Greetings, and welcome to the Caesarstone Limited Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray.
Thank you, Brad Cray. You may begin.
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 SEC.
In addition, on this call, the company will make reference to certain non GAAP financial measures, including adjusted net income, loss, adjusted net income, loss per share, adjusted gross profit, adjusted EBITDA and constant currency. The reconciliation of these non GAAP measures to the most directly comparable GAAP measures can be found in the company's Q2 2020 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. I'm incredibly proud of our entire team for their commitment to excellence and consistent improvement during the Q2. Since our last earnings call in May, we've continued to work hard to manage through the far reaching impact of COVID-nineteen to protect the health and well-being of our employees, trade partners and customers. While health and safety remains our top priority, the Caesarson team has focused on operational performance and financial strength in this dynamic environment. By being adaptable, we were able to quickly right size our resources and continue to safely deliver our premium countertop offerings across our global footprint.
Protecting our strong financial position is a priority and we have taken steps to improve our working capital and maintain our liquidity. As we look back to those decisive actions, we believe we have so far effectively mitigated the impact of various economic limitations and shelter in place guidelines that were beyond our control. We were encouraged to see sequential demand improvements in June, as more businesses are open and consumer to the new social distancing reality. This led to 2nd quarter results that were better than our expectations at the onset of the pandemic in all our 4 global regions. We will continue to focus on controllable factors such as managing costs, preserving our strong capital position and flexing our capacity as needed to appropriately address demand.
While we work to maximize our market opportunity into the recovery, we are also keeping a sharp focus on executing many structural business enhancements as part of our Global Growth Acceleration Plan. Even as we reduced our CapEx as part of the mitigation to the situation, we are still allocating resources and executing against the plan to improve our business over the long term, primarily in areas of product innovation, go to market capabilities, technology and production processes. We continue to invest in innovation, and we are very excited with our strong pipeline of new models we are launching this year and plan to introduce to the market in the coming months. In addition, the award winning Solaris Outdoor Collection that we rolled out last quarter has opened new markets for us. We continue to make further progress on improvements to our go to market approach, including greater use of technology to leverage our virtual capabilities in this new environment.
As we move into the balance of 2020, we are confident in our ability to continue improving our sequential revenue performance as the recovery takes hold. We believe our strong financial resources, talented workforce and transformative investments position us to deliver on our long term approach to value creation. And with that, let me turn the call over to Uphir, who will provide details on our results and outlook.
Thank you, Yuval, and good morning, everyone. Before I begin, I would like to remind you that a significant portion of our business is tied to residential repair and remodel. Recent months, the combination of shelter in place guidelines, social distancing practices and overall economic uncertainty have collectively pressured demand resulting in significant pressure to our top and bottom line. A positive note, these impacts were much more pronounced in April than our business momentum improved as we progressed in the 2nd quarter. With that backdrop, for the Q2 of 2020, global revenues were was $99,000,000 compared to $141,100,000 in the Q2 of last year.
On a constant currency basis, 2nd quarter revenue was lower by 28.3% compared to the same period last year. As Yuval mentioned, this was better than our initial expectations at the onset of shutter in place guidelines implemented across our global footprint. We experienced the majority of the adverse revenue impact in April May, primarily in our Americas region. However, since that time, we are encouraged to see improved business activity as more of our customers opened for business and demand began to return. In July, global sales declined in the high teens percent range year over year, reflecting an improving trend in sales performance compared to the Q2.
Looking at our markets, we have seen various pandemic related impacts. In the Americas, shelter in place guidelines remained in place through May June in many cases, but have now been lifted across most of the U. S. And Canada. The U.
S. IKEA stores were closed for the majority of the second quarter, which naturally had an unfavorable impact. This was partially offset by increased activity compared to last year in the big box channel at Home Depot stores where we have a new and expanding presence. Canada performance also remains affected by soft housing and remodeling markets combined with intense price competition primarily from China. In the APAC region, we have seen various pandemic related impacts.
In Australia, we saw relatively better performance than other countries due to the government's effective response in controlling the virus at the onset of the pandemic. That said, the soft market conditions that existed prior to the pandemic coupled with more intense competition were still unfavorable factors impacting the market. In the EMEA region, both our indirect and core sales were impacted by government lockdowns due to COVID-nineteen, although we have seen some improvement starting June. In Israel, the COVID-nineteen impact on our business in the 2nd quarter has been relatively less severe as very strong sales in June drove mid single digit top line growth in the 2nd quarter. Looking at our Q2 P and L performance, our margin performance and bottom line results were better than our initial expectations at the onset of the pandemic, particularly driven by our swift actions to control costs.
Adjusted gross margin was 20.5% compared to 27.3% in the prior year quarter. The lower year over year adjusted gross margin mainly reflects lower sales volume and less favorable regional and product mix as well as currency exchange headwinds that were partially offset by lower raw material prices. Excluding legal settlements and loss contingencies, operating expenses for the quarter benefited primarily from previous efforts of our Global Growth Acceleration Plan to improve efficiencies combined with tight cost control from our business continuity measures driving lower marketing and sales expenses as well as lower general and administrative expenses. Last quarter, we discussed some of the actions we have taken to improve our financial position during COVID-nineteen. As part of that, we limited capital expenditure and delayed investment related to our Global Growth Acceleration Plan.
As demand level normalized and backed by our strong balance sheet, we plan to accelerate our actions to improve our position by deploying more resources into our global growth acceleration plan. We continue to evaluate our levels of production capacity to meet expected demand. To date, we are pleased with our ability to flex capacity and control inventory, which has helped us to carefully manage our working capital. For the Q3, we expect the sequential improvement in volume to have favorable impact on gross margin compared to the Q2. Furthermore, last quarter, we took necessary actions to improve our cost structure, including moving portion of our workforce to part time or reduced shifts as well as furthering portion of our employees and freezing hiring.
We have now begun to bring some employees back to full time. We are also beginning to bring marketing and promotional spend budgets gradually back to more normal levels, particularly in areas where demand is returning, although we continue to enact strict controls over non essential expenditures. We believe we have a strong financial position and the flexibility required to support our global operations into the coming quarters. Our prudent efforts to control costs, manage our working capital, improve our operational structure and manage production capacity have collectively allowed us to preserve substantial cash position of $130,000,000 as of June 30, 2020. As we move forward, we are confident that the strength of our balance sheet will allow us to continue executing against our plan to improve our business and market position.
With that, let me turn the call back to Yuval for closing comments.
Thank you, Ophir. We remain committed to our strategy to accelerate our growth as a premium countertop market leader.
As we look to
the balance of 2020, we are cautiously optimistic for the recovery to continue, steadily strengthening the demand environment. We continue to see promising market opportunities in North America as economies recover, and we believe the underlying consumer interest remains strong to our best in class cutting edge designs. As we look to the coming quarters and years ahead, we remain confident in our ability to leverage our strengths to become a better performing business and to generate further value for our shareholders. Look forward to update you further on our progress next quarter. Thank you.
And we are now ready to open the call for questions.
Thank you very much. We will now be conducting a question and answer session. The first question is from the line of Reuben Garner from Benchmark Company. Please go ahead.
Thank you. Good morning, everybody.
Hi, Ruben.
So maybe we can start with the demand that you're seeing here recently. You mentioned a couple of times improvements. You mentioned improvements in the month of June and then you gave a global number in the month of July. Can you maybe narrow down a little bit more what are you seeing specifically in the Americas? And then are there other areas of maybe pressure that are offsetting some improvement in certain markets?
And what does that all translate to as far as expectations for demand overall in the
Q3? Yes, sure, Guido. Thank you very much for the question. I think if I start with maybe a global view, we do see we are experiencing the markets being slowly opened according to the changes of the lockdowns and the shelter in place guidelines market by market. Overall, we do see our revenues and volumes being improved from month to month.
As for July, we have mentioned that we are still behind last year in high teens as we experienced in July, but we are seeing a gradual improvement from quarter to quarter. So, all in all, globally, we are seeing improvement from quarter to quarter. If it comes to the WUS business, it's relatively similar situation, although there are some differences between the different markets in the U. S.
Okay. And then within the U. S, are there any particular markets that you're exposed to geographically that maybe you were hurt more by the shutdown? And if so, is there a situation where you've got some pent up demand potentially reopening of the economy where maybe you have more of a snapback than some other building products because you've been impacted more?
I think that we are experiencing the change in volumes and demand according to the development of the pandemic in each of the regions, whether there is a second wave that's still running with the 1st wave. I think you do see a greater impact in the New York region than others. But I think it's also the time to maybe to mention IKEA that will probably close most of the the stores were closed most of the Q2 and just started to open in late June July.
Okay. And so how would you how should we think about your margin, maybe decremental margins if businesses continues to be down over the next couple of quarters? How do you think about decrementals in the back half of the year? It sounds like you've made a lot of moves to your cost structure. Can you just help us with the puts and takes there?
Indeed. First, I think we entered the COVID-nineteen environment in a relatively healthy position. On the back of the actions we took in the second half of last year, including some structural changes, streamlined some of our operations and taking significant cost out of the business, including reducing inventory. So, the way we entered the COVID-nineteen was relatively in a healthy position. And you could see it in the amount of cash that we had at the end of Q4 last year and also in the end of Q1 this year.
Having said that, we very quickly took some decisions on changing our business in color to this current environment, some of which was, of course, limiting our capital expenditure, making sure that we are investing only behind those essentials projects, optimizing our working capital whether it was with customers and suppliers. And I think more than anything else and this is important also to because it has impacted our gross margin is looking at on being very flexible with our plants and production. And we with the experience of 2019, where we reduced inventory to the level we want it to be, We are taking the same exercise this year as well. Obviously, it comes under account of gross margin as the plants are not fully utilized in order to preserve our cash position.
Got it. And then sorry for the baseball metaphor here, but what the global growth acceleration plan, you mentioned it a couple of times. I know you started to see some progress before the virus unfolded. Can you just can you talk about what inning you are in that plan? I know it's tough to gauge your progress with the closures everywhere, but should we expect when things open back up that you will well, I guess, can you give us any update on where you are or what inning you are in that plan and just provide us with some updated thoughts?
By all means, the Global Growth Acceleration Plan was announced late Q2 last year. And I think it was another good build for entering the COVID-nineteen business environment because we already accompanied this program or this plan with structural changes and working on our company culture, especially putting health and safety at the top of our priority. So when we get into this pandemic time, when the business is more focused on health and safety, right structure, including the regional structure and working in our culture, it was a good bit to start with. And yet when we come to the specific programs or projects under the Global Growth Exertion Plan, we are allowing ourselves now when we see a bit of more a bit of improvement in our revenues to come back to those projects that I suppose that will be improving our growth or helping us to grow in our company, acting as some growth engines in our business and resource them back with the right investment, So, we can start or can finish this year and starting next year in a healthier position, if you like, with a better base to demonstrate our growth next year. Some of those projects will be around looking
on the
right MMA for us, especially around maybe materials or geographical spend. So, we are working to see what kind of opportunities we find in the market. At the moment, we are looking on tools to get to have a greater engagement with customers and consumers. We are launching new products, some of which not just different colors, but also new products that can be out of the house. And now when people are more staying more at house, looking at the backyard and having our slabs, if you like, quartz slabs in the backyard as well in the gardens is a new initiative.
So, we are kind of touching the business in few areas and we are we continue to invest behind those projects that will be delivering growth in the short term and the long term.
Great. And one just final follow-up for me on that same note. So I'm hearing what sounds like to be some investment that you're going to continue to make even with everything going on globally. Is it fair to say that you're comfortable making those investments even though the top line is clearly impacted by everything going on with the virus that maybe you're willing to take some near term pain because you see the opportunity longer term to grow the business?
Yes. I think it's a very fair statement. I think the way we are controlling cash now in the company is also demonstrating our hands on approach and how close we are to operate the business in I think in quite effective way. We finished the 2nd quarter with 100,000,000 dollars in our cash position, very similar to how we entered the COVID-nineteen environment. So good control around this issue and I think we are feeling quite comfortable to look on a few opportunities that might be in the market to see if we can invest behind those.
Great. Thank you guys so much and best of luck going forward and stay safe.
Thank you very much, Ruben.
Thank
you.
There are no further questions at this time. I would like to turn the floor back over to Mr. Yuval Thakim, CEO for closing comments. Over to you, sir.
Sir. Thank you, Zohin. Thank you for your attention this morning. We look forward to updating you on our progress next quarter. Thank you.
Thank you very much. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.