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Caesarstone Sdot-Yam Ltd (NASDAQ:CSTE)
Q2 2019 Earnings Call
Aug 7, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Caesarstone Limited Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brad Cray, Investor Relations. Please go ahead, sir.

Brad Cray -- Investor Relations

Thank you, operator, and good morning to everyone. I'm 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 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 like to now turn the call over to Yuval. Please go ahead.

Yuval Dagim -- Chief Executive Officer

Thank you, Brad and good morning, everyone. In the first half of 2019, we have completed a build out of our core leadership team and began executing our global growth acceleration plan. The plan is designed to improve operation efficiencies and reignite growth through a variety of projects across our business and functions while better allocating our resources. As part of this plan and as previously announced in May, we completed a global headcount reduction of approximately 7% across all our business units to improve our efficiencies and cost structure in a range of areas.

In conjunction with these actions, we reduced effective capacity in our US manufacturing facility by 50%. We work to improve our performance and refine our production strategy to increase efficiency and optimize our inventory as already reflected in our results. We are managing a global growth acceleration plan under 10 work streams, covering all aspects of our business, from innovation, production and supply chain to our brand and go-to market. I'm excited with the unified determination of our team to drive improvement in our business through these projects.

As part of realignment of our North American operation earlier this year, our progress is evident from encouraging results in our core business in the US which grew 12% year-over-year. We are in the process of significantly expanding our US. sales force to further improve our presence in large underrepresented metropolitan areas. We expect to keep expanding the US sales force through 2020 as we see great potential in these markets and expect a high return on our investment. Regarding tariffs, our global markets are adjusting to the new conditions following the final resolution on imported quartz countertops from China to the US. These newly imposed duties have adversely impacted our markets outside the US, mainly in Australia and Canada, that have seen a more competition coming from China.

The impact was greater than it's anticipated and resulted in a softer than expected performance during the second quarter, while the expected benefits of our initiatives give us confident in achieving our full-year EBITDA outlook for 2019, we adjusted our expectations from revenue to reflect a more competitive environment than originally anticipated.

In conclusion, we are pleased with the overall progress that we saw in our initiatives 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 Ophir who will provide details on our results and outlook.

Ophir Yakovian -- Chief Financial Officer

Thank you, Yuval and good morning, everyone. I will start by discussing our second quarter results. For the second quarter 2019, global revenue was $141.1 million compared to $139.2 million in the second quarter of last year, approximately half of the decline was attributable to an adverse affects impact of $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 along with lower performance in Ikea US. This was partially offset by improved performance in our core US business and continued strong momentum in the U.K.

In the United States, second quarter sales increased by 7% compared to the second quarter of 2018. This was the fourth consecutive quarter of revenue growth in our core US business which grew 12% year-over-year and was mainly linked to actions taken by the new North American leadership team. As Yuval mentioned, the net impact of tariffs imposed on Chinese quartz countertop imports to the US has been unfavorable to our global footprint. The final determination on tariffs was in June and was generally consistent with the preliminary duties imposed on -- in the second half of 2018.

As a result of the tariffs, we have seen a surge in imports to the US from other developing countries in particular, India and Turkey. Outside the US, other developed markets continue to be served by Chinese manufacturers at low price points as the global market is still adjusting to this new condition. We can say that we have experienced an adverse impact outside of the US which was more severe than I 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 very soft housing and remodelling markets which remain effected by more rigid lending standards and increased mortgage rates.

In Canada, constant currency sales were down 11.6%, our performance was affected by softness in housing and remodeling markets, we have declining trends and 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 volume, mainly due to challenging housing market conditions.

In Europe, constant currency sales grew 15.7% mainly reflecting continued strong momentum in the U.K. Revenue in the rest of the world was also impacted by the Chinese competition, discussed earlier and on a constant currency basis, it was down 27%.

Looking at our second quarter P&L 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 costs 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 of 2018 was our highest gross margin quarter in 2018, 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 in line 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, a margin of 16.5% in the prior year quarter. This primarily reflects the lower gross margin compared to last year, partially offset by lower operating expenses. Adjusted diluted earnings per share in this -- in the quarter were $0.23 compared to $0.43 in the same period last year on a similar share count. We ended the second quarter of 2019 with strong balance sheet including cash and cash equivalents and short term bank deposits of $99.4 million with no financial debt.

Moving to our outlook, for the full year 2019, we reiterate our adjusted EBITDA outlook to be in the range of $72 million to $80 million while moderating our anticipated revenue to a range of $550 million to $565 million. As discussed today, our outlook factors in our expectation for soft global market conditions and the competitive environment to persist in many of our region outside the US during 2019. Specifically, we now expect that the softer-than-expected performance in Australia and Canada as well as in some of our indirect markets will 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 US, 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 will start yielding 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 our outlook, we have used current FX rates and raw material prices change -- changes to FX, all raw material costs 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 support our long term gross margin target of 32% to 35% and our long-term adjusted EBITDA margin target of 17% to 18%. The primary drivers for margin improvement are expected to come from: sales growth, particularly in the US, where we expect to benefit from better ASP 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 growth and improve profitability.

We are encouraged that the actions we took in the second quarter have already yielded improvement in our margin and operating leverage. Our team's commitment, along with continued execution of our strategy through the global growth acceleration plan, gave us confidence, as we look forward.

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

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.

Michael Rehaut -- JP Morgan -- Analyst

Thanks. Good morning, everyone or good afternoon in Israel. First question, if I could just try and get a sense when you are able -- reiterating the 2019 EBITDA outlook despite the lowering of sales, which is just obviously pretty encouraging. I was -- would love to get a sense of since a quarter ago, you've had different changes occur in your outlook, obviously you've 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 obviously, everything kind of offset each other, but -- relative to a quarter ago, if you can kind of give us a -- any type of quantification of what the EBIT, the 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're seeing as a result of that in Australia and Canada, maybe even in the US. And then offsetting that, maybe what some of the positives are that you're seeing that allowed you to maintain that full year EBITDA guidance.

Yuval Dagim -- Chief Executive Officer

Hi, Michael, it's Yuval. Yeah, thanks for the question. I think, putting the growth acceleration plan in front of us, as the new platform. It's actually allowed us to put quite many projects together in order to speed up the improvement and efficiencies in our company. And I think what we got from the first quarter, the second one is a nice tailwind, if you like, to allow us to, to absorb this reduction in revenue. So all in all, I think we're growing the US and we have more and more challenging times in Australia and Canada. But the actions we took in the first quarter, across-the-board, in all over the -- in the company, in all functions and regions, kind of allowing us to -- to kind of bit more confident with EBITDA performance for year.

Ophir Yakovian -- Chief Financial Officer

Yeah. And just to complete, we reduced the headcount by 7% as we announced, the part of it was temporarily reducing the capacity in our Richmond Hill facility in the US to 50%. So all this -- and then in addition to that, cut other operating expenses that gives us the confidence that we can achieve the EBITDA target for the year. I would like to add to that, that we are expecting to increase partially the capacity utilization in our factories in the second half of the year. So this is also something that will help us, improve our margins.

Michael Rehaut -- JP Morgan -- Analyst

So maybe asked another way, obviously a quarter ago, you were still -- the global growth acceleration plan, the headcount reduction, the reduction in capacity, all of those things were expected -- a part of the plan three months ago. However, three months ago, you weren't expecting as much of a softer sales backdrop and some of the additional headwinds -- tougher sales environment in Australia, Canada, the more competitive environment, those things you were not expecting and that, that hurt your performance or reduced 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. So I'm just trying to get a quantification of what that difference was?

Yuval Dagim -- Chief Executive Officer

Yeah, so, first -- there are different dynamics here from FX rates to prices of raw materials, that also changed and provided some headwind, a tailwind. So if you were look at that. I think that we also identified some things that were less clear to us that we can achieve in this year and we will manage to have a clearer path on achieving them this year and we have more confidence that we can achieve more efficiencies in our operating expenses and hence, we think that, this is achievable.

Ophir Yakovian -- Chief Financial Officer

And also, Mike, in terms of organizational behavior, if you like. You see all leaders kind of joining forces together, and I'm very excited with this behavior. So wherever we could find an upside to bring back to the P&L by executing that, that was exactly what we were kind of doing, and I think we've delivered on our expectation in that sense.

Michael Rehaut -- JP Morgan -- Analyst

Any quantification on the raw material benefit this year relative to your outlook three months ago?

Yuval Dagim -- Chief Executive Officer

Yeah, I can say that -- if you look at it in the -- in this quarter, it was compared to last year it was 1%, approximately 1%. It will give us a few -- I think, it will be less less than 1% in the -- for the full year, but it was tailwind.

Michael Rehaut -- JP Morgan -- Analyst

Okay. Secondly, maybe I could ask a question more broadly about your competitive position in the US. In the past, you've given out market share data that kind of puts you in the low double-digits, 10%,12% or so, maybe a little bit more in terms of your market share in the US. I think those share positions were kind of last published in the last couple of years, just 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, maybe you could kind of walk through by channel where you think your position from a share standpoint? Who are the other major competitors? And why you think you can -- I am -- I am assuming obviously over the last couple of years, the market has grown perhaps you've lost a little bit of share. How you're thinking about regaining that share.

Yuval Dagim -- Chief Executive Officer

It's good comment, Michael. I think, it's been a few quarters that, and maybe more, but we are saying to the market and to ourselves, that most of our current performance in the US are in our hands to improve and to work on, and I think that is what happening in the last quarter or two. We put a new team in place, we created the North American region. We took our best talent in the region and put them in the more senior positions. And I think we started to see the fruits or the improvements coming to -- to be in our side. All in all, it was -- in the past, it was our focus -- sorry, our guess of the market share in our view and I think it's -- it's too early to say whether say in a different position. Now, definitely what I can say is that we are more -- way more confident that we can capture the opportunity that that we've seen in the market in the US, and we're definitely going to see growth coming from the US business over the next quarters.

Michael Rehaut -- JP Morgan -- Analyst

Alright. One last one, if I could. I think you said that in the US, the imports -- the China -- the tariffs or duties on the China imports, -- Chinese imports in the US are fully in place, but did I hear 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 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 how big that activity is, and to the extent that it's replacing any of the prior Chinese import activity?

Ophir Yakovian -- Chief Financial Officer

Yeah, Mike. That's a very good point. We see a significant increase in the import from low cost manufacturers, specifically more in India -- from India, Turkey, but from others as well. In terms of the magnitude, if you look at the import data publishing -- import data from March, April, May, and compared it to the equivalent period. Last year, you see that there is a significant say, replacement of the Chinese import by, I wouldn't say why, but one by one, but it's pretty close to what was the to the level that was imported last year.

So I think that there is no vacuum here. I would say that, that the growth --- that's why we said that the growth that we see is more related to the actions that we are taking and the changes that they were made in the US organization under the new leadership there and as we said, we are planning to expand our footprint in the US because we think there is a really great opportunity for us in this -- in this market to grow in the coming years.

Michael Rehaut -- JP Morgan -- Analyst

All right. Thank you.

Yuval Dagim -- Chief Executive Officer

Thank you, Michael.

[Operator Instructions] Our next question comes from the line Dillard Watt with Stifel. Please proceed with your question.

Dillard Watt -- Stifel, Nicolaus & Company -- Analyst

Thanks. Good morning, gentlemen. I want a follow up and ask a follow up on the India and Turkey and other countries that you're seeing import into the US. Is that a -- are you seeing similar -- either landed prices or retail or however you want to measure the price point, is it still -- is it still a pricing headwind that you were -- you had experience in the past with the Chinese competition that was pretty disruptive to the business?

Yuval Dagim -- Chief Executive Officer

Hi, Dillard, it's it's Yuval. I think it's pretty much the same. We are -- from the data that we have, we are experiencing probably the similar price points coming from different locations. I guess, -- the change from China to India is actually in the same segment with the same prices. So obviously, average price, so it's -- it has -- these are accuracy measurement, but all in all I think normal I think, you'll see the same -- same behavior in the market. There's no shortfall of the low cost manufacturing slabs or sources in the US and again, I think it's -- it's mostly what we are doing internally in our business to capture the opportunity rather than less of competition.

Dillard Watt -- Stifel, Nicolaus & Company -- Analyst

Okay. And then I hate to belabor the point too much here on the various low cost competition, but if it's coming in now to Canada, Australia, does they have benefit -- a little bit of some mix of hindsight and experience from what has occurred in the US, -- what might be the strategy to offset some of the volume pressures in those other countries at the same time that you're having some macro pressures there.

Yuval Dagim -- Chief Executive Officer

I think what we're experiencing is more competition in Australia and Canada, mostly in the commercial area with the high rise building and multi-units. This is where -- it's more price sensitive and we see more competition coming. It's only partial or part of our portfolio in those countries and I think we continue to build on our very strong Caesarstone brand in those countries we are very strong with, consumers and the K&B shops. And I think we'll continue to work on, on the demand throughout coming in this -- in this market.

Ophir Yakovian -- Chief Financial Officer

And to add to that, it's really -- when you look at the Australian housing market, it's a very soft market conditions that combined with the competition, gets us to that result, but need to take that into consideration, that the market conditions are pretty soft.

Dillard Watt -- Stifel, Nicolaus & Company -- Analyst

Yeah. Okay, and then lastly for me, if there's any update on any possible news with the home centers here in the US, that would great.

Yuval Dagim -- Chief Executive Officer

So, no formal news at the moment. We are still working on this relationship -- this relationship, I think it's going well so far, but not to the point that we can advise the market on a new deal or that -- or the full agreement on those relationship, but there was still keeping positive on this opportunity.

Dillard Watt -- Stifel, Nicolaus & Company -- Analyst

So it's fair to say then that the acceleration in the core business came from more the K&B [Phonetic] type side of the business.

Yuval Dagim -- Chief Executive Officer

Yeah, for sure. I mean, in the US, we saw a decline in IKEA this quarter as well, but the core business grew 12% and it came from K&B, in our retail side of the business and from [Phonetic] the new building, but not from their big books.

Dillard Watt -- Stifel, Nicolaus & Company -- Analyst

Okay, great. That does for me. Thank you.

Yuval Dagim -- Chief Executive Officer

Thank you.

Ophir Yakovian -- Chief Financial Officer

Thank you, Dillard.

Operator

Our next question is a follow up from Michael Rehaut with JP Morgan. Please proceed with your question.

Michael Rehaut -- JP Morgan -- Analyst

Thanks. Could I get a sense of what your price mix was or average sales price this quarter versus last quarter versus a year ago?

Yuval Dagim -- Chief Executive Officer

When you when you look at the ASP, you need to take into consideration that it's, the combination of mix -- regional mix, the product mix and of course, it's affected by the different foreign exchange rates between the quarter. The period, I can say that compared to last year, there was a small decline in the price, but I think it's not -- I mean, something that it's much more -- a much expected in this environment.

Going forward, the fact that we are going to grow in the US and this is where we see the growth coming. We expect to see better prices there, and then I think that overall mix is this -- in the US, it's better and we should expect the growth in the ASP once we grow more in the portion of the US is higher.

Michael Rehaut -- JP Morgan -- Analyst

I appreciate that. Particularly, given all the complexities with the different regions, maybe just focusing on the US, if you could give us a sense of what price what's your ASP, did last year, and what you expect it to do this year? What you hope it can do in 2020.

Yuval Dagim -- Chief Executive Officer

Mike, I just think -- we would like to take a look at the net numbers and we will come back to you, just a second.

Michael Rehaut -- JP Morgan -- Analyst

Okay. Maybe one -- other one while you're looking at that. The IKEA business has obviously been a lot of volatility -- a source of a lot of volatility. In the last couple of years, I think both in the US and most notably, but also Canada to a -- to a 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, is this a partner that makes sense strategically given all the volatility?

Yuval Dagim -- Chief Executive Officer

Just before the numbers, Michael, I guess the fact that they're growing in their core business, I think gives a hint on where we are putting our focus and it's definitely -- everything that is in our hands and the relationship that we can build with consumers and customers is where we are putting our focus and resources. And yes, I think that the IKEA revenue keeps being volatile and we see that growth in this quarter as well. So, yeah, we are reporting on that, it's still part of our business, but definitely there our focus is on the retail side of the business.

Ophir Yakovian -- Chief Financial Officer

Yes, as for the percentage, it's a -- it's less than 10% of our overall revenues as a company and provide us a good, our profitability and it's good business for us, but it's, less than 10% of our overall business.

Michael Rehaut -- JP Morgan -- Analyst

Okay, thank you.

Yuval Dagim -- Chief Executive Officer

You're welcome.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Yuval Dagim, CEO for closing remarks.

Yuval Dagim -- Chief Executive Officer

Thank you for your attention this morning. We look forward to updating you on our progress next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Brad Cray -- Investor Relations

Yuval Dagim -- Chief Executive Officer

Ophir Yakovian -- Chief Financial Officer

Michael Rehaut -- JP Morgan -- Analyst

Dillard Watt -- Stifel, Nicolaus & Company -- Analyst

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