Greetings, and welcome to the Caesarstone Second Quarter 2024 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 call is being recorded. It is now my pleasure to introduce your host Mr. Brad Cray of ICR. Please go ahead sir.

Thank you, operator, and good morning to everyone on the line. I am joined by Yos 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 income/loss, adjusted net loss/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 second quarter 2024 earnings release, which is posted on the company's Investor Relations website. On today's call, Yos will discuss our business activity and Nahum will then cover additional details regarding financial results before we open the call for questions. Thank you. And I would now like to turn the call over to Yos. Please go ahead.

Thank you, Brad. Good day everyone and thank you for joining us to discuss our second quarter 2024 results. Our second quarter performance demonstrates the ongoing positive impact of our strategic restructuring initiatives. The improvement in our gross margin compared to last year is clear indicator that our efforts to optimize our production footprint and enhance our relationships with manufacturing partners are bearing fruit and assisting us in overcoming slow market conditions across the globe. Current conditions are negatively affecting our revenues in the territories in which we operate primarily in the residential channel. Nevertheless, we continue to make progress on several key strategic initiatives. First, we are driving cost efficiencies across our operations. The closure of our Sdot-Yam and Richmond-Hill facilities remain on track to deliver annual cost savings of approximately $20 million in 2024 and $30 million annually by next year, compared to 2023 savings in line with our previous expectations. Additionally, we are now sourcing over 60% of our production from our global network of manufacturing partners, driving margin improvements and allowing us to better align production to demand. Second, we continue to focus on sales and marketing, mainly on developing differentiated products to improve our sales mix and help mitigate pricing pressures. Third, we continue to strengthen our porcelain business. During July, we increased our stake in our Indian porcelain facility, Lioli Ceramica, from 60% to 81%. This move underscores our commitment to strengthening our position in the porcelain market, which we see as a key growth driver for our business. Fourth, we are investing in our Indian innovation. We've already developed and launched number of new zero crystalline silica product lines. We expect to more than double our zero crystalline silica offering in Australia by the end of 2024. This is particularly important as we…

Thank you, Yos, and good morning everyone. Looking at our second quarter results, global revenue for the second quarter was $119.4 million, down 16.9% year-over-year, or 16.3% on a constant currency basis. The decrease was primarily driven by lower volumes, which were impacted by global economic headwinds, particularly in residential renovation and remodeling channels across our main regions. This resulted in lower demand accompanied by competitive pressures. In the U.S., sales were down 13.8% to $59.8 million. This decline was mainly driven by softer residential end markets and less favorable product mix. However, we did see some bright spots in our commercial business and big box. Canada sales were down 15.9% on a constant currency basis, experiencing similar market dynamics as the U.S. Australia sales were off by approximately 20.8% on a constant currency basis, mainly reflecting slower market conditions and the transition of alternative materials that comply with new regulations in Australia. Our EMEA region saw a decline of 14.9% on a constant currency basis due to slow market conditions in the UK, Sweden and our indirect EMEA business. In Israel, sales were off by 38.9% on a constant currency basis in the second quarter, mainly as a result of the war on Tehran, which has significantly reduced activity in the region. Looking at our second quarter P&L performance, gross margin in the second quarter improved significantly to 22.9% compared to 8.3% in the prior year quarter. Adjusted gross margin was 23.8% compared to 9.6% in the prior year quarter. The increase in gross margin was primarily driven by the benefits of improved production footprint, partially offset by unfavorable product mix. It's worth noting that the gross margin in the second quarter of 2023 included number of transitory factors that were mainly associated with Sdot Yam facility closure, lower…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Reuben Garner with The Benchmark Company. Please go ahead. Thanks.

Thanks. Good afternoon, guys.

Good morning.

I guess let's start with the change in the guidance. Nahum, you mentioned shipping costs. Can you give us a little more detail there? Do you plan to take any additional pricing actions to help? And it's just, there's just a lag or is that not appropriate, are they kind of one time and you expect them to, I guess, retrace going into the next year?

Hi Reuben. So the increase in shipping cost we expected in the second half to impact the results to an area of as we mentioned, $3 million to $4 million per quarter. And in addition to that, we have also the negative impact from sourcing of raw materials. So those two items are going to impact our second half, second half of the year. On the other hand, there are additional savings that are coming from the previous restructuring actions that we took. Specifically, the more expensive inventory from Richmond Hill, which was sold almost in full by mid-year. So we expect to generate more saving and this will partially offset the higher expenses from the shipping and the raw materials that we've mentioned.

Yes. But also to add maybe that the shipping costs at this stage is very high and one could expect that at some stage it will go down in significant amount. We don't know exactly how much and when, but today it's above the normalized levels.

Okay. And then you mentioned the assumption for the second half is a similar demand environment to the first. Does that mean similar revenue dollar amounts in the second half compared to the first half? Or was that a year-over-year comparison comment?

No, the comment was compared to the market dynamics that we saw in the first and second quarter. So this is the assumption, also currently the assumption that we, that we are using for the second half.

Okay. And if things do deteriorate, and there have been some signs, at least here in the States that things may be softened over the course of the summer, if things do deteriorate globally, you've already undergone a restructuring. Do you have more that you could do to take out costs? Where does your utilization kind of rate stand today? And I guess what would those future actions look like if they were needed?

Yes, one of the biggest advantage of the new setup, which makes us more agile, is the ability to reduce cost. We have less fixed costs so we can better control the ongoing cost. And in addition if things turn out to be more positive than we expect, we can relatively ramp up the capacity quite fast without the necessity of deploying money. So yes, we are more agile and we can adjust.

So is there a way to think about what decremental margins would look like from here? If you see another, I don't know, 10% decline in volume, what kind of impact that has on profitability?

No, we are not providing information on sensitivity of the gross margin. But you can look at previous quarters and you can see on one hand the improvement in margins after the restructuring actions that we took compared to the level of revenues that we generated in those quarters. Just maybe to add up to that, the gross margin this quarter compared to the second quarter of last year was higher. Part of it relates to transitory factors that we had last year associated with the closure of the production here in Sdot Yam facility. So, if you exclude it, we were last year at the rate of around 15% of gross margin and this year, under the current volume, we generated almost 23% of gross margin. The majority of it relates to the restructuring actions that we took during the year. So you can – I believe it can help you to calculate the sensitivity.

Great, that's helpful. Thank you guys. Good luck going forward.

Thank you very much.

Thank you.

The next question will come from Stanley Elliott with Stifel. Please go ahead.

Hey, guys, this is Andrew Maser on for Stanley. Thank you for taking my question. I just had a quick one about the other portion of the Richmond Hill plot of land. Wondering if you had any best guess on what you could maybe receive for that portion of it.

So, as we mentioned also in previous calls, we believe it's in the area of several tens of millions of dollars. As we mentioned in the call, we sold the undeveloped part of our site for $10 million. This is the undeveloped, the other part is the developed, including the building. And all in all, we believe we will be able to get, as I said, several tens of millions of dollars.

Got you. And is there any update you can provide on the monetization of the Israel facility?

Yes, as Yos mentioned in his part so we basically established the majority of the available areas here in Sdot Yam plant. And we will start to benefit from it, not on the P&L side, but we will start to benefit from it from a cash flow point of view. Commencing 2025, it will be in the area of several millions of dollars compared to this year.

And then lastly, I was wondering if you could expand on your decision to increase your stake in the Lioli Ceramica business. Just any more details you could provide on timing or anything, really. Thanks.

So, porcelain is a very important part of our growth plans. And our plant in India is a good plant and we believe we can get a lot out of it. So far, we haven't seen a lot, but we believe with the initiatives that we are taking during this year, and also continue next year, we will start to see – we will start to see profits from this site and sales. So far, we see sales, but it's relatively low. And we had 60% of the venture. We decided to increase it to 81% and to buy one of the partners, which brings us, as I said, to 81%. So we are very happy with this move. It was tough negotiation. And once we see that our expectations are starting to mature, we will report more. So far, it's not so significant, but it's very significant, strategic wise. Yes, so this is what I can say about Lioli. If you have any more questions around it, I will be happy to answer.

I guess, from a margin standpoint, is there anything investors should think about as far as margin mix related to that increased stake and then the porcelain roll out over time? Thanks.

I don't think that – at this stage I don't think it will be material. So, yes, you will not see it – you will not see a lot of it in the P&L in the short term.

Got you. That's all from me. So thank you.

Thanks.

Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Yos Shiran for any closing remarks. Please go ahead, sir.

So, thank you everybody for your attention this morning. And we look forward to updating you on our progress next quarter. Goodbye.

Thank you.

[Indiscernible] Thank you for attending today's presentation. You may now disconnect.