Eltek Ltd. (ELTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. First Quarter 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before I turn the call over to Mr. Eli Yaffe, Chief Executive Officer; and Ron Freund, Chief Financial Officer, I'd like to remind you that Eltek's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934 as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release as well as review our latest filings with the SEC for important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. These forward-looking statements are projections and reflect the current beliefs and expectations of the company. Actual events or results may differ materially. Eltek undertakes no obligation to publicly release revisions to such forward-looking statements to reflect events or circumstances occurring subsequent to this date. I would now like to turn the call over to Mr. Eli Yaffe. Mr. Yaffe, would you like to begin, please?

Thank you. Good morning, everyone. Thank you for joining us, and welcome to Eltek's 2022 First Quarter Earnings Call. With me is Ron Freund, our Chief Financial Officer. We will begin by providing you with an overview of our business and summary of our principal factors that affected our results in the first quarter followed by the details of our financial results. After our prepared remarks, we will be happy to answer any of your questions. By now, everyone should have access to our press release, which was released earlier today. The release will be also available on our website at www.nisteceltek.com. In the first quarter of 2022, we recorded revenue of $9.8 million despite the challenging supply chain and the labor environment. This revenue reflects an annual increase of 15% relative to our revenue in 2021. Our forecast is that the defense, aerospace and space sectors will perform better in 2022 than in the last year. Our employees did an excellent job of maximizing production by maximization of throughput per hour resulting in increased efficiency. During the first quarter of 2022, we mitigate all of the material price increase through additional cost savings, adjustment in the mix of raw materials used during the manufacturing process and product price adjustments. The first quarter of 2022 reflects the continued increase in order received from our customers. We ended the quarter with a backlog of 50% greater than the backlog of 2021 year-end. Our PCB book-to-bill ratio was 1.4% for the first quarter of 2022, which means that our accumulation of new orders was higher than our revenue recognition. The significant increase in the backlog is due to several factors: factor number one. The current status of the COVID-19 pandemic enabled most of our customers to return to normal level of business operations, including our customers in the Far East, in particular in India. In Israel, we did not face significant absence of employees due to the isolation requirements. In addition, the reimbursement of the COVID-19 pandemic in China create a shift of manufacturing order of nondefense PCBs to the Western markets. Factor number 2. During Q1 2022, we had no delays in raw material supply, and our increase in inventory levels allowed us more flexibility in our production cycles. Factor number 3, the political and security situation in Europe caused governments to increase their military budget and Eltek as a supplier of significant components to defense system manufacturers and influenced positively by it. In addition, the inflationary pressures and the continued labor challenges in North America helped us in being competitive in price and lead time. Factor number four, increase in demand due to the continuous trend of shifting back to the Western countries PCB manufacturing previously performed in the Far East due to the [ IPN ] security consideration. Furthermore, some of our customers suffered from the lack of critical components, which forced them to redesign the PCB using available components. This redesign led to further request for quotation, some of which we won. All of these 4 factors contribute to our backlog and revenue growth during the first quarter of 2022. I should also mention that we recently won a new sales order wherein we will provide a fully turnkey product to one of our Tier 1 customers by outsourcing the assembly service requested. We will be further investigating this niche and its potential for the future. The increased demand for the company product has led us to decide to accelerate our investment program. During the first quarter, we began the first phase of the program, which include investment in amount of $9 million. This phase is expected to last 2 years. The program includes investment in new production lines as well as an infrastructure in order to enable us to increase the company production capability as well as its efficiency. We expect that the phase will allow us to -- that the first phase will allow us to increase our yearly sales by $5 million to $8 million based on the continuity of the increased demand for our products. The total investment program amount is $15 million. During the first quarter, we continued to experience a significant increase in the price of raw materials. We communicated this increase to our main customers and adjusted our selling prices. Nevertheless, we continue to invest efforts in improving our manufacturing processes and our efficiency in order to be more flexible in our pricing policy. Demand for employees continue to be high in our industry and in a similar one. The situation impair us -- to impair our production capability and sometimes even force us to raise wages level in order to achieve our recruitment targets. Our investment program, mentioned before, includes automation components in order to help us to deal with this difficulty. As the long-term strategy remains unchanged, focused on highest technology PCB in order to maintain our differentiation capability and serve as a highly valued partner to our customers. I will now turn the call over to Ron Freund, our CFO, to discuss our financial statements.

Thank you, Eli. I would like to draw your attention to the financial statements for the first quarter of 2022. During this call, I will discuss also certain non-GAAP financial measures. Eltek uses EBITDA as a non-GAAP financial performance measurement. Please see our earnings release for the definition and the reason for its use. Now I will go over the highlights of Q1 2022. Revenues for the first quarter of 2022 totaled $9.8 million compared to $7.2 million in Q1 2021, an increase of 35%. The increase in revenues is mainly due to the shortage in raw materials in 2021 and the negative effect it had on our sales in the first quarter of 2021. Gross profit increased by 72%, reaching $1.9 million compared to a gross profit of $1.1 million in the first quarter of 2021. The increase is the outcome of the increase in revenues. Operating profit amounted $0.7 million in Q1 2022 compared to $0.1 million in 2021. The revaluation of the U.S. dollar against the Israeli shekel contributed to our Q1 2022 results of operation, and we recorded financial income in the amount of $0.1 million. We have recorded for the first time in recent years a tax expense of $0.1 million due to the deferred tax assets we recorded in 2021 year-end. As you probably remember, this tax asset was recorded based on management estimation that it is more likely to note that the company will utilize its tax loss carryforwards in future years. Net profit was $0.6 million or $0.11 per share in Q1 2022 compared to net profit of $0.2 million or $0.04 per share in Q1 2021. EBITDA was $1.1 million in 2022 compared to $0.6 million in 2021. As of March 31, 2022, we had cash and cash equivalents of $9.1 million. This cash balance and the anticipated cash flow from operating activities will allow us flexibility in operating our business and financing our accelerated investment program that Eli mentioned earlier. We are now ready to take your questions.

[Operator Instructions] The first question is from [ Michael Wu ].

So my first question is, do you guys have any estimate of the month that the revenue you guys got from this quarter because of the manufacturing issue in China and the new kind of shift in orders to you?

Michael, no, we don't have it, but -- we don't have exact number, but we estimate that it is grow the shift back from China to Israel because we got approached by customers that ask us to move it back to Israel, but we don't have -- I don't have exact number.

Okay. That's fine. Do you have any like -- did you see continuing this kind of trend like more customers try to carry about this manufacturing issues in China?

Yes. As I told during my previous comments, I forecast that the shift will continue.

Okay. Great. The second question is, how the manufacturing capacity is running like now? Are you guys in full capacity right now?

Not yet.

Not yet. So like what is the capacity left? I mean, if you can run enough for capacity basis, how many like you can still do?

We adjust our manpower according to the level of POs that we have. And if we hire more employees, we can produce more.

You can do a little bit more?

If it will be justified, we'll hire more employees and will increase our sales by manufacturing more products, yes.

Okay. So then I have another question. So about the new like CapEx, so you said it's totally -- it's $15 million for -- it's not like a 2-year period for the total investment?

No. The $9 million is over 2 years. That's the Phase 1. The $15 million is for the whole program.

Okay. Okay. That's great. So then around the first two years, the $9 million, once you fully invested, when do you expect the capacity will be fully set up and running? Is it like in a stage or you're just like you need to have to wait for 2 years and then get the facility up and running?

It's a very good question. We will grow slowly between now and the end of the program, but there will be a jump in the end of the program.

Okay. So basically, you are like incrementally during this year, maybe you can see some more capacity getting up and running, right? That's my understanding, right?

The capacity right now is dependent upon the manpower. But if we would like to have a breakdown, we have to invest in the new equipment, which we already start the program.

Okay. So basically, you're adding the program, adding more equipment, right? I mean you don't need to wait until the end of 2 years to use the new equipment, right? You can increase the capacity during the time, right?

It's more equipment, but that will replace all the equipment.

Okay. Okay. So what's the difference? Why, I mean...

It's kind of efficiency, quality, less manpower will be required for the new equipment, more automation, more precise, more adopted to the market demand. And be more precise.

Okay. So basically -- also like once you replace the old equipment, you also increase the capacity, right? That my understanding.

Exactly. With the new equipment, we will be able to produce per hour more panels.

Okay. So also increase the efficiency, right?

As I mentioned before, yes.

Okay. Okay. That's great. So do you have any kind of color on the defense contract. Any -- could you give more kind of color on this?

Usually, we don't disclose the name of our defense contractors. On the 20-F, you can see some of the names there and the activity that we mentioned with them. But with all our defense contractors, the market is growing because of the security situation in Europe.

So how -- like I mean, how big is the trend and do you see like how -- what is the amount -- not among, like percentage increase? Do you see the order flow inflows.

As I mentioned, the order flow right now, the backlog is 50% more than we have in the end of last year and the book-to-bill ratio right now is 1.4. So we gained 40% more orders than what we produce.

Okay. That's great. That's great to know. And my last question. So about the inflation pressures, do you guys see any inflation pressure. Can you pass the price to your customer, if you have any like labor extensions?

Yes. Yes. As I mentioned before, there is a difference in the inflation rate between Israel and United States or in United States is easier because inflation in Israel is lower than the inflation in the United States. So it's easily to increase prices in the United States. And in Israel, we do it with more difficulty but we succeed to push the prices up based on the cost of -- the adjustment of the cost.

Sorry, I didn't get it. So you guys be able to increase the price to -- product.

In United States, we do it easily because there is difference in the inflation rate in United States, which is higher than the inflation rate in Israel. In Israel, we do it because it's accepted in Israel, and we do it up to the inflation rate that exists in Israel.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Yaffe to go ahead with his closing statement, I would like to remind the participants that a replay of this call will be available tomorrow on Eltek's website, www.nisteceltek.com. Mr. Yaffe, would you like to make your concluding statement?

Before we conclude our call, I would like to thank all of our employees for their efforts in continuing the company growth. I would like also to thank our customers, partners, investors and the Eltek team for their continued support. Thank you for all for joining us on this today's call. Have a good day.