Greetings, and welcome to the Caesarstone Second 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. 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 Daheb, Caesarstone's Chief Executive Officer Ophir Yakobian, Caesarstone's Chief Financial Officer and Nahum Tross, Director of Finance, Who will succeed Ophir as Chief Financial Officer on September 1, 2021. 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 and be found in the company's Q2 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. As we move further into 2021, I'm very pleased with the pace of recovery we've seen across our business Since the unprecedented year of 2020, as demonstrated by our robust financial results this quarter. During the Q2, we achieved record quarterly revenue of $163,000,000 mainly driven by the Focused execution of our global growth acceleration plan and our ability to capitalize on the continued recovery in the U. S, where we continue to see the greatest potential for growth. We also saw broad based improvement In demand, across our majority of our other global regions as economies around the world Continue to recover from the pandemic.
We drove top line improvement in the U. S. Through a combination of core business improvement, Big box channel growth and the encouraging contribution from our previously announced accretive acquisition of Omicron, A premier stone supplier in Florida and Ohio Valley. It is also important to remember that one of our main strategic pillars Is the focus on improving customer experience and customer engagement, a theme that is managed under the several projects In relation to this pillar and as we have previously discussed, CS Connect It's a transformative digital platform that introduces a technological leap in the way we communicate and connect With our customers and consumers to effectively manage the consumer purchase journey. We recently started implementing CS Connect in several of our key U.
S. Markets as planned, and we are happy with the initial feedback and progress We have made. This follows the successful pilot program in Australia during early 2021. In the coming quarters, we expect to expand the rollout of this platform across the U. S.
And Canada. However, the initial U. S. Launch is already opening new doors for our expanded U. S.
Sales force To establish new relationship and improve engagement. Additionally, our success continues to be bolstered By further penetration into the big box channel through sales of Caesarstone branded slabs at U. S. Home Depot stores. I would also note that our relationship with IKEA remains very important to us, and we are encouraged to see the recovery in our service into this retailer.
On the M and A side, our integration of both Omicron and the Oli continue to progress in line with our plan. Omicron is proving to be extremely complementary to our geographic footprint in the U. S, bringing us closer to our customers Most notably, in Florida, where demand remains strong. Separately, our L'Oreal acquisition continues to be Additive to our sales, mainly in the APAC region and into the Q3, we are excited to introduce Pilot sales of Caesarstone branded Lioli porcelain slabs in Israel. This is an initial step In the launch of a new and exciting porcelain collection under the Caesarstone brand across our global footprint.
Looking at the cost side, we are pleased with our ability to flex capacity to meet demand, while we continuously evaluate additional opportunities to create Throughout our operations, growth time in 2021, our team has displayed unwavering commitment To effectively mitigate global supply chain and inflation challenges impacting Caesarstone and our industry through careful cost management. In summary, we are highly encouraged by the execution of our strategy, which resulted In a significant growth during the second quarter and the first half of twenty twenty one, we are leveraging a world class Caesarstone brand To capture recovering countertop demand across our global footprint, we are utilizing innovative technology based go to market initiatives Such as CS Connect to enhance customer experience and engagement. We are carefully monitoring raising material and shipping costs and are constantly evaluating opportunities to improve efficiencies in the operations and we are focused on successfully developing, testing In July, we announced the promotion of Nahum Trust, our Director of Finance To the position of Chief Financial Officer beginning on September 1, 2021, as Ophir embarks on his next career opportunity. Nahum has demonstrated outstanding leadership and financial expertise during his 7 years with Caesarstone. Nahum has been a key player with implementing our global growth acceleration plan over the past several years.
I'm confident that Nahum will be an excellent addition to our executive team, and we anticipate a seamless transition. Now before I hand the call over to Ophir to discuss our financial results and outlook, I would like to personally thank him for all his contributions. We have had great partnership together over the last 3 years. His leadership and achievements have helped us immensely To build strong foundations for the future of Caesarstone, and I wish him the best of luck on his next journey. I will now turn the call to Ophir.
Thank you, Yuval, and good morning, everyone. It has been an exceptionally rewarding experience to work with Yuval and the entire team at Caesarstone. I'm proud of the accomplishments and milestones we have achieved together, And I'm working closely with Nahum and the entire leadership team to ensure a smooth transition. I will now discuss our Q2 2021 results. For the Q2 of 2021, global revenue increased To a record of $163,500,000 representing 65.1% growth compared to the prior year period.
On a constant currency basis, 2nd quarter revenue was higher by 55.5% compared to the same period last year, Primarily due to improved demand in most of the regions across our global footprint as economies around the world continue to recover from the pandemic. Revenue for the period also included approximately $21,000,000 in contribution from the acquisitions of Omnicom and Lioli. Now looking at our regions. In the Americas, constant currency sales were up 74.2%, mainly due to growth in the U. S.
In the U. S, sales were up 86.6%, driven by the acquisition of Omicron, Core business improvement and solid growth in the big box channel. Our sales in Home Depot stores more than doubled year on year In Canada, on a constant currency basis, sales were up 35.1%, driven by Stronger core business performance, which was partially offset by decline in our IKEA sales due to COVID related restrictions. In the APAC region, constant currency sales grew 35.1%. In Australia, which accounts for the majority of our sales in the region, Growth was driven by improved demand.
Contributions from Lioli sales were also additive to the APAC region sales in the Q2. In the EMEA region, constant currency sales grew 77.6% as we experienced strong demand in both the U. K. And our indirect markets. In Israel, on a constant currency basis, sales were down 20.5% in the Q2, primarily related to more competitive market conditions.
Looking at our 2nd quarter P and L performance, We improved our gross margin by 7 60 basis points on a year over year basis to 28%. Adjusted gross margin also expanded 760 basis points to 28.1% compared to 20.5% in the prior year quarter. The year over year improvement in gross margin primarily reflects better regional and product mix, more favorable currency exchange rates, Enhanced productivity in our factories and growing demand since the beginning of the pandemic, which were partially offset by lower sales prices And raw material and shipping inflation. As we have discussed previously, raw material inflation Has become an important dynamic for Caesarstone in light of the tight supply environment impacting our industry. We experienced some impact From rising inflation in the Q2 of 2021, particularly in polyester, and we expect that higher raw material and shipping costs There will be more significant headwind to our margin in the second half of the year.
We expect to partially mitigate this impact through price increases And other cost cutting initiatives. Operating expenses excluding legal settlements and loss contingencies We're 22.3 percent of revenue compared to 21.6% in the prior year quarter. The increase was mainly due to higher marketing and selling expenses that we expect to remain elevated on a year over year basis As we continue to invest in sales and marketing at more normalized level to support our brand and future growth. Adjusted EBITDA in the 2nd quarter increased 188 percent year over year to $18,800,000 Representing a margin of 11.5 percent compared to $6,500,000 or a margin of 6.6% In the prior year quarter, the 4.90 basis point improvement primarily reflects the higher gross margin compared to last year. Adjusted diluted earnings per share in the quarter were $0.21 on 34,600,000 shares Compared to adjusted loss per share of $0.10 in the same period last year on 34,500,000 shares.
Turning to our balance sheet. As of June 30, 2021, Caesarstone had cash, cash Equivalent and short term bank deposit and short and long term marketable securities of $121,100,000 We've total debt to financial institutions of $13,300,000 providing us with a strong Net cash position of $107,800,000 we believe our strong balance sheet and cash position leave us Well situated to invest further in the initiatives under the Global Growth Acceleration Plan. Moving to our outlook. We are reiterating our expectation 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 similar 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 mentioned earlier in the call.
We continue to invest in our sales and marketing at more normalized levels to support our brand and future growth. As a reminder, these costs were temporarily reduced in 2020 in an effort to mitigate pandemic related impacts and are therefore returning as we invest in growth initiatives. Our outlook continues to assume that pandemic related business restrictions will continue to fade as the year progresses. With that, let me turn the call back to Yuval for closing comments.
Thank you, Phil. In conclusion, our 2nd quarter results reflect positive momentum in our business and we are encouraged by our Performance in the first half of twenty twenty one. Gaston is becoming a more efficient and technology oriented Organization with a great brand and strong potential will transform the market. I would like to express my sincere gratitude To our team members around the globe who continue to drive our progress and accomplishments. Thank you.
And we are now ready to open the call for questions.
Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Stanley Elliott with Stifel. Please proceed with your question.
Hello, everybody. I hope you all are doing well. Starting off on the top line, is there a way to break out kind of the revenue on A like for like basis, kind of what you're doing on the core business versus what you're doing from additional product placements or additional slots at Home Depot and Recovery in IKEA, etcetera.
Yes. Hi, Tilly. Good to have you in the call. I believe that the background we can provide is mostly between the contribution from the M and A Deals that we have, Omicron and Lioli and the core business. And for the M and A contribution Together Omicron and LYOLA you can take something like $21,000,000 as a contribution for the Q2 revenue.
The things tell you that if you look, this is a fair compared to last year. We've seen a very strong Recovery in all channels, both in the core business, IKEA, Home Depot, So it was an easy comp in Q2 last year, so the recovery was meaningful in all channels.
And you mentioned higher costs in the back half of the year, but kind of full year expectations for gross margin really not changed. How does help us with the pricing mechanisms here. How quickly can you get pricing into the market to offset this? Just curious how you're thinking about that.
I think it's quite obvious this year that with the fluctuation of shipping costs and raw material costs, We need to act with fast and to go to the market and see what we can improve, what we can do in the marketplace. And this is it's going to be probably the 2nd price increase for the year that we are issuing. And at the moment, we are looking forward, we believe that we can offset Most, if not all, the dollar impact of the inflation cost increase that
we are experiencing in the second half.
And then in terms of the commentary around Israel, you mentioned kind of down 20 ish percent more competitive market conditions. Could you shed a little more color on what exactly was happening in that market?
Basically, the market is going through a change in And consumer flavor in a way and the porcelain penetration to the Israeli market is happening quite First, on that, I'm very happy to say that we are part of this penetration as well as we move to the multi material strategy 2 years ago and last year with the acquisition of Lioli, we are now growing our porcelain business in Israel In line with the market, yet it's still it's happening it started to happen years ago. So all in all, I believe that we do see a change in the Israeli market. We are now piloting in Israel The first six colors coming from the Lioli plant of ours under the Caesarstone brand in Israel and so far with a very good feedback From customers to consumers.
Perfect. I'll pass along. Thanks for the time and best of luck.
Thank you very much, Stanley. Thank
you. Our next question comes from Reuben Garner with The Benchmark Company. Please proceed with your question.
Thank you. Good afternoon, guys. So maybe just to start, Can you quantify what the price cost drag that you experienced in the second quarter was, Whether it's in dollars or gross margin percentage and then what your expectation is for the second half, I just want to clarify, Yuval, I think you just said that the price you expect the price increases to offset the inflation that you're seeing. But If that's what you said, maybe it's after the second half. Is that the right way to think about it?
Yes. For the Q2, we've started to experience the impact of Inflation in raw material prices and in shipping costs, we expect to see a more impactful impact In the second half of the year, as there is a lag between The
time that we manufacture and
the time that we sell. Having said that, we have implemented price increase that For example, in the U. S. You take place starting July 1. So we expect, as Yuval mentioned, to offset The inflation at least partially or in full by increasing prices starting Second half of the year.
So your full year guidance would imply A lower gross margin in the second half relative to the first and relative to a year ago, how much price cost drag Are you expecting in that outlook?
First, Ruben, we do expect we are expecting some decrease in gross margin in the second half. Although year on year For the full year impact, we mentioned at the beginning of the year and it's still the case that we are expecting a flat Between 2020 2021, so pretty much similar to last year, although we started in a higher position, higher place in gross margin, we believe that For the full year, it's going to be quite similar to a year ago.
Okay. And then seasonality wise, Q2 revenue is normally The high point for the year, is that something that might be different this year and revenue could be higher than Q2 As we move into Q3 and Q4 because you're kind of ramping and you've got a lot of initiatives going on or would that be too aggressive?
It could be the case. Normally in terms of seasonality, both Q2 and Q3 It's been recognized as the strong quarters in the year. But it's true that some of our growth engines Kicking in and there might be a chance that we'll see some upside in Q3. All in all, similar quarters.
Okay. And then Home Depot, you mentioned a couple of times, I think you said that business has doubled. How big is it now as a percentage of your Business in either overall or in the U. S. And how big of an opportunity is that or how big Do you
think it can get in
the next couple of years?
So the specific number we are not providing, it's Unless it's not a practice that we are doing. Yes, it's true that the business has been doubled quarter on quarter. And indeed, we do see the Big Box and Home Depot as part of the Box as a major player It's a great opportunity for us and we will be focusing more and more on the big box channel in the U. S. With more resources, more attention and we do believe that there is a great potential for Caesarstone in the big box channel.
Got it. And last one for me is the marketing and selling expense, I think it was about 23 point $6,000,000 in the second quarter. I know you expect it to remain elevated. Is that the kind of number we should look for As we move into the back half and into next year, or was there anything sort of one time or specific to the Q2 that made that number higher than it will be?
I think that number reflects the reality that we are facing. We mentioned at the beginning of the year that we'll be Bringing our stand to a more normalized level and it's happening in line with our plan. We are investing exactly We're standing exactly in line with our plan, no deviation from the plan and we think it will be contributing to An ongoing Caesarstone growth journey for this year and for the coming years.
Got it. Thank you guys and congrats on the results and good luck, Ophir, moving forward.
Thank you, everyone. Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And I will now turn the call over to Yuval Dagim for closing remarks.
Thank you for your attention this morning. We look forward to updating you on our progress next quarter.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.