Eltek Ltd. (ELTK) Q3 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2023 Third Quarter Financial Results Conference Call. All participant are at present in listen-only mode. Following managements 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 forecast 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 will 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, would you like to begin?

Thank you. Good morning. Thank you for joining us for the third 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 a summary of the principal factors that affected our results during the third 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 the outset, I would like to express our condolences on behalf of the company management and its employee to the families of those killed in a murderous terrorist attack that occurred on October 7, 2023. Our hearts go out to the grieving families and we hope for the speedy recovery of the injured and the safe return of the kidnapped soon. We also share the grief of the families of the IDF soldiers who were killed in the battles that have begun taking place recent weeks and wants to wish wounded a full recovery. We pray for the peace of the soldiers who are still fighting during these days. The company is currently operating smoothly and maintains standard activity levels. Most of our employees are consistently reporting to work and the impact of the war on the attendance has been very minimal to no effect. As of our supply chain, we have implemented several measures, including bolstering our stock of essential raw material, securing advanced deliveries and engaging in active communication with our primary suppliers to ensure continuous flow of resources. The ongoing conflict in Israel underscored the critical significance of domestic PCB industry, such an industry not only offer advanced technological solutions, but also produce intricate circuits tailored to specific defense requirements, employing state-of-the-art technologies and ensuring the highest quality standard. Additionally, it enables swift delivery to meet the immediate demands to defense sector. Eltek holds status of Essential Enterprise as designated by the Israeli government granting us permission to operate around the clock, 365 days a year as needed. We see that Israeli defense sector companies are beginning to place orders, including those for PCBs. We remain committed to our pricing strategy and the selection of the orders we received with the goal of optimizing our production capability, while ensuring strong profitability. [Contextually] (ph), we give priority to higher profitability income purchase orders, including those from other sectors and manage our orders backlog accordingly. Orders received directly from government entities with the requirements for immediate delivery take precedence to promote production. Looking ahead, we believe that the long-term increased demand trend in defense sector worldwide will continue. We are involved in several long-term customer projects. The orders for this project are received throughout the life of the project. Therefore, we expect the stream of income from this project throughout the coming years. We are also experiencing the continued decrease in demand from customers in European countries due to an increased demand for defense products. At this time, the demand for PCB products in Western country, mainly in Europe, increase in such a way that the lead times for production were more than double, which caused price to become a secondary factor. As for our accelerated investment plan, the current situation in Israel may lead to a limited delay in pace of the employing new machines. As of today, we don't see any delays. In addition to the investments in the production equipment, we are also working to upgrade our engineering software to allow us to fully respond to the need of our customers. During the recent months, we felt that the trend of war place market has changed, and there is a greater number of individuals applying for employment interviews. We hope that this trend will strengthen our -- and will allow us to fill open positions more easily and increase our production capacity accordingly. And now our Q3 results. We ended the third quarter of 2023 with revenue of $11.9 million and a net profit of $2.1 million. For the first nine months of 2023, we had revenue of $34.4 million and $5 million net profit. The high profitability is a result of our pricing and purchase order acceptance policy. Due to the high level of demand and the limitation of production capacity, we made sure to choose the orders with high margin of profitability and try to maximize the consideration of the profitability with operational efficiency consideration. I'm glad that this policy has proven itself during the last quarters with gross profit of $3.7 million in Q3 and a gross margin of 31%, the high gross margin is due to an excellent mix of products we sold during this quarter. We are keeping our medium-term target of 27% gross margin. During the third quarter, the dollar rate against the NIS continued to rise. As a result, in the third quarter, we recorded exchange rate income of amount of $0.2 million. As of September 30, 2023, our cash balance amounted to $11.3 million. We have invested most of the balance in interest-bearing deposits. We also decided to hold a substantial part of this balance in NIS to hedge risk range from a sharp drop in the dollar exchange rate. 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 third 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 the 2023 third quarter. All numbers mentioned are in U.S. dollars. Revenues for the third quarter of 2023 were $11.9 million compared to $10.3 million in the third quarter of 2022. Gross profit increased by 51%, reaching $3.7 million compared to a gross profit of $2.4 million in the third quarter of 2022. The increase is mainly due to the increase in revenue and the increase in gross margin, as Eli mentioned before. Operating profit amounted to $2.3 million in Q3 2023 compared to $1.1 million in Q3 2022. We recorded financial income of $0.3 million during Q3 and $0.1 million in Q3 2022, mainly due to the devaluation of the NIS against the U.S. dollar. Profit before income tax amounted to $2.6 million in Q3 2023 compared to $1.2 million in Q3 2022. Net profit was $2.1 million or $0.36 per share in Q3 2023 compared to net profit of $1 million or $0.17 per share in Q3 2022. EBITDA was $2.6 million compared to $1.4 million in Q3 2022. During the third quarter of 2023, we enjoyed positive cash flow from operating activities of $3.6 million compared to $1.7 million in Q3 2022. The increase is mainly due to the increase in net income. As of September 30, 2023, we had cash and cash equivalents of $11.3 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 Michelle Wu. Please go ahead. Michelle, do you have a question?

Oh, is that me?

Yes.

Okay. Sorry. Could you just disclose what is the percentage of the military revenue for this quarter?

We believe that it's around 60% of our sales.

It's probably the same, right?

Yes.

Okay. Going forward, what is capacity, can you give any update about the capacity? Can the capacity meet your demand or any labor-related like issues?

As we mentioned before, we grow slowly in our capacity based on the presentation that we made a quarter ago and we'll gradually by the end of 2025, beginning of 2026, we would like to be in the range of $55 million sales.

Okay. So your -- just like your current -- I mean you current capacity is enough or not to meet your demand?

The capacity -- the installed capacity that we have right now is more than what we sell. We have the ability to grow more and we grow gradually based on the backlog of purchase order that we get, limited by the capacity that we will have when we will touch the capacity limits. Right now, we don't touch the capacity limit yet.

Okay. Great. That's great. Just last question. What is the outlook for the military segment for the next year? Have you any outlook?

We don't disclose it.

Okay. Thank you very much. Thank you. Appreciate it.

Thank you, Michelle.

The next question is from Tom Kerr of Zacks Investment. Please go ahead.

Good morning. Several questions. On the gross margins that were very strong at 31%, but your outlook is still for 27%. Was it just an unusual quarter? Or is that 31% not sustainable? Just trying to get more color on that.

Yes, it was a very high Tom. It was a very unique quarter. We enjoyed the favorable mix of sales, which included sales with relatively low material component and high technological added value. So we don't think that we will keep this gross margin for the next quarter, and we didn't change our estimate or forecast for the 27% gross margin.

Okay. And on the business mix, any information on the flex-rigid versus rigid? Is it still the vast majority is flex-rigid?

No, it is the same. The same ratios that were in the last several quarters that will remain also for this quarter and for the next ones.

And that was about two-thirds or 60% flex-rigid, correct?

Yes. Correct.

Okay. And also, any other information on entering the U.S. market? Are you still looking for capacity there?

Yes, we're still looking for M&A there, but there is no -- nothing to report as of now.

Okay. And defense -- and do you guys have a share buyback authorization with all your strong free cash flow? I was just curious.

No, we don't have any such policy. And as of now, we do not intend to make such a plan.

Okay. I think that’s all I have. Thank you.

Thank you, Tom.

[Operator Instructions] This concludes the question -- the next question is from Shuki Hazan of Hazan Capital Markets. Please go ahead.

Hi. Hello, guys. Very good quarter. I wanted to ask about the needs of the IDF Army, obviously, because of the war, there's urgent needs for components. And I want to know about the pricing of the urgent needs. And do you think the gross margin of these needs is higher than normal. And if we are talking about the situation in Israel, so you, at the moment, prefer to sell to local security companies than to foreign companies?

Hi, Shuki. Eli speaking. Regarding our policy for speeding process, it's the same policy. We didn't change the policy. For speeding process, we have some surcharge, and we keep the same policy even in these days. So if the customer is IDF and they ask for speedy process, they pay the premium. If it's another customer, they need speedy process, they pay the premium as well. We don't differentiate between the two. Now regarding preference of IDF versus other customers, no, we don't differentiate. We continue to work because we would like to keep our customers happy. And a matter of fact in order to reduce fears of our customers, we make delivery to our customers outside Israeli, even faster and ahead of time to be sure that they will be satisfied. Right now, the government when they gave us the Essential Enterprise status, they can force us to have precedence or things that we have to do on top of everything and higher priority, but this is limited up to 2% to 3% of our capacity. So it's not affecting our business.

Okay. And did you feel the change in the business since the 7th of October.

The answer is yes.

Okay. Thank you very much. Good luck.

Thank you.

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 participants that a replay of this call will be available tomorrow on our website. Mr. Yaffe, would you like to make your closing statement?

In closing, I would like to thank the company employees and the management team for their hard work during this time and to thank our customers and our investors for their continued support.

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