Greetings, and welcome to the Caesarstone 4th Quarter 2019 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brad Cray with ICR. Thank you.
You may 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 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 Q4 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. During 2019, we built stronger foundations through our Global Growth Acceleration Plan, which we began executing during the Q2, and I'm very pleased with the progress we've made so far. The plan has already positively impacted our business by allowing us to better execute our plans and deploy resources in areas of production, supply chain, technology, sales and marketing. The project we initiated under the Global Growth Acceleration Plan will continue to contribute and improve our performance over the long term. As we look forward, 2020 is off to an encouraging start.
We have reached an important in our strategy to enter the U. S. Big Box channel. We recently introduced Caesarstone branded products at all U. S.
Home Depot stores, adding to the ongoing strong momentum in this region. In addition, we are reinvigorating our product portfolio. We have recently introduced our new durable outdoor luxury product line. It marks an exciting evolution of our quartz applications in a relatively underpenetrated market segment. This groundbreaking outdoor collection recently won the most innovative 2020 that are intended to boost growth initiatives in our global markets.
Our company's focus is on the U. Where we see the greatest opportunity for growth. We are investing a lot of resources to make sure we realize this opportunity. In the U. S, we have continued the expansion of our sales force and I'm very happy with the progress we've made.
In addition, we have increased our marketing budgets to better support our brand, which is a valuable asset we want to leverage. Improving the level of service to our customers is one of the key growth drivers for Caesarstone in the U. S. Market. As part of the Global Growth Acceleration Plan, we are investing in redeploying our logistic distribution network in the U.
S. In order to improve service and reduce costs. We are also improving our planning and forecasting through implementing new technology and processes. During the second half of twenty eighteen through the first half of twenty nineteen, we reduced our production capacity utilization. The purpose of this move was to balance our inventory and improve our cash flow generation.
During 2019, 20, in response to 20 in response to expected demand and to improve service to our customers, we plan to return to full production in all our factories by the Q2. The exciting initiatives and projects we have planned for 2020 under the Global Growth Acceleration Plan give us confidence in our ability to accomplish our objectives of this year. We remain committed to strengthening our operating infrastructure, optimizing our product portfolio and positioning our business for improved results in the years to come. 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. I will start by discussing our 4th quarter results. For the Q4 2019, global revenue was constant currency basis,
revenue declined by 5.5
On a constant currency basis, revenue declined by 5.5% compared to last year. Continued sales improvement in our core business in the U. S. And the UK was more than offset by softer performance mainly in Australia, Canada and IKEA U. S.
In addition, necessary enhancements to our supply chain forced an estimated $3,000,000 to $4,000,000 worth of revenue mix in the 4th quarter. We expect an estimated impact of $2,000,000 to $3,000,000 from these delays in the Q1 and expect to have the situation fully resolved during the first half of twenty twenty. As mentioned, we plan to return to production in all of our factories by the Q2, which combined with the implementation of improvements in our inventory planning processes are expected to resolve supply chain issues. In the United States, 4th quarter sales increased by 7% compared to the Q4 of quarter mentioned on our last several
earnings calls, intense competition from
As mentioned on our last several earnings calls, intense competition from Chinese manufacturers at low price points continue to pressure our global footprint outside the U. S. In Australia, constant currency sales were down 18.2%. The main reasons for the decline were the factors I just discussed coupled with persisting soft housing and remodeling market conditions along with challenging lending environments. In addition, we had a large customer in Australia that went out of business during the quarter impacting revenue by $1,000,000 This event had no material impact on adjusted EBITDA during the quarter due to our existing insurance coverage and we expect no material 6%.
Our
performance was affected by soft housing and 6%. Our performance was affected by soft housing and remodeling markets combined with more intense low price competition. In Europe, constant currency sales grew 2.1%, primarily reflecting solid performance in the UK, partially were down 14%, mainly due to lower number of selling days compared to the prior year quarter due to the timing of the Jewish holidays. Revenue in the rest of the world continued to experience unfavorable impact related to the low price competition discussed earlier and on a constant currency basis was down 24.7%. Looking at 4th quarter P and L The decline in adjusted gross margin mainly reflects an increased manufacturing business cost due to lower fixed cost absorption from a reduction in capacity utilization in our Richmond Hill facility as well as lower average selling prices and foreign exchange headwinds, partially offset by lower raw material costs and more favorable regional mix.
Excluding legal settlement and loss contingencies, operating expenses for the 4th quarter remained stable at 20 point 4% compared to the prior year quarter. Now looking at our full year financial performance highlights. Sales for the full year were down 5.2%. On a constant currency basis, sales were off 3%. Last year.
The lower adjusted gross margin mainly reflects increased manufacturing unit costs due to lower fixed cost fixed cost absorption resulting from lower capacity utilization in our facilities in addition to lower average selling prices and adverse currency exchange impacts, partially offset by improved regional mix and supply chain efficiencies. Operating expenses excluding legal settlements and loss contingencies improved 70 basis points to 20.4 percent of revenue compared to 21.1% in the prior year, primarily benefiting from lower marketing and sales expenses as well as lower general and administrative expenses. Our adjusted EBITDA was CAD 69 1,000,000 at 12.6 percent margin, down from CAD75,200,000 last year, a 13.1% margin, with the difference primarily attributable to lower gross margin, partially offset by lower operating expenses. Adjusted diluted earnings per share was 2019, CapEx totaled $24,000,000 for the year, representing 4.3% of revenue compared to 3.6% of revenue in the prior year. 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.
We ended 2019 with a strong balance sheet, including cash, cash equivalents and short term bank deposit of $139,400,000 We were pleased to generate strong cash flow from operations of $83,000,000 for 2019 compared to $14,700,000 generated in 2018. Moving to our outlook. For the full year 2020, we are introducing our outlook for revenue to be in the range of $550,000,000 to $570,000,000 and adjusted EBITDA to be in the range of $59,000,000 to $75,000,000 This outlook assumes slight improvement in gross margin for the full year 2020 compared to the full year 2019. We plan to ramp up production through the first half of the year, while we make certain investment to our lines throughout the year. Our outlook also factors in our expectation for strong macroeconomic conditions in the U.
S. Offset by softer global market condition in a persisting competitive environment in many of our regions in 2020. To formulate our outlook, we have used current foreign exchange rate, raw material prices and the cost impact associated with investment related to our global growth acceleration plan. I will also mention that most of our OEM suppliers that provide part of our entry level products are based in China. At this point, we have not seen a material change to our OEM supply chain from the coronavirus and have not factored any impact into our outlook.
We expect our Q1 to be the most challenging period with improvement occurring throughout the year. Overall, we look forward to continue making necessary improvements to our operations and remain focused on executing our various strategic initiative in 2020. These focused efforts supported by a strong balance sheet will help to improve our business and competitive positioning as we look to capture, share and increase our profitability over the long term. Now I would like to turn the call back to Yuval for closing remarks. Thank you, Ophir.
We are pleased with the structural enhancements during the past 12 months, which set the stage for 2020 to be a significant year of transformation for Caesarstone. This includes the realization of marked improvements in execution through the Global Growth Acceleration Plan alongside continued investment in talent, brand, operations and distribution. We see upside potential in our innovations with the launch of our new luxury outdoor product line, the introduction of our branded products in Home Depot and other planned color launches. In addition, our consistently strong cash position provides us with a unique market advantage to evaluate investment opportunities that will strengthening Sisostom's global competitive position in the premium countertop We look forward to 2020 as a transformative year and are confident in the objectives we have set out to accomplish. I look forward to updating you further on our progress next quarter.
Thank you. And we are now ready to open the call for questions.
Thank you. Our first question comes from the line of John Baugh with Stifel. Please proceed with your question.
Thank you. Good afternoon. I wonder, let's see, let's start with, you mentioned in the U. S, you're expanding your sales force and have an increased marketing budget. Could you, I don't know, maybe walk us back to 2017 or 2018 and walk us forward through 2020, what the sales force number has been and then also maybe do the same for the marketing budget?
Hi, John. Thank you very much. I think it's quite obvious that in some of the markets in the U. S, we haven't covered them properly with the amount of sales team on the ground. We closed 2018 with something like 86 sales guys, sales rep, and we finished 2019 with 114.
The aim for this year is actually to raise this number to 130 sales rep in covering our markets different markets in the U. S. As for the marketing budget, we took the opportunity in 2019 to have a realignment on our spend against what we think should be the actions of brand building in the U. S, building Caesarstone brand. And now in 2020, we're allowing us to reinvest back in the brand and to strengthen it going forward.
So I mean in numbers, marketing spend in the U. S. Was maybe down in 2019 versus 2018, but it will be up in 2020 versus 2019. Is that fair?
Yes, that's exactly the case.
Okay. And maybe I know you've never broken out IKEA U. S, but it's been declining for quite some time. And I guess the simple question is, is it sufficiently small that even it declines a lot, we can stop talking about it going forward? Or just give me sort of update on the relative size or importance of that account and maybe a little color on what's going on there?
Yes. So it's less than 10%, obviously, because we are not reporting it in our financial filing as by name. I can say that it's been declining. And we think now that by entering to Home Depot, this channel of big box is going to be balanced. I think that this year, the expectation is that we won't see we will balance like here, and we won't see more decline.
That's what we expect and hope that will happen in 2020. And yes, John, we have a very strong relationship with the IKEA team, and
we are working together to improve results in 2020.
Okay. And then on the U. S, and you mentioned core being slightly different from the total U. S. So maybe you could define what you're calling core.
And then any feel for what pricing versus volume did in the U. S. For the year 2019 versus 2018?
First, John, we the core in the U. S. Is all our sales a part of the sales to IKEA in 2019. So when we are saying that when we are differentiated between the 2, it's just to give the market some perspective on our growth in the core business. What was the other part of the question, John?
Yes. So what obviously, we had the Chinese effectively eliminated from the U. S. Market with the antidumpingcountervailing duties. And I'm sort of curious how that impacted like for like pricing for you in 2019 versus volumes?
I think we mentioned in the past that we look more on us internally on and regarding our growth in the U. S. And I think 2020 is another year when we are investing back in our teams and in brands and expecting to continue our growth volume wide but also pricing. So we are coming with the right with what we think the right pricing strategy to the market, but we're expecting a volume growth as well.
And we did share volume growth
So I don't want to put words in your mouth, but when we talk about one of the gross margin pressures, we talk about pricing. So obviously, that's a challenge in Australia and Canada and other parts where I guess the Chinese are aggressively competing. But even in the U. S, your pricing is relatively aggressive down? No, I think that in
the U. S, you see a healthy pricing environment. We expect to see increase in prices in 2020. We see less pressure than we see in other markets. Okay.
My last question is just around legal. Could you give us an update there in terms of numbers as well as what generally is happening?
You're referring to the legal expenses
that we can do? Yes, the claims, the settlements, how many cases, the stuff that I guess will be updated in the 20 F.
Yes. So in this quarter particularly, we had a provision, a higher
expense due to a legal claim that we have not related to silicosis. It was close to $5,000,000 that we've recorded coming it's an issue going back to 2,007 and it's been ongoing and there was some development in the claim that the legal proceedings that we have updated the accrual. Other than that, the silicosis, there's no significant change in the run rate that we've seen in the past few quarters, and we will update in our filing next month with all the data.
Okay, very helpful. Thank you and good luck.
Thank you, John.
Thank
you.
Thank you. Our next question comes from the line of Asaf Baral Shandali with Oppenheimer. Please proceed with your question.
Hey, guys. So thanks for taking my question. Sorry if I missed this earlier. To what extent is the Home Depot kind of opportunity baked into 2020?
Hi, Asaf. Thanks for the question. Home Depot is a very good development that we are starting the year with. It's been 3 years and more that we are trying to penetrate this big box channel. And I think to start 2020 with this change on this development is very encouraging.
It's already backed into our guidance to the market. So it's in our numbers. And yet, it's the 1st year, so we're expecting to continue to grow with Home Depot in the years to come.
Okay. And maybe just I guess a follow-up
on the China virus. I know maybe it's more headline than kind of financial reality at this point for you guys. But are you feeling anything on the ground in some of the non U. S. Markets?
I assume the production is not mainly in the Wuhan region, but are you feeling anything, any changes that might happen?
I think in the market, it's a bit too early to feel any different momentum in the market themselves. As for the supply chain, we are seeing some delays in shipment of our OEM volume from China, which we are fully covered from our own facilities in Israel.
Asaf.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Dagim for any final comments.
Thank you for your attention this morning. We look forward to updating you on our progress next quarter. Thank you.
Thank you. This concludes