Caesarstone Ltd (CSTE) 2021 Q4 法說會逐字稿

Greetings, and welcome to Caesarstone Limited Fourth 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. 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 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 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 are 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 fifth straight quarter of year-over-year revenue growth. This allowed us to conclude 2021 with a year of record revenue, with more than $600 million in sales for the first time in Caesarstone's 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 the U.S. sales, driven by 3 key areas: organic growth, big box channel growth and the contribution of our Omicron Granite & Tile acquisition.

We saw a continuation of positive momentum in the big box channel during the quarter. We accomplished solid year-over-year growth in the sales of Caesarstone-branded slabs at Home Depot stores. In addition, sales in IKEA continued to recover, increasing approximately 50% quarter-over-quarter.

Looking beyond organic performance, we were pleased to see strong contribution 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 continue to 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 2 accretive acquisitions, which were both completed in the fourth quarter of 2020.

As we look forward, we are seeing continued momentum in demand for Caesarstone premium best-in-class products and are excited to further augment our track record of innovation through the introduction of new multi-material product offerings in 2022.

To that end, following a year of solid results as well as meaningful progress with executing our strategy, we have a clear path forward into the next stage of our growth journey and are excited to introduce today a long-term financial goal for 2025, which includes revenue growing to $1 billion based on the expected benefits from our multi-material strategy, new go-to-market capabilities as well as incremental revenue from our CS Connect platform.

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 to combine 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, and we expect to continue to do so. The plan can be categorized into 3 strategic pillars: a premium multi-material offering, customer experience and engagement and global footprint expansion.

In regards to our multi-material offerings, we have leveraged our acquisition of Lioli and Omicron to design products that incorporate new materials, and 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, which also leverages our leading craftsmanship, engineering knowledge and the global sales force has more than doubled our addressable market.

In conjunction with product development, our marketing teams continue to define Caesarstone as a trendsetter and design innovator, allowing our sales force to accelerate growth of our global share in the countertop industry with unique offerings that utilize our proprietary technology helping to drive a superior value proposition.

As it relates to 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 CS Connect platform has performed in line with our strategic vision to leverage technology to own the countertop value chain and to create new revenue channels while bringing us closer to our customers and business partners. With now already over 700 retail partners and counting, we expect to generate significant revenue from CS Connect over 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, and we will take disciplined approach to review value-enhancing opportunities that can provide us with attractive synergies.

Overall, we are proud to share our 2025 financial goals with you today and believe that 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 of countertops all around the world. 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 our ability to navigate through the current cost environment as we further 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. The 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 Omicron acquisition as well as growth in all regions.

In the Americas, constant currency sales were up 33.7%, mainly due to the growth in the U.S. In the U.S., sales were up 44.8%, driven by our acquisition of Omicron, organic growth and strong growth in the big box channel. We experienced solid growth in sales of our products also 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 both better core business performance and an increase in sales to IKEA. In the APAC region, constant currency sales were up 4.4%. Australia accounts for the majority of our sales in the region and saw year-over-year growth.

In the EMEA region, constant currency sales grew 27.8%, primarily reflecting strong performance in the U.K. as well as in our indirect markets.

In Israel, on a constant currency basis, sales were up 20.1% in the fourth quarter, reflecting our strong performance as well as an easier comp given the Jewish holidays which took place 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. Adjusted gross margin was 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 and primarily reflected higher raw material prices, mainly in polyester, in addition to increasing shipping prices, which was partially offset by price increases and 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 returned to normalized levels of marketing and selling expenses and the 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 13.7% 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 looking at our full year financial performance highlights. Sales for the full year were up 32.4%. On a constant currency basis, sales were up by 28.1%. This increase included 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 the polyester, and shipping price increase, which were partially offset by favorable product mix, selling price increases and more favorable exchange rates.

I'll 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 tight supply environment impacting our industry. We continue to experience material impact from rising costs which impacted us in the fourth quarter of 2021. We expect that higher raw material and shipping cost will be an ongoing headwind to our margins as we enter 2022, though 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 prior year to mitigate pandemic-related impact.

Our full year of 2021 adjusted EBITDA was $68.2 million, a 10.6% margin, compared to $62.1 million last year or a 12.8% margin, with the year-over-year change in margin primarily due to lower gross margins and higher operating expenses (technical difficulty) [support] the 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 the 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 in place to execute further 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 are our 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 higher sales and selling prices to offset the increased costs in connection 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'm 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 levers available to us to drive long-term value creation in our business.

The integration of our Lioli and Omicron acquisitions are expanding 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 utmost confidence in our ability to deliver on our near- and long-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.

(Operator Instructions) Our first question comes from the line of Reuben Garner with The Benchmark Company.

This is Thomas Henry on for Reuben Garner. You mentioned both price and volume driving the double-digit growth in '22. Could you give us a better sense of how much of the 11 points is attributable to both price and growth?

Thomas, thanks for the question. I think it's better to start with what we're experiencing as we are -- as we have now a much clearer path of our Global Growth Acceleration Plan, we see a great outcome of this plan that we introduced in 2020 -- sorry, in 2019. And now a few growth engines are working in our direction, so it's more than just price increase. We see that our addressable market for us has more than doubled as we are now servicing our customers with porcelain and natural stone together with quartz. We launched new go-to-market tool in the market based on technology, advising our K&B business partners with a tool to manage the consumer journey or consumer purchase journey. We have now a direct access to 2 new areas or regions, Florida and Ohio Valley in the U.S. after the acquisition of Omicron and it's going well and we are growing there. And obviously, we are now executing a much -- or accelerated plan of our big box strategy in the U.S.

All in all, you see that kind of all these growth engines, together with new collections that we're going to be launching in 2022, bring us to double-digit growth organically second year in a row, and I believe it's sustainable for the coming years as well.

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

All right. And just a quick follow-up. Is there a flat margin outlook for '22? Is that implying that you'll be trying to catch up with inflation as that pricing flows through in the earlier part of the year and that we'll see improvement in the latter half?

Pretty much as you just mentioned. I think it's important to say, to mention, that we are bringing back guidance to our revenue as we have a much greater confidence in our growth journey, as we are becoming more growth in the company. And we issued a guidance of $710 million to $725 million in revenue.

In line with that, with the volatility that we see in the market in commodities and in the macroeconomic inputs, we will be demonstrating quarter-over-quarter of margin improvement in gross EBITDA and gross margin improvement. But at the moment, we are catching up with the EBITDA margin. So believe it's going to be quite similar to the year before.

Excellent. And one final question from me. Are there any geographies outside of the U.S. that you're 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 as well.

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

A quick question. Can you talk about how you guys are operating at the plant level, throughput yields? 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?

Stanley, good to hear from you in COVID. I will start with Richmond Hill facility, and then I will be completing the rest of the question.

We are experiencing quite nice improvement in our efficiencies in Richmond Hill plant and we are adding capacity from quarter-to-quarter. The capacity is not -- we are not utilizing full capacity yet in 2022, well, but we are approaching that full capacity over the, I would say, 24 months or so. So all in all, 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 and growing quite rapidly in the U.S.

And for the Israel -- and Stanley, for the Israeli plants, Q4 was a good quarter in terms of utilization, without any major changes from prior quarters.

Great. And with transportation costs being higher, I mean, how are you guys doing in terms of finding alternative sources for some of your material inputs? Just kind of thinking about the supply chain impact.

We are constantly looking for subsidiary materials and locations so we can maintain our efficiency at the maximum. Yet we are experiencing increase in cost, something we are intending to mitigate with the price increase we issued effective on the January 3. And it's -- and it will manifest itself to the P&Ls quarter-after-quarter with gradual improvements until year-end.

So all in all, I believe we are mitigating those costs and we are not -- at the moment, we're not taking any potential upside and our view is that it'll be advising us, it will be on the top of our ongoing improvement from quarter-to-quarter.

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

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

Thank you.

Ladies and gentlemen, this does conclude 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.