Greetings, and welcome to the Caesarstone 4th Quarter and Full Year 2018 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 of 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 20F 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 measures to the most directly comparable GAAP measures can be found in the company's Q4 2018 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. With 6 months of my tenure as Caesarstone's CEO, I've been able to spend a significant amount of time with our teams and customers around the world. The many great attributes and assets I've witnessed with the SiriusXM organization have instilled greater confidence in me as we move forward. We spent the last few months preparing our annual operating plan for 2019, where we mapped the opportunities and the challenges we are facing both internally and externally, and we built the plan to address them. While we're realizing that most of the improvements will take time and investment to mature, we see a few near term solutions.
Just last month, we took a major step forward in North America by combining our U. S. And Canadian operations to take advantage of the many similarities between the two regions. We understand that combined North American region provides us numerous opportunities. Scale benefits include the ability to unify certain functions under one team that can create an enhanced go to market strategy, refined operations and improve efficiencies.
The main goal of this step is to better position us to capture additional market share in the U. S. And increase our stability in coming years. This is especially important now given the recently implemented tariff on U. S.
Imports of quartz countertops from China. Once our North American realignment is integrated and working well, we expect to better execute our objectives in the region. Strengthening our capabilities in North America is directly aligned with our actions to enhance our global platform and to more effectively leverage the Caesarstone brand. We are making investments in talent and technology throughout the organization in order to better manage our go to market supply chain and production processes. This will allow us more efficiently having the right product at the right place and at the right time.
In terms of people, we have already begun to enhance our ranks at all levels. As part of our North American region realignment, we recently promoted Ken Williams to lead this effort. Ken has shown remarkable ability in the management of our Canadian business by assembling a strong operating team and overseeing impressive results during his time with us. We have also brought to our company a number of individuals with deep experience at the global and publicly traded companies. Some of these recent appointments include our new VP of Supply Chain, VP of Production, Richmond Hill Plant Manager, General Counsel and VP of HR, along with a range of other talent enhancements throughout the company.
Another area of focus for 2019 is our brand, which we believe carries a lot of commercial value with our retailers, fabricators and consumers. We are committed to strengthening our global brand awareness by inspiring design lovers with our innovative products and solutions. Along these lines, we are increasingly dedicating our production resources to high end products in order to better maximize our core opportunity as a premium quartz countertop leader. Finally, the initiatives that I've discussed today, along with other ongoing efforts, are concurrent with the development of an organizational culture that values accountability. We are simplifying our hierarchy to allow faster decision making process while empowering our people to be fully accountable for their business.
We are determined to generate better results as we pivot our company to focus on growing sustained EBITDA margins. We aim to evolve Caesarstone into a best in class leader in the lifestyle design and building product sector. I look forward to updating you further on our progress in coming months. With that, let me turn the call over to Ophir, who will provide details on our results and outlook.
Thank you, Yuval, good morning, everyone. I will start with our revenue for the Q4. For the Q4 2018, global revenue was $142,900,000 compared to $148,100,000 in the Q4 of last year. This was mostly attributable to an adverse FX impact of $4,000,000 On a constant currency basis, revenue declined by 0.7% versus last year. We saw sales improvement in Europe, stable performance in Canada and softer performance in other regions.
In the United States, 4th quarter sales were off by 0.7% compared to the Q4 of 2017. This was primarily attributable to continued weakness at the retailer IKEA. As discussed in prior calls, changes in IKEA's promotional structure continue to impact our results. While IKEA represent an attractive source of revenue and returns to Caesarstone, the timing and structure of their promotional activity does affect our results. In our core U.
S. Business, revenue grew at a low mid single digit base, which represent the 2nd consecutive quarter of growth. Ongoing changes to enhance our go to market strategy and strengthen previously discussed second half twenty eighteen surge in pre buy activity ahead of recently implemented tariffs on U. S. Import of quartz countertops from China.
As a reminder, since August, there have been several announcements from U. S. Government agencies in the interest of promoting fair trade response to Chinese imports. As it pertains to quartz countertops, there are 3 cumulative tariffs. The first of which is a 10% tariffs on broad basket of Chinese imports in August.
The other 2 preliminary tariffs announced are specific to quartz countertops, including countervailing duty of effectively 34% since September and anti dumping duty ranging from 242% to 3 41% since November. Adding all of these up, the U. S. Has to date placed collective tariffs in the range of 2.85 percent to 3.85 percent on Chinese import to the U. S.
The final determination on tariffs is expected in the first half of 2019. In Australia, constant currency sales were down 2.2%. The decline was mainly due to continued softness in the housing and remodeling markets, coupled with continued competition, which were affected by more rigid lending standards and increased mortgage rates. In Canada, constant currency sales were flat. We experienced better performance in IKEA sales, partially offset by slightly lighter results in our core business.
Sales in Israel on a constant currency basis were down 1.3%, primarily benefiting from stronger pricing, which partially offset lower volume mainly due to challenging housing markets condition and increased competition. In Europe, constant currency sales grew 40.7%, reflecting strong execution in the UK as well as in our indirect distribution operation in Europe. Revenue in the rest of the world on a constant currency basis was down 23.1%. Looking at our 4th quarter P and L performance. Adjusted gross margin was 27.4 percent compared to 31.3% in the prior year quarter.
The decrease in adjusted gross margin reflects the following: increased proulac manufacturing costs in our Israel facilities, foreign exchange headwinds along with inventory and logistics inefficiencies and higher raw material costs. These factors were partly offset by more favorable geographic and product mix. Operating expenses for the Q4 benefited primarily from lower legal settlements and loss contingencies compared to the prior year quarter. Tighter expense control drove an additional 2 70 basis points of improvement year over year. Adjusted EBITDA in the 4th quarter was $17,800,000 a margin of 12.5% compared to $21,000,000 a margin of 14.2 percent in the prior year quarter.
Adjusted diluted earnings per share in the quarter were $0.20 compared to $0.22 in the same period last year on stable share count. While adjusted EBITDA and adjusted EPS performance were in line with our expectation, the decline in both metrics primarily reflects the lower gross margin, partly offset by lower operating expenses. Now I would like to note some of our full year financial performance highlights. Sales for the full year were down 2.1%. On a constant currency basis, sales were off 1.9%.
Adjusted gross margin 28.7% compared to 33.5% last year. The decrease was primarily driven by similar factors experienced in the Q4. For the year, we saw improved performance in our U. S. Manufacturing facility, which contributed positively to margins compared to the prior year.
Operating expenses improved to 22.7 percent of revenue compared to 26.6% in the prior year, driven by lower legal settlement and loss contingencies along with 120 basis points of improvement from lower marketing and sales expenses. Our adjusted EBITDA was $75,200,000 a 13.1 percent margin down from $100,400,000 last year, a 17.1% margin. Adjusted diluting earnings per share were $1.05 compared to $1.45 in the prior year. Similar to Q4, the full year decrease in adjusted EBITDA and adjusted net income mainly reflects the lower gross margin partly offset by lower operating expenses. Turning to our balance sheet and cash flow.
During 2018, CapEx totaled $21,000,000 for the year, representing less than 4% of revenue consistent with the prior year. When we entered Canada in 2010, we did so through a strategic joint venture with Canadian Quartz Holdings. The relationship has been beneficial to both parties for the past ALUs and we experienced great success in Canada. In December 2018, as part of creating a North America region, we acquired the remaining 45 percent ownership interest in our Canadian joint venture for a purchase price of approximately $20,000,000 The purchase provided significant flexibility to more efficiently integrate our wholly owned Canadian operation with our existing U. S.
Operations. In addition, the purchase provided an attractive value to the company, simplifies our financial reporting and eliminates future minority distributions. We ended 2018 with a strong balance sheet, including cash, cash equivalent and short term bank deposits of $93,600,000 Moving to our outlook. For the full year 2019, we 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
$1,000,000 to $80,000,000 This outlook assumes
a similar gross margin for the full year 2019 compared to the full year 2018. Our outlook also factors in expectation for soft global market condition and competitive environment to persist in many of our region into 2019. We expect this dynamic to be most evident in the first half of twenty eighteen, particularly in the first quarter. To formulate our outlook, we have used current foreign exchange rates and preliminary determinations on U. S.
Tariffs on Chinese imports. As I mentioned earlier, the final determination on tariffs is expected in the first half of twenty nineteen. Changes to tariffs or FX may impact our outlook as we move through 2019. While we expect the Q1 will be challenged from a year over year comparison, as we move through the year, we expect to show improvement in key metrics. In the U.
S, we expect stronger revenue growth in the second half of twenty 19 as we expect inventory levels to return to normal following the previously discussed 2018 tariffs related to pre buy activities. Furthermore, we anticipate that the previously discussed enhancement in North America will start yielding results in the second half of twenty nineteen. Outside of the U. S, we are carefully monitoring the collateral impact of tariffs on the global supply chain as Chinese producer potentially seeks to ship their products to other developed markets. Overall, we are confident in the steps that we are taking to improve our business and look forward to accomplishing our objectives in 2019.
We are focused on getting Caesarstone in a better position to capture share and improve profitability. We are improving our processes, prioritizing health and safety and enhancing talent where needed. We are confident that our steps will bring stronger performance in our organization in time as we better realize the power of our brand and leading global market position. Thank you. And we are now ready to open the call for questions.
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Susan Maklari with Credit Suisse. Please proceed with your question.
Hi, this is Amanda on for Susan. Thanks for taking my question. So just given the significant amount of pre buy ahead of the tariffs, can you talk to that near term impact and what the risk that the higher inventory continues to impact post 1Q? And also any additional color on the tariff impact to your global operations? Thanks.
Hi, Amanda. It's Yuval. I think it is right that at the moment, markets are kind of flooded with the pre buying slabs from China. And I think we are experiencing that through same demand as before, not any credit spike in any market demand as we see it in the Q1. We expect that to be fully absorbed in the market in quarter 1 and quarter 2.
And therefore, we are expecting to see some kind of increase in volumes and demand on the second half of the year.
And looking at the global, so we are monitoring the effect globally. We can see that we see a much or a very different environment than we've experienced in the past quarter, but we are monitoring and we will react accordingly. But currently, this is what we see.
Okay, great. Thank you. And then can you just provide an update on maybe output at your Israeli facility? Are you continuing to see improvement in throughput and streamlining production there despite additional product complexities?
Yes, sure. I think it's quite I'm quite happy with the improvements we see in our operations from quarter to quarter. That includes the EASL facilities and our facility in Richmond Hill when we just appointed the new plant manager who started at the beginning of the year. So we look quite positively on our production efficiency as we move throughout the year. And in line with that, we see actually no shortage of capacity for the next negligible time, I guess, for the next 2 or 3 years.
We see us servicing the markets quite well with our 3 facilities.
Thank you.
Thank you. Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.
Good morning, Yuval and Ophir. I have two questions. I guess the first was around the gross margins. We we've gotten some color on the various numbers, basis point impacts from, I believe, the 4 factors that you cited. Is there any color that you could provide again for the year on those?
And I'm particularly interested in Israel and what those plants have done through the year, whether they're truly improving because it sounds like Richmond Hill is getting better, I just don't have a frame of reference as to whether Israel gross margins are getting better.
Yes. So you asked about the Q4 main drivers for the gross margin?
I'm really focused on the year 2018.
Yes. So I think as we said, I mean, the main factors for the year and actually for Q4, we experienced the same. It's the same trend of the product, the manufacturing cost in Israel, which is higher and is we see it as a negative impact on the gross margin. Another one is the foreign exchange headwinds that we experienced, the inventory and logistic inefficiencies. We talked about that in previous calls, and it still affects us and the higher raw material costs.
On the other side, the positive side, we see better geographic and product mix. And for the full year, the improvement that we see in Richmond, the significant improvement in the output in Richmond and in the yield there is also driving a favorable outcome in the gross margin for the full year. And if
I may add, John, I think if you look forward, there's still room for improvement in our operations and supply chain divisions. And for that, I think we recruited quite many new talents, 2 of which are the new VP for operations and new VP for Supply Chain. Both one just joined the business, the other one will be joining the business next week. So I'm looking forward to see more improvement throughout the year.
So Yuval, is the Israeli are the Israeli plants in terms of gross margin, I mean, are they improving sequentially? It's been quite some time where that's been a factor and a drag on gross margins. And you've talked about product complexity there in terms of producing too many complex products. Has that been resolved? Where does that specific issue stand?
And are we seeing any sequential improvement? Thank you.
Thanks for the question, John, because I think it's maybe opportunity to clear some of the themes. Most of the pressure that we see on gross margin actually comes from the market and commoditizing some of our designs and products.
Actually, when we go
to when we look in more deeply on the different models that we have, we actually benefited beneficial quite a lot from the new products even though they are more complicated to produce. But if you look all in all in terms of gross margin, they are very profitable. And when you analyze it properly, you see that the pressure comes from the commoditizing some of the simple products that we have that can be produced in other facilities of our competitors, mostly low cost manufacturing facilities in China.
Okay. And then just quickly on IKEA and the U. S. Piece of IKEA. And I appreciate that you don't like to talk about a customer specifically.
But this has been a source of pretty wide fluctuations for some time now in terms of performance. And I think investors in general don't have a sense for whether IKEA U. S. Is growing, shrinking, still very profitable?
Is there any help you can
give us on that account going forward? Thank you.
I think, John, it's fair to say that quarter on quarter, we still see a lower quarter in this year rather than last year. I think the promotional change that IKEA did probably Q2 last year hasn't been fully manifested itself on the Q3 last year and it's now fully impacting our quarter this year. Yet, I think the relationship any spikes that I can envisage at the moment. So, any spikes that I can envisage at the moment. So it looks quite stable for this year.
Thank you. Good
luck. Just to add, John, we do we will see a tough comp in IKEA for Q1. And as Yuval mentioned, we have less control on this on the activities that IKEA is taking on their promotional and how they structure their promos and the timing and the length of their promotional activities. But our expectation for what we know is to be more pretty stable next year.
Thank you.
Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dagim for any closing remarks.
Thank you for your attention this morning. We look forward to updating you on our progress in the quarters to come. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.