Allison Cain - Investor Relations, Vice President at ICR Yonathan Melamed - Interim Chief Executive Officer Yair Averbuch - Chief Financial Officer

Michael Rehaut - JPMorgan John Baugh - Stifel Lena Rogovin - Chardan Capital Markets

Thank you operator and good morning to everyone. 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 the 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, the company will make reference to certain non-GAAP financial measures, including adjusted net income, adjusted net income per share and adjusted EBITDA. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's fourth quarter and full year 2016 earnings press release, which is posted on the company's Investor Relations website.

With that, I would like to now turn over the call to Yonathan Melamed, Interim Chief Executive Officer of Caesarstone. Yonathan, please go ahead.

Thank you Allison. Good day and thank you everyone for joining us.

I will start by providing some highlights of the fourth quarter. We grew sales year-over-year by 6% to $135 million.

Our adjusted EBITDA was $30 million, a margin of over 22%. Adjusted net income was $18 million and our adjusted diluted earn per share was $0.53.

And also some highlights for the full year. We grew sales by 8% to a record level of $539 million.

2016 adjusted EBITDA was $130 million, a margin of over 24%. Adjusted net income was $81 million and our adjusted diluted earn per share was $2.33.

We closed our year with a stronger performance in the U.S, especially towards the end of the quarter and we saw solid growth in Australia and Canada. We are pleased to begin 2017 with a better momentum in the U.S.

where we remain highly focused on reacceleration growth. We are working hard to constantly improve our operation and refine our approach to market.

We are very pleased to add Lowe's Home Improvement as a new partner with our new Transform by Caesarstone, an innovative product solution. We expect this business to gradually ramp over the course of the year and to contribute more significantly thereafter.

We have also started direct distribution in the U.K. to better serve this market and capture significant growth opportunity we see there.

We remain intently focused on ramping up our Richmond-Hill manufacturing facility which is an important part of our growth plan for 2017 and beyond. As you know, I will remain Interim CEO for a few more weeks until I will hand over the steering wheel to Raanan Zilberman at the end of February.

It has been my pleasure to serve the company in this role and as a Board member for more than eight years. I believe that Caesarstone is commercially and financially an outstanding company which I am confident that Raanan will take to the next level.

Thank you. And I would like to now turn the call over to Yair.

Thank you Yonathan and good morning to everyone. I will start with our regional revenue performance for the fourth quarter and full year.

Four quarter sales in the United States were $55 million, down 2.8% compared to last year. With an improvement in our performance as the quarter progressed, this was better that we had expected when we reported our third quarter results.

Overall, our core business was down year-over-year. IKEA showed strong growth on a relatively easy comparison from the fourth quarter last year when our IKEA business was weak due to temporary changes in IKEA promotional events.

For the full year, our U.S revenue was $222.6, down 0.3% year-over-year. We have a single digit core growth offset by lower sales in IKEA.

As we discussed last quarter, we have worked hard to improve our capabilities in the United States in several areas. We have started to see the benefit of these investments.

We intend to make further investment in the U.S. market in 2017.

We also made strategic progress with the addition of Lowe's Home Improvement as a new customer in the United States commencing in the first quarter of 2017. We are introducing at Lowe's a new innovative solution called Transform by Caesarstone.

Transform is an overlay quartz surface that can be installed in one day over an existing countertop. This is targeted at consumers interested in refinishing without a complete renovation and represent an incremental business opportunity for both Lowe's and us.

We expects this revenue growth associated with this business at Lowe's will be modest this year and stronger thereafter. Turning to Australia region.

We grew fourth quarter sales to $36.1 million, up 17.5% compared to last year. On a constant currency basis, Australia was 12.5% in the fourth quarter.

Our execution in Australia remains excellent. For the full year, despite a soft housing market, we grew our revenue by 18.7% to $130.9 million, 19% constant currency growth.

We grew fourth quarter sales in Canada by 20% to $21.5 million in the fourth quarter. Growth was 20.3% on a constant currency basis.

Like Australia, we have executed very well in a soft market. For the full year, we grew Canada sales by 21.2% to $85.7 million, partially driven by the IKEA ramp-up in the first half of 2016.

Constant currency growth in Canada was 25.4% for the full year. Sales in Israel for the quarter were $9.8 million, up 2.3% compared to the fourth quarter last year.

On a constant currency basis, fourth quarter sales were up 1.8%. For the year, Israel was up 7.3% to $42.5 million.

On a constant currency basis, Israel growth in 2016 was healthy at 6.3%. Europe sales in the fourth quarter were down by 5.1% to $5.2 million and were down 3.8% on a constant currency basis.

For the full year, Europe were up 6.9% to $25.6 million, up 7.1% on a constant currency basis. We are very pleased to have begun direct distribution in the United Kingdom as of January 1, 2017.

This is the first time we have shifted to direct distribution without acquiring the previous distributor. We believe that there is an opportunity for a meaningful increase in the market revenue growth over time.

We expect that this move will have a drag on our operating income margin in 2017 as we ramp up our infrastructure and capabilities. Revenue in the rest of the world was up 4.2% to $7.5 million in the first quarter, growth of 5.2% on a constant currency basis.

For the full year, rest of world was down 1.3% to $31.1 million and down 1% on a constant currency basis. Altogether, global sales for the fourth quarter increased by 6% to $135 million, compared to $127.4 million last year.

On a constant currency basis, total sales increased by 4.8%. For the full year, growth was 7.8% to a record of $538.5 million.

This was above the high-end of our most recent guidance. Without currency impact, growth was stronger 8.4% over prior year.

Gross margin in the fourth quarter was 38.1% compared to 37.9% last year. Lower raw material costs and increased content of higher margin products were partially offset with higher costs in Richmond-Hill pant and the increased portion of IKEA revenue, which has a significant lower margin fabrication and installation component.

Full year gross margin was 39.5% in 2016 versus 40.1% in 2015. Operating expenses in the fourth quarter were $32.3 million versus $25.6 million last year.

Such expenses in the quarter included $3.1 million for legal settlements and loss contingencies compared among other things, a provision related to the potential settlement of certain legal proceedings. Although we are not able to discuss this at this point, if such a settlement materializes, we would see it as a positive outcome.

Excluding the total provisions under legal settlements and loss contingencies, operating expenses in the fourth quarter were $29.2 million, 21.6% of sales, compared with $25.6 million or 20.1% of sales last year. This increase was primarily due to increased strategic investments, specifically marketing and sales in the United States.

Operating expenses for the full year were $119.7 million or 22.2% of sales compared to $103.8 million last year or 20.8% of sales. Operating income was $19.1 million compared to $22.6 million in the fourth quarter of last year.

Our operating margin excluding legal settlements and loss contingencies was 16.5% this quarter compared to 17.7% in the last year. For the full year, operating income was $92.8 million compared to $96.4 million in the prior year.

Adjusted EBITDA in the fourth quarter, which eliminates share-based compensation, legal settlements and loss contingencies expenses as well as other non-recurring items, was $30 million, a margin of 22.2%. This compares with last year's adjusted EBITDA of $30.4 million, a margin of 23.9%.

For the full year, adjusted EBITDA was $130.3 million, a margin of 24.2%. This is an increase from $125.7 million last year, a margin of 25.2%.

The slightly lower margin, both in the fourth quarter and for the year, mainly reflects our increased marketing and sales spending to support stronger growth in the United States. Finance expense in the fourth quarter was $1 million compared to finance expenses of $0.7 million in the prior year, mainly reflecting the increased revolving credit usage and banking activities.

For the full year, finance expenses were $3.3 million compared to $3.1 million in 2015. Taxes in the fourth quarter were $2.8 million or 15.4% of income before taxes compared to a tax rate of only 11.7% last year.

The increase in effective tax rate is mainly due to two factors. One relates to production allocation between our plants in Israel that are subject to different tax rates.

The second relates to higher taxable income outside of Israel where tax rates are higher. For the full year, our tax rate was 14.5% compared to 14.8% last year.

Adjusted net income attributable to controlling interest, which eliminates the same items as mentioned above, was $18.1 million in the fourth quarter compared to $19.7 million same period last year. For the full year, adjusted net income was $81.2 million compared to $83.7 million last year.

Adjusted diluted earnings per share in the fourth quarter were $0.53 on 34.4 million shares. Adjusted diluted earnings per share last year were $0.55 on 35.5 million shares.

For the full year, adjusted diluted EPS were $2.33 versus $2.36 in 2015. Turning to our December 31 balance sheet.

We had cash, cash equivalents and short-term bank deposits of $106.3 million. Our cash flow from operation peaked at $35.9 million in the fourth quarter.

During 2016, we generated $78.1 million of free cash flow and used $39.4 million to repurchase 1.1 million shares, 3.2% of our total shares outstanding. With respect to our 2017 guidance, we are expecting revenue in the range of $580 million to $595 million.

With respect to adjusted EBITDA, we are guiding to a range of $119 million to $126 million. We see 2017 as a transformative year and this guidance reflects mainly our intention to further expand our investment in key markets, particularly in the U.S.

and the U.K. We believe that our strategy, coupled with such investments, will reaccelerate our growth rate and improve our overall performance starting 2018.

The guidance also reflects higher involvement with builders and big boxes and related increase in the fabrication and installation services which contains lower margins as well as an increase in polyester prices. Thank you.

We are now ready to open the call for questions.

Thanks. Good morning everyone.

Good morning.

First question, I was hoping to get a little bit more detail or specificity around the EBITDA guidance for 2017. Obviously, you are looking at margins to be down and the EBITDA dollars to be down despite a stronger topline sales growth even potentially than 2016 and you referred to a bunch of items here that I guess is driving that outlook, expanded investment in the U.S., U.K., more builders and related fabrication and higher raw material prices, polyester.

I was hoping to get a sense of what each of these factors is responsible for the lower EBITDA or the decline in EBITDA margins, however you want to put it and more specifically even what you feel is perhaps one-time investments or leverageable investments versus kind of more of a permanent mix shift in your business.

Hi Mike. Thank you for the question.

Yes. So basically, the EBITDA margin down is a result of two main factors.

One is substantial investment in our M&S and the other one is a channel mix change in the U.S. With regards to marketing and sales, we are investing substantially in sales and marketing, mainly in the U.S.

which is consistent with our marketing expansion strategy as well as in the U.K. With regards to the U.S., we believe that the investment has already contributed to our momentum and I hope that it will continue like that.

With regards to the U.K., we need to really build the full organization, direct distribution organization. On both angles, I believe that those are transitional in nature and we will see a leverage on both aspects after 2017.

With regards to the channel mix, we are going in big boxes. We are going to grow in the commercial builder segment as well.

And the growth in big boxes segment require the fabrication and installation component service. This, we believe, is a major competitive advantage that we have but it clearly is a lower gross margin.

So on the marketing and sales side, I believe that this is transitional. On the channel mix, yet to be seen but I believe that after 217 we will see a faster growth rate in our topline with related profitability.

And maybe as a side note, just to remind us all, myself included, that we do have also a polyester price increase that is reflected in this guidance along with the oil prices that are going up.

So just to get a better sense of this, when you have talked in the past about IKEA and the lower gross margins with those revenues, correct me if I am wrong but I think you have also kind of described it as operating margin neutral, in that you have had also lower SG&A and it's kind of an offset. Is that something that we should think similarly with the Lowe's business model?

I think in Lowe's, we do invest a little bit more this year. We really need to build the infrastructure for this execution.

We need to do a lot of prepare marketing material across the whole chain. And be ready for a nice launch and execution.

So I am not sure that this year is the story. I hope that it will be the story in year thereafter.

Okay. And what type of impact, just on the polyester, higher polyester costs, either on a dollar or a margin basis, do you expect that to impact 2017?

Yes. Polyester is around 50, 60 basis points of the margin erosion.

And the marketing and sales infrastructure and the channel mix are more or less similar numbers to each other, not similar to the 50, but similar impact.

Okay. And just one last one and I appreciate it and I will get back in the queue.

In the past, you have given on the gross margin kind of the puts and takes in terms of how the quarter has been impacted. That's 38%, kind of flattish year-over-year, but for 4Q you mentioned some positives and negatives.

I was hoping if you could give us, as you have in the past, kind of a degree of magnitude of what some of the positives were and some of the negatives that you listed on a basis point --?

Yes. So basically, better product or better product mix or higher content of differentiated products with higher margins.

This and reduced raw material cost was each around 100 basis points. FC was also slightly favorable at the neighborhood of 50 basis points this quarter.

CST pressured margin by around 120 basis points. And increased fabrication and installation component, given the IKEA growth reduced the margin by around 80 basis points.

I am sorry. What was the 120, Yair?

The 120 was the Richmond-Hill performance.

Right. Thank you.

Okay. Thanks very much.

You are welcome.

Thank you. Good morning Yonathan and good morning Yair.

Good morning.

Give some sense of what the plant in Georgia produced, I don't know, maybe for the year but more importantly what was the rate of production in Q4 say versus Q1 or entering here in 2017?

Yes. So in Q4, Richmond-Hill was a bit of a disappointment for us but also we did a lot of fundamental change there which intentionally slowed us down.

For next year, our revenue growth for next year is dependant upon a significant throughput improvement in Richmond-Hill as well as improve the quality rates and improved cost efficiency. So we are looking at a significant ramp-up in 2017 in Richmond-Hill relative to 2016.

It still is not going to be similar to the Israeli plant in performance. This will take more than 2017.

But I believe that as the time go by, Richmond-Hill will relatively increase the performance because Israel is kind of 100% utilization And with that, we will see leverage in their performance.

And so Yair, can you look at yield or scrap or however you measure quality currently and see a meaningful improvement and now it's just a matter of ramping speed? Or are there still big fundamental changes you are going through right now to try to improve those things?

So we are making a lot of changes now. We are expanding shifts to scale up the production.

We are increasing the manpower for those shifts. We have quite dedicated onsite support from Israel now to do further equipment engineering optimization and continue training over there.

We are heavily investing in process improvement over there. And if I can judge by our performance over the last two weeks, I would say that I am encouraged but it's still, we need to see it continue like that and it is a key factor for topline growth next year in 2017.

Right. Thank you.

I am curious on the EBITDA margin guidance which I calculated at the midpoint, down over 300 basis points and you touched on polyester. I am curious though, is there embedded in that assumption a like-for-like price reduction or more competitive promotional effort?

Or are all those pressures, the U.K. and channel mix and starting up with Lowe's, et cetera?

Look, John, we normally don't comment on pricing and we intend to remain synonymous with premium brand product and quality and innovation here. At the same time, we are certainly implementing a competitive multi-channel strategy with distinct offering for each channel and I think that this is what we are discussing here for the most part.

And could you comment on the U.K., how much revenue did you do there this past year, roughly the size of that countertop market and what the penetration rate is currently? And then how we might think about how your revenues should ramp over the next several years?

Yes. So U.K.

currently is a market where quartz penetration is still below all of our main regions. So to our estimate, it's below 10% in volume, 10% of the market.

It's relatively dominated by European competitors. We had quite a reasonable presence there.

But now going direct, we believe that we will make a much faster growth and we can increase the topline in a significant manner. So again, the baseline from where we started now is not very significant.

I would say also that in the second half of 2016, our revenue performance in Europe was negatively impacted by this move.

Okay. And my last question.

As it relates to Lowe's, is there a plan in the future to sell slabs more than just the retrofit products you are talking about? Or is that not in discussion?

I guess we will have to wait and see. Currently it's top bases and stuff.

Okay. Thank you so much for answering my questions.

Good luck.

You are welcome.

Hello. Congratulations on strong revenue growth, I have a couple of questions, The first one is again on the U.K.

What's roughly the expected CapEx for 2017 to launch the distribution? My second question is about Canada and Australia.

So this year was incredibly strong both in constant currency and in reported terms. So it looks like double-digit growth is, I would like it to be sustainable.

So what should we expect going forward? And my last question is about legal expenses which were relatively high in the fourth quarter, so what was the reason for that?

Thank you.

Okay. You give me too much credit to remember all the questions.

But I will try. So with regards to U.K., the reason to the significant CapEx there is we need to do some staffing, creating the offices and the warehouse and everything.

The main investment is in the marketing and sales. And putting together all the sales force organization as well as having a strong presence within the kitchen and best studios, the architects and all of those things.

So a lot of investment in expenses, not so much in CapEx. With regards to Canada and Australia, we are delighted from our results in both regions.

This year that was actually executed despite a weakening housing market. In Canada, our first half of the year was also helped by the ramp-up of the IKEA business.

The cold was very, very strong but there was also a push from the IKEA ramp-up. And then in the second half, IKEA basically reached its anniversary.

So our growth has grown. And then with regards to next year, the signal about the housing market in both regions are not extremely optimal for us.

And yet we plan to continue and go. I would, without getting into any regional guidance for 2017, I would say that we expect U.S.

and Canada to be our fastest growing regions next year. And regarding the legal expenses, it is too early for us at this point to disclose this regarding the potential settlement which we provided for or quote for.

I can just say that we can say that if this settlement materializes, we will view it as a positive outcome. And until this is reached, we will prefer not to comment.

Okay. Thank you very much.

You are welcome.

Thanks. Yair, I just wanted to follow-up about the U.K.

and the investment there. I just wanted to get a sense, number one, if you could give us an idea roughly in terms of the dollar investment in 2017.

And I assume, you are saying it's no CapEx, so I assume it's kind of an incremental dollar expense in 2017 with initially minimal revenues. So just trying to get a sense of that dollar investment for the year.

And I guess secondly, why the departure from typically acquiring a distributor which is what you have always done in the past, if there is a team or a group of person or a group of people that you have been in discussions with that you feel there is an ability to grow it from the ground up particularly given it's obviously from a distance and a core market for you, it's not necessarily an obvious country to kind of go in, particularly in an organic way?

Yes. So with regards to the second question first, Mike.

We have contemplated all options about how to go direct in the U.K. and we decided that that value option for us would be to just establish our own organization.

There are many reasons for that. I prefer not to be specific on those.

But let's just say that we did a lot of preparation ahead of time in the second half of 2016 and I believe we are working on it as we speak and start to do business there. So I think it is a very positive move for the company and I believe, again, that while it is not helping EBITDA, both certainly not margin, but not even an absolute number, it will be a good move for the company over time.

And can you give us a sense of the dollar investment in 2017?

It is less. Our EBITDA in dollar for a few million dollars.

Great. Thank you.

Thank you everyone. As we close the call, on behalf of our entire company, I would like to thank Yonathan for his service, particular these past few months as our Interim CEO.

We are deeply grateful for his efforts and contribution over the years. We are pleased to see the strength of our business reflected in our results globally and the recent improvement in the United States.

We have a good new opportunities, particularly in the Unites States, both in the core market and in the big box channels with IKEA and now Lowe. We look forward to continuing to demonstrate our ability to drive growth and shareholder value.

Thank you all for participating today.