Caesarstone Ltd. Q4 FY2021 Earnings Call

Greetings and welcome to Caesarstone Limited Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require assistance during the conference, please direct your inquiries accordingly. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. You may begin.

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 in response 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 fourth 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.

Thank you, Brad, and good morning, everyone. We're happy to report our fourth quarter results, marking the close of a year of exceptional progress and solid growth for Caesarstone. We successfully executed our strategic initiatives and captured demand opportunities in our end markets to achieve record fourth quarter revenue, as well as the fifth straight quarter of year-over-year revenue growth. This allowed us to conclude 2021 with a year of record revenue exceeding $600 million in sales for the first time in Caesarstone history. Our strong results were driven primarily by further penetration into the U.S. During the fourth quarter, we were thrilled to see significant growth in U.S. driven sales across three key areas: organic growth, big box channel growth, and the contribution from our Omicron acquisition. We saw a continuation of positive momentum in the big box channel during the quarter, with solid year-over-year growth in sales of Caesarstone branded slabs at Home Depot stores. Additionally, sales in IKEA continued to recover, increasing approximately 50% quarter-over-quarter. Looking beyond organic performance, we were pleased to see strong contributions to our results from the successful integration of our Omicron acquisition. This acquisition has proven to be a bright spot within our business, bringing strong synergies and providing us with a solid platform to better serve customers as we deepen our direct presence in attractive U.S. markets. Separately, our integration of Lioli Ceramica is proceeding as planned, and we remain on track to launch an innovative new global porcelain collection under our Caesarstone brand in 2022. Overall, we are pleased with the 2021 performance of these two accretive acquisitions, both completed in the fourth quarter of 2020. As we look forward, we are seeing continued momentum in demand for Caesarstone premium products and are excited to further augment our track record of innovation through the introduction of new multi-material product offerings in 2022. Following a year of solid results and meaningful progress in executing our strategy, we have a clear path forward into the next stage of our growth journey. Today, we are excited to introduce a long-term financial goal for 2025, which includes revenue growing to $1 billion based on the expected benefits from our multi-material strategy, enhanced go-to-market capabilities, and incremental revenue from our CS Connect platform, with an adjusted EBITDA margin in the mid to high teen percent range, boosted by a combination of a stronger gross margin and SG&A leverage. These long-term goals reflect our confidence in our strategy and our ability to leverage the foundations for growth we have developed as we implement our multi-material offerings, increase our addressable market, and broaden our footprint in the U.S. We expect to accomplish these targets through benefits from our technological transformation, enhanced production and supply chain efficiencies, augmented go-to-market strategy, and premium brand recognition. We are delivering results from these initiatives as part of our Global Growth Acceleration Plan, which can be categorized into three strategic pillars: premium multi-material offering, customer experience and engagement, and global footprint expansion. Regarding our multi-material offerings, we have leveraged our acquisitions of Lioli and Omicron to design products that incorporate new materials. Our teams are working to enhance our position in quartz, porcelain, and natural stone products all under the Caesarstone brand name, as the premier choice for countertops. Our initiative to become a multi-material countertop player, leveraging our leading craftsmanship, engineering knowledge, and global salesforce, has more than doubled our addressable market. In conjunction with product development, our marketing teams continue to define Caesarstone as a trendsetter, designing innovative solutions that allow our salesforce to accelerate growth of our global share in the countertop industry. The unique offerings that utilize our proprietary technology have driven a superior value proposition. Regarding customer engagement, we are seeing continued positive reception of our CS Connect platform, which launched nationwide to our kitchen and bath retail partners in the U.S. during the third quarter of 2021. Our rollout of the CS Connect platform has performed in line with our strategic vision of leveraging technology to own the value chain content and create new revenue channels, bringing us closer to our customers and business partners. With over 700 retail partners and counting, we expect to generate significant revenue from CS Connect in the coming years. While our long-term financial targets primarily reflect organic growth, we do continue to view M&A as a key part of our capital allocation strategy, taking a disciplined approach to review value-enhancing opportunities that can provide us with attractive synergies. Overall, we are proud to share our 2025 financial goals and believe we have entered an inflection point of growth with a clear strategy in place and multiple levers to drive year-over-year growth in revenue and profit in the coming years. Looking ahead, I remain confident in the actions we are taking to capture demand and to be the first brand of choice for countertops worldwide. We believe our well-defined strategic initiatives, strong balance sheet, proven record of cash generation, recent pricing actions, and continued demand tailwinds collectively provide us with confidence in navigating the current cost environment as we advance our position as a global countertop leader. With that, I will now turn the call to Nahum to discuss more details on our financial results and outlook.

Thank you, Yuval. And good morning, everyone. I will start by discussing our fourth quarter results. For the fourth quarter of 2021, global revenue grew 25% to a record $171.1 million compared to $136.9 million in the fourth quarter of last year. This increase included a $13.8 million contribution from our acquisition of Omicron. On a constant currency basis, fourth quarter revenue was higher by 24.2% compared to the same period last year, primarily due to the contribution from the Omicron acquisition and growth in all regions. In the Americas, constant currency sales were up 33.7%, mainly due to growth in the U.S. In the U.S., sales were up 44.8%, driven by our acquisition of Omicron, organic growth, and robust growth in the big box channel. We experienced solid growth in sales of our products in Home Depot stores during the fourth quarter, and our sales in IKEA stores were up 50% quarter-on-quarter. In Canada, sales were up 5.8% on a constant currency basis, driven by improved core business performance and an increase in sales to IKEA. In the APAC region, constant currency sales were up 4.4% with Australia accounting for the majority of our sales in the region, contributing to year-over-year growth. In the EMEA region, constant currency sales grew 27.8%, primarily reflecting strong performance in the UK and indirect markets. In Israel, constant currency sales were up 20.1% in the fourth quarter, reflecting our strong performance and an easier comp due to the Jewish holidays occurring in the fourth quarter of the previous year. Looking at our fourth quarter P&L performance, our gross margin was 23.2% for the quarter, compared to an adjusted gross margin of 23.3% compared to 28.6% in the prior year quarter. The year-over-year difference in gross margin was in line with our expectations, reflecting higher raw material prices, primarily in polyester, in addition to increasing shipping prices, which were partially offset by price increases and a favorable product mix. Operating expenses were 21.2% of revenue compared to 22.2% in the prior-year quarter. Excluding legal settlements and loss contingencies, operating expenses were 21.9% of revenue compared to 21.2% in the prior-year quarter, in line with our expectations as we return to normalized levels of marketing and selling expenses and investments related to initiatives under our Global Growth Acceleration Plan. Adjusted EBITDA in the fourth quarter was $11.5 million, representing a margin of 6.7%, compared to $18.8 million or a margin of 17.7% in the prior-year quarter. The year-over-year decline primarily reflects the lower gross margin compared to last year. Adjusted diluted earnings per share in the quarter was $0.01, compared to adjusted diluted earnings per share of $0.05 in the same period last year on a similar share count. Now, regarding our full-year financial performance highlights, sales for the full year were up 72.4%. On a constant currency basis, sales were up by 28.1%. This increase includes a $68.6 million contribution from our acquisitions of Omicron and Lioli. Adjusted gross margin was 26.8% compared to 27.7% last year. The difference in adjusted gross margin mainly reflects higher raw material prices, particularly polyester, and increased shipping prices, which were partially offset by a favorable product mix and selling price increases, alongside favorable exchange rates. I want to reiterate the point we've made in previous quarters that raw material cost pressures increased as the year progressed, in line with our expectations. Given the ongoing supply chain environment impacting our industry, we continue to experience material impacts from rising costs, which affected us in the fourth quarter of 2021. We expect that higher raw material and shipping costs will be ongoing headwinds to our margins as we enter 2022. We expect to partially mitigate this impact through price increases that went into effect on January 1, 2022. Operating expenses, excluding legal settlements and loss contingencies, were 21.9% of revenue compared to 21.6% in the prior year, primarily due to cost-cutting efforts in the previous year to mitigate pandemic-related impacts. Our full year 2021 adjusted EBITDA was $68.2 million, a 10.6% margin, compared to $62.1 million last year, or a 12.8% margin. The year-over-year change in margin primarily reflects lower gross margins and higher operating expenses to revenue growth, as well as the result of our acquisitions in the fourth quarter of 2020. Adjusted diluted earnings per share were $0.83 compared to $0.48 in the prior year on a similar share count. Turning to our balance sheet, Caesarstone's balance sheet as of December 31, 2021, included cash, cash equivalents, short-term bank deposits, and short and long-term marketable securities of $94.2 million, with total debt to financial institutions of $12.5 million, providing us with a solid net cash position of $81.7 million. Our strong balance sheet leaves us confident that we have ample resources to execute our strategic initiatives into 2022. Moving to our outlook, we are pleased to introduce 2022 guidance for revenue to be in the range of $710 million to $725 million. This implies growth of approximately 11% over 2021 at the midpoint of the range. The drivers of growth include volume and price improvements in our key markets. We expect adjusted EBITDA as a percentage of sales to remain similar compared to 2021. We anticipate that higher sales and selling prices will offset the increased costs associated with raw materials and shipping. Our outlook also includes the investment costs associated with our Global Growth Acceleration Plan. With that, let me turn the call back to Yuval for closing comments.

Thank you, Nahum. In closing, I am happy with our 2021 results, which demonstrated tangible progress in executing our Global Growth Acceleration Plan. As we move into 2022, we enter an inflection point in our journey to become a $1 billion countertop leader and see multiple growth opportunities available to us to drive long-term value creation in our business. The integration of our Lioli and Omicron acquisitions is extending our addressable market, and we continue to carefully evaluate additional M&A opportunities that can bring meaningful synergies. We are pleased with the successful rollout of our CS Connect platform in the U.S., which is helping to create a step change in the way we manage customer engagement and experience. Based on the upward trajectory of our business and the strategic initiatives we have in place, I have the utmost confidence in our ability to deliver on our near and longer-term goals. I look forward to updating you further on our progress in the coming quarters. Thank you, and we are now ready to open the call for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. A confirmation tone will indicate your line is in the question queue. Our first question comes from the line of Thomas Henry at The Benchmark Company. Please proceed with your question.

Good afternoon, everyone. This is Thomas Henry on behalf of Reuben Garner. You mentioned both price and volume driving the double-digit growth in 2022. Could you give us a better sense of how much of the 11 points is attributable to both price and growth?

Hi, Thomas. Thanks for the question. I think it is better to start with what we are experiencing now, as we have a much clearer path regarding our Global Growth Acceleration Plan. We see a great outcome from this plan, introduced in 2019. Several growth engines are working in our favor, so it's more than just a price increase. Our addressable market has more than doubled as we now service our customers with porcelain and natural stone along with quartz. We launched a new go-to-market tool based on technology, advising and overcoming to engage business partners with a tool to manage the consumer purchase journey. We have now direct access to two new areas or regions, Florida and Ohio Valley, in the U.S. after the acquisition of Omicron, and it's going well. We are executing a much-accelerated plan of our Big Box strategy in the U.S. Overall, these growth engines, along with new collections we’ll be launching in 2022, are pushing us toward double-digit organic growth for the second year in a row, and I believe it is sustainable for the coming years as well.

And to add to that for 2022, the price increases we introduced to the market in January 2022 will have their impact gradually over the year. So the increase in revenue is partially attributed to those price increases and also to higher quantities and higher demand.

All right. Thank you. And just a quick follow-up. Is there a flat margin outlook for 2022? Is that implying that you will be trying to catch up with inflation as that pricing flows through the earlier part of the year, and that we'll see improvement in the latter half?

Pretty much so. As you just mentioned, it's important to say that we are bringing back guidance to our revenue as we have greater confidence in our growth journey. We have issued guidance of $710 to $725 million in revenue. Due to the volatility we see in the market, in commodities, and in the macroeconomic inputs, we will demonstrate quarter-over-quarter improvements in both gross EBITDA and gross margin. For now, however, we are catching up with the EBITDA margin and believe it’s going to be quite similar to the year before.

Thank you. One final question for me. Are there any geographies outside of the U.S. that you are expecting to be material leaders or laggards from a material volume standpoint?

In 2021, we saw improved demand in all territories, and we expect this trend to continue into 2022, not only in the U.S. but also in other regions.

Thank you very much, everyone.

Thank you, Thomas.

Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Hey, everybody. Thank you for taking the question. Quick question. Could you talk about how you are operating at the plant level throughput yields? I'm just curious to see how the footprint is performing. And then any update on what's happening in Savannah in terms of adding additional capacity down there?

Hi, Stanley. Good to hear from you. I will start with the regional facility, and then Nahum will complete the rest of the question. We're experiencing significant improvement in efficiencies at our Richmond Hill plant, and we are edging capacity from quarter to quarter. We're not fully utilizing capacity yet in 2022, but we are nearing that full capacity over the next 24 months or so. Overall, the Richmond Hill facility is adding more and more capacity and volume to our business to serve our customers in the U.S., as our business is growing rapidly there. For the Israeli plants, Q4 was a good quarter in terms of utilization without any major changes from prior quarters.

Great. With transportation costs being higher, how are you doing in terms of finding alternative sources for some of your material inputs, just thinking about the supply chain impact?

We are constantly looking for substitute materials and locations so we can maintain maximum efficiency. Yet, we are experiencing increases in costs, which we intend to mitigate with the price increase effective January 3rd. This will gradually impact the P&L quarter-to-quarter until year-end. Overall, I believe we are mitigating those costs and are not currently taking any potential upside as we focus on ongoing improvements from quarter-to-quarter.

Perfect, everybody. Thank you so much. Best of luck.

Thank you very much.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

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

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Thank you.

Thank you.