Caesarstone - Q2 2022

Transcript

Operator (participant)

Greetings, and welcome to the Caesarstone second quarter 2022 earnings call. At this time, all participants are in 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 then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray from Investor Relations. Thank you. You may begin.

Brad Cray (VP)

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 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, adjusted net income 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 second quarter 2022 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 (CEO)

Thank you, Brad, and good morning, everyone. The second quarter of 2022 marked another period of significant progress for Caesarstone, in which we achieved our sixth consecutive quarter of double-digit year-over-year revenue growth, led by North America, resulting in record second quarter revenues of $180.3 million. Overall, our results were largely in line with our expectations as we demonstrated further progress against our multi-pronged growth strategy while navigating through a complex global environment. During the quarter, we were able to grow revenues in the U.S., our largest market, by almost 20%, while also successfully implementing pricing actions that helped us mitigate impacts from increasing costs for raw materials and shipping. In turn, we were able to improve our margins on a sequential basis as expected for two quarters in a row.

Our growth in the U.S. continues to be driven by organic growth from the successful integration of our Omicron Granite and Tile business acquired in the fourth quarter of 2020. Benefits from our big box channel sales are also providing solid contributions to our results. As we work to increase our direct presence in our markets as a path to help us gain additional market share, we are excited to report that in July 2022, we acquired a leading distributor in Sweden, establishing our first direct go-to-market presence in the EU. Acquiring this business with $4 million of annualized sales is an important step in our strategy to grow in Europe over time by providing us with a hub in the region directly owned by Caesarstone. In regards to customer experience and engagement, our innovative digital CS Connect platform is performing exceptionally well.

We are well in the path to expanding the reach of this platform further across North America. We are also introducing exciting new product families in several of our regions, including the recent introduction of our new Pebbles Collection. Additionally, and in furtherance of our multi-material growth strategy, we remain focused on introducing our new global Porcelain collection under our Caesarstone brand that will be launched in the third quarter of this year. While we are executing against our strategic growth plan, we are carefully monitoring the cost environment. We recently announced an additional price increase in July to help offset the rising cost of shipping and raw materials. This builds upon our previous 2022 price increases in January and April.

Moving into the second half of 2022, we are confident that the execution of our Global Growth Acceleration Plan is providing for fundamental improvements in our business despite some quarter-to-quarter volatility that we will continue to work through. We are well aware of the potential period of economic uncertainty that lies ahead, and I feel confident that through the actions we have taken over the past four years, we are better positioned than ever to accomplish our objectives. These actions include the significant investment to improve our supply chain and inventory management to have the right products in place to match demand. Next, improve efficiencies at our Richmond Hill facility in the U.S. has put us in a better setup to locally serve the North American region, resulting in shorter lead times and cost savings.

Third, establishing a new leadership team with the right core disciplines as a global organization has provided us with an ability to better allocate and prioritize our resources. Fourth, our regional realignment has helped us to streamline our regional leadership and cost structure and allow for quicker decision making with global and local teams working much more closely together. Lastly, the introduction of our multi-material growth strategy has expanded our addressable market and diversified our business into other attractive counter-product categories beyond quartz. These actions, along with other significant actions we have taken through the Global Growth Acceleration Plan, have also allowed us to push through the pandemic, the global supply chain crisis, and the most significant inflationary pressures our industry has seen in years.

As we move forward, we will continue to leverage our world-class brand, innovative go-to-market initiatives, and multi-material product offerings to drive additional value for our shareholders. With that, I will now turn the call to Nahum to discuss more details on our financial results and outlook.

Nahum Trost (Director of Finance)

Thank you, Yuval, and good morning, everyone. I will start by discussing our second quarter results. Global revenue grew 10.3% to a second quarter record of $180.3 million, compared to $163.5 million in the second quarter of last year. On a constant currency basis, second quarter revenue was higher by 13.7% compared to the same period last year, primarily due to higher pricing across our global footprint, particularly in North America. In the Americas, constant currency sales were up 20%, mainly due to the growth in Canada and the U.S. In the U.S., sales were up 19.5%, driven by strong organic growth. We also experienced solid double-digit growth in our other products, such as natural stone and ancillary products.

In Canada, sales were up 20% year-on-year on a constant currency basis, driven by strong performance in all channels, with IKEA sales continuing to experience strong year-over-year growth. In the APAC region, constant currency sales were up 5.4%. Australia, which accounts for the majority of our sales in the region, and saw year-over-year growth on a constant currency basis, despite continued headwinds from supply chain issues that improved during July. In the EMEA region, constant currency sales grew 11.7%, primarily reflecting solid performance in the U.K., as well as in our EMEA indirect business. In Israel, on a constant currency basis, sales were lower by 19.6% in the second quarter, mainly reflecting competitive pressures in the region. Looking at our second quarter P&L performance. Our gross margin was 26.4% for the quarter.

Adjusted gross margin was 26.4%, compared to 28.1% in the prior year quarter. The year-over-year difference in gross margin primarily reflected higher shipping and raw material prices and unfavorable foreign exchange rate fluctuations that were partially offset by favorable product mix and selling price increases. As we have discussed in previous quarters, we continue to experience pressure from rising costs associated with shipping and raw materials, given the ongoing tight supply environment impacting our industry. In the second quarter of 2022, we were impacted mainly from shipping cost increases across our global footprint. We expect the unfavorable impact of higher raw material and shipping costs to persist. In response, we expect to partially mitigate this impact through an additional price increase that went into effect during July 2022 in several of our markets.

The first quarter price increase that went into effect on January 1st, 2022, and our second quarter price increase that went into effect in April 2022. Operating expenses were 22.8% of revenues, compared to 24.8% in the prior year quarter. Excluding legal settlements and loss contingencies, operating expenses for the quarter were 22.1% of revenue, compared to 22.3% in the prior year quarter, mainly due to higher revenues. Adjusted EBITDA in the second quarter was $17.1 million, representing a margin of 9.5%, compared to $18.8 million or a margin of 11.5% in the prior year quarter. The year-over-year decline primarily reflects the decline in gross margin.

Adjusted diluted earnings per share in the quarter was $0.20, compared to adjusted diluted earnings per share of $0.21 in the same period last year on a similar share count. Based on our net income performance during the second quarter and the year-to-date period, our board declared a dividend of $0.25 per share with a record date of August 17th and payment date of September 7th, 2022. Turning to our balance sheet. Caesarstone balance sheet as of June 30th, 2022, included cash equivalents, and short-term bank deposits, and short and long-term marketable securities of $62.2 million. With a total debt to financial institutions of $18 million. We believe that our balance sheet provides us with an ample resources to execute on our strategic initiatives. Moving to our outlook.

We are reiterating 2022 guidance for revenue to be in the range of $710 million-$725 million. This implies growth of approximately 11% over 2021 at the midpoint of the range. The drivers of the growth are mainly price improvements in our key markets. We continue to 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 cost 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.

Yuval Dagim (CEO)

Thank you, Nahum. Overall, our best-in-class product offerings, successful integration of our acquired businesses, and targeted efforts to enhance the customer experience through the expansion of our CS Connect platform, are all driving fundamental improvements across our business. Our team's commitment to excellence is providing us with strong foundations to achieve our long-term goal of becoming a $1 billion global countertop player by 2025. We remain confident in the levers we have available to us to achieve this goal. Looking ahead, we'll continue to navigate the complex global operating environment with a prudent focus on improving our margins and operational leverage through careful cost management and the implementation of price increases where necessary.

With our strong brand, premium product offerings, and innovative go-to-market initiatives in place, we are well situated to advance our position as the multi-material global countertop leader in 2022 and beyond. I look forward to updating you again on our progress in the coming quarters. Thank you, and we are now ready to open the call for questions.

Operator (participant)

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star key. The first question we have is from Reuben Garner from The Benchmark Company.

Thomas Henry (Analyst)

Good afternoon. This is Thomas Henry on for Reuben Garner. Can you break down the price versus volume assumptions in the new full-year revenue guide? Are there any regional call-outs in terms of changes versus the prior guide?

Yuval Dagim (CEO)

Hi, Thomas. Just in general, Nahum will be elaborating a bit more. What we see in our revenue forecast for the year is a growth of double-digit against last year, mostly dominated by prices. Originally, we thought it's gonna be probably a third growth by the volume and 2/3 by prices. I think it's becoming more dominated by prices rather than volume.

Nahum Trost (Director of Finance)

Yeah. As we are continuing with our price increases across the majority of our regions also in July after two price increases that we already did during this year, first in January and the second in April, we see higher portion of the increase in revenues as we are reiterating our guidance coming from prices and the lower portion coming from volume.

Thomas Henry (Analyst)

Great. Thank you. Are there any benefits from freight or perhaps other areas of cost deflation embedded in the second half outlook, or are these likely 2023 events?

Yuval Dagim (CEO)

At the moment, there are no benefits from shipping or raw material cost decrease embedded in the forecast. We kind of took the current costs that we have currently and took it to the rest of the year. Any changes will be probably advised us to 2023.

Thomas Henry (Analyst)

All right. Thank you. One last question. Given the global uncertainty and changes in rates over the past few months, are there any changes in terms of the investments you're planning to drive growth, and do you anticipate spending perhaps to slow down or will you pull back?

Nahum Trost (Director of Finance)

Currently, we are taking all the necessary actions, including controlling expenses as we did in the previous two quarters for the remainder of the year. Other than that, we currently, you know, we don't see any major change in our level.

Yuval Dagim (CEO)

We, Thomas, in addition, we are monitoring quite carefully our inventory levels. As we haven't seen any drop in demand so far, we continue to monitor those inventory levels and adjust them as necessary in the future. At the moment, we feel quite strong with our customer service and the ability to serve all our markets appropriately.

Thomas Henry (Analyst)

Thank you. Good luck in the quarter.

Yuval Dagim (CEO)

Thank you so much.

Nahum Trost (Director of Finance)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have is from Jonathan Stanley.

Andrew Kerai (Equity Research Associate)

Good morning. This is Andrew on for Stanley. I was wondering if you could expand a little bit on your gross margin assumptions for the back half of the year. Do you expect them to expand sequentially throughout the year? When do you expect them to return to year-over-year growth?

Nahum Trost (Director of Finance)

Given that we are reiterating our guidance for the full year and the first half results, you know, you can assume a slight improvement over the second half of the year. Although we kept you know, prices, as Yuval just mentioned, cost of raw material and shipping costs at a high level, but stable. We introduced another price increase, so we still need to see how that you know comes in the second half.

Andrew Kerai (Equity Research Associate)

Got it. Could you give a little bit more color on the acquisition in Sweden, of how it fits into your strategy and how many locations and any other countries other than Sweden? Thanks.

Yuval Dagim (CEO)

Sure. Thanks for the question. Well, in our strategy, we have one specific pillar regarding global footprint expansion. As in Europe, we are still having a major part of our revenue being done by distributors. It was a good opportunity to go direct in Sweden and to acquire one of our distributors and to have our first direct business in the European continent. We are expecting this business in Sweden to be acting as a hub for us for the northern part of Europe, and we'll see how that will be progressive in the future.

Andrew Kerai (Equity Research Associate)

Got it. Could you talk about any trends you're seeing in North America in through July, given the new construction markets are sort of slowing? Or what are you seeing across repair and remodel?

Yuval Dagim (CEO)

Well, so far, through all year long, we kind of experiencing quite strong demand for our product as we are more dominant in the R&R channels. We are less exposed to a new construction channels as it was quite a strategic decision to make sure that we are not coming with, you know, too big portion of revenue with the fixed prices to major projects. So far, we haven't experienced any major slowdown.

Andrew Kerai (Equity Research Associate)

Got it. Thank you.

Yuval Dagim (CEO)

Thank you.

Nahum Trost (Director of Finance)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, at this stage, we have reached the end of our question and answer session. I would like to turn the call back to Yuval Dagim for closing remarks. Please go ahead, sir.

Yuval Dagim (CEO)

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

Nahum Trost (Director of Finance)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.