Caesarstone Ltd (CSTE) Q3 2021 Earnings Call Transcript

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Caesarstone Ltd (CSTE 4.02%)
Q3 2021 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Caesarstone Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. Please go ahead.

Brad Cray -- Investor Relations

Thank you, operator, and good morning to everyone. I am joined by Yuval Dagim, Caesarstone's Chief Executive Officer; and Nahum Trost, Caesarstone's Chief Financial Officer.

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 third 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. Building on our solid first half 2021 performance, we were pleased to achieve third quarter results that demonstrated our ability to continue to effectively execute our Global Growth Acceleration Plan to drive business enhancements and value creation. We achieved yet another period of record quarterly revenue and our fourth sequential quarter of year-over-year revenue growth attributable to increasing demand for our best-in-class products across the U.S. and a majority of our global markets.

In the U.S., we were encouraged to see significant growth in our sales driven by three areas. Big box channel growth, core business growth and the contribution of our Omicron acquisition. In the big box channel, our sales of Caesarstone-branded slabs for U.S. Home Depot stores continued to be another bright spot as revenue increased nearly 50% year-over-year. We are also happy that our sales to IKEA U.S. recovered substantially during the quarter. In addition, we drove core business improvement and experienced positive contributions from our acquisition of Omicron, a premier stone supplier in the highly attractive markets of Florida and Ohio valley. We are starting to see the benefits of synergies from Omicron. The geographic and service benefits from this acquisition have been very encouraging and we could not be more pleased with the integration efforts of our teams.

Our APAC region continues to benefit from sales related to our Lioli acquisition and we remain excited to launch an innovative new porcelain collection under the Caesarstone brand next year.

As it relates to business enhancement initiatives, during the third quarter, we rolled out our innovative CS Connect platform nationally across the U.S. as planned. We view this national rollout as another critical milestone in our efforts to expand the reach of this digital platform that is helping us to simplify the counter top purchases process and create a step change in the way we communicate with our customers and consumers. Feedback received from our partners and customers has been very positive and we are currently evaluating implementation of the platform in several of our other global regions.

Separately, as we discussed last quarter, our teams are committed to effectively mitigate global supply chain and raw material cost increases impacting Caesarstone and our industry through careful cost management and other strategic actions such as price increases. Also, we have been able to offset some of the rising costs through the price increases that went into effect during 2021 and we recently announced additional price increases in most of our territories to be implemented on January 1, 2022. We continue to diligently monitor cost trends, and although we are taking actions to partially offset the rising costs, we do expect widespread global shipping challenges and rising inputs cost to continue to weigh on our margins in the coming quarters with gradual improvement during 2022 as we realize the price increases in our markets. That said, I remain confident in the actions we are taking to enhance our operations and believe our business remains on a positive trajectory to deliver long-term value.

Looking ahead, we have a strong balance sheet and cash position to continue deploying capital in an accretive nature. This will include developing, testing and introducing premium multi-material offerings to grow our addressable market in the quarters and years to come.

I would also like to take a moment to highlight the publication of our first ever global ESG report in October. We are pleased with our ESG accomplishments to date, and are excited to have now built a prudent framework to accomplish our new ESG goals set forth in the report. We believe our success is directly related to how well we take care of our clients, our employees and our communities. And we are dedicated to help create a more sustainable future for all of our stakeholders.

With that, I will now turn the call over to Nahum to discuss more details on our financial results and outlook.

Nahum Trost -- Chief Financial Officer

Thank you, Yuval, and good morning everyone. I will start by discussing our third quarter results. For the third quarter of 2021, global revenue increased to a third quarter record of $163.3 million representing 31.8% growth compared to the prior year period. On a constant currency basis, third quarter revenue was higher by 29.2% compared to the same period last year, primarily due to improved demand in most of our regions across our global footprint. Revenue for the period also included approximately $22.8 million in contribution from our acquisitions of Omicron and Lioli Ceramica that we completed during Q4 last year.

Now looking at our regions. In the Americas, constant currency sales were up 42.6%, mainly due to growth in the U.S. In the U.S., sales were up 51.8% driven by our acquisition of Omicron, core business improvement and strong growth in the big box channel. Our sales in Home Depot stores were up nearly 50% year-on-year for the third quarter and we also experienced increased activity at IKEA stores in the U.S. which led to a strong recovery in sales with this retailer. In Canada, sales were up 11% on a constant currency basis, driven by stronger core business performance and the slight increase in our sales to IKEA.

In the APAC region, constant currency sales grew 16.3%. In Australia, which accounts for the majority of our sales in the region, growth was driven by improved demand despite rigid COVID-19-related restrictions that continued in most of the quarter and into October. Contributions from our business in Southeast Asia and Lioli were also additive to the APAC region sales in the third quarter.

In the EMEA region, constant currency sales grew 18.2% as we experienced strong demand in the U.K. and the indirect sales channel. In Israel, on a constant currency basis, sales were down 12.2% in the third quarter, primarily related to competitive market conditions in the region, together with lower number of selling days compared to the prior year quarter due to the timing of the Jewish holidays.

Looking at our third quarter P&L performance. Our gross margin was 26.2% for the quarter. Adjusted gross margin was 26.3% compared to 31.4% in the prior year quarter. The year-over-year difference in gross margin was in line with our expectations and primarily reflected higher raw material prices, mainly in polyester, in addition to increase in shipping prices, which was partially offset by price increases and more favorable product mix and exchange rates. As many industries have experienced, pressure from raw material costs have increased as the year progressed given the ongoing tight supply environment impacting our industry. We experienced material impact from rising costs in the third quarter of 2021, particularly in the polyester and shipping prices.

Operating expenses, excluding legal settlements and loss contingencies, were 21% of revenues compared to 18.8% in the prior year quarter. The increase was mainly due to a return to normalized levels of marketing and selling expenses and investments related to initiatives under our Global Growth Acceleration Plan.

Adjusted EBITDA in the third quarter was $17.7 million, representing a margin of 10.8% compared to $23.7 million or a margin of 19.1% in the prior year quarter. The year-over-year difference in margin primarily reflects the lower gross margins and together with higher operating expenses compared to last year.

Adjusted diluted earnings per share in the quarter were $0.20 on 34.6 million shares compared to adjusted earnings per share of $0.41 in the same period last year on 34.5 million shares.

Turning to our balance sheet. As of September 30, 2021, we had cash, cash equivalents and short-term bank deposits and short and long-term marketable securities of $104.7 million with a total debt to financial institutions of $13.2 million providing us with strong cash position of $91.5 million. Resiliency of our balance sheet continues to give us confidence in our ability to execute throughout the initiatives under our Global Growth Acceleration Plan. In accordance with our dividend policy and based on our net income performance during the third quarter and the nine-month period of 2021, our Board declared a dividend of $0.10 per share with a record date of November 17 and payment date of November 30, 2021.

Moving to our outlook. Based on our performance year-to-date, we are reiterating our expectations 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 slightly lower 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 discussed earlier.

In the fourth quarter, we expect that higher raw material and shipping costs will be an even more significant headwind to our margins. We expect to partially mitigate this impact through additional price increases and other cost-cutting initiatives. As Yuval discussed, on November 1, we announced the price increase in most of our markets to take effect on January 1, 2022.

Additionally, we expect operating expenses to remain elevated on a year-over-year basis as we continue to invest in sales and marketing at normalized levels to support our brand and future growth. This growth has returned as we have ramped back up investments in our growth initiatives following a temporary reduction in investment during 2020 in an effort to mitigate pandemic-related impacts.

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

Yuval Dagim -- Chief Executive Officer

Thank you, Nahum. In closing, our third quarter results represented continued progress against our strategic plan and we remain encouraged by our performance year-to-date. Our successful national rollout of CS Connect platform in the U.S., strong synergies from our Omicron business, and our planned porcelain product launches give us optimism in the trajectory of our business as we make meaningful tangible progress on our Global Growth Acceleration Plan.

Looking to the remainder of the year, we have a strong cash position to continue with prudent investments in our several [Phonetic] marketing capabilities as we utilize our world-class Caesarstone brand to build additional value for our shareholders.

Thank you, and we are now ready to open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is coming from Stanley Elliott of Stifel. Please go ahead.

Andrew Mazerall -- Stifel -- Analyst

Hey, good morning. This is Andrew Mazerall [Phonetic] for Stanley.

Yuval Dagim -- Chief Executive Officer

Hi, Andrew.

Andrew Mazerall -- Stifel -- Analyst

I'm wondering if you could maybe bucket the margin headwinds in the quarter related to materials, certain shipping logistics or plant inefficiencies.

Yuval Dagim -- Chief Executive Officer

Maybe I will start. Generally speaking, I think margins came quite aligned to what we advised in the second quarter. We haven't seen anything addition to what we already saw in our cost, in raw materials and shipping cost in doing our production schedules in Q2 before servicing the markets in Q3. So all in all, not great -- greater surprises, very much in line of what we expected to have.

Nahum Trost -- Chief Financial Officer

Yeah, so the 5% decrease can be attributed to 240 basis point related to the higher raw material cost, 210 basis points related to the landed cost -- the increase in the landed prices, and 250 basis points relates to the lower throughput that we had in our Israeli plants. Those three items were partially offset by higher revenue, improved product and regional mix of around 280 basis points.

Andrew Mazerall -- Stifel -- Analyst

Perfect, thank you. And I guess on Q4, what sort of margin headwinds would you expect there? And when do you think price cost would turn positive for you all? And when do you expect to see year-over-year margin growth, either for gross margins or EBITDA margins?

Yuval Dagim -- Chief Executive Officer

We do believe that the fourth quarter is -- it will be a continuation of what we see in Q3 with some adjustments as we see the products coming from the balance sheet to the P&L. Yet, we are expecting to demonstrate some gross margin recovery on the back of our global price increase that we lately announced.

Nahum Trost -- Chief Financial Officer

So the price increase will offset partially in Q4, but will have a higher impact during next year. As we said, the price increase will be -- majority of it will be effective January 1. In addition, keep in mind that Q4, given our seasonality, is a bit slower quarter in terms of revenues, given holidays, Christmas. So it will also impact our margins in Q4.

Andrew Mazerall -- Stifel -- Analyst

Gotcha. Thank you. And last one on CS Connect. I was wondering if you can maybe provide any metrics around that, maybe what percent of the U.S. is trained in using this and does it give you any better visibility into 2022?

Yuval Dagim -- Chief Executive Officer

Yeah, the CS Connect platform has been launched two quarters ago. And since then, we are distributing or expanding the spread and the presence of CS Connect in the market, especially with our kitchen and bath partners. So far we're very pleased with the uptake of this platform. But it's very early days to -- now to put the metrics and financial metrics around our expectations. We are going to be expecting we'll move that in 2022 and I'll be more than happy to report on the progress in the coming quarters.

Andrew Mazerall -- Stifel -- Analyst

Awesome. That's all I got. Thank you.

Yuval Dagim -- Chief Executive Officer

Thank you very much, Andrew.

Operator

[Operator Instructions] We're showing no additional questions at this time. I would like to turn the floor back over to Mr. Dagim for closing comments.

Yuval Dagim -- Chief Executive Officer

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

Nahum Trost -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Brad Cray -- Investor Relations

Yuval Dagim -- Chief Executive Officer

Nahum Trost -- Chief Financial Officer

Andrew Mazerall -- Stifel -- Analyst

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