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spk07: Greetings and welcome to the Caesarstone third quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. Please go ahead.
spk06: Thank you, Operator, and good morning to everyone. I am joined by Yuval Begim, 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-S 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 third 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.
spk04: Thank you, Brad, and good morning, everyone. Building on our solid first half 2021 performance, we were pleased to achieve third quarter results that demonstrated our ability to continue to effectively execute our global growth acceleration plan to drive business enhancements and value creation. We achieved yet another period of record quarterly revenue and our fourth sequential quarter of year-over-year revenue growth attributable to increasing demand for our best-in-class products across the U.S. and the majority of our global markets. In the U.S., we were encouraged to see significant growth in our sales driven by three areas, big box channel growth, core business growth, and the contribution of our Omicron acquisition. In the big box channel, our sales of ScissorStone branded slabs for U.S. Home Depot stores continued to be another bright spot as revenue increased nearly 50% year over year. We are also happy that our sales to IKEA US recovered substantially during the quarter. In addition, we drove core business improvement and experienced positive contributions from our acquisition of Omicron, a premier stone supplier in the highly attractive markets of Florida and Ohio Valley. we are starting to see the benefits of synergies from Omicron. The geographic and service benefits from this acquisition have been very encouraging, and we could not be more pleased with the integration efforts of our teams. Our APAC region continues to benefit from sales related to our Leoli acquisition, and we remain excited to launch an innovative new porcelain collection under the Sizzleton brand next year. As it relates to business enhancement initiatives, during the third quarter we rolled out our innovative CS Connect platform nationally across the U.S. as planned. We view this national rollout as another critical milestone in our efforts to expand the reach of this digital platform that is helping us to simplify the content of purchases process and create a step change in the way we communicate with our customers and consumers. The feedback received from our partners and customers has been very positive, and we are currently evaluating implementation of the platform in several of our other global regions. Separately, as we discussed last quarter, our teams are committed to effectively mitigate global supply chain and raw material cost increases impacting ScissorStone and our industry through careful cost management and other strategic actions such as price increases. So far, we have been able to offset some of the rising costs through the price increases that went into effect during 2021, and we recently announced additional price increases in most of our territories to be implemented on January 1st, 2022. We continue to diligently monitor cost trends, and although we are taking actions to partially offset the rising costs, we do expect widespread global shipping challenges, and raising inputs costs to continue to weigh on our margins in the coming quarters, with gradual improvement during 2022 as we realize the price increases in our markets. That said, I am confident in the actions we are taking to enhance our operations and believe our business remains on a positive trajectory to deliver long-term value. Looking ahead, we have a strong balance sheet and cash position to continue deploying capital in an accretive nature. This will include developing, testing, and introducing premium multi-material offerings to grow our addressable market in the quarters and years to come. I would also like to take a moment to highlight the publication of our first ever global ESG report in October. We are pleased with our ESG accomplishments to date and are excited to have now built a prudent framework to accomplish our new ESG goals set forth in the report. We believe our success is directly related to how well we take care of our clients, our employees, and our communities, and we are dedicated to help create a more sustainable future for all of our stakeholders. With that, I will now turn the call over to Nahum to discuss more details on our financial results and outlook.
spk01: Thank you, Yuval, and good morning, everyone. I will start by discussing our third quarter results. For the third quarter of 2021, global revenue increased to a third quarter record of $163.3 million, representing 31.8% growth, compared to the prior year period. On a constant currency basis, third quarter revenue was higher by 29.2% compared to the same period last year, primarily due to improved demand in most of our regions across our global footprint. Revenue for the period also included approximately $22.8 million in contribution from our acquisitions of Omicron and Loyola ceramica that we completed during Q4 last year. Now looking at our regions. In the Americas, constant currency sales were up 42.6%, mainly due to growth in the US. In the US, sales were up 51.8%, driven by our acquisition of Omicron, core business improvement, and strong growth in the big box channel. Our sales in Home Depot stores were up nearly 50% year on year for the third quarter, and we also experienced increased activity at IKEA stores in the US, which led to a strong recovery in sales with this retailer. In Canada, sales were up 11% on a constant currency basis, driven by stronger core business performance and a slight increase in our sales to IKEA. In the APAC region, constant currency sales grew 16.3%. In Australia, which accounts for the majority of our sales in the region, growth was driven by improved demand despite rigid COVID-19-related restrictions that continued in most of the quarter and into October. Contributions from our business in Southeast Asia and Loyoli were also additive to the APAC region sales in the third quarter. In the EMEA region, constant currency sales grew 18.2% as we experienced strong demand in the UK and the indirect sales channel. In Israel, On a constant currency basis, sales were down 12.2% in the third quarter, primarily related to competitive market conditions in the region together with lower number of selling days compared to the prior year quarter due to the timing of the Jewish holidays. Looking at our third quarter P&L performance, Our gross margin was 26.2% for the quarter. Adjusted gross margin was 26.3% compared to 31.4% in the prior year quarter. The year-over-year difference in gross margin was in line with our expectations and primarily reflected high raw material prices, mainly in polyester, in addition to increasing shipping prices which was partially offset by price increases and more favorable product mix and exchange rates. As many industries have experienced, pressures from raw material costs have increased as the year progressed, given the ongoing tight supply environment impacting our industry. We experienced material impacts from rising costs in the third quarter of 2021, particularly in the polyester and shipping prices. Operating expenses, excluding legal settlements and loss contingencies, were 21% of revenues, compared to 18.8% in the prior year quarter. The increase was mainly due to a return to normalized levels of marketing and selling expenses and investments related to initiatives under our global growth acceleration plan. Adjusted EBITDA in the third quarter was $17.7 million, representing a margin of 10.8% compared to $23.7 million, or a margin of 19.1% in the prior year quarter. The year-over-year difference in margin primarily reflects the lower gross margins and together with higher operating expenses compared to last year. Adjusted diluted earnings per share in the quarter were $0.20 on 34.6 million shares, compared to adjusted earnings per share of $0.41 in the same period last year on 34.5 million shares. Turning to our balance sheet, as of September 30, 2021, we had cash, cash equivalents, and short-term bank deposits and short and long-term marketable securities of $104.7 million, with a total debt to financial institutions of $13.2 million, providing us with a strong cash position of $91.5 million. Resiliency of our balance sheet continues to give us confidence in our ability to execute towards the initiatives under our global growth acceleration plan. In accordance with our dividend policy and based on our net income performance during the third quarter and the ninth month period of 2021, our board declared a dividend of 10 cents per share with a record date of November 17 and payment date of November 30th, 2021. Moving to our outlook. Based on our performance year to date, we are reiterating our expectations for revenue and adjusted EBITDA to be higher year over year in 2021, with the expectation that revenue will grow faster than EBITDA. This outlook assumes slightly lower annual gross margin compared to 2020, with more favorable mix and higher revenue being offset by the higher raw material and shipping costs that I discussed earlier. In the fourth quarter, we expect that higher raw material and shipping costs will be an even more significant headwind to our margins. We expect to partially mitigate this impact through additional price increases and other cost-cutting initiatives. As Yuval discussed, on November 1st, we announced a price increase in most of our markets to take effect on January 1st, 2022. Additionally, we expect operating expenses to remain elevated on a year-over-year basis as we continue to invest in sales and marketing at normalized levels to support our brand and future growth. These costs have returned as we have ramped back up investments in our growth initiatives following a temporary reduction in investment during 2020 in an effort to mitigate pandemic-related impacts. With that, let me turn the call back to Yuval for closing comments.
spk04: Thank you, Nahum. In closing, our third quarter results represented continued progress against our strategic plan and we remain encouraged by our performance year to date. Our successful national rollout of CS Connect platform in the U.S. Strong synergies from our Omicron business and our planned porcelain product launches give us optimism in the trajectory of our business as we make meaningful, tangible progress on our global growth acceleration plan. Looking to the remainder of the year, we have a strong cash position to continue with prudent investments in our sales and marketing capabilities as we utilize our world-class sales and brand to build additional value for our shareholders. Thank you, and you are now ready to open the call for questions.
spk07: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register a question at this time. Our first question is coming from Stanley Elliott of Stiefel. Please go ahead.
spk05: Hey, good morning. This is Andrew Mazeroth for Stanley. I'm wondering if you could maybe bucket the margin headwinds in the quarter related to materials or shipping logistics or plant inefficiencies.
spk03: Maybe I will start. Generally speaking, I think margins came quite aligned to what we advised in the second quarter. We haven't seen anything in addition to what we already saw in our costs in raw materials and shipping costs during our production schedules in Q2 before servicing the markets in Q3. So all in all, not great surprises. very much in line of what we expected to have.
spk02: Yeah, so the 5% decrease can be attributed to 240 basis points relates to the higher raw material cost, 210 basis points related to the landed cost, to the increase in the landed prices, and 250 basis points relates to the lower throughput that we had in in our Israeli plans. Those three items were partially offset by higher revenue improved product and regional mix of around 280 basis points.
spk05: Perfect. Thank you. And I guess on Q4, what sort of margin headwinds would you expect there? And when do you think price costs would turn positive for you all? And when do you expect to see year-over-year margin growth, either for gross margins or EBITDA margins?
spk03: We do believe that the fourth quarter will be a continuation of what we see in Q3, with some adjustments as we see the products coming from the balance sheet to the P&L. Yet we are expecting to demonstrate some gross margin recovery on the back of our global price increase that we lately announced.
spk02: So the price increase will offset partially in Q4, but will have a higher impact during next year. As we said, the price increase will be, majority of it will be effective January 1st. In addition, keep in mind that Q4, given our seasonality, is a bit slower quarter in terms of revenues, given holidays, Christmas. So it will also impact our margins in Q4. Gotcha. Thank you.
spk05: And last one on CS Connect, I was wondering if you could maybe provide any metrics around that? Maybe what percent of the U.S. is trained in using this and does it give you any better visibility into 2022?
spk03: Yeah, the CS Connect platform has been launched two quarters ago and since then we are distributing or expanding the spread and the presence of CS Connect in the market, especially with our Kitchen and Bath partners. So far, we're very pleased with the take of this platform, but it's very early days now to put the metrics and financial metrics around our expectations. We are going to be expecting way more of that in 2022, and I'll be more than happy to report on the progress in the coming quarters.
spk05: Awesome. That's all I got. Thank you,
spk07: Thank you very much, Andrew. Once again, ladies and gentlemen, that is star one to register a question at this time. One moment, please, while we poll for any additional questions. We're showing no additional questions at this time. I would like to turn the floor back over to Mr. Dagum for closing comments.
spk04: Thank you for your attention this morning. We look forward to updating you on our progress next quarter.
spk02: Thank you.
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