Greetings and welcome to the Caesarstone Third Quarter 2023 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning to everyone on the line. I am joined by Yosef Shiran, 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 loss income, adjusted net loss income per share, adjusted gross profit adjusted EBITDA and constant currency. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's third quarter 2023 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 Yosef. Please go ahead.

Thank you, Brad. Good day, and thank you everyone for joining us to discuss our third quarter results. I will discuss our business activity and Nahum will then cover additional details regarding our financial results before we open the call for questions. I would like to start by expressing that we are saddened by the horrific acts of vicious, violence and terror that have occurred in Israel on October 7th. We are confident that Israel will not only prevail, but will also exercise justice towards all who were involved in committing these heinous crimes. Our thoughts are with our employees, customers, and others impacted by these events. We are focused on business continuity and our global operations are running smoothly with no material impact to our strategy, Israeli production and our overall ability to continue serving customers globally. The one aspect impacted is the market in Israel, which accounted for about 5% of our revenues in the third quarter. We remain committed to supporting the people of Israel and the rehabilitation of our affected townships, and we have decided to donate 2,000 kitchen surfaces to families in the south of Israel whose homes have been lost or damaged during the war, in addition to other supporting activities. Now, we will move to our third quarter results. We generated our third straight quarter of robust cash flow from operations, adding $28.2 million to our year-to-date total of just over $53 million. We maintained our sharp focus on executing further against our global restructuring actions. Our results improved sequentially as we moved through the quarter. At the same time, we made significant progress with the implementation of various initiatives under our strategic plans to better utilize our resources, improve our cost structure, realign our workforce, and optimize our production footprint. In regards…

Thank you, Yosef, and good morning everyone. Looking at our third quarter results, global revenue in the third quarter was $142.4 million compared to $180.7 million in the third quarter of last year. The decrease of 21.2% was primarily driven by softer global market conditions, particularly in the North American renovation and remodel channels, mainly as a result of higher interest rate which has impacted residential spending. In addition, our sales were also impacted by the competitive landscape for our products. The impact of softer residential sales activity, which slowed down commencing in the second half of 2022, has been more pronounced in our results since the second quarter of this year. On a constant currency basis, third quarter revenue was down 20.3%. The 0.9% difference between US dollar revenues and the constant currency revenues reflect the impact of strong US dollar against our revenues generated in all other markets outside of the US. In the US, sales were down 24.8%, mainly tied to softer residential end markets, particularly for third-party distributors. This was partially offset by higher year-over-year sales with big box customers and improved performance in our commercial business. In our other large markets, Canada's sales were lower by 17.5% on a constant currency basis, experiencing similar market dynamics as in the US. Australia's sales were off by roughly 8.4% on a constant currency basis, reflecting slower market conditions, although to a lesser extent. Looking at our third quarter P&L performance, I will start by noting that we produced a significantly higher sequential gross margin as promised. Our gross margin was 19.1% for the quarter, and the adjusted gross margin was 19.8%, which was similar to our gross margin of 19.7% in the first quarter on lower revenues. Gross margin was lower compared to the 23% in the…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Reuben Garner of the Benchmark Company. Please go ahead.

Thank you. First of all, our thoughts and prayers are with the Caesarstone team and everyone impacted by what happened last month. I guess to start guys, if you don't mind, I was kind of thinking that maybe there would be not necessarily a step function, but kind of gradual improvement in the margins from the third quarter, or second to the third and then third to the fourth. It sounds like the fourth is going to look more like the third quarter. Is that mostly a function of the impact of Israel or is there any other factors that maybe are not leading to showing improvement on a sequential basis?

So in general -- Hi, Reuben, thank you. In general, the 5% or almost 5% that we will not generate in the fourth quarter, according at least to the current situation in the Israeli market will be missing in our overall results. There is also seasonality impact for sales, so Q3 usually is higher than Q4, so we expect low revenues. And on the other side we expect better performance in terms of cost following our restructuring plan. In addition, we are going to invest higher on marketing, so we'll have higher marketing spend. So all in all, we expect similar EBITDA, but better cost performance and better setup for the future.

Okay. And so, just to be clear, your expectation is based on your Israel business essentially going to zero in the near term. Is that right?

It's not zero. But, first of all, we don't know yet. We don't know how the war will continue to develop. So we may -- on a positive side, we may incur some positive result. But as it seems now, the market is quite frozen. So we took it as close to zero.

Understood.

Hi, Ruben. Hey, Reuben, it's Nahum. And to add to what you said, so despite the near term reduction in the Israeli revenues, we expect to see the normal seasonality that we used to see in previous years. I mean before COVID, before any unusual events. But -- so despite the reduction in the Israeli revenues, we expect to see the normal seasonality in Q4. This is something that should be taken into consideration.

Got it. And in the prepared remarks, you mentioned up to 40% of your product being manufactured by third-party vendors by year end. What did that number look like coming into 2023?

40% is in terms of our production, in terms of sales, it's a bit less because there is time differences. In terms of sales coming into 2023, it was around 20%. And we see a gradual increase over the previous quarter. And we expect to see another increase, gradual increase, in Q4 of this year. But again, 40% is production and not sales. Sales will be lower than 40%.

Okay. And you mentioned pricing. I can't remember the term you used, but that was pricing optimization or pricing initiative of some kind? And then I know you talked about marketing a couple of times. Is your product priced too highly in the market to compete in this environment? What exactly are you leading to there? And then what -- are there specific geographies where the marketing expenses being ramped? What's the kind of, I guess, dollar spend and what the benefit is expected to be from those investments?

Yeah, so there are a few aspects. So first of all the marketing expenses mainly aimed at the US market, but also to other markets. So we are trying to increase our marketing spend in order to elevate the brand and to reach traditional customers. In terms of the production in our strategic partners, third-party strategic partners, so we estimate next year to be at around 50%. So 50% of our production will be produced by our partners. So this will allow us to be more competitive and this will allow us to approach additional channels that we in the past we neglected and are now open to us. And in addition to that we are investing a lot in innovation and this will allow us to compete better across all the fields, also in the higher end, in the middle end, and in the lower end. So this is in a nutshell.

And those -- the channels, is that big box retail in the US? Is that -- what channels are you leading to?

No, so channels, yes, mainly the commercial channels when I say, maybe not neglected, but maybe we went out of most of the commercial channel in the states, so we are going to get back to there. But also to reinforce our other channel, which includes also big box, but also retail, kitchen and bath, and hand stone suppliers that also performed quite bad in the last year.

Great. Thanks for the detail, guys, and stay safe. Good luck through the rest of the year.

Thank you.

Thanks.

The next question is from Stanley Elliott of Stifel. Please go ahead.

Hey everybody. Nice to hear your voice. Thank you for the question. Can you all talk about how you see working capital as a percent of sales longer term? I mean, you've done a nice job of pulling inventory out. Your relative to historical levels, it would look like you'd still have some ways to go. And now with the model transforming to more of a third party import model for a larger part of the revenue base, just curious where we think working capital could end up here for the business.

Hi Stanley, it's Nahum. Our -- we improved working capital specifically in terms of the inventory levels that were elevated last year. And now we're back to a normalized level, more or less, around 120 inventory days. And we believe, as you said rightfully, that there is still room for improvement and we are aiming to be at an area of around 100 days of inventory. And in general, in terms of percentage of working capital out of revenues, we expect to be around 25% working capital out of revenues.

Perfect. And the comment on the competitive landscape, is that just market? Did you find you maybe were priced too high in certain SKU categories? And then just kind of any detail around kind of the price versus volumes in the quarter that you might have seen, in the US specifically?

So Stanley, we believe that the decreasing volume are mainly related to the soft market conditions on the back of a higher inflation globally, not only in the US. You saw the results in other regions as well. So it's on the back of higher inflation and on the back of higher interest rate, which results in a way in residential customers postponing certain projects or innovation projects. So this is the major impact that we saw globally and in the US. On the other hand, we saw some positive signs, as we said. In the big box channel we're starting to see positive signs. In the commercial channels, as Yosef mentioned earlier. So this is on the other end.

Yeah. The big box channel actually was interesting comment. I mean, I think they've talked about their day sales being down modestly. Was your comment really more of incremental SKU, are you're doing better in that market or maybe it's just performing better than some of the fabricators which you mentioned were having a bit more of a struggle?

No. So our portion there is quite small. So we have a lot of potential growth. And it's a matter of focus and offering the right offer to the different consumers, including big boxes. It's not only -- and also commercial contractors and others. And as to the markets, just to add to what Nahum said. So that a part of the market decline, of course, also the competition accelerates under these situations because everybody is fighting for the same dollars. So I think that we, on the sales, we suffer from the market situation and also increasing competition. However, we are doing many things that we believe will allow us to perform better than the market in the future.

Great, guys. That's it for me. Thanks so much. Best of luck.

Thank you very much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Yosef Shiran for closing remarks.

Thank you. And thank you all for your attention this morning. We look forward to updating you on our progress next quarter. See you.

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