Greetings, and welcome to the Caesarstone Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 on the line. I'm joined by of 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 loss, income; 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 fourth quarter 2023 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, and thank you, everyone, for joining us to discuss our fourth quarter and full year results. In 2023, we were able to navigate through challenging macroeconomic, regional geopolitical and regulatory dynamics occurring in our key markets. We have implemented a new strategic plan and initiated significant restructuring actions, which allowed us to accomplish our primary financial objective of generating positive cash flow from operations. We more than delivered on this front as our working capital management and meaningful savings stemming from our global restructuring actions generated positive operating cash flow in four consecutive quarters, totaling $66.5 million. This left us with a solid net cash position of $83.5 million. Overall, we are executing in accordance with our strategic plan. We believe actions taken during 2023 have set this foundation for an optimized production footprint, better utilization of resources and improved cost structure and realigned workforce, allowing us to capture greater efficiencies and opportunities. We believe that these factors will allow us to enhance our brand, better compete, grow market share and get back to profitability. In regard to driving production cost efficiencies, we are quickly transitioning production to our global network of production business partners. In the second quarter of 2023, we made a decision to close our Sdot-Yam manufacturing facility. And in December, we announced the closing of our Richmond Hill facility. Following these strategic changes to our operations, we are now sourcing over 40% of our products from production business partners. We expect that percentage to trend up further as we move through 2024. As another result of the closure of these two facilities, we have reduced our spend on CapEx, and we're able to reduce our workforce by approximately 14% across the organization. In turn, we expect to realize annual cost savings…

Thank you, Yos, and good morning, everyone. Looking at our fourth quarter results. Global revenue in the fourth quarter was $128.5 million compared to $159.4 million in the fourth quarter of last year. On a constant currency basis, sales were down 19.6%. The decrease was primarily driven by softer global market conditions particularly in North American renovation and remodel channels, mainly as a result of higher interest rates, which has impacted residential spending. In addition, our sales were impacted by the competitive landscape for our products. In the U.S., sales were down 21.1% mainly tied to softer residential end markets, particularly through third-party distributors. This was partly offset by higher year-over-year sales with big box customers and improved performance in our commercial business. Canada sales were lower by 13.8% on a constant currency basis, experiencing similar market dynamics as the U.S. but to a lesser extent. Australia sales were off by approximately 8.1% on a constant currency basis, reflecting slower market conditions. The Australian government's decision to ban quartz slabs did not have an impact on our fourth quarter sales, given the planned mid-2024 implementation of that ruling. In Israel sales were challenged in the fourth quarter, mainly as a result of the war on terror, which has significantly reduced activity in the region. Looking at our fourth quarter P&L performance. Our gross margin was 18.1% for the quarter. Adjusted gross margin was 18.9% compared to 19.7% in the prior year quarter. The year-over-year decrease in margin mainly reflected the impact of lower revenues, unfavorable product mix, higher slow-moving inventory provisions and the increased manufacturing unit cost driven by lower fixed cost absorption due to the lower capacity utilization. These factors were partially offset by lower sea freight expenses and the benefits of our improved production footprint as we transitioned…

[Operator Instructions] The first question comes from Reuben Garner with The Benchmark Company. Please go ahead.

Good afternoon. Thanks for taking my questions.

Good morning.

Maybe to start, you referenced stabilization or signs of stabilization, I think, in North America, in particular. Can you talk about what exactly you're seeing there? Maybe have things changed dramatically on a year-to-date basis versus what you were seeing in the fourth quarter? Or is it just an assumption that the easing rate environment throughout the year will result in better results?

Reuben, it's Nahum. So basically, as we mentioned, we see first signs of stabilization, meaning Q1 is trending in line with Q4. And based on the things that we analyze and read, we expect to see a gradual improvement also in the macroeconomics as we progress during the year. But in terms of Q1, we see the same dynamics as in Q4, not deteriorating, let's say, further.

Okay. And then how about from a pricing versus a volume standpoint? Can you help us with what you saw in the fourth quarter and how to think about 2024, whether that's in North America or the whole business altogether?

So yes. So in North America, we saw down volumes, mainly on the back of the macroeconomic -- the soft macroeconomic, the higher inflation rate, and it impacted mainly the residential channel. We saw some positive signs in the commercial channel and also in the big box. This is basically the same dynamic globally. In certain regions, we see it to a higher extent, in other regions like Australia and Canada, we saw the same dynamic, but to a lesser extent. And again, based on the things that we analyze, we expect to see a certain relief throughout 2024. The pricing that we mentioned that impacted negatively gross margin was not a decline in the average selling price, but rather the mix of channels and the mix of products that we sold during the quarter.

Okay. And then a question on your restructuring actions. What -- so it's $30 million total over the next two years, what portion of the expense -- why is some of it out in 2025, the facility closures have already taken place. Can you help us understand what portion of the savings kind of gets pushed out into next year?

Yes. So the Richmond Hill was only closed in the beginning of January, and we are still holding inventory that was produced in that plant and still reflects the higher prices -- the higher cost. This cost will be digested during 2024. So the positive -- the savings coming from Richmond Hill will be reflected in full only in 2025. In 2024, we will digest and eat the more expensive inventory that came from Richmond Hill, especially in the first half of 2024.

Okay. And I'm going to sneak one more in and then I'm done. The cash flow from operations goal of being positive. In 2023, you got a big benefit from working capital, obviously, reducing inventory. Do you have more room to go there in '24? Or how do we think about how you get to cash flow positive? Is it going to look differently this year than it did last?

The positive cash flow this year definitely will be to a lesser extent on the back of improvement in inventory, although we still have room for improvement in inventory days. Just as a reminder, we reduced inventory days from the beginning of the year that -- it was around 170 days, to 120 days at the end of 2023. And as I said, we still have some room for improvement during 2024 also on the back of closing the Richmond Hill manufacturing activity. In addition to that, we believe that during the year as our profitability will increase and be more significant, we will also benefit from that and not only from the improvements in working capital.

Thank you and good luck.

Thanks.

Thank you. The next question is from Stanley Elliott with Stifel. Please go ahead.

Thank you guys for the question. When we talk about the outlook, can you give us some of the building blocks you're looking at for sequential improvement on the revenue build. And I say that in context -- after July 1, 20% of your business is going to be under severe pressure. But under this contract, a sequential improvement, we're actually looking at growth into the December quarter. And I'm just curious how we get to that buildup? Thanks.

Stanley. So first of all, as we mentioned, Q1 is -- we expect Q1 to be our lowest quarter in terms of revenues. And then we -- and then we believe that the seasonality that we used to see in our results in previous years, I mean, before the impact of COVID and other external impacts, to be evident in 2024. So we expect Q2 and Q3 to be higher in terms of revenues compared to Q1 and also Q4 compared to Q1. So basically, we expect to see a gradual improvement in the coming quarters, while Q1, as we mentioned in the outlook section is trending in line with Q4. So this is one reason. And with regard to Australia, we took a proactive approach to the new regulations that came -- that were published during December. And we are -- and as we said, we are preparing a collection that will meet the regulations, and it will be ready by the end of Q2, by middle of the year and expect to maintain our leading position in that market.

Any guess what the Australia business is going to look like after July 1? I mean is it going to be like a $50 million run rate business? Is it $80 million? Just trying to get a sense for the magnitude of change that we should expect there.

So Stanley, so far, the business in Australia continues quite well, and business as usual in terms of selling the products. And this expected to continue until July. From July, we don't know now exactly what will be the reaction in the market. What we are seeing is a very positive sign for the products that we introduced. And we will have to wait and see. There are still things that needs to be cleared by the Australian government. So the signs are very good, but we don't have something which is carved in stone as of yet. But overall, it seems that the products that we have introduced -- by the way, also some of our competitors are introducing similar -- not similar, but let's say look-alike products. And the reaction from the government is positive. And also, we believe it's in accordance with the Australian new regulations. So as I said, we definitely got some positive response in the last few weeks. And we are advancing with the products and with the production. And we will have to wait and see what will be the exact revenue. We also have our lines of porcelain, which are relevant to the Australian market under the new regulations. So all in all, we believe that we will continue to maintain our leading position in the market. How much exactly will it be? We don't know at this stage.

Yes. That's fair. And I guess one last just kind of a point of clarification. So maybe help us with the inventory days, how you see this model running now that you're going to be more on the import side? And then lastly, a point of clarification, you mentioned positive operating cash. Are you also expecting positive free cash flow in 2024?

So in terms of the inventory, that as Nahum has said, we went down from 170 days to 120 by the end of Q4. We are aiming to be lower than 100. So there is still room for improvement there. And in terms of free cash flow, we are reducing our CapEx. So we will still have CapEx for our porcelain plant in India and also for plant in Israel, mainly. But it's -- it will be less than what we used to have when we had all the additional factory in Sdot-Yam and Richmond Hill, of course. So all in all, we believe that we will still generate positive cash flow, of course, and we will, of course, have free cash flow after that.

Perfect, guys. Thanks so much. And best of luck.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Yos Shiran, Caesarstone's Chief Executive Officer, for any closing remarks.

Thank you for your attention this morning, and we look forward to updating you on our progress next quarter. Thank you very much. Bye. Thanks.

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