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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brad Cray, Investor Relations.
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 Q1 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 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 an improved allocation of our resources, while positioning ourselves more efficiently for sustainable accelerated growth. In the last decade, we have grown at a fast pace, thanks to passionate and energetic teams. This was a truly remarkable achievement for us.
With much larger business today, we have 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 over time. The actions include expansion of our sales force in the U. S. While significantly improving our logistics distribution network, technological infrastructure and processes Cost 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 will 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 Silverstone towards a more efficient, lean and agile organization. Also, as part 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 reduced 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 talents to our team, we have announced global leadership changes to strengthen our company's marketing efforts and drive technological transformation. This includes the appointment of 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.
1 of our forward initiatives will be to expand our U. S. Sales force over the next months by approximately 15% to 20% or 20% to 30 people. The emphasis will primarily target large 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 this multiyear plan.
While some of these actions will contribute to our 2019 results, 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 Ofer, who will provide details on our results and outlook.
Thank you, Yuval, and good morning, everyone. I will start by discussing our Q1 results. For the Q1 2019, global revenue was $128,200,000 compared to $136,100,000 in the Q1 of last year. This was mostly attributable to an adverse FX impact of $5,300,000 On a constant currency basis, revenue declined by 1.9% compared to last year as soft market condition 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, 1st quarter sales were off by 0.6% compared to the Q1 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 3rd 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 twenty eighteen surge in pre buy activity ahead of recently announced tariffs on U. S.
Imports of quartz countertop from China. The impact of these tariffs in the U. S. Should be favorable over the long term. However, there are other developed markets that continue to be served by Chinese competitors at low price points.
Therefore, outside of the U. S, some of our key markets are expected to feel continued pressure from Chinese manufacturers. 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 increased 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 continuous 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 conditions 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 at our Q1 P and L performance. Adjusted gross margin was 25.3% compared to 25.2% in the prior year quarter. The similar adjusted gross margin mainly reflects the following: increased unit manufacturing costs 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 Q1 was $11,600,000 a margin of 9.1% and improve our operational efficiency as we work to overcome challenging and improve our operational efficiency as we work to overcome challenging global market conditions and increased 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 totaled $6,000,000 for the 1st quarter, representing equivalent and short term bank deposits of $86,800,000 with no financial debt to banks. Moving to our outlook. For the full year 2019, we continue to anticipate revenue to be in the range of $580,000,000 to $600,000,000 and adjusted EBITDA to be in the range of $72,000,000 to $80,000,000 As noted on our last earnings call, we expected the Q1 to be most challenged from a 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 twenty nineteen.
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 tariffs is still expected in the first half of twenty nineteen. 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 twenty nineteen 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 twenty nineteen.
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 Q2 2018 was our highest gross margin quarter in 2018, which will not recur in the Q2 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 Yuval 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 intend to take as part of the global growth acceleration plan, the company expects to incur a one time charge of approximately $1,000,000 in the Q2 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 will bring stronger performance to our organization in the coming years.
Thank you. And we are now ready to open the call for questions.
Our first question comes from the line of Susan Maklari with Credit Suisse. Please proceed with your question.
Hi. This is 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 a 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?
Hi, Chris. Thanks a lot for your question. Actually, when we are looking on this Global Growth Acceleration Plan, we intend to continue our investment behind our U. S. Operations.
And we are coming with quite large investments also I mean, 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 1st and foremost will be the U. S. Operations when we are become 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 or with quite direct cost cutting exercise in order for us to fund this future growth of ours and to fuel it.
And I think altogether, it's kind of a 3 years plan, which during these 3 years, we expect the company to acquire market shares in a few markets, continue to invest in our main markets and to become more efficient.
Okay. Thanks for that. And just as a follow-up, could you just 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?
So again, what was the question, Chris? I didn't get it.
Just what your current capacity utilization is in the U. S, given that you're going to be reducing it by 50%? And what's your room for expansion going forward after the reductions?
So all in all, as we are a global company and we are supplying our demand from 3 different plants and 7 lines, I guess the total capacity is the one that we are putting a focus on. And I think we are now moving from 80% utilization to 85 percent by shutting down temporarily this line, one line in Richmond Hill plant. Altogether, I think we will be around 85% of the addition. So we're going to have enough room for any growth increase or any more demand coming from the markets definitely for the next 2 to 3 years.
Okay. Thanks for that. Very helpful.
Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.
Thank you for taking my question. So, I wondered if we could 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 to 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 has it not happened yet, but you still expect it to happen in the second half?
Hi, John. Great to hear you. I think if you remember in our last conversation, we kind of the the new tariffs on products coming from 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 will 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 the medium and premium end. Having said that, I think what we should be experiencing is a bit of more or a bit of less pressure on prices. And I think that's 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.
And
what thank you for that, Yuval. What are you seeing specifically in Australia and or other parts of the world as it relates to the Chinese competition?
So I think in both countries that we were kind of expecting to see some maybe increase in competition levels, 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 2 countries is actually a bit of slowdown in the industry. And I think not too much of greater competition.
I just add to that, that in Australia, John, we do see 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 this competition. They are there, but it's not it didn't change dramatically.
Okay. And I'm trying to obviously the U. S. Facility has a lower margin than your Israeli lines. But I'm curious, is this decision in any way to temporarily close the U.
S. Line relating to either increased 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 read if anything into the U.
S. Line closure as it relates to your sourcing strategy or your expectation for a home center gain?
So John, we are following in terms of sourcing the original plan for the year, and we are kind of sourcing out of our own production facilities at the amount we plan to do. I think the temporary closure of the line in the U. S. Will serve, I guess, 2 main drivers at the moment or reasons. One is really to make sure that is becoming better and we'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 lined or relatively new line in Richmond Hill plant to make sure that we are kind of closing the gaps ongoing gaps, I guess, of the KPI productions production KPIs 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 time. We're actually investing more 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.
Okay. Ophir, what is the nonrecurring import related expense of $1,100,000
Yes. This is actually, we had this charge in the previous quarter, and this is kind of a completion to that. It relates to some custom related items, and we don't expect this to recur in the future. This is, I can say, in confidence that this is the last quarter that we should see this one timer.
Okay, good. And then I noticed legal settlement and loss contingencies were down almost $1,000,000 year over year. Is there anything to read into that? Thank you.
I don't think so, John. It's we are recording the expenses as we get the claims. So it fluctuates a little bit. You can see it between the quarters. I wouldn't take anything for the future on that.
Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Hi, this is actually Maggie on for Mike. First, I wanted to ask kind of about your longer term gross margin trajectory. I think you said that in 2019, you see gross margins gradually improving over the year and ending at a similar level to 2018. But as you look a couple of years out, how are you thinking about margins?
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 1 or 2 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 expect together. Currently, we are working. We do think that we will see gradual improvement in the gross margin next year and years to come.
Okay. And second, and I apologize if I missed this earlier, but I know sometimes you'll quantify the some of the tailwinds and headwinds that affected gross margin during the quarter. So I was wondering if you could do that for your 1Q results.
Yes. We did that when we had some big fluctuations, and we wanted to give more color, but we are not providing this information on a regular basis.
There are no further questions in queue at this time. And I'd like to turn the call back over to Yuval for closing remarks.
Thank you for your attention this morning. We look forward to updating you in the coming quarters. Thank you very much.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.