Eltek Ltd. ($ELTK)

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2025 Annual and Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before I turn over the call 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. Thank you for joining us for our 2025 annual 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 the principal factors that affected the results during 2025. After our prepared remarks, we'll 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 was also available on our website. Revenue for 2025 totaled $51.8 million, representing an 11% increase compared to 2024. This growth reflects the company's strategic accelerated investment program, which is the beginning of our bear fruits, also not yet its full potential. It will be elaborate on this shortly -- I will elaborate on this shortly. During the year, we faced several operational challenges, including the relocation of the machinery and production lines within the facility to prepare for the installation of the new plating lines, difficulties in recruiting employees, challenges in retaining highly experienced personnel and a significant depreciation of the U.S. dollar exchange rate, which adversely affect the dollar-denominated profitability we report by approximately $2.2 million compared to 2024 profitability. I will now address each of these areas in more detail. As noted, we concluded the year with revenue approaching $52 million. At the time we approved the accelerated investment plan, Eltek was generating average annual revenue of approximately $37 million. The subsequent increase in revenue reflects strong demand for the company products alongside the substantial investment made in the machinery and equipment over the recent years. As previously communicated, we are targeting annual revenue installed capacity in the current plant of $60 million to $65 million at current market prices. During the year, we encountered significant operational constraints that affected our ability to meet customers' delivery schedules. This situation, combined with the demand level exceeding domestic production capacity in Israel, led to increased competition from overseas players seeking to capture a share of the local demand. We continue to observe strong demand for our products, including from international customers, driven by limited manufacturing capability in the Western countries. We are steadily improving delivery performance for our domestic customers, recognize that we -- that many Western countries, including Israel, aim to preserve local manufacturing capability. At the same time, we are actively expanding our presence in overseas market, particularly in the United States to increase order volume from these regions. Turning to operations. We are making steady progress on our investment program. The core component expected to drive meaningful improvement in output and quality are the 2 new plating lines. While they do not represent the majority of the accelerated investment budget in financial terms, the impact on production is highly significant. The first line arrived to the facility at the beginning of 2026, and it is currently in the assembly phase, which was interrupted by the current tension situation in Israel. We remain hopeful that the ongoing conflict will not result further delay in completing the installation. Following the installation, an extensive qualification process will be required to certify the lines across the full range of our product portfolio. Throughout the year, we also addressed the need to recruit additional employees, particularly engineers to support the extended base of the machinery and equipment as well to manage the operational complexities created by reallocation of production lines and the resulting impact of ongoing manufacturing. In addition, we experienced the departure of several highly acknowledged employees, including retirements. These operational challenges weighed on overall efficiency. We continue to make progress in advancing the process of bringing foreign workers from abroad in order to support our workforce needed as the company expands. Finally, the depreciation of the U.S. dollar resulted in the increase of approximately $2.2 million is reported in the NIS-denominated expenses compared to '24, adversely affecting both gross and operational profits. It's worth noting that part of our current backlog was priced based on higher exchange rate; therefore, margin on these orders will remain below the level originally anticipated in the same -- in the time of the quotations. Despite these challenges, we remain confident in the company's business and in our ability to return to healthy profitability levels upon completion of the investment program, installation of the new plating lines and stabilization of the production. In line with this long-term commitment, we extended the lease agreement for our manufacturing facility through the end of the year 2039. As part of this expansion, we received a payment intended to partially offset the company investment in the facility. This amount will be amortized over the lease term and will moderately reduce annual rental expenses. 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 year ended December 31, 2025, and for the fourth quarter of 2025. 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 reasons for its use. I will now go over the highlights of 2025. All numbers mentioned are in U.S. dollars. Revenues for the year ended December 31, 2025, totaled $51.8 million compared to $46.6 million in 2024. Gross profit was $8 million compared to $10.3 million in 2024. Gross margin was 15% compared to 22% in 2024. The decline in gross profit and gross margin was primarily attributable to higher NIS-denominated expenses resulting from the depreciation of the U.S. dollar in 2025 as well as reduced production efficiency. Operating profit amounted to $2.3 million in 2025 compared to $4.4 million in 2024. In 2025, we recorded financial expenses of $1.3 million compared to financial income of $0.7 million in 2024. This change was primarily due to the depreciation of the U.S. dollar against the NIS. Net profit was $0.8 million or $0.12 per share in 2025 compared to net profit of $4.2 million or $0.63 per share in 2024. EBITDA was $4.5 million in 2025 compared to $5.9 million in 2024. During 2025, we generated positive cash flow from operating activities of $0.6 million compared to $4.5 million in 2024. As of December 31, 2025, we had cash and cash equivalents and short-term bank deposits in the total amount of $12.1 million. I will now go over the highlights of the fourth quarter of 2025 compared with the fourth quarter of 2024. Revenues for the fourth quarter of 2025 were $13.2 million compared to $10.8 million in the fourth quarter of 2024. Gross profit amounted to $1.2 million in the fourth quarter of 2025 compared to $1.9 million in the fourth quarter of 2024. Net loss in the fourth quarter of 2025 was $0.3 million or $0.05 per share compared to net profit of $23,000 in the fourth quarter of 2024. EBITDA was $0.7 million in the fourth quarter of 2025 compared to $0.8 million in the fourth quarter of 2024. We are now ready to take your questions.

[Operator Instructions] The first question is from Mark Sharogradsky of Kepler Capital.

The first question I have is the gross margin for this quarter was really low, like 9%, if I collect it correctly. So when do you expect to see some improvement on this result because revenue was pretty okay, but the gross margin was really low. So how do you see the situation?

Mark, as we previously reported, we expect to complete the integration and installation of the new plating line, which arrived at the beginning of '26 -- by mid-'26. The line is expected to streamline the core manufacturing processes and expand the production capacity. Following the completion of the installation, we will begin qualification process and it's expected to continue through the remainder of 2026. During this period, we plan to qualify product families on a gradually phased basis, enabling the phased transition of the production to the new line until fully comply and full qualification for all company products is completed. We also expect that at that time, our production process will be stabilized, which should contribute to the improvement of the gross margin. And as we noted in the past, each additional dollar of revenue contributes meaningful to the gross profit and of course, to the net income. Therefore, the answer to your question is increasing our sales volume is expected to have significant positive impact on the profitability and improve the gross margin.

Yes. But I'm trying to understand that even before you had gross margins of 27% to 29%. And now I understand the dollar situation and everything, but why such sharp drop on the margins even now, even before those lines are installed?

Mark, this is Ron. So on the first quarter, the depreciation of the U.S. dollar continued, and this caused us significant additional NIS-denominated expenses to be dollar-reported amounts to increase. In addition, the same as was in prior quarters, we have issues with efficiency in production. And we expect that as Eli said previously, once we will achieve increased sales volume, gross margin will return to its positive prior margins.

And can you guys speak a little bit about the pricing dynamic because everyone saw this USD depreciation, but I was also today on PCB calls and they said they are raising prices now to adjust this depreciation to work on normal gross margin. So how do you see the pricing dynamics going forward?

The pricing dynamic is that we immediately update our pricing system to reflect the new depreciation and the new exchange rate of the dollar. But as I mentioned before, we have quotations on the way that was based on long-term proposals that was based on dollar to NIS ratio that is higher than today, and we will get this proposal -- we will get this purchase orders, and we will have some of our basket in the future is going to be below the expected volume of our proposals today.

And Mark, it is not just quotation. We have actually orders that were given and received in a higher dollar rate. So in these orders, we expect a lower margin than anticipated for new orders to be received in the next months.

Of course, I understand because -- so if you will adjust those orders to the new USD -- NIS exchange rates, then do you expect to see some improvement of this adjustment in the next quarter, in Q1 or in Q2?

As we told before, usually, we have 1 to 2 quarters backlog, and we didn't wait till this call. We already updated our pricing system. So we expect to see it within 4 to 5 months to see some increase.

No, because I assume that you also updated it before because their problems began already in Q3.

Yes, you are right. But as in the fourth quarter, the depreciation continued, we had to update it again.

[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 our website. Mr. Yaffe?

As we conclude, I would like to thank our investors for their support and confidence in the company. Your long-term presence and the belief in our strategy enables us to continue investing in our capability and pursuing our growth objectives. I also want to recognize the commitment of our employees; their professionalism, adaptability and dedication throughout the period have been critical to maintaining our operations and advancing our strategic initiatives. Thank you for joining us today. Have a good day.

This concludes the Eltek Ltd. 2025 Financial Results Conference Call. Thank you for your participation. You may go ahead and disconnect.