Eltek Ltd. (ELTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2023 First Quarter 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 they will be referring to forward-looking information in today's presentation and in the Q&A. By its nature, this information contains forecasts, assumptions and expectations about future outcomes, which are subject to the risks and uncertainties outlined here and discussed more fully in Eltek's public disclosure filings. These forward-looking statements are projections and reflect the current beliefs and expectations of the company. Actual events or results may differ materially. We'll also be referring to non-GAAP measures. Eltek undertakes no obligation to publicly release revisions to such forward-looking statements to reflect events or circumstances occurring subsequent to this date. I will now turn the call over to Mr. Eli Yaffe. Mr. Yaffe, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us, and welcome to Eltek's 2023 First Quarter Earning 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 result during 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 also be available on our website at www.nisteceltek.com. The trend of high demand for our company products that we witnessed in 2022 continue into the first quarter of 2023. I'm pleased to report that the efforts of our dedicated employees and the strong demand have result in record sales of $11.5 million during this quarter. Our backlog today is 10% higher than it's -- in the beginning of the year. We are currently experiencing a significant trend we identify in recent years and we have prepared to, the shift back of PCBs manufacture to Western countries. In the segments in which we prepared, mainly the military, defense, aerospace and medical market, this policy of shifting manufacturing back to the Western countries began in recent years due mainly to the security consideration. This trend supported our forecast of sustained high demand and is the reason for our significant efforts to enhance our operation and efficiencies as well as for our ongoing accelerated investment plan. During the first quarter of 2023, we finished issuing orders for all the machines and production lines planned to be purchased as part of the first phase of our accelerated investment plan. Some of these machines are already operational, and all contribute to our production capacity, while the rest -- last machines is scheduled to arrive by the end of 2025. It is important to note that the installation of these machines will take place gradually through this period, resulting in a gradual contribution to our sales and profitability. The increase in our gross profit margin to 26% in Q1 2023 is mainly attributed to the growth of our sales. Our fixed expenses, such as rent, municipal [ tanks ] and insurance, do not vary in the same ratio as sales. As a result, the higher of our sales, the greater our company gross profitability. We ended the first quarter of 2023 with a record pretax income of $1.9 million and net income of $1.6 million. These results and the high profitability during the last quarters of 2023 -- 2022 resulted in high cash flow from operating activity. In light of this, we decided to repay $1.6 million of long-term loans in order to reduce our financial expenses, given the high prevailing interest rates. I will now turn the call over to Ron Freund, our CFO, to discuss our financial results.

Thank you, Eli. I would like to draw your attention to the financial statements for the first quarter of 2023. During this call, I will also discuss certain non-GAAP financial measures. Eltek uses EBITDA as a non-GAAP financial performance measurement. Please see our earnings release for its definition and the reason for its use. I will now go over the highlights of 2023 first quarter. All numbers mentioned are in U.S. dollars. Revenues for the first quarter of 2023 were $11.5 million compared to $9.8 million in the first quarter of 2022. Gross profit increased by 54%, reaching $3 million compared to a gross profit of $2 million in the first quarter of 2022. The increase is mainly due to the increase in revenue and the fixed component of part of the expenses included in cost of revenues. Operating profit amounted $1.6 million in Q1 2023 compared to $0.7 million in Q1 2022. We recorded financial income of $0.3 million during Q1 and $0.1 million in Q1 2022 due to the devaluation of the mix against the U.S. dollar. Profit before income tax amounted $1.9 million in Q1 2023 compared to $0.8 million in Q1 2022. Net profit was $1.6 million or $0.27 per share in Q1 2023 compared to net profit of $0.6 million or $0.11 per share in Q1 2022. EBITDA was $1.9 million compared to $1.1 million in Q1 2022. During the first quarter of 2023, we enjoyed positive cash flow from operating activities of $2.8 million compared to $0.3 million in Q1 2022. As of March 31, 2023, we had cash and cash equivalents of $8 million compared to $7.4 million at the end of 2022. We are now ready to take your questions.

[Operator Instructions] The first question is from Tom Kerr of Zacks Investment Research.

First question is on gross margin. The 26% seems to almost exceed one of your long-term goals or near-term goals. Do you feel that's sustainable in coming quarters or coming years? And can it improve from there?

Yes. We think that we'll achieve this goal, and we are targeting this gross profit margin. We hope that we can improve our efficiency and even reach higher. Although currently, we are satisfied with this percentage.

Okay. On the capital, the accelerated investment plan, kind of where are we in terms of spending? And then related to that, will that show up on the financial statements? Because capital expenditures were $305,000. So where are we on sort of the time line of accelerated investment plan? And where does that spending show up?

Thank you, Tom. As I mentioned before, we commit ourselves already to most of the investment, and it's in the form of PO. So nothing still yet on our books, but the planning is done. Most of the critical machine, we already defined and PO already issued. We start to get some of the machine earlier, and that's result some of our sales increase during Q1. And we can assume that linearly or in the -- it will be ended by the end of 2025. This is the plan.

Okay. And one more question. Any thoughts on paying the remaining debt balances since cash balances have become so high?

I didn't understand your question fully.

Plans to repay the remaining amount of long-term debt.

Yes. So yes, as you saw, we have a ILS 6 million balance of long-term debt. We have a plan for financing the accelerated investment plan. However, we will consider repaying this amount during the current quarter. And besides, whether we stay with the long-term loan or fully pay it, we have unutilized credit lines, so that shouldn't -- this would be a pretty easy decision.

The next question is from [ Michael Wu ].

Congrats for a great quarter. So my first question is can you give some color on the product revenue mix? How -- what is the percentage you have in the revenues from the defense sector?

I didn't analyze it, but I can estimate it. It's approximately 60% is aerospace and defense.

Okay. Great. So any like updates going forward? Like do you have any, on this sector, like any color there?

Sorry. I didn't get your last sentence.

Yes. Just like what's the -- like the trend, do you see any trend on the defense sector?

We believe the defense sector will only grow and will not decline in the coming years.

Okay. Great. So a follow-up question from the capital expenditure. So you said it will be fully invested until like 2025, right?

Yes.

Okay. So it's sort of like a linear investment or -- for all those in accelerated investment plan, right?

Yes. As I said, we commit ourselves and issued PO for the balance of the equipment. That is going to arrive step-by-step between now and the year 2025. Some of the equipment already arrived in Q1 2023. And it's partially reflected in our results.

Okay. Great. Any update on the labor side? Do you have -- like would you be able to enough -- to acquire enough workers for you, guys?

Yes. We decided that in the next months, we will decide if we will continue to grow, the growth only in the facility that we have here or will go to the other facility. Most of -- it seems to me, and I cannot commit it to right now, that we'll give up the site in the North, and we'll focus on one site, because the market is very strong, and we would like to react to the market as fast as possible and not -- and we don't have time to build something that it will take longer. But there is no final decision about it yet. But in the next weeks, we will decide about it.

Okay. So it's clear. Do you have numbers on how many -- like any quantity you have right now like whereas last year, how many you added?

We added approximately 50 employees during 2022, and we maintained the same amount of employees as we were in the end of 2022.

[Operator Instructions] The next question is a follow-up from Tom Kerr of Zacks Investment Research.

Just a quick follow-up on the backlog or the components of backlog. Is it still the majority of flex rigid? Or did those components make a change?

Yes, it's the same mix.

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.

Before we conclude our call, I wish to thank our employees for the continued -- to contribute to Eltek and our critical mission of inspiring innovation for our customers. I would also like to thank all our customers, partners, investors and the Eltek team for their continued support. Thank you all for joining us on today's call. Have a good day.

This concludes the Eltek Ltd. 2023 First Quarter Financial Results Conference Call. Thank you for your participation. You may go ahead and disconnect.