Q3 2019 Earnings Call

Greetings welcome to Caesarstone third quarter 2019 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. If anyone should require operator systems. During the conference. Please press star zero and your telephone keypad.

As a reminder, this conference is being recorded and is now my pleasure to introduce your host Brad Gray I see I think you may begin.

Thank you operator, and good morning to everyone.

I'm joined by you bought the game Caesarstones Chief Executive Officer.

No fear you Cobian Caesarstones 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 Securities and Exchange Commission.

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 and adjusted EBITDA.

The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's third quarter 2019 earnings release, which is posted on the company's Investor Relations website.

Thank you and I would now like to turn the call ever Tivo. Please go ahead.

Thank you Brad and good morning, everyone.

I will still called to do what does it have been results reflect all of a focused efforts to execute the various aspects of our global growth acceleration plan that we introduced earlier this year.

Execution, I guess discipline combined with tight cost control, but the primary drivers in helping us grow <unk> adjusted EBITDA and achieve higher adjusted EBITDA margin compared to the prior year quarter.

In addition, I'm encouraged with our execution in the U.S.

Well, we drove 8% growth you know cold business.

This was largely due to the solid execution of our North American leadership do you follow the realignment well celebration in that region early this year.

Why many will fall markets outside the U.S. continued to experience intense competition from low price many fixtures.

Confidence he was the steps, we're taking to improve our performance and enhance our position.

Our new leadership team has not fully in place executing I was threat did you see variety of project.

But to leverage I was strong brands, most effectively control cost increase efficiencies and streamline processes.

Today, we have started 90% outdoor finish you'll still get did before project, although the growth acceleration plan.

No I would like to provide civil updates when our progress so.

First on the production side, we have already begun to develop improved sourcing strategies.

We initiated the projects to enhance productivity and stability of our manufacturing.

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I wouldn't be should reduction early this year to less than 50% off one capacity you know Richmond Hill manufacturing facility has provided us the opportunity to further improve productivity and quality.

Well they can go at least you officials days, we now believe we're going to position to increase effective capacity to 60%, while maintaining improved level both performance.

We then I will supply chain, we are implementing new processes and technologies to improve our forecasting blending distribution and inventory management that would provide the fishing season, but to service to all customers.

On the technology front, we have initiated a new IP strategy that will transform our company to a doctor driven organization as well as automate processes.

Overall, we are confident that these strategic initiatives along with our strong balance sheets will better position us to generate additional value for shareholders over the long term.

With that let me turn the call over to feel will provide details on our results and outlook.

Thank you all and good morning, everyone.

I will start by discussing our third quarter results.

Well the first quarter, Wendy 19, Clobbered revenue was one of them at $42.8 billion compared to $147.7 million into felt the quota philosophy you.

More than half of the decline was attributable to outdoor FX impact of $2.7 million.

On a constant currency basis revenue declined by 1.5 per cent compared to last year due to softer market condition in most.

Oh, the reason outside the U.S. combined with more competitive markets, mainly in Australia, and Canada, along with lower performance and Ikea U.S.

It was partially offset by improved performance in our core U.S. business and strong demand in the UK.

In the United States.

At quarter says increased by 5% compared to the first quarter 2018.

Our core U.S. business grew 8% year over year.

This marks the fifth consecutive quarter of revenue growth in our core U.S. business and he is mainly attributable to the success of our North America region realignment earlier this year, including the installment of new original leadership team.

As mentioned on our last earning call intense competition from Chinese manufacturer, that's low price point continued to pressure our global footprint outside the U.S.

In Australia costs oncology says we're done.

10.1% as a result of the fourth or I just discussed.

But we have so housing and remodelling markets and the more challenging <unk> lending environment.

In Canada constant currency says were down 12.1%.

Outperformance was affected by softer housing and remodeling markets combined we have more intense competition from Chinese imports.

In Europe constant currency says grew 16.3%, primarily reflecting continued strong performance in the UK.

Says he needs with on a constant currency basis were up 7.5% as we experienced benefits from a higher number of selling days compared to the prior year quarter due to the timing of the Jewish holidays.

Revenue in the rest of the World continued to experience on favorable impact related to the Chinese competition discussed earlier.

On a constant currency basis was down 10.7%.

Looking at our third quarter PNM performance.

Adjusted gross margin was 29.9% compared to 29.7% in the prior year quarter and 27.3% into second quarter of 2019.

The modest year over year improvement in adjusted gross margin, mainly reflects lower raw material cost and more favorable regional mix.

Partially offset by increased manufacturing unit cost due to lower fixed cost absorption, resulting from lower capacity utilization. In addition to lower average selling prices and foreign exchange headwinds.

Excluding legal settlement and loss contingencies operating expenses for the first quarter benefited primarily from the execution of our global golf acceleration plan.

Combined with tight cost control.

Driving lower marketing and says expenses.

Well as lower general and administrative expenses.

Adjusted EBITDA in the third quarter was 22.5 million door, a margin of 15.8% compared to 21.6 million dollar a margin of 14.6% in the prior year quarter.

These solid performance primarily reflects the higher gross margin compared to last year. In addition to lower operating expenses, excluding legal settlement and loss contingencies.

Adjusted diluted earnings per share in the quarter with 29 cents compared to 31 cents into same period last deal.

On a similar shirk out.

Adjusted net income for the third quarter and first nine months of 2019 excludes also a noncash exchange rate differences as a result of the implementation of the new lease accounting standards.

We ended the third quarter was 29 thing.

We have a strong balance sheet, including cash cash equivalent and short term bank deposits $116.8 million, we have no financial debt.

Moving to our outlook.

As we discussed today, we expect self global market condition, and the competitive environment to persist in many of our region outside the U.S. where you're at.

We continue to expect the most significant the buckets these pressure in Australia, and Canada as well as in most of our indirect markets.

In addition, since the last update to our outlook currency headwinds have continued as the U.S. dollar continued to appreciated against our other main currencies when estimated impact of approximately 2 million dollar on the second half of 2019 expected revenue.

[noise] Accordingly, we now expect our full year 2019 results to be at the low end of our previously communicated outlook ranges for both revenue and adjusted EBITA.

Well the fourth quarter, we anticipate higher adjusted EBITDA margin you over here, mainly attributable to operational efficiencies and cost control.

Despite the continuation.

Market pressure.

On revenue outside the U.S. and less favorable currency exchange rates.

As a reminder, the financial impact so far global go for acceleration plan is included in our outlook for 2019 and he is intended to support additional growth in revenue and adjusted DB, though over the long term.

To formulate our outlook, we have used car the FX rates and the raw material prices.

Changes to FX or raw material prices may impact our walk.

In summary.

We are encouraged with the improvement in gross margin and adjusted EBITDA in a challenging environment during the third quarter.

Execution of our global growth acceleration plan.

Allowed us to generate additional efficiencies throughout the organization, helping create the strong base to achieve our long term objectives.

Now I would like to turn to called back to evolve for closing remarks.

Thank you will feel.

What we expect our coal U.S. business to remain strong and our ongoing operational initiatives to positively impact results the competitive environment in most of the other regions. He was likely to persist into Comping quotas.

We recognize that you're shifting the fundamentals of organization and it will take time to fully recognized the benefits that we are bringing into the organization.

Recent margin improvements.

Still in the early stages or at least initiative and the based on our progress also we're confident that though when you leadership team you just picking the right actions to deliver on our objective and to improve operating performance over the coming years.

I look forward to updating you further when our progress next quarter.

Thank you and we're now ready to open the call for questions.

Thank you if he would like to ask your question. Please press star one on your telephone keypad confirmation tell indicate your line is in the question here you made press star to if he would like to remove your question from like you ever a participant using speaker equipment may be necessary to pick up the headset before pressing the star.

He is.

Our first question is from Dillard Watt, let's stay file. Please proceed.

Thanks, Good morning.

Maybe you wanted to talk a little bit about the the core business and the U.S. saw that's somewhat measurable deceleration in terms of the year over year growth from the second quarter, but I don't I'm not sure. If there's some other some year over year things that you guys are lapping or.

Or anything that might explain that.

Hi idea, though thank you for the question I think only know we do see a quite.

Interesting increase your old the watts penetration in the in the U.S. and.

And we have quite a quite encouraged by them and that continues the penetration over well this category the U.S. in which we all can do you know do we know afterwards.

To a EM.

I have a better go to market blood tool and we continue to invest behind those sales team and actually all the initiatives. The to put you know the global Goldex television plan outlined plans regarding the U.S.

I think the old that has been kind of ER and diversity itself in a these school do increase in a in a in Italy growth you know what revenue it was 4.6% female gold business.

Okay and on the sales team I know that that's sort of a process to get to get everyone hired in ramped up on how how far along are you.

In terms of ER, either the number of people or the markets, you're targeting or any of those type of metrics.

[noise] all the notice if you use a journey, we are really a building new foundations ball business in the U.S.

We are in line with all expectations ball, there and manpower and capacity.

These you and I think when we [noise] wipe the quite.

Robert spend for next year, all what's been going quite well and we all think bringing quite a lot of a new talent to all business.

Okay, and then I guess, you know Ikea I know, it's tough to answer questions about specific customers to do a headwinds from a year over year standpoint start to ease whether it be due to their a change their promotions or or their comps or anything like that.

What should we expect over the next couple of quarters in terms of the stuff that you cannot control as it relates to Ikea.

The only been just doing to repeat the numbers again I'll go business actually grew by 8% and altogether, we didn't qia.

It's only 4.6 person hey, we all kinds of having very close relationship with a key on but we are coming back on so you said it's been a.

Flatten out or not only NOLA, yeah, I think a we know continue with our relationship with like you're supporting them in their journey and I hope that and others will come and go up again.

Okay, and then I guess internationally.

Sort of a a similar story that you've seen and the pass in the United States now playing out in Europe . Once the dumping duties of has of course been put in place and that probably needs to go elsewhere [noise].

Is there anything you've learned from the U.S. that that makes you feel like you can put together some sort of defensive strategy or protect yourselves or or anything like that that you basically had the benefit of 'em up some hindsight here that you can do you can use jewelry advantage.

There's this dynamic is playing out in other markets.

I think we refer to the in the past.

You know.

To the fact that I think most of the.

Initiatives, you should be taking Oh, we do you know company to improve the way we do business. If there's a lending. This is the learning which would your form that we are putting all plans going forward. It's the same two other regions when competition there it will be no one existing and will be nine all the regions than <unk>.

You know, we mostly focused on what do we can do better how we consumed with all customers with ER and new innovative products and services and a and just to make sure that you know appears as though a best in each and every market.

Oh got a I'll defer to others.

As a reminder, just star one on your telephone keypad, if he would like to ask the question. We were all pledged for a brief moment.

There are no more questions at this time I would like to turn the call back to evolve for closing remarks.

Okay. Yeah. Thank you for your attention. This morning, we look forward to a updating you.

Oh no progress next quarter. Thank you very much.

Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.