Q4 2019 Earnings Call
[music].
Greetings and welcome to the Caesarstone fourth quarter 2019 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero are neutral.
Funky pad.
A reminder, this conference is being recorded I.
I would now like to turn the conference over to your host Mr., Brad Gray with I see our.
Thank you you may begin.
Thank you operator, and good morning to everyone.
I'm joined by you've all the game Caesarstones Chief Executive Officer.
Endo 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 the actual events or results may differ materially.
For more information please refer to the risk factors contained in the Companys. 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 fourth 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 over to Yuval. Please go ahead.
Thank you Brad and good morning, everyone.
During 2019, we've been stronger foundation.
Global growth acceleration plan, which we began executing during the second quarter.
I'm very pleased with the progress we've made so far.
The plan has already positively impacted the old business by allowing us to bet to execute our plans and deploy resources in areas, both production supply chip technology sales and marketing.
The project, we initiated the global growth acceleration plan, we've continued to contribute and improve outperformance over the long term.
As we look forward what doesn't 20.
Two encouraging stopped.
We have reached an important milestone you don't see what did you went to the U.S. Big books gentlemen.
We recently introduced Caesarstone brand the product at old U.S. home depot stalls, adding to the ongoing strong momentum in this region.
In addition, yeah reinvigorating our.
We have recently introduced the public durable outdoor luxury product line.
Marks an exciting evolution, although quals applications.
Actively under penetrated market segment.
These breaking out the collection recently won the most innovative product a world it's KBC 2020.
More broadly we all want to based launch system, an exciting new models. It doesn't 20, that's all they tended to boost growth initiatives you know global markets.
Oh companies focus is on the U.S., but we see the greatest opportunity for girls.
We are investing a lot of resources to make sure we I realize be slippage or anything.
In the U.S., we've continued expansion of all systems and I'm very happy with the progress with me.
In addition, we've increased our marketing budgets to better support our brand, which is available assets you want to leverage.
Improving the level of service to all customers one of the key growth drivers for she's just wanting to U.S. markets.
As part of the global growth acceleration plan, we are investing in redeployed gold logistic distribution network in the U.S., you know that Weve seen service and reduce cost.
Yeah, Olson proving double blending can focus be fully implementing a new technology unfolds.
During the second half of 28 team through the first off of 29 to reduce don't production capacity utilization.
The purpose of diesel was to balance out the inventory and improve our cash flow generation.
During 2019, we significantly reduced total inventories and generated solid cash flow from operating activities.
Given <unk> plans for two doesn't wedding in response to expected the men and to improve Silverstone customers. We plan to return to full production in all <unk> factories, but the second pooled.
The exciting initiatives and projects, we have planned for 2020 onto the global growth acceleration plan give us confidence you know ability to accompany show objectives. This year.
We remain committed to strengthening calibrating infrastructure optimizing gold product portfolio.
<unk> business.
Results and they used to go.
With that let me turn to people that will feel we'd provide details.
Okay.
Thank you all and good morning, everyone.
Well, we started by discussing all fourth quarter results.
For the fourth quarter 29 thing nobody revenue was $133.9 million compared to one another and $42.9 billion into fourth quartile of raw steel.
On a constant currency basis revenue declined by 5.5 per cent compared to last year.
Continued says improvement in our core business in the U.S. and the UK was more than offset by softer performance, many in Australia, Canada and Ikea U.S.
In addition necessary enhancements to our supply chain forced an estimated $3 million to $4 million woeful revenue mix into fourth quarter.
We expect an estimate that impact of $2 million to $3 million from these delays in the first quartile and expect to have a they situation fully resolved during the first off twentytwenty.
As mentioned, we plan to return to production in all our factories, but the second quarter, which combined with they blame addition of improvements in our inventory planning processes are expected to result supply chain issues.
In the United States fourth quarter says increased by 7% compared to the fourth quarter of 2018, including core business growth was 9% year over year.
We're pleased to market. This is the sixth consecutive quarter revenue growth in our core U.S. business driven by the new leadership in our North America region.
As mentioned on our last several earning calls intense competition from Chinese manufacturers at low price points continue to pressure our global footprint outside the U.S.
In Australia constant currency sales were down 18.2%.
The main reasons for the decline where the factors I just discussed coupled with persisting soft housing and remodeling market conditions alone we have challenging lending environment.
In addition.
The other large customer in Australia that went out of business during the quarter impacting revenue by 1 million dollar.
This event had no material impact on adjusted EBITDA during the quarter due to our existing insurance coverage.
We expect no material impact to our business moving forward.
In Canada constant currency says, but down 13.6% outperformance was affected by soft housing can remotely markets combined with more intense price competition.
In Europe constant currency says grew 2.1%, primarily reflecting solid performance in the UK, partially offset by decline you know in direct markets.
Says he needs with on a constant currency basis, but down 14%, mainly due to lower number of selling days compared to the prior quarter due to the timing of the Jewish holidays.
Revenue in the rest of the World continued to experience some favorable impact related to the low price competition discussed earlier and don't and constant currency basis was down 24.7%.
Okay got fourth quarter being a performance.
Adjusted gross margin was 26.4% compared to 27.5% and apply this quarter.
The decline in just two gross margin, mainly reflecting increased manufacturing even these cost due to lower fixed cost absorption from a reduction in capacity utilization you know Richmond Hill facility.
As well as lower <unk> average selling prices and foreign exchange headwinds.
Partially offset by lower raw material cost and more favorable regional mix.
Excluding literally go set them at their loss contingency as.
Operating expenses for the full quartile remained stable at 20.4 per cent compared to that buyer you quoted.
Now looking at the auto full year financial performance highlights.
Sales for the full you well down 5.2%.
On a constant currency basis says Oh play percent.
Adjusted gross margin was 27.3 per cent compared to 28.8% left here.
The lower adjusted gross margin, mainly reflects increased manufacturing unit costs due to lower costs lower fixed cost absorption, resulting from lower capacity utilization and all facilities.
In addition to lower average selling prices and adverse currency exchange impacts, partially offset by improved original mixed and supply chain efficiencies.
Operating expenses, excluding legal settlements and loss contingencies improved 70 basis points to 20.4% well for revenue compared to 21.1% <unk> into <unk>, primarily benefiting from lower marketing that said expenses.
Well as lower general and administrative expenses.
Our adjusted EBITDA was 69 million dollar a 12.6% margin down from $75.2 million last deal.
I felt pinpoint 1% margin. We've the difference is primarily attributable to lower gross margin, partially offset by lower operating expenses.
Adjusted diluted earnings per share was 77 cents compared to one dollar in five cents into part here.
Turning to our balance sheet and cash flow.
Doing 29, being Capex totaled 24 million dollar for the you representing 4.2% before revenue compared to 3.6% of revenue into play area.
We expect to increase our capex in Twentytwenty, primarily driven by initiatives related to our global growth acceleration plan any investment in all production lines.
We ended 2019, we have a strong balance sheet, including cash cash equivalents and short them back deposit 139.4 billion dollar.
We were pleased to generate strong cash flow from operations of $83 million Fourtwenty 19, compared to $14.7 million generated 2018.
Moving to our outlook for the full year Twentytwenty, we are introducing our outlook for revenue to be into range of $550 million to $570 million and adjusted EBITDA to be in the range of $69 million to $75 million.
This outlook assumes slight improvement in gross margin for the full year twentytwenty compared to the Fool you 29 thing.
Blend to went up production through the first half of the year why do we make certain investment to our lines throughout the year.
Oh outdoor causal factors in.
It's our expectation for strong macroeconomic conditions in the U.S. offset by softer global market condition persisting competitive environment in many.
Overall regions in Twentytwenty.
To formulate our outlook, we have views current foreign exchange rate raw material prices and the cost impact associated with the investment related to our global growth acceleration plan.
I will also mentioned that most of our OEM supply us provide part of our entry level products are based in China.
At this point, we have not seen how material change to OEM supply chain from the Corona virus and I've not factored any back into our Austin.
We expect <unk> first quarter to be the most challenging period, we improvement occurring throughout the year.
Overall, we look forward to continue making necessary improvements to our operations and remain focused on executing all of our is strategic initiative in twentytwenty.
These focus therefore, it's supported by strong balance sheet will help to improve our business and competitive positioning I was looking to capture share and increase our profitability over the long term.
No I would like to turn the call back to evolve for closing remarks.
Thank you all feel.
We are pleased with the structural enhancements during the past 12 months, which set the stage for 2020 to be a significant year of transformation for system.
This includes utilization of marked improvements in execution.
The global growth acceleration plan alongside continued investment in talent brand operations and distribution.
We see upside potential you know innovations we they launch over why wouldn't you luxury outdoor product line. The introduction of our branded products in the home depot and although plant Colo launches.
In addition, our consistently strong cash position provides us with a unique market advantage to evaluate the investment opportunities that will strengthening she's just global competitive position into people come to dope markets.
We are prepared to invest further in exciting initiative that we shape the trajectory your phone company in coming years.
I look forward to do doesn't funny as it stands for multi view and I'm confident in the objectives, we have set out to accomplish.
I look forward to updating your fair, though what else progress next quarter.
Thank you and we're now ready to open the call for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation ton will indicate your line is in the question Ken.
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Our first question comes from the line John Barber with Stifel. Please proceed with your question.
Thank you good afternoon, I Wonder, let's say, let's start with a you mentioned.
In the U.S., you're expanding your sales force and you have an increased marketing budget could you I don't know maybe walk us back to 2017 or 18 and walk us forward through 2020.
What the sale force number is being and then also maybe do that same for the marketing budget.
Hi, gentlemen, thank you very much and I think it's quite a quite obvious that do in some of the markets in the U.S., we haven't come with them at properly with the amount of.
Sales team on the ground Hey, we closed the 2018, we say something like 86 and sales guys says Rep and we finished 2019, we'd say 114. The aim for this year is actually too.
Right just number 230.
Sales rep in a covering all markets they are different marketing in the in the U.S.. It's still the marketing budget. He would do different units in 2019 too.
[laughter] had the realignment when I will spend against what we think should be the actions over brand building in the U.S. <unk> man building sees its own brand.
And now in 2020, we allow me stuff too.
Reinvest back into brand and to strengthen and going forward.
Sure too.
Oh, I mean numbers marketing spend in the U.S. was maybe down a 19 versus 18, but it'll be up and 20 versus 19 is that there.
Yeah, that's exactly the case.
Okay, and then maybe I know you've never broken out Ikea U.S., but it's been declining for quite some time I guess the simple question is I mean, you know is is it sufficiently small, but even if the declines a lot we can stop talking about it going forward.
Corridor or just give me sort of a update I'm not relative size are important to that account and maybe a little color on what's going on there.
Yes, so it's a it's less than 10% obviously because.
We are not reporting it.
In our you know financial filings as a I am by name Man I can say that day, it's been declining in the yeah. We think now that the by entering into.
The two home depot or a you know this Johnny look big boxes, a he's going to work to be balanced I think that they feel the expectation is that the here.
Yeah, we won't see a you know we rebalanced day in every way again, we know we once here and will decline. That's what we are we expect and hope that they will happen in Twentytwenty and you have to join we have a very strong relationship with ER and they care team and we are working together to a improved results in 2020.
Okay.
Okay.
And then on the U.S. Tonight, you mentioned core being slightly different from the total U.S. So maybe you could define what you're calling core and then any feel for what pricing versus volume did in the U.S. 19 for the year 19 versus 80.
First Oh, we are the cold in the U.S., he's a well ourselves about over the fields to wear to work here in 2019, so wouldn't be a thing that went beyond differentiated between the doing just where you know give their marketing some perspective on our growth in the Colby.
Yes.
And what was the other say other than part of the question Joel.
Yeah. So you know what what obviously we'd have to Chinese.
Effectively eliminated from the U.S. market, where the anti dumping and countervailing duties and I'm sure. It Im curious how that impacted you know like for like pricing for you in 2019 versus volumes.
I think we mentioned the independents that Oh, we Luke.
More well not internally on the and then golfing other groping, there and in the U.S. and I think it's done 20 the is.
Another you wouldn't be all investing back into you know teams in brown and expecting to continue a war volume wise, but also a a pricing. So we all we are coming with the right. We do what we think the right pricing strategy to the market. What are you expecting your volume growth as well.
And we did well.
Yeah.
So I don't want to put words in your mouth, but when we talk about one of the gross margin pressures are we talking about pricing. So obviously, that's a challenge in Australia, and Canada and other parts, where I guess, the Chinese are aggressively competing but even in the U.S. your pricing is.
Is a relatively aggressive.
Down I think that date in in the U.S. you see a a healthy pricing environment. We expect to see are increasing nine prices in a twentytwenty and we see less bullish show. A then we see now other markets.
Okay. My last question is just around the legal or could you give us an it up they.
Are there in terms of numbers as well as.
Well generally is happening.
Youre, referring to the do their legal and expenses that basically yeah. That'll claims this that all man's how many cases the stuff that I guess will be.
Great and the 20-F.
Yes, so somebody just got a specific particularly on the provision a a higher right expenses due to legal.
HM claim that we had not related to silly causes it was close to $5 million that we've the colder the coming a it's a it's a an issue where going back to 2007 and it's been.
Ongoing and there was some development India into claim that the legal proceedings that there we have updated via the accrual.
It doesn't nothing because these there's nowhere as significant changed in the run rate that we've seen there in the past few quarters. Then we will lay up they are in our filing in the next month day Weve, Yeah, we both Uh huh.
Okay very helpful. Thank you and good luck.
Think of John.
Thank you.
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Thank you. Our next question comes from the line I suffer on Sunday Night with Oppenheimer. Please proceed with your question.
Hey, guys. So thanks for taking my question I'm, sorry, if I missed this earlier just to what extent is the is the home depot kind of.
Opportunity baked into 2020.
[laughter] hi, so thanks for the question.
At home Depot <unk> home depot always a is a is a very good development a old that we are starting to where they usually it's been a three years and moved it to we are trying to penetrate a big big Big books in China, I think you had to stop the 2020 with the these are these change on these development. These.
Are very encouraging it's already baked into a and got into the market. So it's a it's a you know numbers.
Yeah, I think the first used to we're expecting to continue to grow we told me told people into used to come.
Okay, and maybe just I guess, a follow up on the China virus I know, maybe it's more had mine in kind of financial reality at this point you guys, but are you feeling anything on the ground in some of the non U.S. markets.
I assume the production was not namely in the region, but are you feeling anything any changes that you know might happen.
I think in there [noise] into markets. It's a it's a bit too early to fill any any different than momentum in the markets themselves as for the supply chain, we are seeing some and delays in the.
And shipment of our OEM volume format, China, which we are fully covered from our own there and facilities in Israel.
Okay. Thank you yeah that that helps us that's all for me. Thank you.
Yeah.
Yourself.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. ducking for any final comments.
Thank you for your attention. This morning, we look forward to updating you whenever progress next quarter.
Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.