Greetings, and welcome to the Caesarstone Limited 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A 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 of 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 Ophir 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 Q4 2020 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. Today, we issued our 4th quarter results, marking a successful close to a very dynamic year for Caesarstone. Q4 results demonstrated a significant progress in streamlining our business During 2020, as we further executed on our business transformation. Since the onset of COVID-nineteen pandemic, We have prioritized the health and safety of our employees and we will continue to do so. We are especially grateful for our team members We remain focused in executing the initiatives under the Global Growth Acceleration Plan through this challenging period.
The progress we have made since we announced the Global Growth Acceleration Plan has allowed us to build the foundations for global operating platform And to launch new growth engines while improving our competitive power in the market as the premium multi material countertop Last quarter, we discussed the 3 strategic pillars that are integral to unlocking Caesarstone potential, which are a premium multi material offering, customer experience and engagement and global footprint expansion. Our commitment to excellence and strong working capital management during the year provided us with the flexibility to make significant progress on many of the projects under each strategic pillar. In 2020, we introduced accretive M and A As a new avenue to accelerate the implementation of our strategic objectives. Our strong financial position supported the recent and successful completion of the 2 accretive acquisitions. Lioli Ceramica, a producer of cutting edge porcelain slabs and Omicron granite and tile, A premier strong supplier in the U.
S. As it relates to our strategic pillars, Lioli has expanded our addressable market beyond quartz, allowing Seresno to become a leading premium multi material countertop company. Our objective of global footprint expansion also incorporates our goal to provide better service to our customers, while at the same time improving our logistical efficiency. The acquisition of Omicron is directly aligned with this pillar By allowing us to leverage a vertically integrated approach to enhance our go to market capabilities in the U. S.
Omnicom augments Caesarstone's existing network with strategically located distribution centers Throughout attractive U. S. Markets, providing us a path to increase market share with more direct approach to our end markets. One of the innovative initiatives under the Global Growth Acceleration Plan is a technological leap In the avenues through which we communicate and connect with our customers and consumers to further differentiate Caesarstone by creating a step change in the way we approach customers' experience and engagement. To that point, we recently test launched A platform called CS Connect in our Australian markets.
CS Connect is an easy to use digital platform That enhances our CRM capabilities for both our KNB and fabricator partners to help them more effectively manage the consumer purchase journey. We believe that CS Connect will increase our customers' sales conversion rates and drive higher customer satisfaction. In doing this, we are strengthening our network of partnership to better position Caesarstone to win over the long term. Additionally, the recent revamp of our North American website aims to elevate consumer engagement and activity, And we have received great feedback so far. We now enter 2021 as a much strong company and with the right foundation in place To more effectively leverage Caesarstone's world class brand to pursue sustainable long term growth.
While the immediate global economic outlook and continued impacts of the pandemic remain uncertain, Our strong financial position and clear strategy give us the confidence to continue executing on our plan. Our 2020 achievements have proven our ability to execute under challenging market conditions. With our dedicated focus on driving improvement in results, we are well situated to capture additional market share In quarters years ahead, 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 Q4 results. For the Q4 of 2020, global revenue grew 2.3 percent to $136,900,000 compared to $133,900,000 in the Q4 of last year. The increase included $6,400,000 Contribution from acquisition of Lioliosaromica. On a constant currency basis, 4th quarter revenue was lower by 0.4% compared to the same period last year, primarily due to pandemic related business disruption, particularly In the Americas region, partially offset by the contribution from the early acquisition as well as growth in all other regions.
In the Americas, constant currency sales were down 12.7% as pandemic related Continue to have ongoing impact on business activity. In the U. S. And Canada, our business performance continues to be impacted by lower sales at IKEA stores. This factor accounted for roughly 40% of our North America sales decline in This impact to the Big Box channel was partially offset by increased activity at U.
S. Home Depot stores, which was better than our plan. While cost sales were lower year over year, we are encouraged by the sequential improvement. Furthermore, we are seeing faster recovery where we have a direct presence, which gives us confidence in our indirect channels as demand continues to ramp up. In the APAC region, constant currency sales were up 17.5%.
Australia Accounts for the majority of our sales in the region and performance has been better than our expectations, helped in part by government stimulus actions. In addition, the contribution from the Liolios sales in APAC were included for the first time in the region sales. In the EMEA region, constant currency sales grew 45.8%, primarily reflecting pent up demand Following the rigid lockdowns earlier in the year in both our direct and indirect markets, in addition to the contribution from the Liolios Acquisition of sales in the region. In Israel, on a constant currency basis, sales were up 9.4% in the 4th quarter. Looking at our 4th quarter P and L performance.
We were pleased to improve our 4th quarter margin on a year over year basis. Our operating results continue to benefit from our focused execution of initiatives to improve efficiencies across our business. Adjusted gross margin improved 220 basis points to 28.6% compared to 26.4% in the prior year quarter. The higher year over year adjusted gross margin mainly reflects improved product mix, lower raw material costs, More favorable currency exchange rates and improved efficiency, partially offset by lower sales volume, lower sales prices unless favorable regional mix. It is important to note that in the Q4 of 2020 2019, We operated our production facility that's less than in full potential and that was a significant drag on our gross margin.
As a reminder, in the Q1 of 2020, we were operating at a higher capacity utilization. And in turn, we expect gross margin in the Q1 of 2021 to be lower year over year. Excluding legal settlement and loss contingencies, operating expenses for the quarter were 21.2 percent of revenue compared to 20.4% in the prior year quarter. The increase was in line with our expectation as we returned Our investment in sales and marketing to more normalized level to support our brand and future growth following 2 quarter of significant cost cutting. Adjusted EBITDA in the 4th quarter increased 19.1% year over year to $18,800,000 representing a margin of 13.7 percent compared to $15,700,000 or a margin of 11.8% in the prior year quarter.
The 190 basis point improvement primarily reflects the higher gross margin compared to last year. Adjusted diluted earnings per share in the quarter were $0.05 compared to adjusted diluted earnings per share of $0.16 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 down 10.9% on a constant currency basis. Sales were off by 11.1%.
Our focused execution to improve efficiencies and lower raw material input costs led to annual growth in our gross margin and adjusted EBITDA margin. Adjusted gross margin was 27.7% compared to 27.3% last year. The higher adjusted gross margin mainly reflects improved efficiency, lower raw material cost and improved product mix, partially offset by the impact of lower sales volume, lower sales price and less favorable regional mix. Operating expenses excluding legal settlement and loss contingencies were 21.6% of revenue Compared to 20.4% in the prior year, primarily due to lower revenue. Our full year 2020 adjusted EBITDA was $62,100,000 a 12.8% margin compared to $69,000,000 last year At 12.6 percent margin, we have the year over year margin improvement primarily due to higher gross margin.
Adjusted diluted earnings per share were $0.48 compared to $0.77 in the prior year, mainly adversely impacted by foreign exchange rate Turning to our balance sheet. We completed the acquisition of Omicron on December 31, 2020. We acquired the company in consideration of approximately $19,000,000 while assuming $8,000,000 of net debt. On a pro form a basis, Omicron was profitable and would have contributed over $50,000,000 in revenue Weathered the challenges of 2020 and to further invest in our future growth. Our prudent effort to control costs, Manage our production capacity and working capital and improved operational efficiency during 2020 helped us generate strong cash flow From operations of $48,000,000 during the year.
Our balance sheet as of December 31, 2020 included cash, cash equivalent and short term bank deposits and short and long term marketable securities of $133,000,000 With total debt to financial institutions of $23,000,000 providing us a solid net cash position of $111,000,000 The strong balance sheet leaves us confident that we can execute on our plan in 2021 to produce strong long term returns for our shareholders. Moving to our outlook. We anticipate 2021 revenue and adjusted EBITDA to be higher year over year. We have expectation that revenue will grow faster than EBITDA in 2021. This outlook assumes a similar gross margin compared to 2020 with a higher revenue impact offset by higher shipping and raw material costs.
In addition, we expect to return to more normalized levels of sales and marketing expenses to support sales growth. Furthermore, We temporarily reduced or delayed significant costs during 2020 due to pandemic related impacts, We will now return. Our outlook assumes that pandemic related business Restrictions will fade as the year progresses. In the Q1, we expect revenue growth To be driven by the contribution of acquisition followed by a return to organic growth beginning in the Q2 of 2021. We are pleased to be focusing on growth and making the right investment to not only support expansion in 2021, but also position us as a leaner and faster growing company beyond 2021.
With that, Let me turn the call back to Yuval for closing comments.
Thank you, Rafael. In conclusion, I'm extremely proud of the Caesarstone team for their unwavering commitment to transform our business and improve our results. Our success in the 4th quarter Closed out a year that demonstrated significant progress since we first introduced our Global Growth Acceleration Plan in 2019. Since that time, we have fostered a more productive corporate culture, improved our competitive positioning And broadened the reach of our addressable market. We have utilized accretive M and A as available lever for growth to expand our presence and offering now as a leading premium multi material countertop company.
As we move into 2021, I'm confident We look forward to updating 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. Our first questions come from the line of Reuben Garner with The Benchmark Company. Please proceed with your questions.
Thank you. Hello, everybody.
Hi, Robin. Good morning.
Good morning. So maybe just a first a clarification question about the Q4 P and L. The Finance charge that you had below the line, it said it was predominantly related to exchange rates. Can you just Tell us what that was and how it works and what to expect going forward.
Yes. This is
hi, Ubel, it's Ophir. It mainly relates to the weakness of the dollar against the Australian dollar and the Israeli shekel. This is I mean, assuming that there won't be any major fluctuation in currencies, we don't see that as something that will Recur, this is a revaluation of some balance sheet item, mainly lease liabilities that created its Charge, which is a one off thing, assuming we will not see a Fluctuation, it's, of course, non cash charge.
Okay, perfect. That's All I needed to do, that makes much more sense. So, I guess, Looking at
your congrats by the way
on the close to 2020, nice results. Talking about your outlook, is there any more color you can give on kind of the puts and takes, the revenue growth and EBITDA growing lower than revenue comments. I think those both make a lot of sense. Can you give us some more Color on what that at least the organic revenue growth profile might look like and then maybe which markets are going to be growing faster and slower than kind of the company average overall.
Yes, William, I will start and Ophir can add some more colors at the end of my sentence. First, I think 2021 will be The first year when we see some of our new growth engines under the 3 pillars of the strategy come into play. And if you look into those 3 pillars, we'll talk about the multi material strategy, the go direct And so to an extension and the last one, the customer engagement. And what we will be experiencing in 2021 is Liuli M and A being fully part of our business for the full year. And I guess the latest M and A, Omicron, now as we added only On December 31 last year, going to be full year part of our business.
So this will be the first in fact, the first year when we are Moving full steam ahead with the execution of our strategy.
Certain areas in Israel, in Canada, in the U. K. And in other Arias, I can say on the for the pooling, we expect the gross margin to be Similar to 2020, we see some volume as a positive Driver for that, but we see higher shipping costs and raw material prices that are kind of a headwind that We are seeing coming. In terms of operating expenses, we're going to move to a more normalized level of operating expenses and we have some Additional OpEx coming from the 2 recent acquisitions, and this is the reason we said that we expect to grow both EBITDA and revenue this year, but the revenue growth will be higher than the
Our next questions come from the line of Assaf Baral Shandali with Oppenheimer, please proceed with your questions.
Yes. Hey, guys. So congrats on a really solid result. Despite the challenging backdrop, maybe if we can just start on Lioli. Revenues during the quarter were $6,400,000 Thank you, by the way, for reporting them separately.
It's very helpful for us in modeling. If we annualize that, it reflects some really nice growth versus the previously reported annual revenue number, if I'm not mistaken. I think it was $18,000,000 Prior to the close, it's a relatively small number for now as we compare it with the full year kind of Solidated number, but how should we be thinking about the growth rate within the business?
Hi, Taf. Obviously, the Lioli deal is opening new addressable market for us. And it is important to know that We are planning to take most of the volume from the Lioli plant in India to serve our counterpart markets. And this is not in the current stage of the company. So at the moment, most of this revenue is devoted to flooring and cladding.
But as we as all our go to market, if you like the right to win for us, is around the countertop Application and where the higher margins are, we intend to take most of the volume to this application. Obviously, 2021 is a transitional year when you see both of those revenues. But in terms The Lioli plant, we have one line there, and this is pretty much the revenue that we're expecting to get from the plant itself.
Okay. Okay, great. On gross margins, they were really quite strong in the second half of 2020 even after we neutralize some one time items in the Q3. How should we be thinking about the gross margin profile in 2021? Any puts and takes there or how you think it should kind of develop from 1Q 2021 into 4Q 2021 Would be helpful for us.
Do you still expect you still feel confident that the strength you saw in the second half of twenty twenty Is it going to take us closer to the 30% plus number that's the long term target?
1st, our long term target is still valid, and we do aim to 32% to 35 As a long term target. 2021, we believe, will be similar in the gross margin to 2020, we have expecting higher volumes, and obviously, the This cost will be lower on a cost per unit basis. But on the other on the flip side, we have inflation in raw material prices that we are And shipping costs, which is something that is pretty significant What we see in the coming in the past few weeks, The Q1, we expect a lower gross margin year over year because we are utilizing our factories Less than we've done in prior quarter. So that but that will change over the year and the cost margins should improve With the revenue growth as we progress in the year.
Okay, great. So turning to Omicron, I guess maybe I can even kind of fit in a related gross margin question. Jim, number 1, can we expect to see separate segment reporting? Number 2, How are you thinking about the gross margin impact on the consolidated numbers? I hope you guys will report something separate, Because it will be kind of a meaningful part of revenues and I imagine it's a headwind to consolidated gross margins.
And then maybe if you just want to take this opportunity To kind of talk to us about how you plan on integrating Omicron into the general Global acceleration strategy.
Sure, Ataf. The Omicron acquisition is more than acquisition to In executing our strategy of 1 of the pillars actually 2 of the pillars, which is 1st and foremost, expanding our footprint And we'll go direct or closer to our customers. And the other one, which is very much in line with The portfolio of Omnicom is a multi material strategy. So we are introducing to our business now a business a Omnicom business, Which has also Natural Stone and Porcelain as part of it. Obviously, Porcelain in the future is going to be coming from us directly once we'll be Launching later this year a very impressive new collection in porcelain coming from Lioli naturally.
And the NetSolStone business will be an integral part of our portfolio going forward in the U. S. So the Oncom deal is improving our footprint dramatically. We have no presence when this is in Distribution centers, of course, in the Florida region and Ohio Valley. And now we with Omnicom, we have And additional 17 locations with very nice proximity to our customers and to the market.
So all in all, it is a bolt on acquisition. We will not be going forward reporting that separately as it's going to be part of the Sealson Regional structure, if you like, and that maybe reflects also on the integration that we're working on, which will be full integration of the business
Okay, great. And I guess maybe just last question from my end before I jump back in the queue. I'll ask one Nobody has any others. But how should we be thinking about this kind of direct Sales strategy being on the ground, should we expect this to continue? Should we expect other deals or other actions From the company similar to Omicron?
Obviously, Seth, we are looking on more business That can help us to speed up the execution of our strategy. We laid out our strategy very clearly. We There's no hidden agenda there. So other businesses that can be part and be becoming an integral part of Sealtom should be considered. And that will be kind of looking at the market will be an ongoing effort on our side.
In addition, we are also working quite intensively On the last pillar that we haven't mentioned, which is a part of our go to market capabilities Through customer engagement and on that, we will be launching a new platform, which we call CS Connect To help our business partners, especially K and B's studios, to manage their consumer purchase journey And to make sure that on their side, they have the higher conversion rates. On our side, we get better loyalty and engagement with our customers.
Okay, great. Thank you for taking my questions. I'll jump back in the queue.
Thank you, Asaf.
Thank you. Rejoining the queue is Reuben Garner with The Benchmark Company. Please proceed with your questions.
Thank you. Sorry about that, guys.
I don't know what happened there.
It got kicked off. But just I had a couple more. Back to the outlook on 2021, maybe ask it this way. Do you think you can get back to 20 19, 2018 2019 revenue levels this year, obviously 2020 was impacted by shutdowns, Especially in the middle part of the year and hopefully as we progress through the year, those are no longer there. Is that A reasonable way to look at your business, do you think you can get back there?
I guess, first organically and then second of all, Maybe remind us what those two acquisitions are expected to add from a revenue and profitability standpoint. I think they're both Just to be accretive, can you just kind of give us what the expected accretion is from the deals?
We don't have the we are not servicing or disclosing the breakdown. But obviously, we are expecting to be altogether with Revenue higher than 2019 2018 altogether. We'll see the COVID-nineteen environment is still around, and we see it in the Q1. So I think it's a bit too early for us I'll disclose a full breakdown of the revenue. But as the year progresses, we will see where it goes.
We believe that The increase of the growth in 2021 is going to be significant.
Okay. And then on the Sales and marketing side, I think you referenced that you got back to a more normal level in the Q4. Did I hear that Right. So is that in terms of dollars, so the $18,000,000 in marketing and selling expenses, is that A reasonable run rate for going forward? Or do you think that there would be more to go on that, that it's going to be moving even higher from here?
I think looking here on the previous years that it will be a good reflection of where we are heading with our cost in on sales and marketing. Obviously, as we are progressing with our global growth acceleration plan, more and more projects are coming to fruition, And we implemented them or executed them in the market. So those, if you like, new growth engines are coming also with some support behind them. But the pace of investment and the pace of launching those new projects will be entirely to our decision to see if the market can accept those And the benefits in our revenues and profits are coming in line with our expectations. So, We will be dealing with SMM spend very much as we have done in the last 2, 3 years, Very close management also to understand and with a very good control on that.
Okay. And then you've mentioned material and shipping cost inflation. I guess The shipping part is definitely understandable. What materials are you seeing inflation in? What kind of percentage are we talking about?
And then What's the pricing environment like this year? I'd imagine you're not the only one seeing inflation. Is there any expectation that you can get any Price to offset the higher cost?
It's a bit too early, Ruben, To note specific price increase in raw materials, we still have some deals that are going forward from previous year to this year. So, it's a bit too early, but we do see In the markets, we are preparing our business to bring some greater efficiencies to offset any price increase that we might have in the market. Obviously, the shipping cost is already part of our business environment, and we are now shipping goods and raw materials To the plants and goods from the plants to the market at higher cost. I think this is something that many global companies are now experiencing with.
Okay. And then last one
for me. I want to think in that the USA portion of the Americas Mark, kind of coming back a little slower than I would have thought. Is there something Specifically going on there from a comps perspective, I understand that the shutdown impact and all of that, but I assume a portion of that business New construction, which is doing pretty well here in the States and then even the repair and remodel markets Broadly have been getting better. Can you just talk about what you're seeing there and maybe what specifically your outlook is for the next couple of quarters in that market From an organic perspective?
In the U. S, I think the major impact at the moment is, I guess around our exposure to IKEA, we have an exclusive deal with them. And as they are coming back to the market, We will see some greater growth in the coming quarters. In Q4, it was still AKIAR our sales to AKIAR was still behind Our expectations, but it's they are improving gradually over the last few weeks. So I think the major impact will be that and some exposure to in our non direct markets when we have less presence of Direct Caesarstone employees, obviously, the and business.
Obviously, the acquisition of Omicron It's part of the rapid situation, and we are moving more directly in more regions in the U. S. So over the next few quarters, you'll see us, I guess, closing the gap and we are continuing Faster demonstrating faster growth in the U. S.
Great. Thank you, guys. Congrats on the end of 2020 and good luck this year.
Thank you very much, Ruben.
Thank you. There are no further questions at this time. I would like to turn the call back over to Yuval Dagim
Thank you for your attention this morning. We look forward to updating you on our progress Next quarter. Thank you very much.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.