Greetings, and welcome to the Caesarstone First 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 Dagim, Caesarstone's Chief Executive Officer and Ofer Yakovian, 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 Q1 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. Our first quarter results marked another consecutive quarter of growth As we continue to successfully execute our strategy to transform Caesarstone into a leading premium multi material countertop company. The collective actions we have taken since we announced our Global Growth Acceleration Plan 2 years ago Have allowed us to establish an efficient global operating platform while using M and A as an important tool to implement our strategy. This was demonstrated by 15% growth to a record first quarter revenue of $146,000,000 helped by our recent accretive acquisition of Omnicom and Lioli Ceramica. We were also pleased to produce a 3rd straight quarter of year on year EBITDA margin expansion.
Our results are encouraging and are attributable To the superb execution of our entire team, for whom I'm very grateful. As we have mentioned previously, We continue to view accretive M and A as an important tool to drive sustainable long term growth and we are pleased to report The integrations of Omicron and LYOLE acquisitions are progressing in line with our plan. We expect to begin leveraging our world We know Caesarstone brand to execute on our multi material strategy through the sale of Caesarstone porcelain slabs As we introduce our new premium porcelain collection in the second half of this year throughout select markets. The integration of Omicron is anticipated to be completed in the coming months and we see great potential in the combined business Once fully integrated, we are pleased with the performance of Omnicom's business in the Q1 With strong contribution to our revenue, while augmenting Caesarstone's performance in the U. S.
Another important growth lever is our continued penetration into the U. S. Big box channel for Caesarstone branded products at Home Depot stores, And we are excited by our progress in this area as we nearly doubled ourselves compared to the Q1 last year. Separately, as we have discussed previously, a key focus area for Caesarstone is to leverage technology to simplify the consumer journey. A simplified and consistent approach to the countertop purchasing process is especially important to us as we further expand the global Reach of our products with multi material offerings.
To that point, we are happy with the progress made During the CS Connect test launch in Australia and we are on track to further expand the pilot program into several of our U. S. Markets. We believe that CS Connect will increase our customers' service conversion rates and fortify new and long standing partnerships with our customers. While there are many projects still underway as part of our plan And some lingering impacts of the pandemic across our global footprint, we are highly encouraged by our positive momentum to start the year.
We have a strong financial position, a more efficient operation and a clear strategy in place to create additional value for our shareholders. I will now turn the call over to Ophir, who will provide details on our results and outlook.
Thank you, Yuval, and good morning, everyone. I will start by discussing our Q1 results. For the Q1 of 2021, global revenue increased To $146,000,000 representing 15.4% growth compared to the prior year period. The year over year increase included approximately $20,000,000 in contribution from our acquisition of Omicron and Lioli Ceramica. On a constant currency basis, 1st quarter revenue was higher by 9.8% compared to the same period last year, primarily due to the contribution of acquisitions.
Now looking at our regions. In the Americas, constant currency sales were up 11.8% as we began to see benefits from our Omnicorn acquisition. In the U. S. And Canada, our performance continues to be impacted by lower sales at IKEA stores.
This impact to our Big box channel was partially offset by increased activity at U. S. Home Depot stores where our Q1 performance was better than expected. In the U. S, we are happy with the sequential improvement in our business and see positive momentum into the Q2 of 2021.
In Canada, rigid government restrictions related to COVID-nineteen continued to impact our sales. In the APAC region, constant currency sales were up 21.5%. In Australia, which accounts for the majority of our sales in the region, Solid results were driven by improved demand and government stimulus actions. Contribution from Lioli sales were also additive To the APAC region sales in the Q1. In the EMEA region, constant currency sales grew 3.3%.
We experienced strong performance in the UK, which was partially offset mainly by the impact of continued COVID-nineteen related restrictions on our indirect markets. In Israel, on a constant currency basis, sales were down 24.6% In the Q1, primarily related to slow recovery from the country's 3rd pandemic related lockdown, which ended in late January, as well as the timing of Passover holiday. Looking at our Q1 P and L performance.
We are pleased to improve
our gross margin by 90 basis points on a year over year basis to 29.7% as we continue to benefit from our actions to improve efficiencies across our business. Adjusted gross margin improved 120 basis points To 30.1% compared to 28.9% in the prior year quarter. The year over year improvement And gross margin primarily reflected better product mix, improved efficiencies and more favorable currency exchange rates, partially offset by the impact of higher manufacturing unit costs due to lower fixed cost absorption and lower selling prices. Operating expenses, excluding legal settlement and loss contingencies, were 22.3% of revenue Compared to 24.7 percent in the prior year quarter, the decrease was mainly due to higher revenues. Going forward, we expect operating expenses to remain elevated as we return our investment Sales and marketing to a more normalized level to support our brand and future growth.
Adjusted EBITDA in the Q1 increased 54.1 percent year over year to $20,300,000 representing a margin of 13.9% compared to $13,100,000 or a margin of 10.4% in the prior year quarter. The 3.50 basis point improvement primarily reflects the higher gross margin compared to last year. Adjusted diluted earnings per share in the quarter were $0.42 compared to adjusted diluted earnings per share of $0.13 In the same period last year on a similar share count. Turning to our balance sheet. As of March 31, 2021, Tidestone had cash, cash equivalent and short term bank deposits And short and long term marketable securities of $118,700,000 with total debt The financial institution of $13,400,000 providing us with a solid net cash position of $105,300,000 The strength of our balance sheet continues to give us confidence that we can successfully execute on our strategic initiatives.
In accordance with our dividend policy and based on our net income performance during the Q1 of 2021, Our Board declared a dividend of $0.21 per share with a record date of May 18 and a payment date of June 1, 2021. Moving to our outlook. I would like to first take a moment to comment on the impact of raw material inflation to Caesarstone in light of the tight supply environment across the industry. While we did not experience a material impact from inflation in the Q1 of 2021, we anticipate That higher raw material and shipping costs will be a significant headwind to our margins in the coming quarters. In regards to timing, we anticipate that these headwinds will start to impact us in the Q2 and will continue throughout the remainder of the year.
We expect to partially mitigate this impact through price increases and other cost cutting initiatives. For some additional context on the breakdown of our raw materials, in 2020, raw materials accounted for approximately 34% of our cost of goods sold, including both the purchase price of the materials and the costs related to logistics and delivering of the materials to our facilities. This excludes the cost of OEM products Sold, which accounted for less than 10% of our cost of goods sold in 2020. Quartz is the main raw material component used In our engineered quartz product, in 2020 quartz accounted for approximately 39% of our raw material costs, while polyester, which Act as a binding agent in our product accounted for approximately 31% of our raw material cost in 2020. Historically, the price of parts have been relatively stable, while polyester is more prone to a significant price fluctuation.
Since 2020, we have been using dynamic hedging strategy to reduce our exposure to change in polyester prices. However, our hedging results are charged to finance expenses and therefore do not offset the impact of polyester prices on our operating income. We will continue to carefully monitor the impact of price fluctuation in our raw materials and we'll update you accordingly as the year progresses. With that said, we continue to anticipate 2021 revenue Adjusted EBITDA to be higher year over year with the expectation that revenue will grow faster than EBITDA in 2021. This outlook assumes similar gross margin compared to 2020 with higher revenue impact offset by higher shipping and raw material costs.
In addition, we continue to increase our sales and marketing expenses to more normalized level to support our sales growth. As a reminder, We also temporarily reduced or delayed significant costs during 2020 due to pandemic related impacts, which are now returning. Our outlook assumes that both pandemic related business will fade and that the supply environment will improve as the year progresses. In the Q2, we expect revenue growth to be driven By the contribution of acquisition, we have a return to organic growth as well. With that, Let me turn the call back to Yuval for closing comments.
Thank you, Ophir. We started 2021 on a positive note And the focused execution of our plan resulted in strong Q1 results. As vaccines roll out across the globe, We'll continue to prioritize the health and safety of our employees and express our sincere gratitude to all of our global team members who work tirelessly to support our customers and achieve our growth objectives. Moving forward, we are focused on further enhancing our global operating platform we built by leveraging our innovative go to market initiatives, world class season from brand and multi material product offerings to drive additional value
for our
shareholders as the year unfolds. We look forward to update you further on our progress next quarter. Thank you. And we are now ready to open the call for questions.
Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Thank you. Our first question will come from Ruben Gardiner with Benchmark Company.
Please proceed with your question.
Thanks. Good morning. Well, good evening, good afternoon, you guys. So maybe I'll start on the top line. Can you talk to me about what you're seeing in maybe the U.
S, particularly about A recovery, can you maybe starting with I know you gave a constant currency number, but any way to tell us what like the organic Revenue growth was like in the U. S. And I think you mentioned an expectation that in the second quarter organic volume growth returns. That's encouraging. It is an easy comp.
What about as you move through the rest of the year, are you seeing signs of the likely acceleration in your business?
Hi, Ruben. Good morning. First, I think I would like to start with really being Optimistic on what we see as the momentum in the U. S, we do see the progress from quarter to quarter. And even in the Q1, We see a great change between January, February to March.
Some of the momentum continues with us To the Q2 as well. So all in all, we do see a very nice recovery in the U. S. Organically and obviously unorganically as well. All in all, we believe that the Q1, although the difficult comparison to the Q1 of last year, We'll be kind of organically is 7% down to the Q1, something that Completely recovers in March and later on in April as well.
Wait, I'm sorry. Can you repeat that? What is down 7% sequentially? Is that what Q2 will look like versus Q1?
No, no, no. What you've all said is that organically compared to last year in the U. S, we were down 7%. We see good momentum into Q2 and expect To see this improved performance in the U. S.
As we progress through the year, of course, There are easy comps there, but compared to last year, but still I think with that performance we expect We'll be much improved. Also, we are very happy with the integration of Omicron in the Q1 and the And the revenue delivered by Omicron in the Q1 in the U. S.
Got it. Okay. And then, on the gross margin commentary, I think you said that this year, the full year will be similar to 2021. So can you talk to us like the last three quarters now, your gross margins averaged about 30 Percent. You've got a recovering end markets as we move through the rest of this year.
I The revenue is only going to improve from where you've been the last few quarters. Your guidance kind of implies that you're under 27% For gross margin in the next few quarters, I guess, one, am I looking at that the right way? And then secondly, what's Kind of the difference between the 30% the last few quarters and the 27%, how much of that is price cost because of Inflation you're seeing and how much is maybe other factors?
I mean, most of it is of the first, you're looking at Adit, you're right. We are seeing a significant headwind coming from any raw material prices and also Shipping, there's a very tight supply chain. We see polyester, which is an important Materially for us price inflation of over 40%, that's what we see As a price today compared to what we've seen in the past few months, so it's a very significant increase. We do expect that as we progress in the year, there will be some improvement in the But looking at that, we do expect to see this headwind impacting our gross margin. We do plan to mitigate that at least partially by a price increase in A selected market where we think it's the right thing to do and by managing our Cost more tightly to mitigate.
But yes, we do see these headwinds, and It will be on a higher revenue base, as you mentioned.
Okay.
I guess same line of questioning on the EBITDA line. I don't think I heard you give specific EBITDA Guidance, but the last three quarters have been north of 14%. And obviously, you've got some gross margin pressure, but you're also going to have a Better top line, I mean, is 14% Sustainable? I know your longer term targets are above that, but how do we think about that 14% number that you've put up the last couple of quarters as we move through the rest of this year.
First, we're very happy The first quarter's results, but looking forward, mainly Due to the fact that gross margin is going to be lower, we don't think that this is sustainable to this year. And we do expect both revenue and EBITDA to grow this year and but revenue will grow Faster than EBITDA, and the profitability on the EBITDA will be lower due to the lower gross margin.
Okay. Thanks, guys. Congrats again, and I'll let someone else jump in here.
Thank you, Ruben.
Thank you. Our next question comes from Reuben Gardiner with The Benchmark Company.
Hey, guys. Sorry, I figured I'd jump back in. So just a couple of quick follow ups. We talked about the U. S.
Market. What about internationally? It was a nice recovery in Australia. Are you seeing That trend continuing and then maybe Israel, I understand had a tough dynamic going on in the Q1. Do you expect that Sort of return to growth, I've read and heard that the vaccine has taken very well over there and things are opening back up.
Just Any update you can give us on those 2 big markets of yours?
Yes, sure, Ruben. First, I think It's nice to see that in the Q1 of this year, we do see some of the fruits and the outcomes of the early buds of the execution of our strategy And we do see it in a number of markets. We are launching few growth engines this year and we are On the journey to introduce more and more of those growth engines as the year progresses, as for the two countries you mentioned, we do see or We are experiencing some nice market recovery in Australia where you see growth on constant currency basis And we are performing quite well in Australia. As for Israel, we just ended The latest lockdown in January and to the fact that Passover holiday was coming a bit Earlier this year, we have experienced a bit softer Q1. We believe that some of it will be offset during the year.
Okay. And then last one for me is just a follow-up on the gross margin and the cost of goods. How much so you told us how much polyester and quartz are as a percentage of your raw materials. How much are your raw materials as a percentage Of cost of goods? And then how much is shipping and how much would that shipping element be up?
What kind of inflation are you seeing in that aspect of your business?
So raw material in 2020 was 30 4% of cost of goods sold 34% of cost of goods sold in 2020. And as for shipping costs, when you look At say, finished goods, the estimation will be say $2,000,000 $3,000,000 of impact assuming that shipping costs will remain at the Current levels.
Okay, great. Thank you guys again and congrats on the quarter and good luck as you move through the year.
Thank you. There are no further questions at this time. I would like to turn the floor back over to Yuval Dagim for closing comments.
Thank you for your attention this morning. We look forward to updating you on our progress next quarter.
This concludes today's conference. You may now disconnect your lines. Thank you for your participation. Have a wonderful day.