Eltek Ltd. (ELTK) Q2 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Eltek Ltd 2023 Second Quarter Financial Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [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 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. Please go ahead.

Thank you. Good morning. Thank you for joining us for our second quarter fiscal year 2023 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 our results during the second 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. In the second quarter of 2023, revenue were $11 million due to the continued strengths in the aerospace and the defense end market. The trend of high demand for our company products, which we witnessed in 2022 continues into 2023. The efforts of our dedicated employees and the strong demand enabled us to meet our sales target. Also the second quarter usually has fewer working days due to the holidays. As we look into the rest of 2023 and into 2024, we see an increased demand in the semiconductor segment, which we hope will be translated into purchase orders and increased sales. During the second quarter of 2023, we repaid the balance of our bank loans to the amount -- in the amount of $1.8 million. And as of June 30, 2023, we had no bank loans outstanding. The decision to repay our bank loans was based on our strong cash flows and the prevailing high interest rates. The erosion of the shekel against the dollar continued during the second quarter of 2023 and allowed us to record financial income. This erosion has continued into the third quarter of 2023. I would like now to expand a little bit on our strategy. The high-end PCB sector is expected for substantial growth in the upcoming years driven primarily by the defense, aerospace and medical device domain. The defense sector is driven by the increased complexity and sophistication of military electronics. The aerospace industry, which we are active in, is expecting growth and creating new opportunities for us such as satellite and other spacecraft that require complex electronic systems with high-end and reliable PCBs. The medical device industry is in a position of steady growth with global annual sales forecast rise by over 5% a year. These projections reflect increasing demand for innovative new devices. We believe that the high-end PCB sectors is expected to grow significantly in the coming years with these sectors being major drivers of the growth. The key trends that are expected to shape the future of the PCB industry in these sectors include the increasing demands of high-performance PCBs, miniaturization, growing importance of reliability and safety and the increasing demand for sustainability. In light of this, we continue to invest in our growth. In recent years, we have invested heavily in improving profitability and operational efficiency. At the beginning of 2022, we decided on an accelerated investment plan to expand the capacity and efficiency of our manufacturing lines, which will enable increasing sales. At the same time, we invested a lot of efforts on increasing our workforce. As of today, we have increased our workforce by 24% since the beginning of 2022. Our strategy to increase growth also include M&A activity. Our initial goal in this area is an acquisition of a company with manufacturing capacity in North America that will allow us to expand our activities in this territory. Earlier this month, we were informed by the Ministry of Environmental Protection that it rejected our claim to reduce the clean air penalty imposed on us on January this year. Therefore, we have provided the full allowance for the penalty in our Q2 interim financial statement and record a onetime expense in the amount of $350,000. We have decided to file an administrative appeal, which we hope will reduce the penalty amount. 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 statement for the second 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 reasons for its use. I will now go over the highlights of the 2023 second quarter. All numbers mentioned are in US dollars. Revenues for the second quarter of 2023 were $11 million compared to $9.1 million in the second quarter of 2022. Gross profit increased by 76%, reaching $3 million compared to a gross profit of $1.7 million in the second quarter of 2022. The increase is mainly due to the increase in revenues. Operating profit amounted to $1.4 million in Q2 2023 compared to $0.3 million in Q2 2022. We recorded financial income of $0.2 million during Q2 2023 and $0.6 million in Q2 2022 due to the devaluation of the NIS against the US dollar. Profit before income tax amounted to $1.6 million in Q2 2023 compared to $1 million in Q2 2022. Net profit was $1.3 million or $0.22 per share in Q2 2023 compared to net profit of $0.8 million or $0.13 per share in Q2 2022. EBITDA was $1.7 million compared to $0.8 million in Q2 2022. During the second quarter of 2023, we enjoyed positive cash flow from operating activities of $0.1 million compared to $0.5 million in Q2 2022. The decrease is mainly due to an increase in trade receivables and inventory levels, which derives from the increase in revenues. As of June 30, 2023, we had cash and cash equivalents of $8.3 million compared to $7.4 million at the end of 2022. We are now ready to answer your questions.

Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Tom Kerr of Zacks Investments. Please go ahead.

Good morning. Can you talk about the current capital improvement plan and where you are in the spending on that? I think the total was $15 million. Is -- where are we in that? And when should that be completed?

Hi, Tom. Good morning. Yes, I can elaborate about it. As we spoke about in the previous call, we had put POs for most of the equipment. And the balance of the equipment is going to arrive in '24 and '25. Some of the equipment is going to arrive between now and the end of the year 2023. You don't see it in our books yet, but the POs were already issued to the manufacturers in Europe.

Okay. And what does that mean? Where do we stand in terms of revenue capacity? I think last year it was in the $40 million to $55 million range. So has that increased recently?

No, we're still in this range. We hope to be in $55 million when we'll -- capacity, production capacity when we'll finish these capital investments.

Okay. And then can you provide more color on the entry into the US market? Did you say you were looking for acquisitions, have found one or just still in the process of searching?

Hi, Tom. No, we still did not find one. We are in the stage of searching and trying to find a target company which will be good for us to acquire.

Okay. One more question. Do you -- have you outlined gross margin goals for the rest of this year or perhaps in the next year, have you set targets for what gross margin could reach?

Yes, we -- our target for this year will be around the 27% as was in the first half of 2023. And we hope that with increased sales, it will be even higher. But as of now, 27% is our target.

Okay. Thanks. That's all the questions I have for this morning.

Thank you, Tom.

Thank you, Tom.

[Operator Instructions] The next question is from Shuki Hazan of Hazan Capital Markets. Please go ahead.

Hi. Hello. I wanted to ask, the operating income was $1.4 million after deduction of $350,000?

Yes.

Yes, you're right, Shuki.

Okay. And let's say, the third quarter, if I compare it to the second quarter, in the third quarter, there's more working days than the second quarter, I'm correct?

Yes, you are.

I understand. Okay. And about your production capacity in 2023, let's say, for the second half of this year, the maximum capacity that you can produce is around $12 million, 12.5 million, $13 million. Do you have any range that is the maximum that you can sell in a quarter, in the next two quarters, the maximum that you can sell?

The range of our sell capacity depends upon the mix is $11 million to $13 million per quarter.

$11 million to $13 million?

$11 million to $13 million, 1-3, yes.

Yes. Okay, okay. I understand.

But it depends upon the mix of the products.

I understand. Okay. Thank you very much and good luck. Thank you.

Thank you, Shuki

Thank you, Shuki

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, please go ahead.

So in closing, I would like to thank our employees, our customers and our investors for your continued support as we continue to move forward as a company. Thank you again. Thank you for joining us. Take care.

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