Q1 2021 Caesarstone Ltd Earnings Call
Okay.
Greetings and welcome to the Caesar Stone and first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded and is now my pleasure to introduce your host Brad Cray and Investor Relations.
You may begin.
Thank you operator, and good morning, everyone I am joined by evolved the game, either stones, Chief Executive Officer and <unk>.
Your your Cobian easiest zone, Chief Financial Officer.
Certain statements in todays conference call and responses to various questions may constitute forward.
And looking.
On.
Yeah.
We caution you that such statements reflect only the companys 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.
Okay.
Yes, and subsequent filings with the S D C and.
In addition.
Yeah.
And it's called 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.
Uh huh.
Adjusted EBITDA and constant currency.
The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found and the company's first quarter 'twenty 'twenty.
<unk> earnings.
Yeah.
Yes.
And <unk>, which is posted on the company's Investor Relations website.
And.
Thank you and I would now like to turn the call over to Yuval. Please go ahead.
Thank you Brad and good morning, everyone.
Our first quarter results marked another consecutive quarter of growth as we continue to successfully execute our strategy to transform Caesar stone into a leading premium multi material countertop company.
The collective actions, we have taken since we announced our global growth acceleration plan two years ago have allowed us to establish and and efficient global operating platform, while using M&A as an important tool to implement our strategy.
This was demonstrated by 15% growth to a record first quarter revenue of $146 million helped by our recent accretive acquisition of Omega on and legally Cirami com.
We were also pleased to produce our fifth straight quarter over a year on year EBITDA margin expansion.
Our results are encouraging and on attributable to the superb execution of our entire team for.
And I'm very grateful.
As we have mentioned previously we continue to view accretive M&A as an important tool to drive sustainable long term growth and we are pleased to report that the integrations on corn and leasehold acquisitions and progressing in line with our plan.
We expect to begin leveraging our world renowned brand and to execute on our multi material strategy through the sale of Caesar stone porcelain slabs as we introduce our new premium porcelain collection and the second half of this year throughout select markets.
The integration of AUM and corn is anticipated to be completed in the coming months and we see great potential in the combined business once fully integrated.
We are pleased with the performance of formic on business in the first quarter with strong contribution to our revenue, while augmenting Caesar stone and performance in the U S.
Another important growth lever is our continued penetration into the U S Big box channel.
And see just don't brands and products at home depot stores and we are excited by our progress in this area as we nearly doubled our sales compared to the first quarter and lost here.
Separately as we have discussed previously and key focus area for system is to leverage technology to simplifying and the consumer journey.
A simplified and consistent approach to the continental purchasing process.
Especially important to us as we further expand on the global reach of our product with multi material offerings.
To that point, we are happy with the progress made during the C. S. Connect test launch in Australia, and we are on track to further expand the pilot program into several of our U S markets.
We believe that <unk> connect will increase our customers' sales conversion rates and fortify new and longstanding partnerships with our customers.
While there are many projects still underway as part of our plan and some lingering impacts of the pandemic across our global footprint. We are highly encouraged by our positive momentum to start the year.
We have a strong financial position and.
More efficient operation and a clear strategy in place to create additional value for our shareholders.
I will now turn the call over to Phil who will provide details on our results and outlook.
Thank you al and good morning, everyone.
And we start by discussing our first quarter's results.
For the first quarter of 2021 global revenue increased to 100 and and $46 million.
And then thing 15, 4% growth compared to the prior year period.
Day over increase included approximately $20 million and contribution from our acquisition of Omicron and day early ceramic huh.
On a constant currency basis first quarter revenue was higher by nine 8% compared to the same period last year, primarily due to the contribution of acquisitions.
Now looking at our regions.
And the Americas constant currency says rub 11, 8% as we began to see benefits from our Army Corps and acquisition.
And the U S and Canada, our performance continues to be impacted by lower says at Ikea stores. This impact to our big box channel was partially offset by increased activity at U S home depot stores.
And our first quarter performance was better than expected.
And the U S. We are happy with the sequential improvement and our business and see positive momentum into the second quarter of 2021.
And Canada rigid government restrictions related to COVID-19, and continue to impact ourselves.
And the APAC region constant currency sales were off 21, 5% and Australia, which accounts for the majority of ourselves and the region solid results were driven by improved demand and government stimulus actions.
Contribution from the early says were also additive.
The APAC region says and the first quarter.
And the EMEA region constant currency sales grew three 3%, we experienced strong performance and the U K, which was partially offset mainly by the impact of continued COVID-19 related restrictions on our indirect markets.
And Israel on a constant currency basis says non 24, 6% and the first quarter primarily related to slower recovery from the country's third pandemic related Lockdowns, which ended in late January as.
And that's what allows day timing of Passover holiday.
Looking at our first quarter P&L performance.
We were pleased to improve our gross margin by 90 basis points on a year over year basis to 29, 7% as we continued to benefit from our actions to improve efficiencies across our business.
Adjusted gross margin improved 120 basis points to 31% compared to 28, 9% and to play this quarter.
They all have improvement and gross margin, primarily reflected better product mix improved efficiencies and more favorable currency exchange rates.
They offset by day impact of higher manufacturing unit costs due to lower fixed cost absorption and lower selling prices.
Operating expenses, excluding legal settlement and loss contingencies with 22, 3% of revenue compared to 24, 7% and the pilot this quarter.
The decrease was mainly due to higher revenues.
Going forward, we expect operating expenses to them and elevators.
And return our investment and sales and marketing to a more normalized live and to support our brands and to vehicles.
Adjusted EBITDA and the first quarter increased 54, 1% it all day.
The 24 and $3 million, representing a margin of 13, 9% compared to $13 1 million.
Or a margin of 10, 4% and the prior quarter.
350 basis point improvement.
And how they reflect the higher gross margin compared to last day.
Adjusted diluted earnings per share and the Codell, well 42 cents compared to adjusted diluted earnings per share of 13 cents and the same period last year on a similar share count.
Turning to our balance sheet.
As of March 31st 2021 sees us on had cash cash equivalents and short term bank deposits and short and long term marketable securities of $118 $7 million.
Total debt, the financial institution, and a $15.4 million.
Providing us with a solid net cash position of $105 3 million.
The strength of our balance sheet continues to give us confidence that we can successfully execute on our strategic initiatives.
And according to our dividend policy and based on on net income performance. During the first quarter of 2021, our board declared a dividend of 21 cents per share with a record date of may 18th and.
And a payment date of June 1st 2021.
Yeah.
Moving to our outlook.
I would like to first take a moment to comment on the impact of raw material inflation to see this on in light of the tight supply environment across the industry.
While we did not experience and material impact from inflation and the first quarter of 2021 we anticipate that higher raw materials and shipping costs will be a significant headwind to our margins and the coming quarters.
And in regards to timing, we anticipate that these headwinds will start to impact us and the second quarter and will continue throughout the remainder of the year.
We expect to partially mitigate this impact through price increases and other cost cutting initiatives.
Well some additional context on the breakdown of our raw materials and Twenty-twenty raw materials accounting accounted for approximately 34% of our cost of goods sold.
Including both the purchase price of the materials and the costs related to logistics and delivering of the materials to our facilities.
This exclude the cost of OEM products sold which accounted for less than 10% of our close the goods sold in 2020.
What is the main raw material component to us and our engineered quartz product in 2020 quads accounted for approximately 39% of our raw material costs, while polyester, which acts as.
As a binding agent and our product accounted for approximately 31% of our raw material cost and 2020.
Historically, the price of parts have been relatively stable, while polyester is more prone to have significant price fluctuations.
Since 2020, who have been using dynamic hedging strategy to reduce our exposure to champion and polyester prices.
However, our hedging results are charged to finance expenses, and therefore did not offset the impact of polyester prices on our operating income.
We will continue to carefully monitor the impact of price fluctuation in on.
Our raw materials, and we will update you accordingly as day progresses.
With that said, we continue to anticipate 2021 revenue and adjusted EBITDA to be higher year over here, we have a day with the expectation that revenue will grow faster than EBITDA and 2021.
This outlook assumes similar gross margin compared to 2020, we've hired revenue impact offset by higher shipping and raw material costs.
In addition, we continued to increase our sales and marketing expenses to more normalized levels to support our sales growth.
A reminder, we also temporarily reduced or delayed and significant cost during 2020 due to pandemic related impact which on our returns.
Our outlook assumes that both pandemic related business restriction will fade and that the supply environment will improve as day.
Your progresses.
And the second quarter, we expect revenue growth to be driven by the contribution of acquisition.
Our return to organic growth as well.
With that let me turn the call back to vote for closing comments.
Thank you Phil.
We started 2021 on a positive note and the focused execution of our plan resulted in a strong first quarter results.
As vaccines rollout across the globe will continue to prioritize the health and safety of our employees and express our sincere gratitude to all of our global team members, who work tirelessly to support our customers and achieve our growth objectives.
Moving forward, we are focused on further enhancing our global operating platform. We have built by leveraging our innovative go to market initiatives World class CS and some brand and multi material product offerings to drive additional value for shareholders as the year unfolds.
We look forward to update you further on our progress next quarter.
Thank you.
And we are now ready to open the call for questions.
Thank you well now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate that your line is and the question you May Press star two if he would like to remove your question from the kit for participants using speaker equipment and may be necessary to pick up on your handset before pressing and historically.
One moment, please while we poll for questions.
Thank you our first question will come from Reuben Garner with benchmark Company. Please proceed with your question.
Thanks, Good morning, well, a good evening and good afternoon, and you guys.
So maybe I'll start on on the top line can you can you talk to me about what Youre seeing and maybe day U S, particularly about a recovery can.
Can you maybe starting with you know I know you gave a constant currency number but any way to tell us what like the organic.
Net revenue growth was like and the U S and I think you mentioned and XP.
Expectation that and the second quarter organic volume growth for returns and that's a.
That's encouraging it is an easy comp on what about as you move through the rest of the year are you seeing signs of a likely acceleration and you're in your business.
Hi, Ruben and good morning, and.
First I think I would like to start with a really being optimistic on what we see as the momentum and the U S. We do see the progress format and quarter to quarter and even in the first quarter, we see a great change between the you know the.
January and February to March and some of that momentum continues with us due to the second day to the second quarter as well. So all in all we do see a very nice recovery and the U S organically and and obviously on on organically as well.
We're all in on what we do believe that the first quarter, although the difficult.
And the comparison to the first quarter of last year and.
Will it be kind of organically.
7% down two and to the first quarter and something that's M. The completed and recovers in the in the and the in margin and the late late on wanting that bill as well.
Wait I'm sorry can you can you repeat that what what is down 7% sequentially.
Sequentially is that that's that's what Q2 will look like versus Q1.
No no no no and what did you buy.
<unk> said is that organically compared to last year and.
The U S. We were down 7%, we see good momentum into Q.
Two and and unexpected.
Expect AR.
To see this improved performance in the U S as they progress through the year.
Yeah of course, and easy comps, there, but theyre compared to a two last day, but still I think without the performance we expect our Oh.
Yeah.
We will be much improved and also.
Also we are very happy with D E and progression of Omicron day in the first quarter and their performance.
And the and the revenue delivered by Omicron, India first quarter and the U S.
Channel, Okay, and then on the gross margin commentary I think you said that this year the full year will be similar to <unk>.
2021, so can you talk to us like the last three quarters now your gross margins averaged about 30% you've got a recovering.
You know and markets as we move through the rest of this year I assume.
You know the revenue is only going to improve from where you've been the last few quarters.
Your guidance kind of implies that you know you're under 27% for gross margin and the next few quarters and I guess one of my am I looking at that the right way and then secondly, what what's kind of the the difference between the 30%.
Last few quarters, and the 27% and how much of that is price cost because of inflation, you're seeing and how much is maybe other factors.
Yep.
I mean, most of most of it is oh the different tests youre looking at the right we are seeing.
And Ah <unk>.
Significant headwind coming from mainly raw material prices and also a shipping and there's a very tight supply chain and received a polyester which is.
And important the material materially out before us.
And the price inflation of over 40%, that's what we sit and the other.
And I said today compared to what we've seen and.
And in the past few months, though it's a it's a very significant increase we do expect that there.
As we progress in the year, there will be some improvement and the supply chain and prices will come.
Come back to a more normalized level, but looking at that we do expect to see are these headwinds.
Impacting our gross margin, we do plan to mitigate that.
At least partially by a price increase.
And in our selected.
Selected market, where we think it's the right.
Thing to do and a buy and managing our cost and more tightly to mitigate but yes, we do see these headwinds and the and it will be on a higher revenue base as you mentioned.
Okay.
So I guess the same line of questioning on the EBITDA line and then I don't think I heard you give specific EBITDA guidance, but the last three quarters have been north of.
A 14% and obviously you've got some gross margin pressure, but you're also gonna have a better.
Better top line I mean is is.
14%.
Now on.
On sustainable I know your longer term targets are above that but what well how do we think about that 14% number.
And that you've put up the last couple of quarters as we move through the rest of this year.
First day, we're very happy with.
The first quarter as a result, but and looking forwards mainly due.
Due to the fact that gross margin is going to be lower we don't think that is sustainable and could this here.
And and we do expect our both revenue and EBITDA to grow and.
The desir and but revenue will grow at a faster than EBITDA.
And and the profitability on the EBITDA will be lower due to the lower gross margin.
Okay. Thanks, guys, Congrats again, and I'll I'll, let someone else jump jump in here.
Thank you Ruben.
Okay.
And as a reminder, if you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and my question to you.
Thank you. Our next question comes from Reuben Garner with the Benchmark Company. Please proceed with your question.
Hey, guys, sorry, I figured I'd jump back in so just a couple quick follow ups you know we talked about the U S market what about internationally. It was a nice recovery and in Australia.
Are you seeing.
And that that trend continuing and then maybe you know Israel I understand had a tough a day.
Dynamic going on and the first quarter and do you expect that to sort of returned to growth.
I've read and heard that that that the.
Vaccine has taken very well over there and things are opening back up just any update you can give us on those two big markets of yours.
Yeah, sure Ruben and first I think you'd say, it's nice to see that and the first quarter of this year, we do see the and.
And some of the fruits and the outcomes of all.
The early buzz of the execution of our strategy and we do see it in the number and number of markets. We are launching a few growth engine this year and and we are on the on the on the journey to introduce more and more of those growth engines and getting progresses.
For the two countries you mentioned, we do see we are experiencing some nice market recovery in the Australia.
We see growth.
On constant currency basis and local currency.
And we are performing quite well in Australia as for easily and we are we had just.
And did it.
And the latest lockdown and in.
January and to the fact that the Passover holiday will come and give me. The earlier. This year. We have seen we have experienced a bit softer Q1. We all are we believe that some of it will be offset during the year.
Okay, and then last one for me and it's just a follow up on the gross margin and the cost of goods.
How much so you told us how much polyester and and courts are as a percentage of your raw materials. How much are your raw materials and as a percentage of of cost of goods and then how.
How much is you.
You know shipping and.
And how much would that shipping element and be up.
And what kind of inflation are you seeing and that aspect of your business.
So raw material in 2020 was 34% of cost of goods sold three 434% of good cost of goods sold day in 2020.
And.
And as for for shipping costs.
When you are and look.
Look at the finished goods.
On the estimation will be say, two or $3 million of impact day, assuming that the shipping cost.
We remain on the current AR levels.
Okay.
Okay, great. Thank you guys again, and and congrats on the quarter and good luck as move through the year.
Yeah.
Thank you welcome.
Thank you there are no further questions at this time I would like to turn the floor back over to you of all the games for closing comments.
Thank you for your attention. This morning, we look forward to updating you on our progress next quarter.
Okay.
This concludes today's conference you may now disconnect. Your lines. Thank you for your participation and have a wonderful day.
Okay.