Q2 2019 Earnings Call
Greetings and welcome to the Caesarstone Limited second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to your host.
Right Great Investor Relations. Please go ahead Sir.
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 todays conference call and responses to various questions may constitute forward looking statements.
We caution you that such statements reflect only the companys 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 second 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.
In the first half of 2019, we have completed the build out of our core leadership team and begin executing our global growth acceleration plan.
The plan is designed to improve operational efficiencies and reignite growth through a variety of projects across all the business.
And functions, while allocating our resources.
As part of these plans.
And as previously announced in May.
We completed a global headcount reduction of approximately 7%.
All all <unk> business units to improve our efficiencies and cost structure in a range of areas.
In conjunction with these actions we reduced effective capacity you know U.S. many victory facility by 50%.
We work to improve our performance.
And be fine I will production strategy to increase efficiency and optimize our inventory is already reflected in our results.
Well managing a global growth acceleration plan, although 10 work streams.
Covering all aspects of our business for innovation production and supply chain to other brands and go to market.
I'm excited with the unified determination of our team to drive improvement in our business. So these projects.
As part of the realignment of our North American operation earlier. This year, our progress is evident from encouraging results in our coal business in the U.S., which grew 12%.
Year over year.
We are in the process of significantly extending how about your sales force to further improve our presence in large underpenetrated metropolitan areas.
We expect to keep expanding the U.S. cells Fools. So 2020, as we see great potential in these markets and expect a Hollywood 10, one out investment.
Regarding tariffs have a global markets are adjusting to the new conditions. Following the final resolution on imported quartz countertops from China to the U.S.
These newly imposed duties habit visit the impacted markets outside the U.S.
Mainly in Australia, and Canada that have seen more competition coming from China.
The impact was greater than anticipated and resulted in a softer than expected performance during the second quarter.
Why did the expected benefits of our initiatives give us confidence in achieving our full year EBITDA outlook for 2019, we adjusted <unk> expectations for revenue.
To reflect a more competitive environment.
Than originally anticipated.
In conclusion, we are pleased with the overall progress that we saw you know and you should be was during the second quarter.
As we continue to improve our scalability for new growth opportunities.
I look forward to updating you further on our progress next quarter and with that let me turn the call over to Phil will provide details on our results and outlook.
Thank you Bob and good morning, everyone.
How we start by discussing our second quarter results.
For the second quarter 2019, global revenue was $141.1 billion.
But the $149.2 million in the second quarter of last year.
Approximately half of the decline was attributable to an adverse FX impact.
$3.9 billion.
On a constant currency basis revenue declined by 2.9% compared to last year due to soft market conditions combined with more competitive markets, mainly in Australia, and Canada I don't we have lower performance you Nike anyways.
This was partially offset by improved performance in our core U.S. business and continued strong momentum in the UK.
They do or not it's that second quarter sales increased by 7% compared to the second quarter of 2018.
These.
Was the fourth consecutive quarter of revenue growth in our core U.S. business, which grew 12% year over year and was mainly linked to action thinking.
I didn't you wouldn't know from Murray Kinda leadership team.
How did you both mentioned the net the impact of targets imposed on Chinese quartz countertop imports to the U.S. has been unfavorable <unk> global footprint.
The final determination on target was in June and was generally consistent with the preliminary duties imposed.
In the second half of 2018.
As a result of the targets we have seen a surge in imports of <unk> to the U.S. from other developing countries in particular, India and Turkey.
Outside the U.S. other developed markets continued to to be served by Chinese manufacturers.
Low price points.
As the global market they still adjusting to these new condition. We can say that we have experienced an adverse impact outside of the U.S., which was more severe than initially anticipated, particularly in Australia and Canada.
To that point in Australia constant currency sales were down 12%.
The decline was attributable to continued competition.
Mainly from Chinese manufacturers as I just mentioned.
This was coupled with a very soft housing and remodeling markets, which remain affected by more rigid lending standards and increased mortgage rates.
In Canada constant currency says were down 11.6%.
Our performance was affected by softness in housing and remodeling markets Weve declining trends in housing completion combined with more intense competition from Chinese imports.
Sales in Israel on a constant currency basis were down 3.5% as we experienced lower volumes, mainly due to challenging housing market conditions.
In Europe .
Constant currency says grew 15.7%, mainly reflecting continued strong momentum in the UK.
Revenue in the rest of the world.
It was also impacted by the Chinese competition discussed earlier and on a constant currency basis was down 27%.
Looking at the second quarter being added performance.
Adjusted gross margin was 27.3% compared to 32.4% in the prior year quarter.
And 25.3% in the first quarter of 2019.
The lower year over year adjusted gross margin, mainly reflects the increased manufacturing unit cost due to lower fixed cost absorption driven by lower capacity utilization and FX headwinds.
Partially offset by lower raw material costs.
As we mentioned on our last earnings call. The second quarter 2018 was our highest gross margin quarter in 28 then.
Which we did not expect to repeat this quarter, primarily due to lower capacity utilization.
Operating expenses for the second quarter benefited primarily from lower marketing and sales expenses compared to the prior year quarter aligned with our more prudent spending policy.
Adjusted EBITDA in the second quarter was $19.2 million, a margin of 13.6% compared to $24.6 million.
The margin of 16.5% into play this quarter.
This primarily reflects the lower gross margin compared to last year.
Partially offset by lower operating expenses.
Adjusted diluted earnings per share in the <unk> in the quarter were 23 cents compared to 43 cents in the same period Oh still similar.
<unk> account.
We ended the second quarter of 2019, we have strong balance sheet, including cash and cash equivalent and short term bank deposits of $99.4 million, we've known for a notch up that.
Moving to our outlook.
For the full year 2019, we reiterate our adjusted EBITDA outlook to be in the range of $70 million to $80 million.
Why didn't moderating dissipated revenue to a range of $550 million to $565 million.
As discussed today, Oh look fructose and our expectation for soft global market conditions.
And the competitive environments to persist in many of our region outside the U.S. doing 2019.
Specifically, we now expect that the softer than expected performance in Australia and Canada.
I was when I was in some of our indirect markets, which continue for the remainder of the year.
As a reminder, the financial impact of our global growth acceleration plan is included in our outlook for 2019 and is intended to drive additional growth.
In revenue and adjusted EBITDA in the coming years.
In the U.S., we continue to expect stronger revenue growth in the second half of 2019.
As the enhancements that we are making in our North America region started eating better results.
Based on the cost reduction actions as well as other initiatives to enhance our production and supply chain operations. Our full year gross margin should be roughly stable year over year, Despite lower expected revenue base.
To formulate the outlook, we have used current FX rates and raw material prices.
<unk> changes to FX or raw material cost may impact our outlook as we move through the year.
Looking beyond 2019.
In May we introduced our long term margin goals.
We have a range of initiatives in the works under the multi year global growth acceleration plan.
We have a clear path to improve our performance.
These plans to support our long term gross margin target of 52% to 55% and our long term adjusted EBITDA margin target of 17% to 18%.
The primary drivers for margin improvement are expected to come from.
Says wharf.
Particularly in the U.S. well, we expect the benefits from better a spirit and product mix.
Higher capacity utilization of our production facilities.
Improved efficiencies from our global growth acceleration plan, and finally, introducing innovative products to accelerate your off any political stability.
We are encouraged that the actions we took in the second quarter have already did improve and you know margin and operating leverage.
Our team's commitment along with continued execution of our strategy through the global growth acceleration plan give us confidence.
As we look forward.
Thank you and we are now ready to open the call for questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from the line of Michael Rehaut with JP Morgan.
Please proceed with your question.
Thanks, Good morning, everyone.
Or good afternoon and Israel.
First question, if I could just trying get a sense when you're able you know reiterating the the 2019.
EBITDA outlook, despite the lowering of sales which is a.
She is obviously pretty encouraging I was would love to get a sense of.
Since a quarter ago.
You know when you've had different changes occur in your outlook. Obviously, you cited some pluses and some minuses.
Some some tailwinds and some headwinds when you think about the reiteration of the EBITDA guidance.
I'd love to get a sense of.
You know, obviously everything kind of offset each other.
But.
You know, what you know relative to a quarter ago.
Okay. If you could kind of give us a any type of quantification of.
What the EBIT and you know they incremental negative impact on EBITDA was from.
Some of the headwinds that you've discussed like the softer sales backdrop. The more competitive backdrop that you are seeing as a result of that and in Australia, and Canada, maybe even in the U.S.
And then offsetting that.
You know maybe what some of the positives are that you're seeing that allowed you to maintain a that full year EBITDA guidance.
Hi, Michael its a too low.
Yeah. Thanks for the question I think you know we think as a goal for the acceleration plan in front of us as the new platform, it's actually allow us to.
And to put a quite as many projects together in order to speed up the you know the improvement of the efficiencies in our company and I think what we got away from the first quarter to second the second one is a is a nice tailwind if you like to allow us to absorb these this reduction in the in revenue. So all in all I think you know we are growing the U.S. and we have here more more challenging at times in Australia, and Canada, but the actions we took in the first quarter growth doubled in all over the company the company million all functions and regions kind of allowing us to get a bit more confidence, we though EBITDA performance for the year.
Yeah, and then just to complete the we reduced the headcount by 7% as we announced a part of it was that a temporarily reducing the capacity now Richmond Hill facility in the U.S. to a 50%.
So all this and then in addition to that cut a other operating.
Expenses that gives us the confidence that we can they achieved EBITDA target for the year I would add to that that we are expecting to a increase partially the a capacity utilization in our factories and in the second half of the year. So this is also something that we live here.
Help us a improves our margins.
So maybe asked another way you know, obviously a quarter ago.
You are still.
You know the the global growth acceleration plan the head count reduction the reduction in capacity all of those things were expected you know part of the plan three months ago.
However, three months ago, you weren't expecting as much of a softer sales backdrop in some of the additional headwinds so tougher sales environment and.
Australia, Canada, the more competitive environment. Those things you are not expecting and that hurt your performance or reduce your sales growth outlook, what I'm trying to get a sense of it let's say you didn't have those incremental headwinds.
Would we be looking at.
A an increase in EBITDA guidance by a certain amount because obviously.
You are still expecting all those benefits and they just got offset by these incremental headwinds I'm just trying to get a quantification of.
What that difference was.
Yes, so so.
First it's a different the dynamics there from a you know FX, a ray said to add prices affair.
Raw materials, but also a change in the provided some headwind.
Tailwind sorry, if you were.
A look at that I think that the we also identified some things that were less clear to us that we can achieve in this year end and we were managed to add it to have a clearer path on achieving them this year and the and we have more confidence that we can a few more.
More efficiencies in operating expenses and hence we think that there and this is achievable and all and also Mike in terms of the organizational behavior. If you like you see all the leaders can offer joining forces to get together and I'm very excited with the with this behavior. So wherever we could find the an upside to bring back to the personnel by executing that it was exactly.
What we were kind of doing and I think weve delivered on our expectations in that sense.
Okay any quantification on the raw material.
Benefit.
This year relative to your outlook or three months ago.
Yes, I can say that India.
If you look at it the in the a and this quarter. It was a compared to last it was 1% the approximately 1%. If you will give us a few a few I think it will be less less than 1% in there for the full year, but it was a it was a tailwind.
Okay.
Yes, secondly, maybe I could ask a question more broadly about.
Your competitive position in the U.S.
In the past you've given out market share data.
That kind of puts you in the low double digits.
10, 10, 12% or so maybe a little bit more.
In terms of your market share in the U.S. you know I think those share positions were.
Kind of last published in the last couple of years.
Trying to get a sense of.
How you think about your updated your current competitive position in the marketplace I mean over the last couple of years the marketplace has changed dramatically.
You know, maybe you could kind of walk through by channel.
Where you think you're positioned from a share standpoint.
Who are the other major competitors.
And why you think you can.
Yeah, I'm, assuming obviously over the last couple of years the market has grown.
Perhaps you've lost a little bit of share.
Hi, how youre thinking about regaining that share.
It's a good point, Michael I think.
It's been a few quarters that maybe more that we all.
Thanks to the markets and also the most of our current performance in doing so.
Now, hence due to improve and to work on and I think this is what's happening in the lost a quartile too we put a new team in place we created the North American region. If we do go best talent oil in the region and put them in the in the more senior positions and I think we are starting to see the none of the fruits all the all the improvements coming to.
It will be in our sites all in all it was a deposit was the other.
And Paul Sorry, I would guess the overlay of the market share in our view and I think it's too early to say, whether it's in a different position now definitely what I can say that we have more away more confident that we can.
Capture the opportunity that we see in the market in the us and we definitely going to going to see good growth coming from the U.S business over the next few quarters.
All right one last one if I could I think you said that in the us.
Yeah the imports.
Yeah, the the China. The tariffs are duties on the China imports Chinese imports in the U.S. are fully in place.
But did I hear it right that you said that you're also now seeing maybe an increase in imports in India, and Turkey, and I just wanted to make sure I heard that right.
And if you could give us a sense of if the amount of imports.
From those regions are equal to the prior amount of imports from China are they half of the amount of imports from China, just trying to get a sense of.
Yes, how how big that.
Activity is and to the extent that it's replacing.
Any any of the prior.
Chinese import activity.
Yes, that's a that's a very good point, we see a significant increase in any portfolio man low cost manufacturer, specifically more in India from India, Turkey, but some others as well.
In terms of the magnitude if you look at the input data.
Publishing for input data for Marchex will make it to the equivalent period last do you see that there is a significant say.
Replacement of the Chinese import bye.
I wouldn't say, we bought one by one but it's pretty close to what was there and to the to the level that was important the last year. So I think that there is no vacuum here.
And I would say that the that the that the growth. That's why we said that the growth that we see is more related to the actions that we're taking and the changes that they were made in the.
U.S. organization under the new leadership, there and as we said we are planning to expand our footprint in the U.S. because we think that there is really a great opportunity for us in this market to grow in the coming.
Yes.
Great. Thank you.
Thank you Michael.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. One moment. Please as we poll for more questions.
Our next question comes from the line.
Dillard Watt with Stifel. Please proceed with your question.
Thanks, Good morning, gentlemen.
Want to follow up and ask a follow up on the India, and Turkey and other countries that youre seeing imports into the US is that US are you seeing similar.
Other landed prices or.
You know retail or however, you want to measure the price points is it still on is it still a pricing headwind that you were had experienced in the past with the Chinese competition that.
There was pretty disruptive to the business.
Hi, the limits. Its you bought I think it's pretty much. The same we have no from the data that we have we are experiencing probably the similar similar.
Price points coming from different locations against the immediate to.
Changed from China, India is actually the same site with the same prices, obviously average price so it's a.
It has these accuracy.
Measurement, but the all in all I think you'll see the same same behavior in the market. There is no short fall over.
Low money from a low cost manufacturing slabs all sources in the us and again I think its a.
It's mostly.
What we are doing internally now business to capture the opportunity rather than less of competition.
Okay.
And then hate to belabor the point too much here on the various.
Low cost competition, but.
If it's coming in now to Canada, Australia.
Obviously have benefit a little bit of somebody's hindsight and experience from what has occurred in the us.
What's what might be the strategy.
To to offset some of the volume pressures and in those other countries at the same time that you're having some macro pressures there.
I think what we're experiencing is is.
More competition in Australia, Canada, mostly in the commercial area with the high rise buildings and.
Multi multi units this is where.
It's it's more price sensitive and we see more competition coming in that area. It's only partial part of our portfolio in those countries and I think we continue to build on our very strong seasonal some brands in those countries. We are very strong, we see and consumers and that can be shops or nothing.
We will continue to work on on the demand to all coming in this in this markets.
And then to add to that it's a really new you know when you look at the Australian housing market is a very soft market conditions that the.
Combined with the competition gets us to that result, but the need to take that into consideration that the to the market conditions.
Yeah, our pretty soft.
Yeah Okay.
And then lastly for me if there is any update on.
On any possible news with the home centers here in the U.S. that'd be great.
So no no formal news at the moment, we are still working on on this this relationship. This relationship I think it's a it's going well so far but not to the point that we can we can.
Advise the market on on a new deal all the.
All the full agreement on those relationship, but we are still there.
Keep being positive on this opportunity.
So it's fair to say then that the acceleration in the core business came from.
More the K Mb type.
Type side of the business.
Yeah for sure I mean in the U.S., we saw a decline in Ikea this or this quarter as well, but the core business grew 12% and came from there can be the and then our retail side of the minutes and Glenn the newbuilding, but not from the big box.
Okay, Great that does for me. Thank you.
Thank you Dylan.
Our next question is a follow up from Michael Rehaut with JP Morgan. Please proceed with your question.
Thanks.
Could I get a sense of.
You know what your price mix was.
Our average sales price.
This quarter versus last quarter versus a year ago.
When you when you look at the the SP.
You need to take into consideration that it's a combination of mix.
Regional mix the product mix and of course, it's a it's affected by.
By the a.
Different a foreign exchange rates between the quarter the periods I considered compared to last year there was a.
Small decline in India in the price, but the I think it's a you know.
No I mean, something that it's much more a much expected in this environment a going forward. The fact that we are going to grow in the U.S. and that this is where we see the growth coming and we expect to see better prices there and the and then I think that overall mix is this a India Oasis is better and we should expect a growth in DSP. Once we grow more in that portion of the U.S. is higher.
I appreciate that.
Particularly given all the complexities with the different regions, maybe just focusing on the U.S.. If you could give us a sense of.
What price.
What your ASP.
I did last year, what you expected to do this year, what you hope it can do in 2020.
But just again, we aren't where we would like to take a look at the numbers. It would come back to just a second.
Okay.
Maybe one one other one while you're looking at that.
You know the Ikea business has obviously been a lot of volatility.
Source of a lot of volatility.
You know in the last couple of years I think both in the U.S. and most notably but also Canada to us to secondary extent.
I was just trying to get a sense of what percent of the roughly what percent of the business in the us and in.
Number one and secondly in Canada what.
What does Ikea represent as a percent of the business and.
You know is this a a partner that makes.
Sense strategically given all the volatility.
Just before the numbers Michael I guess, they know the the fact that they're growing in the in our coal business.
I think you've heard it gives a hint on there where we're putting our focus.
And it's definitely in a.
I think thats using that in our hands and the relationship that we can deal with consumers and customers is where we are we're putting our focus and resources and yes, I think the key.
Revenue.
It keeps being a volatile and we see it go for at least this quarter as well so.
Yes, we are reporting on that it's still part of our business, but definitely the whole focus is on on the retail side of the business.
Yes, I saw that as a percentage it's a it's a it's less than 10% of overall revenues as a as a company and provide us a good the where profitability.
It's a it's a good business for us, but it's in less than 10% of all of our business.
Okay. Thank you.
You're welcome.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to you all the game CEO for closing remarks.
Thank you for your attention. This morning, we look forward to updating you on our progress next quarter.
Thank you very much.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.