Welcome to
the Caesarstone First 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 It is now my pleasure to introduce your host, Brad Cray of ICR. Thank you.
You may now begin.
Thank you, operator, and good morning to everyone. I am 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, adjusted net income 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 Q1 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 would first like to say that our hearts and thoughts go out to all of those who have been impacted by the unfortunate COVID-nineteen pandemic. We express our gratitude to all the frontline workers around the world who are showing up day and night to help us all overcome this crisis. The world has changed great deal in just months. So I would like to also thank all our employees across the globe who are dedicated to working safely and supporting our customers during this unprecedented time.
Our solid Q1 2020 results reflect the focused implementation and execution of our global growth acceleration plan that we have communicated over the past year, which is focused on creating more efficiencies and ultimately driving sustained growth. Our aggressive efforts to control cost, streamline processes and place the right talent allowed us to achieve positive first quarter performance, including the expansion of gross margin and EBITDA year over year. We were happy with the strong performance of our global sales teams who collectively outperform our regional plan before the impact of COVID-nineteen business. In the U. S, we have achieved tremendous progress in executing our sales strategy and building momentum in all channels.
We have begun to see particularly positive impact from our continued ramp up in our Home Depot sales, which is encouraging. While our strong first quarter results do not reflect the current market environment, they are indicative the new level of operational outperformance that the business has reached as well as the future potential. Throughout the last year, we significantly reduced our inventories and generated solid cash flow from operating activities, leaving our balance sheet in a very defensible position with $132,000,000 in cash as of March 31, 2020. These actions have collectively provided us with the added financial and operational flexibility to navigate the unprecedented global impact of the COVID-nineteen pandemic. Given that health and safety are at the core Caesarstone's culture as an organization, in this uncertain environment, our top priority is maintaining the health and safety of our employees, partners and customers.
During the quarter, we rapidly implemented necessary measures to preserve capital and ensure continuity of operations with safety at the forefront, while continuing to deliver exceptional service to our customers. As an example, we took immediate actions at the onset of the crisis to cut non essential travel, implement work from home policies and maintain strict social distancing practices across all of our production facilities and warehouses. As of today, all of our manufacturing facilities remain operational and we continue to service our customers in accordance with the applicable shelter in place orders in many of our countries where we operate globally. Through our business continuity plans, we have turned our immediate focus to the controllable aspects of the business given the evolving pandemic across our global footprint has limited our near term visibility on industry demand. As we look forward, we are aware that demand for our products has started to meaningfully slow down as we were ending the quarter and we are expecting to see demand remain pressured as people remain home.
We have evaluated many different possible demand scenarios and have applied necessary enhancements to our cost structure and operations to mitigate these uncertain periods of lower demand. We are prepared to flex our capacity as needed to drive margins and revenue opportunities. As shelter in place orders begin to ease, we expect our cash preservation measures during this period of low demand to help drive structural changes in our cost base. Equally important for us is remaining flexible with enhancements that we have already made in our business to get mature. These are advantages that we will look to further build upon as the market recovers.
Despite the challenges ahead, we remain committed to our global growth acceleration plan to improve operational efficiencies, better align throughout our business and help us emerge from this present climate as an even stronger company. While current market challenges will likely delay a portion of our strategic initiatives in 2020, our long term strategy to reignite growth is unchanged. In summary, we are very pleased with our Q1 results. I'm very proud of our team's achievements and have the utmost confidence in our ability to overcome the challenging period ahead. We believe our strong brand reputation and diverse product offerings combined with our ongoing cost savings initiatives, strong balance sheet and near term focus on preserving cash leave us well positioned once we begin to return to normal operating conditions across our diverse geographic footprint.
With that, let me turn the call over to Ophir, who will provide details on our results and outlook.
Thank you, Yuval, and good morning, everyone. Before I start discussing our Q1's results, I would like to remind everyone that beginning with the Q1 of 2020 results, we have modified our presentation of regional revenue reporting to align with our organizational structure as well as the implementation of strategic initiatives across our global footprint. Our 4 geographic regions now comprise in order of revenue, the Americas followed by Asia Pacific, which we refer to as APAC, then Europe, the Middle East and Africa or EMEA region and finally Israel. For the Q1 of 2020, global revenue was 126 point $6,000,000 compared to $128,200,000 in the Q1 of last year. On a constant currency basis, Q1 revenue grew by 0.5% compared to last year.
In the U. S, we experienced sales improvement in the big box channel primarily driven by our recent expansion into U. S. Home Depot stores. We also grew our core U.
S. Business by 4% and delivered stronger sales in our EMEA region. This improvement was partially offset by softer performance mainly in the APAC region and Canada. We estimate that we experienced an adverse revenue impact of $3,000,000 to $4,000,000 for market related challenges due to COVID-nineteen during the Q1. Looking at our Q1 P and L performance, We were pleased to achieve improvements in production productivity and by further enhancement to our cost controls, leading to an adjusted gross margin of 28.9 percent for the Q1.
Our first quarter results were encouraging overall including a solid year over year increase in adjusted EBITDA, dollars and margin. We view this as a solid start to the year despite the spread of the COVID-nineteen pandemic, which increasingly impacted our global business as the quarter progressed. With this backdrop, we realize that market conditions are likely to remain challenging for a period of time as evidenced by substantial softening of demand across our global markets during April. So far in the Q2 on constant currency basis, global sales have declined by approximately 30%, reflecting the magnitude of these unprecedented times. We anticipate that sales will remain weak through the Q2 of 2020.
We have very limited visibility on the coming months, but we expect to see our results begin to improve when the economies reopen across our diverse footprint. We have seen various COVID-nineteen related impact globally. In the Americas, stay at home orders remain in place across the majority of the U. S. And Canada, although some states have unveiled plans to reopen their economies.
In both the U. S. And Canada, the lockdowns have impacted demand and we expect a substantial impact to our sales during the Q2. In addition, Canada performance also remains affected by soft housing and remodeling markets combined with more intense low price competition primarily from China. In the APAC region, we have seen various level of impact from COVID-nineteen.
In Australia, our largest market in the region, in the Q1 business has mostly continued as usual given the country's proactive response to the spread of the virus. Though in April, government limitation related to COVID-nineteen were felt more in our business. That said, in Australia, we continue to see the impacts of a more competitive market combined with solid housing, remodeling and lending conditions. In Asia, we have seen the greatest impact to our business starting in the month of February and we expect to experience continued interruption to our business in this territory in the coming months. In the EMEA region, both our indirect and cost sales have been impacted by government lockdowns due to COVID-nineteen.
In Israel, the COVID-nineteen impact on our business in the Q1 has been relatively less severe. However, we see greater impact on our business in April and expect this continue in the coming months. Given the lack of visibility on the overall global economic impact of COVID-nineteen and related effects on the demand environment, we have withdrawn our previously communicated full year 2020 financial outlook. A significant portion of our business is tied to residential repair and remodel and new residential construction. In coming months, the combination of shelter in place guidelines, social distancing practices and overall economic uncertainty will pressure demand and delay certain projects.
That said, we believe the underlying demand remains healthy for our wide offering of premium countertops, one of the most important feature of any home. Although we do not yet know the full extent of the adverse impacts to our business from COVID-nineteen, we believe we have a strong financial position and the flexibility required to support our global operations during this volatile period. Our prudent effort to control costs, improve our operational structure, reduce inventory and manage production capacity have collectively allowed us to build a substantial cash position of $132,000,000 as of March 31. And just as important, we have no financial debt. We have also taken additional actions to further improve our balance sheet and liquidity.
1st, we are significantly limiting capital expenditure and delaying most investment related to our Global Growth Acceleration Plan. On our previous earnings call, we mentioned that we expect to increase our CapEx in 2020, primarily driven by initiatives related to our Global Growth Acceleration Plan and investment in our production lines. Given the current uncertainty within the demand environment, we have put most of these initiatives on hold to provide us with added flexibility to navigate this uncertain environment. 2nd, we are curtailing production capacity to meet expected demand. Last quarter and prior to the impact of COVID-nineteen, we had discussed ramping production capacity back up at our U.
S. Facility. Looking ahead, we will adjust our production capacity based on our assessment of demand. While the tighter inventory build will certainly help us preserve cash, we caution that the combination of lower sales and low utilization levels will have a severe adverse impact on gross margin mainly in the Q2. 3rd, we are taking other necessary actions to improve our cost structure including moving a portion of our workforce to part time or reduced shifts as well as furloughing a portion of our employees and freezing hiring.
We are reducing marketing and promotional spend and cutting non essential expenditure across the organization, mainly in areas where we are adopting to reduce level of demand. As part of our cost saving efforts, our senior management and members of the board have also taken 15% to 20% pay cut through year end. In addition, last quarter we discussed necessary enhancements to our supply chain that we had expected to impact first quarter revenues by approximately $2,000,000 to $3,000,000 We are happy to report that we did not experience any impact from supply chain delays in the Q1 and have fully resolved the situation. Importantly, I would also like to note that most of our OEM supplier that manufacture part of our entry level products are based in China. Up to this point, throughout the evolution of the pandemic due to mitigating actions we have implemented, we have not seen material impact related to our OEM supply chain from the coronavirus.
Other impact to our supply chain related to COVID-nineteen remain minimal at this time. With that, let me turn the call back to Yuval for closing comments.
Thank you, Ophir. In conclusion, we have adapted rapidly to the new economic environment and we will continue to focus on managing our cost structure while actively controlling discretionary spending. In light of the expected near term challenges ahead, our focus will remain on realizing the long term potential of our solid capital position to provide the necessary financial support to weather the storm and win into the economic recovery. We intend to come out of this pandemic stronger than we came to it with an even better performing business. We 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. Thank you. Our first question is from the line of John Baugh with Stifel. Please proceed with your questions.
Good morning and congratulations on a good Q1. I was let's see, let's start with the U. S. Marketplace. Curious on a couple of fronts.
1, whether there's any update on like for like pricing,
given
the Chinese exit from What's going on with IKEA? And then you said core was up, I think, 4 percent. Is that kitchen and bath? So sort of channel mix and pricing.
Hi, John. Thank you for the question. I think it's the U. S. Results are quite promising in the Q1 on the back of the actions we took back in 2019, putting a new team in place, expanding the sales team in the U.
S. And indeed ASP is up and revenue is up. The core is up by approximately approximately 3.9 percent when AKIA is kind of it's a bit down, but kind of a flattening out. And obviously, the benefit of ramping up with Home Depot is working in our favor.
Okay. And is there a mix shift? Is Home Depot ramps, I guess, as a percentage versus K and B and how does that influence gross margin?
I think it's a bit too early for us to comment on that. And I guess, the last few weeks of the Q1 are kind of a mix of drivers to our end results. So we will need to go through the second quarter to get a better read on that. Okay. And then,
a question on inventory, obviously, it built year over year and that was the plan and then of course, the pandemic hits. So to your comments, you're going to take utilization rates down. The question is inventory, I guess, will be a source of cash going forward. And I understand there are a lot of dynamics in calculating free cash flow for the year that are unknown. But is there any help, Ophir, on how you see free cash flow playing out in the latter 9 months of 2020?
Maybe just before handing over to Phil, John, just to comment on Q1 again because it was kind of an item that we left open in the last quarter of last year. In the Q1, we had no missing stuff in terms of supplying to the demand. I think it was quite a successful quarter by not just building some inventory but also fulfilling all the demand in our markets.
Yes. And regarding cash flow,
I think, John, it's a bit early for us to predict what will be the cash flow for the full year. As you know, there's a lot of uncertainty and it's very hard for us to really understand and forecast the revenue for the coming quarters. So once we know that, it will be much easier. We can say that we took a lot of actions to preserve cash from, as we said, holding CapEx investment and production curtailing production, optimizing our working capital and then all the actions that we took with in terms of fellow employees and adjusting our workforce and of course cost control, which is very tight. Once we know and we have a clear picture of the coming months, we'll be better focusing the cash flow.
Okay. And then my last question is, and I appreciate the comments about March impact of $3,000,000 to $4,000,000 I assume that was last couple of weeks and then April being down 30%. Is there any trend that you can see in April? Are we down 30% throughout the weeks pretty evenly? Or has it accelerated to the downside?
What kind of lag in terms of timing, in terms of what's happening at the installation or demand level versus your production and sales? And do you expect the rate of sales maybe in May to be worse than that 30% or similar or better? Thank you.
First regarding April, I think it was relatively stable between the weeks. We haven't seen a huge change between the weeks as it was driven by mostly by the lockdowns of each of our countries in our portfolio. And regarding May, it's a bit too early to say, but I think we're starting May similarly to April.
And I think it very much depends on the different lockdowns that governments implement in the different regions that we operate. There are differences between Australia that there was very minimal interruption in March, a bit more in April and the UK, which is almost a halt of the business in April. There was, for example, IKEA shut down in since April since March 2018 in North America. So it's there's a delay when we feel this the impact on our business, it's we start feeling it more towards the second half of April because we are delivering some of the orders that were already in the system. So it's very mixed, but and by the way, it's very hard to say exactly what will happen in May.
I think that we are awaiting and it very much depends on the reopening of the economies in the different states and countries that we operate in.
Thank you and good luck.
Thank you, John. Thank you, John.
Thank you. At this time, the next question comes from the line of Asaf Baral Shandali with Oppenheimer. Please proceed with your question. Hey, guys. Thanks for taking my question.
Again, congrats on a solid quarter. Just one question on my end. Could you help maybe quantify the incremental effects of some of the actions you're taking on operating expenses, just on a year over year basis?
Basis? Just as Ophir is collecting the numbers, maybe to advise that we have entered the Q1 with some actions from 2019 that are working in our benefit. And I think that the Q1 was probably our most efficient quarter in a while now. And it can be or it has been manifested itself to our very impressive gross margin for the Q1.
Yes. In terms of expenses, I think that we did take actions, but this is something that we are monitoring the situation and kind of we'll take more actions as we see the development in the different markets that we operate. So we take steps that and comparing employees and reducing shifts, etcetera. But I think that it's early to say what will be the impact on the full year because it's going to be evolving as we monitor the situation and the revenue over the year.
And I think Assaf just to complete the answer, with the experience from 2019. We know that we can be very flexible with our production and our cost base and we will be managing the cost in the company and the production and inventory in line with it in line with the figures we will be getting from the markets.
At this time, I will turn the floor back to Yuval Entegui for closing remarks.
You for your attention this morning. We look forward to updating you on our progress next quarter.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.