Welcome to the Caesarstone Limited Second 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. 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.
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 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 Q2 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. In the first half of twenty nineteen, 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 operational 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 U.
S. 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 U. S, which grew 12% year over year. We are in a process of significantly expanding our U. S. Sales force to further improve our presence in large underpenetrated metropolitan areas.
We expect to keep expanding the U. S. Sales force through 2020 as we see great potential in this market 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 U. S.
These newly imposed duties have adversely impacted our markets outside the U. S, mainly in Australia and Canada that have seen more competition coming from China. The impact was greater than anticipated and resulted in a softer than expected performance during the Q2. While the expected benefits of our initiatives give us confidence 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 our overall progress that we saw our initiatives during the Q2 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.
Thank you, Yuval, and good morning, everyone. I will start by discussing our Q2 results. For the Q2 2019, global revenue was $141,100,000 compared to $149,200,000 in the Q2 of last year. Approximately half of the decline was attributable to an adverse FX impact of $3,900,000 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 U. S.
This was partially offset by improved performance in our core U. S. Business and continued strong momentum in the UK. In the United States, 2nd quarter sales increased by 7% compared to the Q2 of 2018. This was the 4th consecutive quarter of revenue growth in our core U.
S. Business, which grew 12% year over year and was mainly linked to action taking by the new North American leadership team. As Yuval mentioned, the net impact of tariffs imposed on Chinese quartz countertop imports to the U. S. Has been unfavorable to our global footprint.
The final determination on tariffs was in June and was generally consistent with the preliminary duties imposed in the second half of twenty eighteen. As a result of the tariffs, we have seen a surge in imports to the U. S. From other developing countries, in particular India and Turkey. Outside the U.
S, 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 U. S, which was more severe than 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 remodeling markets, which remain affected 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 with declining trends in 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 UK.
Revenue in the rest of the world was also impacted by the Chinese competition discussed earlier and on a constant currency basis was down 27%. Looking at our 2nd quarter P and L performance. Adjusted gross margin was 27.3% compared to 32.4% in the prior year quarter and 25.3% in the Q1 of 2019. The lower year over year adjusted gross margin mainly reflects 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 Q2 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 Q2 benefited primarily from lower marketing and sales expenses compared to the prior year quarter, aligned with our more prudent spending policy. Adjusted EBITDA in the 2nd quarter was $19,200,000 a margin of 13.6 percent compared to $24,600,000 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 the quarter were $0.23 compared to $0.43 in the same period last year on a similar share count. We ended the Q2 of 2019 with strong balance sheet including cash and cash equivalent and short term bank deposit of $99,400,000 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 $72,000,000 to $80,000,000 while moderating our anticipated revenue to a range of $550,000,000 to $565,000,000 As discussed today, our outlook factors in our expectation for soft global market conditions and the competitive environments to persist in many of our region outside the U. S. 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 U. S, we continue to expect stronger revenue growth in the second half of twenty nineteen as the enhancements that we are making in our North America region 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.
Changes to FX or 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 Multiyear Global Growth Acceleration Plan with 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 U.
S, 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 2nd 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 give us confidence as we look forward. Thank you. And we are now ready to open the call for questions.
Thank you. At this time, we'll be conducting a question and answer Our first question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Thanks. Good morning, everyone, or good afternoon in Israel. First question, if I could just try and get a sense when Abel reiterating the 2019 EBITDA outlook despite the lowering of sales, which is obviously pretty encouraging. I would love to get a sense of since a quarter ago, when you've had different changes occur in your outlook, obviously, you cited some pluses and some minuses, 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 what relative to a quarter ago, if you can kind of give us any type of quantification of what 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 U.
S? 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?
Hi, Michael, it's Yuval. Yes, 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 Q1 to the second one is a nice tailwind if you like to allow us to absorb this reduction in revenue. So all in all, I think we are growing the U.
S. And we have more challenging times in Australia and Canada. But the actions we took in the Q1 across the board in all over the company in all functions and regions kind of allowing us to come a bit more confident with our EBITDA performance for the year.
Yes. And then just to complete, we reduced the headcount by 7% as we announced. Part of it was temporarily reducing the capacity in our Richmond Hill facility in the U. S. To 50%.
So all this and 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 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.
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 3 months ago. However, 3 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 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 an increase in EBITDA guidance by a certain amount because obviously you were 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?
Yes. So, first, it's there are different dynamics here from FX rates to prices of raw materials that also changed and provided some headwind tailwind, sorry, if you 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 are more confident that we can achieve more efficiencies in our operating expenses and hence we think that this is achievable.
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 and L by executing that, that it was exactly what we were kind of doing. And I think we've delivered on our expectations in that sense.
Okay. Any quantification on the raw material benefit this year relative to your outlook 3 months ago?
Yes. I can say that in the if you look at it 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 than 1% in the for the full year, but it was a tailwind.
Okay. Secondly, maybe I could ask a question more broadly about your competitive position in the U. S. 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 U. S.
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 you're positioned from a share standpoint, who are the other major competitors, and why you think you can I'm 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?
It's a good point, Michael. I think it's been been a few quarters that and maybe more that we are saying to the market and to ourselves that most of our current performance in the U. S. In our hands to improve and to work on. And I think that is what's happening in the last quarter or 2.
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're starting to see the fruits or the improvements coming to be in our side. All in all, it was in the past, it was our sorry, our guest of the market share in our view.
And I think it's too early to say whether it's in a different position now. Definitely what I can say is that we have more way more confident that we can capture the opportunity that we see in the market in the U. S. And we're definitely going to see growth coming from our U. S.
Business over the next quarters.
All right. One last one, if I could. I think you said that in the U. S, the imports, the China the tariffs or duties on the China imports Chinese imports in the U. S.
Are fully in place. But did I hear it 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 of 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?
Yes, market that's a very good point. We see a significant increase in import from low cost manufacturers, specifically more in India, Turkey, but from others as well. In terms of the magnitude, if you look at the import data, published import data from March, April, May compared to the equivalent period last year, you see that there is a significant, say, replacement of the Chinese import by I wouldn't say 1 by 1, but it's pretty close to what was to the level that was imported last year. So I think that there's no vacuum here. I would say 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 were made in the U.
S. Organization under the new leadership there. And as we said, we are planning to expand our footprint in the U. S. Because we think that there is really a great opportunity for us in this market to grow in the coming years.
Okay. Thank you.
Thank you, Michael.
Our next question comes from the line of Dillard Watt with Stifel. Please proceed with your question.
Thanks. Good morning, gentlemen. I want to follow-up and ask a follow-up on the India and Turkey and other countries that you're seeing import into the U. S. Is that a are you seeing similar either landed prices or retail or however you want to measure the price points, is it still a pricing headwind that you had experienced in the past with the Chinese competition that was pretty disruptive to the business?
Hi, Dylan, it's Yuval. I think it's pretty much the same. We are now from the data that we have, we are experiencing probably the similar price points coming from different locations. I guess the immediate change from China to India is actually in the same with the same prices. Obviously, average price, so it's it has these accuracy measurement.
But all in all, I think you see the same behavior in the market. There's no shortfall of low cost manufacturing slabs or sources in the U. S. And again, I think it's mostly what we are doing internally in our business to capture on the opportunity rather than less of competition.
Okay. And then hate to belabor the point too much here on the various low cost competition. But if it's coming in now to Canada, Australia, obviously, you have benefit a little bit of some hindsight and experience from what has occurred in the U. S. 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?
I think what we're experiencing is more competition in Australia and Canada, mostly in the commercial area with high rise buildings and multi, multi units. This is where it's more price sensitive and we see more competition coming in that area. 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 and B shops.
And I think we will continue to work on the demand to our coming in these markets.
And then 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.
Yes. Okay. And then lastly for me, if there's any update on any possible news with home centers here in the U. S, that'd be great.
So no formal news at the moment. We are still working on 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 the full agreement on those relationship, but we are still keeping positive on this opportunity.
So it's fair to say then that the acceleration in the core business came from more the KMB type side of the business?
Yes, for sure. I mean, in the U. S, we saw a decline in IKEA this quarter as well, but the core business grew 12%, and it came from K and Bs and our retail side of the business and the new building, but not from the big box.
Okay, great. That's it for me. Thank you.
Thank you. Thank you, Dylan.
Our next question is a follow-up from Michael Rehaut with JPMorgan. Please proceed with your question.
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?
When you look at the ASP, you need to take into consideration that it's a combination of mix, regional mix, product mix, and of course, it's affected by the different foreign exchange rates between the quarter. The periods, 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 much expected in this environment. Going forward, the fact that we are going to grow in the U. S. And that this is where we see the growth coming, we expect to see better prices there.
And I think that overall, the mix in the U. S. Is better, and we should expect a growth in the ASP once we grow more and the portion of the U. S. Is higher.
I appreciate that, particularly given all the complexities with the different regions. Maybe just focusing on the U. S, if you could give us a sense of what price what your ASP did last year, what you expect it to do this year, what you hope it can do in 2020?
Michael, just a second. We would like to take a look at the numbers and we'll come back to just a second.
Okay. Maybe one other one while you're looking at that. The IKEA business has obviously been a lot of volatility source of a lot of volatility in the last couple of years, I think both in the U. S. Most notably, but also Canada 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 U. S. And in number 1 and secondly in Canada? What does IKEA represent as a percent of the business? And is this a partner that makes sense strategically given all the volatility?
Just before the numbers, Michael, I guess the fact that we are growing in our core business, I think, gives a hint on where we are putting our focus. And it's definitely in 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. Yes, I think the revenue keeps being volatile and we see a little drop this quarter as well. So we are reporting on that. It's still part of our business, but definitely our focus is on the retail side of the business.
Yes. As for the percentage, it's less than 10% of our overall revenues as a company and provide us a good profitability and it's a good business for us, but it's less than 10% of our business.
Okay. Thank you.
You're welcome.
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.
Thank you for your attention this morning. We look forward to updating you on our progress next quarter. Thank you very much.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.