Q1 2020 Earnings Call

Greetings welcome to the Caesarstone first quarter 2020 earnings conference call.

At this time, all participants are in listen only mode.

Brief question answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host Brad Grey advice you are.

Thank you may now be gets.

Thank you operator, and good morning, everyone I enjoyed by your Barbecuing Cedar Stones, Chief Executive Officer, and don't fear your 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 expectation and that actual events or results may differ materially.

For more information please refer to the risks factors contained in the company's most recent annual report on form 20-F subsequent filings with that you see.

In addition on this call the company will make reference certain non-GAAP financial measure.

Including adjusted net income.

Adjusted net income per share.

Adjusted gross profit.

Adjusted EBITDA in constant currency.

A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's first quarter 2020, <unk> earnings release, which is posted on the on the company's Investor Relations website.

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

Thank you Brad and good morning, everyone.

I would first like to say <unk> bolt go out to all those where we need to buy a bit unfortunates coping 19 pandemic.

We expect some gratitude to all different languages around the world well, it's showing up day and night.

That's all overcome these crisis.

The what does change great dealing just medical few months. So I would like to also think all employees across the globe well dedicated to working safely and supporting customers. During this unprecedented Tony.

I was sold in fiscal 2022 result.

Correct.

The focus implementation and execution.

Global growth acceleration plan that we have communicate that over the past year, which is focused on creating more efficiencies and ultimately driving sustained growth.

Oh, well aggressive efforts to control cost streamlining processes and placed the right talent allowed us to achieve positive first quarter performance, including the expansion of gross margin and EBITDA year over year.

So we're happy with the strong performance, although global sales teams, who collectively outperform our original plan before that you've booked or corporate banking.

No business.

The U.S., we have achieved tremendous progress in executing all the sales strategy and building momentum in all channels.

Had begun to see particularly positive impact from continued ramp up you know home people cells, which used encouraging.

Well I was strong first quarter results do not reflect the current market environment data indicative didn't do you live in <unk> operational outperformance the business has reached as well as the future potential.

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Well the last year, we significantly reduced inventories and generated solid cash flow from operating activities living go but I'm sure you know very defensible position with $132 million in cash as of March 31st two dozen a 20.

These actions have collectively provided us with the financial and operational flexibility to navigate the unprecedented global impact the cobot 19 condemning.

Given the health and safety how did the call she's just phones culture as an organization.

These uncertain environment.

Oh priority is maintaining the health and safety will fall employees partners and customers.

During the quarter, we rapidly implemented necessary measures to preserve capital spending should continue to fall operations, which safety a default front, what continuing to deliver exceptional service to all customers.

That's an example, we took immediate sections.

At the onset of the crises target non essential travel implement work from home policies.

Maintain strict social dispensing practices across all of our production facilities and warehouses.

As of today, all of our manufacturing facilities in operational.

And we have continued to service our customers in accordance with applicable sheltering place orders in many countries, where we operate globally.

So I will be just continue with the plans we have turned to other meet your focus to the controllable aspects of the business given the evolving been doesn't make a cross all global footprint has limited our near term visibility on industry demand.

As we look forward, we owe will that demand for products has started to meaningfully slow down as we were ending the quarter.

And we are expecting to see demand remain pressured.

As people remain.

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We have evaluated many different supposed to be meant scenarios and have applied necessarily enhancements to our cost structure and operations to meet the good these uncertain periods of lower demand.

Well prepared to flexible capacity.

As needed to drive margins and revenue opportunities.

That's just an in place all does begin to ease we expect our cash position measures you wouldn't be spilled over low demand to help drive structural changes in our cost base.

Equally important for US is remaining flexible weve enhancements that we have already made you know business to get I'm sure.

These advantages that we will look to further buildable as the markets we called is.

Despite the challenges ahead, we remain committed to all global growth acceleration plan to improve operational efficiencies that doesn't align resources throughout our business and help us image from these president climate as an even stronger company.

Well at current market challenges, we lucky delay emotional false did you can they should do you have skin in 2020 other long term strategy to reignite growth is unchanged.

In summary, we're very pleased we felt first quarter results.

I'm very proud of our teams achievements and have the ultimate confidence you know ability to overcome the challenging period with Uh huh.

We believe all the stroke bring to patients and their vis product offerings combined with <unk> ongoing cost savings initiatives strong balance sheet and near term focus on preserving cash should collectively leave us well positioned once we begin to return to normal operating conditions across holiday.

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

Thank you vault and good morning, everyone.

Before I start discussing our first quarters result, I.

I would like to remind everyone that beginning with the first quarter of Twentytwenty results, we modified our presentation regional revenue reporting well I knew organizational structure.

Well as the implementation of strategic initiatives across our global footprint.

Oh for geographic regions now comprise in order of revenue the Americas, followed by Asia Pacific, which we afraid to US eight back then Europe, the middle East and Africa, or EMEA region, and finally easily.

For the first quarter of Twentytwenty global revenue was $126.6 million, but the one out in $28.2 million in first quarter last year.

On a constant currency basis first quarter revenue grew by 8.5 per cent compared to last year in the U.S.. We experienced says improvement in the Big books, China is primarily driven by recent Dick's expense you need to U.S. home depot stores.

Well, so grew our core U.S. business by 4% and <unk> and delivered strongest says you know EEMEA region.

This improvement was partially offset by softer performance, mainly in the Aproch region and Canada.

We estimate that we experienced an IDE vis revenue impact of $3 billion to $4 billion for market related challenges due to covert 19, you're going to first quarter.

Looking at the <unk> first quarter being out of performance.

We were pleased to achieve improvements in production productivity and by further enhancement to our cost controls.

Leading to an adjusted gross margin of 28.9% for the first quarter.

Our first quarter results are encouraging overall, including a solid year over year increase adjusted EBITDA dollars and margin.

Be viewed this as a solid start to the year. Despite the spread of the corporate 19, pandemic, which increasingly impacted our global business as the quarter progressed.

With this backdrop, we realize that market <unk> market conditions are likely to remain challenging for period of time.

Evidenced by substantial softening of demand across our global markets during <unk>.

So far into second quarter on constant currency basis Global says have declined by approximately 30%, reflecting the magnitude of these unprecedented times.

We anticipate that says we remain weak who the second quarter of Twentytwenty.

Well, we are very limited visibility on the coming months, what we expect to see all results begin to improve windy economies reopened across our diverse footprint.

We have seen Vargas covert 19 related impact globally.

In the Americas stay at home orders remain in place across the majority of the U.S. in Canada, Although some states have unveiled plants do we opened their economies.

Both the U.S. in Canada, the low does have impacted demand and we expect the substantially back to our says you're going to second quarter.

In addition candidate that performance also remains affected by soft housing and remodeling markets combined with more intense low price competition, primarily from China.

And the epic region.

We have seen virus level of impact from Corbett 19.

In Australia, all largest market in the region and the first quarter businesses. Most the continued as you as well.

Given the country's proxy response to the spread over the virus.

The <unk> government limitation related to covert 19 were fed more in our business.

That said in Australia, we continue to see the impacts of a more competitive market combined with solid housing remotely and lending conditions.

In Asia, we have seen the greatest impact to our business starting in the month of February and we expect to experience continued interruption to our business and just territory in the coming months.

Indeed, EMEA region, both our indirect in courses have been impacted by government locked down due to covert 19.

He is well they could not didn't impact on our business into first quarter has been relatively less severe.

However, we see greater impact on our business <unk> and expect this to continue in the coming months.

Given the lack of visibility on the overall global economic impact of covered 90.

And do it I did affect some of the demand environment, we have redo on our previously communicated full year Twentytwenty financial outlook.

Significant portion of our business, despite the residential repair and remodel and new residential construction.

In coming months, the combination of shuttering plays guidelines, social distancing practices and overall economic uncertainty with pressured the men and delay certain project.

That said, we believed the underlying demand remains healthy for wide offering of premium countertops, one of the most important feature.

If any on.

Although we do not yet no the full extent of the adverse impacts to our business from Corbett 19.

We believe we have a strong financial position and the flexibility required to support our global operations.

These volatile period.

Oh prudent effort to control costs improve operational structure, we do see inventory and managed production capacity you have collectively allowed us to build a substantial cash position $132 million as of March Freddie first.

And that and just as important we have no financial debt. We have also taken additional actions to further improve our balance sheet and liquidity.

First we have significantly limiting capital expenditure and delaying most of investment related to our global Gulf acceleration plan.

Porno previous earning call. We've mentioned that we expect to increase our capex seemed twentytwenty, primarily driven by initiatives related to our global growth acceleration plan you need to that spent you know production lines.

Given the current uncertainty within the demand environment, we have put most of these initiatives on hold to provide us weve added flexibility to navigate these uncertain environment.

Second we are curtailing production capacity to meet expected demand last quarter and prior to the impact of Corbin 19, we have discussed ramping production capacity back up at our U.S. facility.

Looking ahead, we will adjust our production capacity based on our assessment of demand.

Why the tighter inventory build will certainly help us preserve cash.

Portion that they could be national floor sets and low utilization levels.

We'll have a severe adverse impact on gross margin belly into second quarter.

Third.

We are taking other necessary actions to improve our cost structure, including moving a portion of our workforce part time or reduced chiefs as well I was just filling a portion of our employees and freezing hiring.

We are reducing marketing and promotional spend.

Cutting non essential expenditure across the organization mailing in areas, where we are adopting do reduced level of demand.

As part of our cost saving efforts, our senior management and members of the board has also taken 15% to 20% pay cut through yearend.

In addition last quarter, we discuss necessary investments to our supply chain. That's the I'd expect it to impact first quarter ever news by approximately $2 million to $3 million.

We're happy to report that we did not experience any impact from supply chain delays in the first quarter and I fully resolved. The situation importantly, I would also like to note that most of our OEM supplier that might affect your part of our entry level products are based in China.

After this point throughout Dave the evolution of the pandemic due to mitigating actions. We have implemented we have not seen material impact related to our OEM supply chain.

From the current of right virus.

How do we bucket do our supply chain related to covert 19 remain minimal at this time.

We've got let me turn to called back to watch for closing comments.

Thank you feel.

In conclusion, we have adapted rapidly to didn't you economic environment.

And we will continue to focus on managing our cost structure, well actively controlling discretionary spending.

In light of the expected near term challenges ahead.

Our focus we remain on realizing the long term potential of our business.

We are confident in the plan, we haven't place and they'll sorted capital position to provide the necessary financial support weathered the storm and went into the economic recovery.

We intend to come out of these pandemic stronger than we came into it we didn't even better performing business.

We look forward you to update you fit the Ono 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 answer session. If you like to ask a question today. Please press star one from your telephone keypad and a confirmation telephone indicate your line is in the question Q.

You mean fresh start to feel like your move your question from the Q.

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Once again, let's start wanted to ask a question well pause a moment to assemble the queue.

Thank you I first questions from the line of John Baugh Stifel. Please proceed with your questions.

I'm good morning, and congratulations on a good first quarter.

I was let's say, let's start with.

The U.S. market place.

Curious won a couple of broad Swan.

Whether there's any update on like for like pricing you have in.

Chinese exit from those market, that's now Ah well on the rear view mirror and then maybe some comments around the mix you mentioned, you're ramping home depot.

You know, what's going on with Nike and.

And then you see core was up I think 4%.

Yeah, It was that kitchen, and Bath, some sort of channel mix and pricing.

Hi, gentlemen, thank you for the question.

I think it's a yea. The U.S. is also quite a promising into school don't pay on the back over.

No the they actually do come back in 2019, putting a new team in place they expand going to sell the meeting the U.S. and indeed, the I guess speeds up and revenue was up.

Oh goal is up a bike and both for me books about <unk>, 0.9% when Aquia, you've got one thing to be done, but kind of the flattening out and though and obviously the benefit all the ramping up we stay at home depot is working in our favor.

Okay.

And is there is there a mix shift.

It is a home depot ramps I guess as a percentage versus can be and how does that.

Influence gross margin.

I think exhibit too early for us to add to comment on death, and I guess you know there the last few weeks old they over the first quarter kind of.

Mix.

Drivers do well and he's also we need to too.

Go through the second bullet to do as good a bit to read on that.

Okay and.

And then I'm a question on inventory, obviously bill year over year and that was the plan and then of course, the pandemic gets up so up to your comments, you're going to take utilization rates down. The question is inventory I guess will be a source of cash going forward and <unk> and I understand there a lot.

<unk> dynamics in calculating free cash flow for the year that are unknown, but is there any help oh fear on on you know how you see free cash flow all playing out in the latter nine months of 2020.

Maybe just before handing over to will feel Joel just just to comment on Q1 again, because it was gonna thing and I can that we left open in the in the.

Last quarter old Lucky in the first we'll do we had no.

I'm missing stood up in terms of say is supplying to the demand and I think it looks like a successful water by not just building some inventory, but also fulfilling all the demand in all markets.

Yeah, not any regarding customer I think good Johnny it's a big the early for us to to predict what will be to capital for the full year as you know, there's a lot of uncertainty and it's their outdoor.

For us to really understand the N. and focus did their revenue for the coming quarters. So once we know that it will be much easier or we can say that you know we took a lot of actions to add to preserve cash from as we said you know were holding.

Capex, a investment and the production.

Uh huh.

Curtailing production and optimizing our walking copied or and then all the actions we took swift in terms of a fellow employees and adjusting all right.

Well costs and of course that cost control, which is very tight and once we know when we have a clearer picture over the coming months would be better forecasting the cash flow.

Okay and then my last question news and appreciate.

<unk> comments about marching Packer three to 4 million I assume that was last couple of weeks or than April getting down 30% is there any trend.

Oh that you can king see in April or where you down 30% throughout the weeks pretty evenly or has that accelerated the downside and what kind of lag in terms of timing.

In terms of what's happening.

At the installation or demand level versus your production and sales and you know do you expect the rate of sales maybe in may to be worse than that 30% or similar or better. Thank you.

Good to go I think a at real.

It was the relatively.

Stable between the two weeks and we haven't seen the M. A huge change between the we as it was driven by yeah. It mostly by their lockdowns they'll say each over other countries. The you know portfolio and the Golden Gate every dumping Medicaid seems to be willing to say, but I think we starting in may.

Hey, Similarly to do happen.

And I think it's very much depends on the on the different look down the government implemented into different regions that we operate the don't does no different we didnt, Australia that there was.

A minimal the interruption in the in March a bit more in every other than in the UK, which is all the OLED.

All of the business a in a in a in that group.

Yeah. There was a for example, like yet and shut down in that it seems a Britain since March 18.

In North America. So it's there's a delay when when we feel this the impact on our business. It's the we start feeling need more towards the ended the second novel therapy, because we are delivering some of the orders that were already.

In the system. So it's it's it's very mixed but a and it and by the way today, it's very hard to say exactly what will happen in may I think that they will.

Well, we our a rating and you know we very much depends on the reopening of the economies in the different states in countries that we operate in.

[noise]. Thank you in a good luck.

Thank you and I could you.

That's it reminds me Chris Star one to ask a question.

Thank you.

Thank you.

At this time. It next question comes from the line of I saw BRL Shoddily with Oppenheimer. Please proceed with your question.

Hey, guys. Thanks for taking my question again, congrats on solid quarter. Just one question on my end could you help maybe quantify the incremental facts of some of the actions you're taking on operating expenses just on a year over year basis.

Just just stay where as the ofili there collecting the numbers.

Maybe maybe to add to advise that we <unk>. We have entered the you know the first what do we.

Some of them yeah.

Action from 2019, that's a working you know benefit and I think that's the first quarter was there.

Probably our most efficient at quarter.

You know why now.

Turning things can be.

Oh, it had been many pet.

Well it was very impressive gross margin for the first quarter.

Yeah, and telephone expenses I think that you know we did take a accident, but this is.

It's something that you know we are monitoring the situation in there and kind of I will take more actions as we yeah. There the app development into different markets that we operate Oh, you know, we take steps that day and a compelling employees on reducing good.

She leaves et cetera, and but I think that early to say what they'd be the they impact on the full year, because it's going to be a evolving as we are monitoring the situation and the and then the revenue away and over to you and I think a sub just to complete. The then so yeah. We said the they experienced to date.

The 19, we know that we can be a very flexible we felt action and no of course basin, we Oh, we wouldn't managing the close in the company and the production and inventory in line with it or not we the people, we would be a and get people to market.

Okay, great. Thank you guys.

Thank you at this time I will turn the floor back to evolve the game for closing remarks.

Thank you for attention this morning before to update you on our progress next quarter.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.