Hello, and welcome to the Caesarstone Ltd. Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I now would like to turn the call over to Brad Cray, Investor Relations. Mr. Cray, please go ahead.

Thank you, operator, and good morning to everyone. I am joined by Yuval Dagim, Caesarstone's Chief Executive Officer; and Nahum Trost, 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 SEC. 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, adjusted EBITDA and constant currency. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's third quarter 2022 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. Our third quarter 2022 results reflect further progress against our multipronged growth strategy to transform Caesarstone into a leading premium multi-material countertop company. We produced our seventh consecutive quarter of double-digit revenue growth on a constant currency basis, leading to another quarter of record revenue. In our largest market, the U.S., our results benefited in part from organic growth from the successful integration of our Omicron Granite and Tile business acquired in the fourth quarter of 2020 and the expanding presence of our innovative digital CS Connect platform across North America, which is substantially improving customer experience and engagement throughout our business. Additionally, successful implementation of pricing initiatives is helping to more than offset softening volume due to the challenging macroeconomic environment as higher interest rates and inflation have continued to pressure renovation and new construction activity mainly in the U.S. As a result of these macroeconomic conditions, we have already taken measures to align our production and inventory levels to new conditions in the market and plan to continue to take actions to reduce costs. In response to the increases in shipping and raw material prices that have pressured our margins, we have announced three price increases so far in 2022, with our most recently announced price increase in July, which is partly reflected in our third quarter results. Additionally, we are carefully monitoring the demand environment and would note that our global markets outside the U.S. have been less impacted by inflation and higher interest rates. Overall, while we believe the execution of our strategy remains effective, foreign exchange rate fluctuations, primarily related to the strengthening U.S. dollar, have become an increasing headwind to our top and bottom line as reflected in our third quarter results. Our results in all regions…

Thank you, Yuval, and good morning, everyone. I will start by discussing our third quarter results. Global revenue grew 10.6% to a third quarter record of $180.7 million compared to $163.3 million in the third quarter of last year. On a constant currency basis, third quarter revenues was higher by 14.9% compared to the same period last year, primarily due to higher pricing across our global footprint, particularly in North America. The 4.3% difference between the U.S. dollar revenues and constant currency revenues reflects the previously discussed headwind from the strong U.S. dollar against our generated revenues in all markets outside of the U.S. In the Americas, constant currency sales were up 10.2%, mainly due to growth in the U.S. and Canada. In the U.S., sales were up 10.8%, driven by solid organic growth generated from higher prices. In Canada, our sales were up 8.7% year-over-year on a constant currency basis, driven by strong performance in all channels, with IKEA sales continue to experience strong year-over-year growth. In the APAC region, constant currency sales were up 17.4%. Australia, which accounts for the majority of our sell-in in the region, saw year-over-year growth of 14.6% on a constant currency basis despite continued headwinds from supply chain issues. Our EMEA region experienced constant currency sales growth of 41.1%, primarily reflecting strong performance in our EMEA indirect business. Our growth in this region was higher than usual given the timing of customer orders. In Israel, on a constant currency basis, sales increased by 16.5% in the third quarter, partially resulting from the timing of the Jewish holidays that took place in October this year. Looking at our third quarter P&L performance. Our gross margin was 23% for the quarter. Adjusted gross margin was 23.1% compared to 26.3% in the prior year quarter. The…

Thank you, Nahum. In closing, we remain encouraged by the ongoing disciplined execution of our Global Growth Acceleration Plan. I'm grateful for the significant contributions of all our team members across the globe and appreciate their dedication to excellence while working through a volatile global landscape. We are confident that our leadership teams are taking the right actions to deliver on our objectives. This includes evaluating areas to further improve our margins and operating levers through careful cost management and the implementation of price increases where necessary. As we move into 2023, although it is hard to predict the magnitude and duration of the complex macroeconomic environment we are experiencing, I'm confident that we have the right plan in place to execute against our strategic pillars effectively. We are focusing on the factors that are in our control to create additional shareholder's value by leveraging our world-renowned brand, multi-material product offerings and innovative go-to-market initiatives. I look forward to updating you again on our progress in the coming quarters. Thank you. And we are now ready to open the call for questions.

[Operator Instructions] And the first question comes from Stanley Elliott with Stifel.

Thank you, Yuval. Thank you guys for taking the questions. I guess starting off, could you just help remind us, I guess, what level of pricing you all had kind of year-to-date through all of the increases? And then maybe what sort of additional pricing are you contemplating? And I guess the gist is, is kind of what sort of pricing carryover should we expect in the '23, all else being equal?

Thanks, Stanley. Maybe I'll start. First, so far, we had three price increases through the year, with quite a successful recovery on the price increase note, all our BOM and shipping costs were pretty much covered by those price increases. And we are monitoring the cost going forward to see if we need any further pricing actions going forward.

The third - Stanley, the third price increase that we did was in July and was relatively smaller than the first two ones that we did in the first half of the year. And we expect to benefit from the third price increase also in Q4 and obviously in the entire - in the beginning of 2023.

Perfect. And kind of with the pricing strength, like it sounds like kind of building a little momentum, when do you think you'll get back to margin growth? I understand the pricing or the inflation piece has been pretty volatile here this year. But curious how we're thinking about when we get back to margin expansion. You have tougher comps certainly in the first half of next year, and then it obviously gets a little bit easier in the back half of '23.

Stanley, without the impact of the exchange rate in Q3, we have expected to continue our growth - gross margin growth to be happening in Q3 as well. I think we haven't expected the dollar to be that strong, to impact us that much. So I believe that now, with the actions that we are taking, together with maybe potential price increases in the near future, we should be coming to growth in our gross margin in the coming quarters.

And Stanley, to add to that, other than the fact that year - quarter-over-quarter, the majority of the decrease is coming from the FX rate. All other factors are more or less neutralizing one another. We are taking different actions. Not only pricing actions, additional pricing actions, but we are taking other cost efficiencies actions in order to improve gross margin down the road in future periods.

Perfect. And I guess, kind of you mentioned aligning production. Are you all going to be importing more product or shipping more product? I guess that would kind of tie in to your commentary about transportation costs being higher. Just curious what's going to happen from a manufacturing perspective. Or what changes you're making, given the demand environment that you're seeing right now.

Indeed, Stanley. We are actually seeing some increase in utilization capacity of our Richmond Hill facility as we have shorter lines to supply our main markets in the U.S. and Canada, so the North American market. And we expect that to be continuing the next year as well. We do believe that if we need any changes in production in order to manage our inventory carefully, we will do it in all our plants, but probably mainly not in the Richmond Hill facility this time around.

Great guy. Thank you very much for the time and best of luck.

Thank you. And the next question comes from Reuben Garner with The Benchmark Company.

Thank you. Good morning, everybody. I had some technical difficulties at the beginning of the call, so apologies if I - any of the questions are repetitive. But I guess can you start - can you quantify the FX impact to gross margin and EBITDA margin in the quarter? And what changed for the full year? It sounds like you're saying predominantly, but could you put some numbers to it?

Yes, Reuben. So the revenue, the difference between the reporting - reported U.S. dollars and constant currency basis is around 4.3%. Let's say 2.8% of the amount that we lost in revenues is going down to gross margin, and around 2% in the EBITDA margin.

So you get this stipulation that most of the change is coming from the exchange rate differences.

And that's what took place in the third quarter?

So in the third quarter, as opposed to the second quarter, when we saw the U.S. dollar getting stronger against the Israeli shekel, in the third quarter, the U.S. dollar got even stronger against all other currencies that - in which we are generating revenues, compared to the Australian dollar, the Canadian dollar and the GBP. And - yes.

Okay. And can you go into any more detail about what kind of cost actions you're taking? I think this is kind of a follow-up to Stanley's question. But are you taking out shifts? How do we think about how you're going to align production with the volume slowdown?

Thanks, Reuben. We are taking actions in all fronts. So we are taking shifts out so we can - so we're going to be producing less and more in line to the current demand that we see. In addition, we are looking on our - all indirect costs to make sure that we are making the right decisions there as well, in order to make sure that our company is ready for any future challenges, not just on the front of exchange rate differences, but also against any fluctuation on demand that might be coming our direction.

Will you be pulling back on the growth investments here in the U.S., as an example?

Not at all. I mean, we are following our Global Growth Acceleration Plan. We are launching our multi-material. Under our multi-material strategy, we have launched our porcelain offering under the Caesarstone brand in the U.K., Australia and Israel this year, and we are coming early next quarter in the - sorry, early first quarter 2023 to the U.S. and Canada with this launch. So we are continuing to - we continue to execute our strategy and our Global Growth Acceleration Plan. We are looking on improving our footprint in the U.S. at the same time. And as we will be coming across any potential acquisition to do, we will be looking at in detail to see if that fits to Caesarstone.

Okay. And then last one for me is how do we think about margin downside for next year? I think it's pretty clear that there's potentially some volume headwinds coming for a period of time. I mean, if we were to see 10% volume declines, what kind of decremental would we see on the business, given that you've been kind of behind from a price/cost standpoint over the last year or so?

Reuben, still hard to say with regard to 2023. But we are focusing and aiming to improve profitability and to improve our cash balance through the activities that Yuval mentioned, pricing and other cost efficiencies. But still early to predict how it will shape up in 2023, given the macroeconomic uncertainty and things that we saw only in September and now in Q4.

Okay, thank you. Good luck guys.

Thank you.

Thank you. And this concludes the question-and-answer session. I now would like to return the floor to Yuval Dagim for any closing comments.

Thank you for your attention this morning. We look forward to updating you on our progress next quarter. Thank you very much.

Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.