Greetings, and welcome to the Caesarstone Limited Second Quarter 2019 Earnings Conference Call. [Operator Instructions] 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 second quarter 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 2019, 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 to 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 under-penetrated 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 softer-than-expected performance during the second quarter. 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 in our initiatives during the second quarter, 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 second quarter results. For the second quarter 2019, global revenue was $141.1 million compared to $149.2 million in the second quarter of last year. Approximately, half of the decline was attributable to an adverse FX impact of $3.9 million. 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 U.K. In the United States, second quarter sales increased by 7% compared to the second quarter of 2018. This was the fourth consecutive quarter of revenue growth in our core U.S. business, which grew 12% year-over-year and was mainly linked to action taken 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 2018. 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…

[Operator Instructions] Our first question comes from the line of Michael Rehaut with JP Morgan.

First question, if I could just try and get a sense when -- 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, 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?

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 first quarter, 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 first quarter, across-the-board, in all over the -- in the Company, in all functions and regions, kind of allowing us to get a bit more confident with our EBITDA performance for the year.

Yes. And 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 these -- 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 three months ago. However, three months ago, you weren't expecting as much of a softer sales backdrop and some of the additional headwinds, a tougher sales environment in Australia, Canada, the more competitive environment, those things you were not expecting. And that hurt your performance or reduce your sales growth outlook. What I'm trying to get a sense of, 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, but also change in the -- provided some headwind -- tailwind, so 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 managed 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 the organizational behavior, if you like, you see all leaders kind of joining forces together and are very excited with this behavior. So where ever we could find an upside to bring back to the P&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.

Any quantification on the raw material benefit this year relative to your outlook 3 months ago?

Yes. I can say that in -- 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 comment, Michael. I think it's 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. is in our hands to improve and to work on. And I think that is what happening in the last quarter or two. We've put a new team in place. We've 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 even started to see the fruits of all the improvements coming to be in our side. All in all, it was -- in the past, it was our focus -- sorry, our guess of the market share in our view. And I think it seems too early to say whether it's in a better position now. Definitely, what I can say is that we are 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.

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 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, Mike. That's a very good point. We see a significant increase in imports from low cost manufacturers, specifically more in -- from India, Turkey, but from others as well. In terms of the magnitude, if you look at the import data publishing -- import data from March, April, May, and compare it to the equivalent period last year, you see that there is a significant, say, replacement of the Chinese import by -- I wouldn't say one by one, 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.

[Operator instructions] Our next question comes from the line of Dillard Watt with Stifel.

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 -- are you seeing similar landed prices or retail or however you want to measure the price points? Is it still a pricing headwind that you were -- had experienced in the past with the Chinese competition that was pretty disruptive to the business?

Dillard, it's Yuval. I think it's pretty much the same. We are -- 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 the same, with the same prices, obviously, average price, so it's -- it has this accuracy measurement. But all in all, I think you see the same behavior in the market. There's no shortfall of low cost manufacturing stubs 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 I hate to belabor the point too much here on the various low cost competition. But if it's coming in now to Canada, Australia, you obviously have benefit a little bit of some mix of 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 a partial of -- part of our portfolio in those countries. And I think we've continued to build on our very strong Caesarstone brand in those countries. We are very strong with consumers and the K&B shops. And I think we'll continue to work on the demand throughout 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 the 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 relationships. But we are still being positive on this opportunity.

So it's fair to say then that the acceleration in the core business came from more of the K&B type side of the business?

Yes, 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&Bs and our retail side of the business and the new buildings, but not from the big bucks.

Our question is a follow-up from Michael Rehaut with JP Morgan.

Could I get a sense of what your price mix was or your 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 of 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 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 want to -- we would like to take a look at the numbers, and we'll come back to you, just a second.

Okay. Maybe one other one while you are 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 one, 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're 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 and it is where we are putting our focus and resources. Yes. I think the IKEA 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, there, 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 overall business.

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.