May 1, 2019
Operator
Greetings, and welcome to the Caesarstone First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] As a remainder this conference is being recorded.
I would now like to turn the conference over to your host Brad Cray, Investor Relations. Thank you.
You may begin.
Brad Cray
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 and 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 First 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
Thank you, Brad, and good morning to everyone. We are excited to share with you today the news about our Global Growth Acceleration Plan.
The intention of this plan is to oversee and improve allocation of our resources while positioning ourselves more efficiently for sustainable accelerated growth. In the last decade, we have grown at the fast pace, thanks to compassionate and energetic teams, this was a truly remarkable achievement for us.
With much larger business today we've set out to optimize our global structure to operate more efficiently and improve scalability for new growth opportunities. We anticipate that the initiatives and actions taken through our Global Growth Acceleration Plan will empower us to achieve our 2019 goals and we expect to see further contributions from this multiyear plan overtime.
The actions include expansion of our sales force in the U.S. while significantly improving our logistics distribution network, technological infrastructure and processes, costs rationalizations including headcount reduction announced today that will enable a redirection of resources to be invested back into the business; investments in product innovation to enhance our portfolio of premium product offerings and more efficient management of our go-to-market supply chain and production processes.
Globally, we would reduce our headcount by approximately 7% or 110 employees across all business units and functions mostly in the U.S. Our headcount reduction measures are intended to move Caesarstone towards a more efficiently lean and agile organization.
Also, as start of these headcount reductions, we are temporarily reducing the effective capacity of our U.S. manufacturing facility by 50%, which should provide for increased production efficiency and reduce inventory levels.
We are confident that this facility will have meaningful contribution to our business over the long term. In line with our focus to bring the best talent to our team we have announced global leadership changes to strengthen our company’s marketing efforts and drive technological transformation.
These include appointment of a new Global Chief Marketing Officer and Chief Information Officer who are both expected to join our company in the next couple of months. Technological and digital investments will be geared towards operational enhancements such as inventory management and production along with improvement of our go-to-market tools.
One of our forward initiatives will be to expand the U.S. sales force over the next month by approximately 15% to 20% or 20 to 30 people.
The emphasis will be primarily target larger metropolitan areas where our presence has been underrepresented in the past. Beyond currently identified opportunities, we are actively pursuing additional avenues to accelerate growth and generate better results through these multi-year plans.
While some of these actions will contribute to our 2019 result, we recognize the majority of actions will benefit results over the long-term. These changes and enhancements should allow us to generate greater value for our shareholders in the coming years.
I look forward to updating you further on our progress next quarter. With that, let me turn the call to Ophir, who will provide details on our results and outlook.
Ophir Yakovian
Thank you, Yuval and good morning everyone. I will start by discussing our first quarter results.
For the first quarter 2019 global revenue was $128.2 million compared to $136.1 million in the first quarter of last year. This was mostly attributable to an adverse FX impact of $5.3 million.
On a constant currency basis revenue declined by 1.9% compared to last year, a soft market position in Canada, Australia and Israel combined with lower performance in IKEA, U.S. more than offset sales improvement in Europe and the company's core business in the U.S.
In the United States, first quarter sales were off by 0.6% compared to the first quarter of 2018. This was primarily attributable to expected softer performance in the retailer IKEA that was partly offset by low single digit revenue growth in our core U.S.
business which grew for the third consecutive quarter. We estimate that there are still elevated inventory levels of quartz countertop in the U.S.
due to the previously discussed second half 2018 surge in pre-buy activity ahead of recently announced tariff on U.S. imports of quartz countertops from China.
The impact of these tariffs in the U.S. should be favorable over the long term.
However, there are the developed markets that continue to be served by Chinese competitors at low price points. Therefore outside of the U.S.
some of the key -- of our key markets are expected to feel continued pressure from Chinese manufacturer. In Australia constant currency sales were down 3.8%.
The decline was attributable to continued competition mainly from Chinese manufacturers coupled with continued softness in the housing and remodeling markets, which were affected by more rigid lending standards and increase mortgage rates. In Canada, constant currency sales were down 9.2%.
Our performance was affected by soft housing and remolding markets with a decline in housing completions and continues decline trend in the remodeling market. This was partially offset by slightly better results in our IKEA business.
Sales in Israel on a constant currency basis were down 8.9%. We experienced lower volume mainly due to challenging housing market condition and increased competition.
In Europe, constant currency sales grew 27.5% reflecting continuous strong momentum in the UK, as well as in our indirect distribution operations in Europe. Revenue in the rest of the world on a constant currency basis was down 7.9%.
Looking out our first quarter P&L performance; adjusted gross margin was 25.3% compared to 25.2% in the prior year quarter. Similar adjusted gross margin mainly respects the following; increased unit manufacturing cost due to lower fixed cost absorption and foreign exchange headwinds.
These factors were offset by more favorable geographic and product mix, lower raw material costs and better supply chain efficiencies. The temporary 50% reduction in our U.S.
manufacturing capacity should improve the fixed cost absorption as we optimize our production allocation globally and work down inventory. Adjusted EBITDA in the first quarter was $11.6 million, a margin of 9.1% compared to $11.2 million, a margin of 8.2% in the prior year quarter.
This primarily reflects our efforts to control costs and improve our operational efficiency as we work to overcome challenging global market conditions and increase competition. Adjusted diluted earnings per share in the quarter were $0.08 compared to $0.10 in the same period last year on a similar share count.
Turning to our balance sheet and cash flow; CapEx total $6 million for the first quarter representing approximately 5% of revenues. We ended the first quarter of 2019 with the strong balance sheet including cash, cash equivalents and short-term bank deposits of $86.8 million with no financial debt to bank.
Moving to our outlook. For the full year 2019 we continue to anticipate revenue to be in the range of $580 million to $600 million and adjusted EBITDA to be in the range of $72 million to $80 million.
As noted on our last earnings call, we expected the first quarter be most challenged from year-over-year comparison, but as we move through the year we expect to start to show improvement in key metrics with growth largely coming in the second half of 2019. Our outlook also factors in our expectation for soft global market conditions and for competitive environment to persist in many of our regions during 2019.
These outlooks assume a similar gross margin for 2019 compared to full year 2018. To formulate our outlook we have used current foreign exchange rates, raw material prices and preliminary determination on U.S.
tariffs on Chinese imports. The final determination on tariff is still expected in the first half of 2019.
Changes in tariffs, FX or raw materials prices may impact our outlook as we move through the year. In the U.S., we continue to expect stronger revenue growth in the second half of 2019 as we expect inventory levels return to normal.
Furthermore, we continue to expect that the previously discussed enhancements in North America will start yielding results in the second half of 2019. We expect our gross margin to improve gradually over the year with the full year gross margin to be similar to 2018, the improvement in the gross margin will cascade to the bottom line which together with the revenue growth will increase EBITDA as the year progresses.
As a reminder the second quarter 2018 was our highest gross margin quarter in 2018, which it will not recur in the second quarter 2019 primarily due to lower capacity utilization. As a result we expect adjusted EBITDA to be lower year-over-year in the second quarter.
As we announced today and were discussed in detail our multiyear Global Growth Acceleration Plan will result in us taking a number of steps to improve our operations. The financial impact of this plan is included in our unchanged outlook for 2019 and intended to drive additional growth in revenue and adjusted EBITDA in the coming years.
In connection with the action we intent to take as part of the Global Growth Acceleration Plan, the company expects to incur a one-time charge of approximately $1 million in the second quarter of 2019. Overall, we believe that we are on track to achieve our full-year 2019 objectives.
We are focused on improving our operations, our profitability and capturing market share as the year progresses. We are confident that the specific actions we are taking would bring stronger performance to our organization in the coming years.
Thank you. And we are now ready to open the call for questions.
Operator
At this we’ll be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Susan Maklari with Credit Suisse.
Please proceed with your questions.
Unidentified Analyst
Hi. It’s actually Chris on for Susan.
Thanks for taking our questions. My first question is just on your announced global growth initiative.
Are there specific channels of distribution you're targeting? And is there way you could quantify the pace of growth acceleration you’re expecting in the back half of this year and possibly into 2020 as well?
Yuval Dagim
Hi, Chris. Thanks a lot for your question.
Actually when we’re looking on this Global Growth Acceleration Plan, we intent to continue our investment behind our U.S. operation; and we’re coming with quite large investment also in headcount and sales force, but also creating some other momentums around technology by creating this new innovation group to help us to come with better technology services and approach in our consumer and customer journey.
So, first and foremost will be the U.S. operations when we want to invest more behind our sales force.
And then I guess around the consumer and customer journey of ours. For that we are kind of coming with also with efficiency program with quite direct cost-cutting exercise in order for us to fund this future growth of ours and to fuel it.
And I think all together it's kind of three years plan which – during these three years we expect the company to acquire market shares in few markets, continue to invest in our main market and to become more efficient.
Unidentified Analyst
Okay. Thanks.
And just as a follow-up, could you give us a sense of what your current capacity utilization is in the U.S. and what your target run rate is for going forward after you execute on this plan?
Yuval Dagim
So, again, what was the question Chris, I didn’t get it.
Unidentified Analyst
Just with your current capacity utilization is in the U.S. given that you’re going to be reducing about 50% and what’s your room for expansion going forward after the reductions?
Yuval Dagim
So, all-in-all as we are global company we are supplying our demand from three different plants and second line, I guess total capacity, the one that we are putting a focus on, and I think we’re now moving from 80% utilization to 85% by shutting down temporarily this line, one line in Richmond Hill plant. All together I think it will be around 85% utilization.
So we’re going to have enough room for any growth increase or any more demand coming from the markets definitely for the next two to three years.
Unidentified Analyst
Okay. Thanks for that.
Very helpful.
Operator
Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.
John Baugh
Thank you for taking my questions. So, I wondered if you talk a bit the Chinese impact both in the United States as well as perhaps Australia.
In the U.S., I would assume that inventories are coming down, and that perhaps your business sequentially by month from January, April is somewhat better or less pressured and I’m excluding IKEA from that. So is that right and is that sort of expected to continue or is that not happened yet, but you still expected to happen in the second half?
Yuval Dagim
Hi, John. Great to hear you.
I think if you remember in our last conversion we kind of explained it, we are not seeing large amount of demand coming our direction from the new tariffs on products coming China. And I think it’s still the case, we are not seeing a huge amount of demand.
At the moment I think all-in-all if we look at it correctly I guess we would not be competing with the Chinese volume neck-to-neck. It was – most of it 90% of it was to serve the low end of the market and we are playing in the medium and premium end.
Having said that, I think what we should be experiencing the bit of more or bit of less pressure on prices. And I think that something we should be expecting.
Having said that if we will have brighter views or better vibes on demand over the next few months we’ll be more than happy to share to the market.
John Baugh
Thank you for that, Yuval. What are you seeing specifically in Australia and/or other parts of the world as it relates to Chinese competition?
Yuval Dagim
So, I think in both countries that we were kind of expecting to see some maybe increase in competition level, Australia and Canada. At the moment what we are not experiencing that harsh competition.
I think it’s maybe still to come or not. I think what we are experiencing in those two countries is actually a bit slow down in the industry and I think not too much of greater competition.
Ophir Yakovian
I’ll say to that -- that in Australia, John we do see a competition from China, but it didn’t change what we see in the market since the new tariffs implemented in the U.S. So we see these competition, they are there, but it’s not – it didn’t change dramatically.
John Baugh
Okay. And I’m trying to -- obviously the U.S.
facility has a lower margin you’re your Israeli lines. Then I’m curious is this decision in any way that temporarily close the U.S.
line relating to either increase sourcing of product around the world or the view that a home center won't come in with significant volume which I would presume would make sense to service from the U.S. perhaps not.
I’m just trying to get to read if anything into the U.S. line closure as it relates to your sourcing strategy.
What you’re expectation for a home center gain?
Yuval Dagim
So, John, we are following in term of sourcing the original plan for the year and we are kind of sourcing out of our own production facilities and the amount we plan to do I think the temporary closure of the line in the U.S. will serve I guess two main drivers at the moment -- or regions.
One is really to make sure that our utilization is becoming better and they’re not building inventories anymore in our yards; that’s one element. And the other one is to allow us to focus on this one newly line or relatively new line in Richmond Hill plant.
To make sure that we are kind of closing the gaps that ongoing gaps I guess of the KPI production – production KPI against the other plants that we have in Israel. So it’s actually a good opportunity for us to focus resources.
We are not coming too short on headcount with this specific plan and investing already human resources around this one line in order to become very more professional and when demand will increase to open the other line on a stronger base and professionalism of the plant.
John Baugh
What is the non recurring import related expense of $1.1 million?
Ophir Yakovian
This is -- actually we have this chart in the previous quarter and this is kind of completion to that. It relates to some customer related items and we don’t expect this to recur in the future.
This is I can say, in confident that this the last quarter that we should see this one-timer.
John Baugh
Okay. Good.
And then, I notice legal settlement and loss contingencies were down almost to $1 million year-over-year. Is there anything to read into that?
Thank you.
Ophir Yakovian
I don’t think. So, John, we are recording the expenses as we get the claims.
So it’s fluctuate a little bit. You can see, it’s between the quarters.
I wouldn’t take anything for the future on that.
John Baugh
Thank you very much. Good luck.
Ophir Yakovian
Thank you.
Operator
Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Unidentified Analyst
Hi. This is actually Maggie [ph] on for Mike.
First, I wanted to ask kind of about sure longer term gross margin trajectory, I think you said that in 2019 you see gross margins gradually improving over the year and ending kind of at a similar levels to 2018, but as you look a couple of years out how are you think about margins?
Yuval Dagim
Hi, Maggie, thank you for the question. We do expect gross margin to improve.
I would say that in the longer term goal not talking about the next one or two years, we do expect to be higher than maybe 30% to 35% something in that area, but I would not specify the exact time that we really expect together and currently we are working. We do think that we will see gradual improvement in the gross margin next year and days to come.
Unidentified Analyst
Okay. Thanks.
And second and I apologize if I miss this earlier, but I know sometime you’ll quantify the -- some of the tailwinds and headwinds that affected gross margins during the quarters. So I was wondering if you could do that for your 1Q results?
Ophir Yakovian
We did that when we had some big fluctuations and we wanted to give more color, but we are not providing this information on our regular basis.
Unidentified Analyst
Okay. Thank you.
Operator
There are no further questions in the queue at this time. And I’d like to turn the call back over to Yuval for closing remarks.
Yuval Dagim
Thank you for your attention this morning. We look forward to updating you in the coming quarters.
Thank you very much.
Operator
This concludes today’s conference. You may disconnect your lines at this time.
Thank you for your participation.