Eltek Ltd. (ELTK) Q3 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Eltek Ltd. 2024 Third Quarter Financial Results Conference Call. All participants are 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 question-and-answer session. 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'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 third quarter fiscal year 2024 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, 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. We concluded the third quarter of 2024 with a record revenue totaling $13.5 million. During this period, self-defense market segment represents 64% of our total sales, while the industrial market segment contribute 14% and the medical market segment accounted for 7%. We continue to maintain strong backlog and anticipate steady growth in demand for the high-end products and in line with our growth strategy. We do not expect any significant change in market trends and believe that critical sectors such as medical and defense will continue to generate strong demand for PCBs due to the ongoing trade conflict between the U.S. and China and the various tensions worldwide. Demand for our products in India remains robust and continue to grow. In the Industrial segment, we have observed a slowdown due to the reduced demand from our primary customers, stemming from changes in its end customers business. We anticipate a recovery in this segment in 2025. We are initiating co-production partnership with specialized companies overseas to better meet customers demand, reduce lead time and improve pricing. However, there is not yet been significant progress on these sales through this partnership. Gross profit for the third quarter was $3.5 million, resulting in a gross margin of 26%. This quarter's gross profitability was affected by the return to the typical product mix compared to our second quarter, as well as the decline in profitability due to the adjustment in production worker wages, reflecting the current labor market condition in Israel. We anticipate a gross profit margin of 26% to 29% in the long, medium term. Operationally, we have made significant progress. We are in the final stage of opening a new production all dedicated to the solder mask application department, which is part of our accelerated investment program with an investment of approximately $2 million. This space was created by reproposing office space and storage area, which were reallocated to other smaller areas. Our border investment strategy prioritized machinery and require less manpower for operation, but demand higher technical skills. During the quarter, we stabilized our workforce by hiring approximately 13 new employees and increased wages level to direct employees only in order to support recruitment. We -- continues in this process in the coming quarters to prepare for the integration of additional machinery arriving next year as part of our accelerated investment plan. We have also initiated an ERP project, which is not part of the accelerated investment program to replace most of the company computing systems. This initiative aims to streamline various processes and consolidate numerous existing satellite systems into the new ERP system, a project expected to spend approximately 2.5 years. Our Board of Directors adopted the dividend distribution policy. Under this policy, following the filing of the company's annual financial statement, the Board will be declared dividend distribution of up to 25% of the company net profit. Distribution will take in consideration in the company's financial position and cash flow needs. 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 2024. 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 2024 third quarter, all numbers mentioned are in U.S. dollars. Revenues for the third quarter of 2024 were $13.5 million, compared to $11.9 million in the third quarter of 2023. Gross profit for Q3 2024 totaled $3.5 million. compared to $3.7 million in Q3 2023. This decrease primarily reflects a more favorable product mix in Q3 2023 that included some orders with a lower material cost component. Additionally, at the beginning of Q3 2024, we have adjusted wages for our manufacturing employees, prompt by shift in the local labor market, which contributed to the decline in gross margin. Operating profit for Q3 2024 was $1.9 million compared to $2.3 million in the same period last year. We recorded financial income of $0.1 million in Q3 2024 compared to $0.3 million in Q3 2023, mainly driven by changes in the net exchange rate relative to the U.S. dollar and interest earnings on our cash reserves. Profit before income tax stood at $2 million in Q3 2024, down from $2.6 million in Q3 2023. Net profit for Q3 2024 was $1.7 million or $0.25 per share, compared to $2.1 million or $0.36 per share in Q3 2023. EBITDA amounted to $2.3 million in Q3 2024, compared to $2.6 million in Q3 2023. In the third quarter of 2024, we generated positive cash flow from operating activities of $1.6 million compared to $3.6 million in Q3 2023. The decrease is primarily attributed to higher sales, leading to an increase in trade receivables. As of September 30, 2024, our cash balance sheet totaled $18.1 million. We are now ready to answer your questions.

Thank you. If there are any questions, Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Michael Mo. Please go ahead.

Hi, I have a question about the defense sector orders. It seems, obviously, this quarter is a little bit higher. Going forward, what do you expect the revenue mix like 60% or 64%. Can you give any color on this?

Yes. Thank you, Michael. As I mentioned before, the increased backlog mainly due to the strong defense sector, and we expect that the defense sector, the profitability of its products will not go down. It may will go up.

Okay, thanks. So the second question is about the CapEx for the new facility. You said it's going to be opened by the end of this year. So what is the left CapEx for this year and then next year? Do you have any guidance?

Yes. So basically, what we are opening in year-end in 2024 is part of the accelerated investment plan, and it cost us $2 million and it was already paid. What is left in this accelerated plan is around $7 million to $8 million to be paid during 2025. And it will, of course, include the coating lines that will arrive during 2025.

So I just want to know what the capacity, we will be able to generate by the end of this year and next year, like extra capacity?

So we expect that the production capacity that will serve sales of approximately $55 million to $65 million by the end of the accelerated investment program.

By next year, right? But the full program ends, right?

Yes.

Okay, great. Thank you very much.

Thank you.

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

Good morning, guys. The -- can you discuss more the worker labor issue in the cost of goods sold. Does that just mean there was a shortage of workers and you had to pay higher salaries? Or what else does that mean?

Hi, Tom, good morning. So yes, you are right. We experienced the need to increase workers' salaries in order to keep them working in our facility and also to recruit more employees. The current situation in Israel in Central of Israel is that there is a high demand for employees. And we had to increase the level of salaries in order to keep their workforce and also to recruit new ones.

And that will continue going forward?

So we believed that we reached the level that is good. We don't expect to increase more of the salaries at least not that we see any such need at this stage.

Okay. And a big picture question. You mentioned you were exploring opportunities outside of defense and medical markets last quarter. Any progress on that? Or anything of note there?

So I don't recall that statement, but we are operating in the defense, in the aerospace, industrial and medical. These are the three main segments. We are also trying to increase our operation in the commercial side. We don't expect to move or to expand our operations in other areas.

Tom, it's Eli. I would like just to clarify that the increase in wages, we already tested and the customers is expected to pay for all these differences.

Okay. So you passed that through, right, right?

Yes, slowly we pass it, yes.

Yes. Okay. And one more question. On the accelerated investment plan, there's $8 million left and you said $2 million will go to this new facility and the remaining $6 million in 2025, refresh my memory on what that goes to.

No. Maybe I was not understood. So the $2 million we already paid. What is left in the accelerated investment is around $7 million to $8 million. It is mainly on the two coating lines left, which should arrive and installed during 2025.

Okay, that makes more sense. Okay, thank you. I'll get back in line.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Yaffe, there is a follow-up question from Kerr Tom of Zacks. Please go ahead.

Hello, just one more quick one. On the fourth quarter, are we still expecting similar strong revenue growth? And when you -- and secondly, you said gross margins returned to 28%, 29% range. Did that mean fourth quarter and beyond?

So Thomas, we don't give any forecast as to next quarter revenues, no next year revenues. And what Eli said is that we forecast that in the mid, long-term, our gross margin will be between 26% to 29% and that reflects our understanding of the situation of the wages, price increases, et cetera.

Okay. Medium to long-term. Okay, I thought you said short-term. Okay, thank you. That's all I have.

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, would you like to make your concluding statement?

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

This concludes the Eltek Ltd. 2024 third quarter financial results conference call. Thank you for your participation. You may go ahead and disconnect.