Q4 2020 Caesarstone Ltd Earnings Call
Greetings and welcome to the Caesar Stone Ltd fourth quarter 2020 earnings Conference call.
At the time, all participants are in a listen only mode.
And the answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference.
Is being recorded.
It is now my pleasure to introduce your host Brad Cray of Investor Relations. Thank you you may begin.
Thank you operator, and good morning to everyone I.
I am joined by you of all the game Caesar Stone Chief Executive Officer.
Endo fear of your Cobian ease of Sun's Chief Financial Officer.
Certain statements in todays 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.
The 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 fourth quarter 2020 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.
Thank you Brad and good morning, everyone.
Today, we issued the fourth quarter results, marking of successful close to a very dynamic year for system.
Q4 results demonstrate the significant progress in streamlining our business during 2020 as.
As we fill the executed on our business transformation.
Since the onset of COVID-19, pandemic, we have prioritized the health and safety of for employees and we will continue to do so.
The other especially grateful for all the team members, who remain focused in executing the initiatives under the global growth acceleration plan for these challenging periods.
The progress we have made since we announced the global growth of consolidation plan.
Has allowed us to build the foundations for global operating platform and to launch new growth engines, while improving our competitive barbell in the market as the premium multi material countertop company.
Last quarter, we discussed the three strategic pillars, that's all the.
Integral to unlocking the potential which all the premium multi material offering Gus.
Customer experience and engagement.
<unk> global footprint expansion.
Our commitment to excellence and through working capital management during the year provided us with the ability to make significant progress on many of the projects under the each strategic pillar.
In 2020, we introduced accretive M&A as the.
New Avenue for that.
Accelerate the implementation of our strategic objectives.
Our strong financial position supported the recent and successful completion of the two accretive acquisitions.
The only through amico and producer of cutting edge porcelain slabs and the only Couldnt Remington time, the premier supplier in the U S.
As it relates to all the other strategic pillars. The only has expanded our addressable market beyond quotes, allowing Sears is going to become a leading premium multi material countertop company.
I would hope objective of global footprint expansion also incorporates our goal to provide better service to our customers one of the same time, improving our logistical efficiency.
The acquisition of Omega one he is directly aligned with the pillow by allowing us to liberally of vertically integrated the approach to enhance of our go to market capabilities in the U S.
I'll make one of the mens she's just don't exist in the network with strategically located distribution centers throughout the attractive U S market.
Writing us the best to increase market share with more direct approach.
Two other end markets.
One of the innovative initiatives under the global growth acceleration plan is the technological leap in the.
Avenues for which we communicate and connect.
With our customers and consumers to fair that the free should see the storm like creating a step change in the way we approach customers experience and engagement.
The vet 0.2 recently launched the platform called <unk> connect.
Trailing markets.
<unk> connect is an easy to use of digital platform that enhances our CRM capabilities for both all of it can be and fabricate the partners to help them more effectively manage the consumer purchase journey.
We believe the <unk> connect will increase the old customers sales conversion rates and drive higher customer satisfaction.
And do any of these we are strengthening our network of partnerships to better position Caesars for them to win over the long term.
Additionally, the recent three of them of our North American website aims to elevate consumer engagement and activity and we have received great feedback so for them.
We now enter 2021 is of much soon the company and with the right Foundation in place to more effectively leverage Caesar stone World class brands to pursue sustainable long term growth.
While the immediate the global economic outlook and continuing the inputs of the pandemic remain uncertain.
Our strong financial position and clear strategy gives us the confidence to continue executing on our plan.
Our 'twenty 'twenty of achievements have proven our ability to execute on the challenging market conditions.
With all of a dedicated focus on driving improvement in results.
Well situated to capture additional market share in quarters and use the head.
I'll now turn the call over to Phil will provide details on all of the soles and outlook.
Thank you al and good morning, everyone.
I will start by discussing our fourth quarter of results.
For the fourth quarter of 2020 global revenue grew 2.3 per cent.
100 of $36 $9 million.
Compared to $133 $9 million in the fourth quarter of last day.
The increase included $6 $4 million.
Contribution for acquisition of ceramic tile.
On a constant currency basis fourth quarter revenue was lower by one four per cent compared to the same period last year, primarily due the pandemic related business disruption, particularly in the Americas region, partially offset by the contribution from the all the acquisition as well as growth in all other regions.
In the Americas constant current is it says were down 12, 7% of spend downtick related restrictions continue to have ongoing impact on business activity.
In the U S and Canada, our business performance continues to be impacted by lower says I'll take care of stores.
This factor accounted for roughly 40% of our North America sales declined in the quarter.
This impact to the Big box channel was partially offset by increased activity at the U S home depot stores, which was better than our plan.
While of course says when the lower here over here we are.
We're encouraged by the sequential improvement. Furthermore, we are seeing foster of recovery, where we have of direct presence, which gives us confidence in our indirect channels.
As demand continues to ramp up.
In the APAC region.
Constant currency sales were up 17.5 per cent.
Australia accounted for the majority of art sales in the region and performance has been better than our expectations helped in part by government stimulus actions.
In addition, the contribution from the the only says in APAC were included for the first time in the region says.
In the EMEA region constant currency sales grew 45, 8%, primarily reflecting pent up demand following the rigid lockdown. So earlier in the year in both of our direct and indirect markets. In addition to the contribution from the early acquisition of sales in the region.
The newswire on a constant currency basis says are up $9 four per cent in the fourth quarter.
Looking at the fourth quarter P&L performance.
We were pleased to improve our fourth quarter margin on a year over year basis.
Our operating results continued to benefit from our focused execution of initiatives to improve efficiencies across our business.
Adjusted gross margin improved 220 basis points to 20 816 per cent compared to $26 four per cent in the prior year quarter.
The higher year over year adjusted gross margin, mainly reflects the improved product mix lower raw material of course, more favorable currency exchange rates and improve the efficiency, partially offset by lower sales volume lower sales prices and less favorable regional mix.
It is important to note that in the fourth quarter of 2020 in 2019.
We operated all of production facility that less than the full of potential and that was a significant drag on our gross margin.
As a reminder, in the first quarter of 'twenty 'twenty, one of our operating at the higher capacity utilization and in turn we expect gross margin in the first quarter of 'twenty 'twenty, one to be lower year over here.
Excluding the legal settlement and loss contingencies operating expenses for the Codell well 'twenty one two per cent of revenue compared to 24 per cent in the prior quarter.
The increase was in line with of our expectation as we returned our investment in sales and marketing the more normalized level to support our brand and future growth falling to quarter of significant cost cutting.
Adjusted EBITDA in the fourth quarter increased $19 one per cent the over here to $18.8 million, representing a margin of $13 seven per cent.
Compared to $15 7 million or margin of 11, 9% in the prior quarter.
The 100, and the 90 basis point improvement primarily reflects the higher gross margin compared to last year.
Adjusted diluted earnings per share in the quarter with five cents compared to adjusted diluted earnings per share of 16 cents in the same period last year on the similar share count.
Now looking at the full year financial performance highlights.
Sales for the full year were down 10, 9% on the constant currency basis sales were off by 11.1 per cent.
Our focused execution to improve efficiencies and lower raw material input costs led to annual growth in our gross margin and adjusted EBITDA margin.
Jessica the gross margin was 27 seven per cent compared to the 27, 3% last year.
The higher adjusted gross margin, mainly reflects improved efficiency lower raw material cost and improved product mix.
Partially offset by the impact of lower sales volume lower sales price and less favorable regional mix.
Operating expenses, excluding legal settlement and the loss contingencies were 21, 6% of revenue compared to 24 percentage point of view, primarily due to lower revenue.
Our full year 'twenty 'twenty of adjusted EBITDA was $62 $1 million.
12.8% margin compared to $69 million last deal of 12, 6% margin with the.
The year over here margin improvement, primarily due to higher gross margin.
Adjusted diluted earnings per share were 48 cents compared to 77 cents in the prior of here.
Really adversely impacted by foreign exchange rate changes.
Turning to our balance sheet.
We completed the acquisition of for me, calling on December 31st 2020.
We acquired the company English for the duration of approximately $19 million, while assuming $8 billion of net debt.
On a pro forma basis only.
The only corn was profitable and would have contributed over $50 million in revenue for the company's 2000 twenty's of sorts.
She was the strong balance sheet enabled us to successfully weather the challenges of 2020 and to further invest you know for Youtube World.
A prudent effort to control costs manage our production capacity and walking up at the and improved operation efficiency during 2020.
It helped us generate strong cash flow from operations of $48 million doing do you.
Our balance sheet as of December 31st 2020 included cash cash equivalents and short term bank of deposits and short and long term marketable securities of $133 million with total debt for financial institutions of $23 million.
Providing us a solid net cash position of $111 million.
The strong balance sheet leaves us confident that we can execute on our plan in 2021 to produce strong long term returns for our shareholders.
Moving to our outlook we.
We anticipate 2021 revenue and adjusted EBITDA to be higher year over here.
We have expectation that revenue will grow faster than EBITDA in 2021.
This outlook assumes a similar gross margin compared to 2020 with the higher revenue impact offset by higher shipping and raw material costs.
In addition, we expect the return to more normalized levels of sales and marketing expenses to support sensible.
Furthermore, we temporarily reduced or delayed significant cost during 2020 due to pandemic related impact, which will now return.
Our outlook assumes the pandemic related business restrictions will fade as the year progresses.
In the first quarter, we expect revenue growth to be driven by the contribution of the acquisition followed by a return to organic growth beginning in the second quarter of 2021.
We are pleased to be focusing on growth and making the right investments to not only support the expansion in 'twenty 'twenty, one, but also position us as the leaner and faster growing company beyond 2021.
We've got the let me turn the call back to volume for closing comments.
Thank you for them.
In conclusion I'm extremely proud of the seals the team for their unwavering commitment to transform our business and improve our results.
Our success in the fourth quarter.
Those out a year that demonstrates the significant progress since we first introduced of a global growth acceleration plan in 2019.
Since the time, we have fostered a more productive corporate culture improved our competitive positioning and broaden the reach of our addressable market.
We have utilized the accretive M&A is available lever for growth to expand off of presence and offering.
Now as the leading premium multi material come to the company.
Moving to 2021, I'm confident with other strategic plan, which will ultimately create positive long term outcomes for our business.
We looked for you'd probably the tune of further on our progress next quarter.
Thank you.
We're now ready to open the call for questions.
Thank you Bill.
Now be conducting a question and answer session.
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Our first questions come from the line of Reuben Garner with the benchmark company. Please proceed with your question.
Thank you everybody.
Yeah.
Hum.
Good morning.
Good morning, So maybe just the first a clarification question about the fourth quarter, our P&L. The the finance charge that you had a below the line instead of it was predominantly right at the exchange rates can you just tell us what that was and how it how it works and what to expect.
Going forward.
Yes. It is.
Hi, everybody for fear.
And mainly relates to.
The.
Weakness of the dollar against the Australian dollar and day Israeli.
Sure.
And this is the I mean, assuming the won't be.
Major the fluctuation in currencies, we don't see that the something that recur the revaluation of some balance sheet items, mainly a at least the liabilities that created the.
The charge.
The.
One of the.
The theme of assuming we will not see a.
Saturation is it's of course non non cash share.
Yeah.
Okay perfect. That's all I needed to get out of that makes the it makes much more sense. So I guess.
Looking at your congrats by the way on the close to 2020, a nice results.
Talking about your outlook is there any more color you can give on kind of the the puts and takes of the revenue growth and EBITDA growing slower than revenue comments I think those boats.
<unk> make a lot of sense can you can you give us some more color on what that the at least the organic revenue growth profile might.
Might look like and then maybe which markets are going to be growing faster and slower than kind of the company average overall.
Yeah.
Hey, everyone I will start in the field can can add some more color at the end of my.
Some of them first I think of the 2021 will be the first to you and we see some of our.
New growth engines under the three pillars of the strategy coming to play and day.
Looking at the amendment there was the three pillars of talking about the the multi materials strategy. The go the rig.
And flipping the expansion and the last one of the.
The customer engagement and what we will be experiencing 2021.
And the only M&A.
<unk> be fully fully part of our business for the full year and I guess the.
Latest M&A all the gone now.
We had only the on the December 31st of all steel going to be full year part of our business. So lets play this the it'll be the first day and conducted the first day. When we are moving full steam ahead with the execution of the strategy.
Obviously, when the COVID-19 hit a beginning.
Beginning with the end of last the end of the first quarter last year.
The the major growth will be a day.
Hoping you know company from the second quarter this year onwards.
Yeah, and then we expect the I mean.
The first quarter of growth there will be driven by the recent acquisitions the <unk>.
Based on the <unk>.
<unk> from the COVID-19 in the southern areas in Israel, The NAV, Canada, and the U K and in other areas.
I can say on the for the fully we expect the the gross margin to be similar.
Similar to the 2020 receives from the Volte.
Volume as a positive.
The driver for that but we see higher shipping costs in the raw material prices, that's our kind of of hand headwinds that the.
We are seeing coming.
In terms of operating expenses, and we're going to move to a more normalized level of operating expenses and we have some additional the opex coming from the two recent debt acquisition and this is the and the reason we said that we expect to grow of both EBITDA and the end revenue at this day this year, but the.
The revenue growth would be.
The higher than the.
The <unk>.
EBITDA.
Yeah.
As a reminder, if you would like to ask the question. Please press star one on your telephone keypad.
Our next question is coming from the lineup of soft for Ralph Sun Valley with Oppenheimer. Please proceed with your question.
Yeah, Hey, guys.
That's kind of really solid results.
Despite the challenging backdrop.
Maybe if we can just start on the only revenues during the quarter were $6 4 million. Thank you by the way for for reporting them separately, it's very helpful for us.
In modeling if we annualize that are of flex and really nice growth versus the previously reported annual revenue number if I'm not mistaken I think of $18 million.
I'm glad for the close it's a relatively small number for now of the compare it with the full year of kind of consolidated number, but how should we be thinking about the growth rate within the business.
Hi itself.
Obviously, the the only deal is the opening.
The new addressable market for us and it is important to know that we are preparing for what we are planning to take most of the volume from the only the.
The only plan.
In India to serve on kind of the markets and this is not the not the current state of stage of the company. So at the moment. Most of these revenue was devoted to flow in the clouding, but as we are all of our go to market. If you like the right to win for US is the around the countertop.
Application and with the higher margins, though we intend to take most of the volume too.
Application, obviously 2021 of the transitional year, where do you see both of those the revenues, but the <unk>.
Terms of the only the only promptly of one line, though and.
This is broke pretty much the revenue that we're expecting to get from the plant itself.
Okay, Okay great.
On gross margin they were really quite strong in the second half of 2020, even after we neutralized from one time items in the third quarter.
How should we be thinking about the gross margin profile in 2021, any puts and takes there or how you think it should kind of developed from one of the Q 21, and just working 'twenty one would be helpful. For US do you still expect we still feel confident that the strength we saw in the second half of 2020.
He's going to take us closer to the 30% plus number that's the long term target.
Our longtime I'm tired of it.
The target is still the still valid in the end, we do aim to 32% to 35% of the long term target.
The 2021, we believe it will be similar or in the call.
The margin that we're at the 28 20, and we have the.
The.
The higher volume from obviously, the the the logistic cost will be lower on the cost per unit basis, but on the other on the flip side, we have it.
Based on the raw material prices that the.
We are seeing in the in the and shipping cost is that something that is the.
The pretty significant what we seen in the coming in the in the past the.
If you were the.
Weeks.
The first quarter of and we expect the.
At a lower gross margin year over here because we are of a.
Utilizing our factory.
The less than the <unk>.
We've done the net prior year quarter, so that the but that's the changeover, although the even the the cost of all of this would improve.
And we of the revenue growth.
As we progress the.
In the year.
Okay, great. So turning to the Omicron I guess, maybe I can even.
Kind of fit in the related gross margin question number one.
Can we expect to see separate segment reporting number two of them how.
How are you thinking about the gross margin impact on the consolidated numbers I Hope you guys will report something separate them because it will be kind of a meaningful part of revenues and I imagine it. It's it's a headwind to consolidated gross margin and then maybe if you just want to take this opportunity to kind of talk to us about how are you.
Plan on integrate in integrating on the crowd into the general global acceleration strategy.
Sure they'll be calling the acquisition is a bolt on acquisition to our <unk>.
The good thing our strategy.
One of the one of the pillars of actually two of the pillars, which is.
The first and foremost expanding our footprint and more go direct the <unk>.
The closer to our customers and the other one which is the very much in line with the the portfolio of WOMAC on is the multi materials strategy. So we are introducing to our business now the.
The business will only convenience, which have which has also natural stone and.
In both the lens part of it obviously both of them in the future is going to be coming for months directly once we will be launching later this year very impressive new.
A new collection in both of them coming from the Ali.
Naturally and the the.
The natural the natural stone business the wood.
An integral part of our portfolio going forward and in the U S. So the only can do.
Proving out of footprint dramatically, we had the no presence in the.
And the distribution centers of course in the Florida, The Florida region in Ohio Valley and now we know we can begin.
The additional 17 locations.
With the very nice proximity to our customers and to the market. So all the knowledge. It is the board of an acquisition.
He will not be there.
Going forward the reporting that separately as it is going to be part of the season.
The regional structure, if you like.
And that's maybe a reflect of also on the integration that we're working on which will be a full integration of the business interest system.
Okay, Great and I guess, maybe just last question from my end before I jump back in the queue I'll ask for questions and nobody has any others, but.
No.
How should we be thinking about these kind of direct sales strategy being on the ground should we expect this to continue should we expect other deals or other actions from the company similar to the omicron.
Obviously the stuff we are looking on the on the more businesses that can.
Can help us to.
The speed up the the execution of our strategy.
The laid out of switches you very clearly we are theres no. He didn't gender there. So other businesses that can be part of Mb.
And becoming an integral part of the system and should be considered and that will be kind of looking at the market will be an ongoing effort from our side. In addition, we are also working quite intensively on the law.
Just below that in the strategy, we haven't mentioned which is a.
Part of our go to market capabilities for.
Our customer engagement and non debt will be launched.
Launching.
The new platform, which we call <unk> connect to help our business part of especially can be.
<unk> two <unk>.
The consumer purchase journey and to make sure that you don't want that.
And this idea of the pilot.
Conversion rates when all of the side, we get the by the loyalty and.
The engagement with our customers.
Okay, great. Thank you for taking my questions and I'll jump back into queue.
Thank you Joseph.
Thank you rejoining the queue, it's Reuben garner with the benchmark company. Please proceed with your questions.
Thank you sorry about that guys I don't know what happened I got kicked the kicked off but just the the I had a couple of more debt the.
Got back to the outlook on on 'twenty, one maybe ask it. This way do you think you can get back to 2019, 2018 2019 revenue levels.
Levels. This year, obviously 'twenty was impacted by shutdowns, especially in the middle part of the year and hopefully as we progressed through the year those are no longer.
No longer there is that a reasonable way to look at you know your your business do you think you can get back there I guess first organically and then second of all maybe remind us what those two acquisitions are expected to add from a revenue and profit of the profitability standpoint that I think they're both.
Just to be accretive can you just kind of give us what the what the expected accretion is from the deals.
We don't have the we are not.
The service, even though the disclosing the breakdown but.
Obviously, we are expecting to be altogether with the.
The revenue higher than 2000.
The 19 in 2018 altogether.
But we will see the you know the COVID-19 environment is still around and we see it in the first quarter. So I think it's a bit too early for us to.
The disco.
For the full breakdown of the revenue, but as the year progresses, we will see.
Where it goes we believe that the the the in the income.
Kris of the growth in 2021 is going to be significant.
Okay, and then on the the sales and marketing side I think you referenced that you you got back to a more normal level in the fourth quarter did I hear that right. So is that in terms of dollars. So the the the $18 million in marketing and selling expenses as that.
A reasonable run rate for going forward or do you think that there would be more to go on that debt, it's gonna be moving even even higher from here.
I think you know looking at them on the previously as the two it will be a good reflection of where we are heading with the with all the cost in the on the sales and marketing.
Obviously as we are progressing with our global growth acceleration plan moving more projects for coming to fruition and we are and we implemented them or will execute them in the market. So those are those the if you like new growth engines are coming also with some support behind them.
The pace of investment and the pace of launching those new projects will be entirely 12.
So our decision to see of the market is going to accept the those and the and the benefits in our revenues.
And profits of upcoming are in line with our expectations. So we will be dealing with the SMN spend very much.
As we have done in the last two.
Two to three years.
The close management of for the spend in the with a very good very good control of them debt.
Okay, and then are you you've mentioned material and shipping cost inflation.
I guess.
The shipping part is that its definitely understandable, what what materials are you seeing inflation and what what kind of percentage of we're talking about and then what's the what's the pricing environment like.
Like the sheer I'd imagine you're not the only one seeing inflation is there any expectation that you can get any price to offset the higher costs.
It's a bit too early rubin to eh too.
No specific share price increase in raw materials, we still have some deals that are going forward from the previous year to this year. So it's a bit too early but we do see the <unk> in the markets we are preparing our business.
To bring some of greater efficiencies to offset any price increase and the two might have in the market. Obviously the shipping cost is already.
Part of our business the environment and we are now shipping goods and raw materials to the plant and good for the plants to the markets. The it's higher.
Of course, I think this is something that the.
The many global companies are now experiencing.
Okay, and then last one for me element sneak in the the the USA portion of the the Americas market kind of coming back a little slower than that I would of thought is there something specifically going on there from a comps perspective.
I understand that the shutdown impacting the you know all of that but I assume a portion of that business. The new construction, which is doing pretty well you know here in the states and then the even the repair and remodel markets are broadly have been getting better can you just talk about what you're seeing there and maybe what spin.
Typically your outlook is for the next couple of quarters and in that market.
From an organic perspective.
In the U S. The thing of the major impact at the moment is is.
The.
I guess the around the.
Our exposure to again, we have a <unk>.
Exclusive of the deal with them and as they are coming back to the market. We will see some great the growth in the coming quarters.
In Q4, which will still.
Our sales to Ikea was still behind our expectations about the said, though the.
The improving greatly casualty of nave and then over the last few weeks. So I think the major impact will be debt some of them some exposure to it.
In our non direct markets win.
When we have less presence over the direct Caesar stone.
The employees, obviously, the and business obviously the.
The acquisition of forming corn is a part of of.
The remedy the situation and we are moving more directly in more regions in the U S. So over the next few quarters Youll see us I guess the closing the closing the gap.
And the continuing faster demonstrating faster growth in the U S.
Great. Thank you guys. Congrats on the end of 2020 and good luck this year.
Thank you very much robin.
Thank you there are no further questions at this time I would like to turn the call back over during your ballgame for any closing comments.
Thank you for your attention. This morning, we look forward to updating you on other progress next quarter. Thank.
Thank you very much.
Okay.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines of this time.
Great day.