Eltek Ltd

NASDAQ:ELTK

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2024 Second 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 would 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, Mr. Yaffe, please go ahead.

[Eli Yaffe, executive]

Thank you. Good morning. Thank you for joining us for 2024 second quarter 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 quarter 2, 2024. 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.

Today, I would like to address 2 key areas: revenues and operations. I will start with revenues. Since the beginning of 2023, we have [ demonstrated ] consistent growth driven by high demand for our products, timely workforce expansion and ongoing investment in machinery and infrastructure. We actually forecast increased demand and initiate an accelerated investment plan in early 2022, which has already enhanced our capacity and will continue to do so through the end of 2025.

However, in this quarter, we experienced a decrease in revenue and profit compared to the previous period. This decline is primarily due to the significant timing shift of some of our key customers who prioritize orders for PCB with medium technology requirements, resulting in lower price and margins. We did not succeed to maintain our profitable mix from the prior period and orders and more complex, higher-margin PCB were pushed to the end of Q2 '24 and Q3 2024.

Moreover, as mentioned in the previous call, our [ corn ] bottleneck is manpower. During the second quarter, we continue to face production delays due to the manpower-related capacity constraints. During the quarter. We had 59 working days compared to 60 to 90 days in Q2 2023, a decrease of 5%. The shortage of manpower and decrease in workdays prevent us from producing and delivering some of the high-margin PCB orders we had on [ hand ] for Q2 delivery. This [ unfordable ] mix had negatively impacted our short-term financial performance. We finished Q2 with $10.5 million in revenue, gross profit of $1.6 million and gross margin of 16%.

As mentioned earlier, the lower gross margin for the quarter is attributable to the product mix. Manufacturing costs remains consistent with the previous quarter, but the average sales price was lower leading to a decline in gross margin. We remain confident in our long-term strategy and market position. We expect to return to profitability parameters of previous quarters in Q3 and Q4 2024.

As product mix strategies are realigned. As of today, our backlog has increased by 30% since the beginning of 2024. This increase highlights our need to increase capacity immediately, primarily by growing our workforce, which we'll discuss later.

Increase in backlog is due to the strong defense sector demand related to the current situation in our area and the shift back of manufacturing from the East. These 2 factors are major influence in our backlog and future revenues. We estimate that we have not yet seen the full impact of the regional conflict and we anticipate further increase in the defense sector demand for our products in the coming quarters. We continue to focus on securing long-term orders rather than short-term orders. we have also decided that in spite of the high defense sector demand, we will continue to allocate enough capacity to meet the demand of our high-end industrial and medical sectors, and we will try to keep the mix of the service segment as before.

I will now discuss our accelerated investment plan and our action to deal with the management -- with the manpower issues. We are continuing our accelerated investment plan with a significant focus on 3 new coating lines. The first quoting line, which called [ Via Feline ] is already installed and operational. During the quarter, we reviewed the status of our suppliers and confirm that the installation of the remaining 2 coating lines will be installed by the end of 2025. These new lines will increase our capacity, enable the production of more advanced technological products and improve yields.

We are currently in the middle of the transition office -- transition office space within our building to accommodate the required construction for the remaining 2 coating lines. By the end of the second quarter, we had issued [ Orchard ] to all the components of the plan. The balance of payment forecast through the end of 2025 is approximately $8 million. It's important to note that as mentioned previously, this investment is in addition to our regular capital expenditure, which range from $2 million to $3 million per year. Regarding manpower, we are navigating the challenging market with the strong demand for employees.

In response to this demand and our forecast for the increased order flow, we have adjusted our decrement policy, primarily by increasing direct labor salaries. This action has already had a positive effect, and we are now increasing our workforce daily. Our plan is to add about 50 new employees in the coming months and to extend our manufacturing capacity to include an extended [ care ] shift. We expect these measures to help us to meet delivery schedule, accelerate delivery dates and increase revenue. I will now turn the call over to Ron Freund, our CFO, to discuss our financial results.

[Ron Freund, executive]

Thank you, Eli. I would like to draw your attention to the financial statements for the second 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 second quarter of 2024. All numbers mentioned are in U.S. dollars. Revenues for the second quarter of 2024 were $10.5 million compared to $11 million in the second quarter of 2023. Gross profit reached $1.6 million compared to a gross profit of $3 million in the second quarter of 2023. The decrease is due to the decrease in revenue and the unfavorable mix of products sold. Operating profit amounted to $0.4 million in Q2 2024 compared to $1.4 million in Q2 2023.

We recorded a financial income of $0.5 million during Q2 2024, including income from the devaluation of [ Denis ] against the U.S. dollar and interest on our interest-bearing bank deposits. Net profit was $0.8 million or $0.11 per share in Q2 2024 compared to net profit of $1.3 million or $0.22 per share in Q2 2023. EBITDA was $0.10 million compared to $1.7 million in Q2 2023. During the second quarter of 2024, we enjoyed positive cash flow from [ operating ] activities of $1.8 million.

As of June 30, 2024, we had cash and cash equivalents and short-term bank deposits of $18.3 million with no debt outstanding.

We are now ready to answer your questions.

[Operator]

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

[Thomas Kerr, analyst]

Good morning. Can you explain in more detail the timing shift by these customers that go to medium technology? Is that -- what specific reason would they shift to medium technology PCBs instead of traditional complex PCBs?

[Ron Freund, executive]

The reason for this unfavorable mix was the timing of production that was required by our customers. For lower technology than the regular mix. And that [ salad ], we produced more than 40% of region instead of the average of 30%. It was time -- it was a requirement by our customers. And usually, we try to support our customers and change the manufacturing plan according to their requirements.

[Thomas Kerr, analyst]

Okay. And you indicated it will return to more complex PCBs in the third and fourth quarter. Will that mean the traditional gross margin of 27% will be returning?

[Eli Yaffe, executive]

Yes. Tom, it's Eli. Yes, we'll return to the 27% for long term. And as I mentioned before, some of the high-end PCB were pushed to the end of Q2 and to worth in Q3 2024.

[Thomas Kerr, analyst]

Got it. And I noticed that capital expenditures were $5.9 million for the quarter. Is that all related to the accelerated investment program?

[Ron Freund, executive]

Most of it.

[Thomas Kerr, analyst]

Most of it and what can we expect that in the...

[Ron Freund, executive]

Just one correction, the $5.9 million is for the 6 months, not the quarter. In the quarter, we invested $3 million.

[Thomas Kerr, analyst]

Okay. Sorry, I thought that was the other one. Where do you expect that in the second half of the year in terms of capital expenditures?

[Ron Freund, executive]

So as we say, it depends mainly on the timing of installation of machines and delivery. We have a balance of about $8 million regarding the accelerated investment plan to be, paid during the rest of 2024 and 2025. I estimate that during the next half year, we'll spend some somewhere around $2 million. .

[Thomas Kerr, analyst]

Okay. So much of that will be in 2025, then...

[Ron Freund, executive]

Yes. .

[Thomas Kerr, analyst]

One more, the -- are you guys still looking for a presence in North America? Any progress on that?

[Ron Freund, executive]

Yes, we are still looking for a suitable target company. We cannot tell something about it. It hasn't reached a stage we will report something, but we are working with this issue also. .

[Thomas Kerr, analyst]

Okay. Thank you. I'll jump back in the line. Thank you.

[Operator]

The next question is from Michael Wu.

[Michelle Wu, analyst]

First of all, would you mind to disclose the percentage of the revenue mix for the defense sector?

[Eli Yaffe, executive]

The defense sector is approximately 60% -- was 60% in Q3 -- Q2 2024.

[Michelle Wu, analyst]

So it's the same, right, around...

[Eli Yaffe, executive]

Yes. Yes. It does not change. What was changed is the mix of the product within the defense sector. .

[Michelle Wu, analyst]

Okay. So I mean, do you expect the Q3, Q4 will be the same similar like revenue mix?

[Eli Yaffe, executive]

No, the mix is going to change back to 30-70 as we mentioned, not 40-60 as it was as it was in Q2, sorry. .

[Michelle Wu, analyst]

Okay. So we'll go up, let's say, right?

[Ron Freund, executive]

Will go up.

[Eli Yaffe, executive]

High-margin PCBs will go up.

[Michelle Wu, analyst]

Okay. Great. About the CapEx from -- for the next 1.5 years until the end of 2025, would you expect like the total CapEx would be around $10 million, $12 million.

[Ron Freund, executive]

Yes. We expect that it will be around the $10 million.

[Operator]

[Operator Instructions] The next question is from Tom Kerr of Zacks.

[Thomas Kerr, analyst]

Just one follow-up on the manpower issue. I couldn't quite hear the phone line was a little blurry, but did you say you will be hiring 50 people and maybe just explain the manpower issue one more time.

[Ron Freund, executive]

Right now, the current situation in the manpower labor market in Israel is very tough. So we increased in July 1 to increase salary of direct employees in Eltek. And by doing it, we start to absorb more people to work with us. I'm speaking about direct employees. And the plan is to increase the manpower by 50 people, [ Five old ].

[Eli Yaffe, executive]

And we are hoping to do it by the year end. It's a very tough market, but our steps shown performance. That means that once we raise the salaries of direct labor, we could [ tribute ] more employees, and we are retributing on a daily basis.

[Thomas Kerr, analyst]

And are those all primarily manufacturing employees? Or are there other areas?

[Eli Yaffe, executive]

Manufacturing employees.

[Ron Freund, executive]

Direct employees and manufacturing employees, yes.

[Operator]

The next question is from Ron Su.

[Unknown Analyst]

First question is regarding this potential future deal in North America, how are you going to finance these kind of deals? Do you consider like future offering as you did in the $16 per share offering? Or do you consider financing with bank loan or change of shares? This is the first question. Second question is, do you think that the changes in the mixture of PCB complex products that you can compensate on even the revenue and the profit. So that in the total year, you will reach your -- I don't know if it's target because you don't publish target, but to compensate even more for the 27% gross margin and for even higher revenue than previous quarters?

[Eli Yaffe, executive]

So in regard to your first question, any financing plans for the purchase will depend, of course, on the scope of acquisition and the form of financing that will be discussed and agreed between the parties. But at this point, our plans are to try and finance the purchase with the cash we have on hand. And by raising debt, we do not intend at this stage to raise additional capital for this purchase.

[Ron Freund, executive]

Regarding your second question, Ron, regarding the mix of product in Q2, as I said in our PR, the mix of the quarter contained mortgage requirement that results lower prices and margins, but the average normal average is 30% rigid PCB and 70% rigid-flex with high margins. But this quarter, in quarter 2, the mix was contained 42%, more precisely, 42% of rigid PCB with low margin and 58% high-end PCB with high margin. And we agreed to receive and produce this order since we have long-term relationships with our key customers. And when there is a demand for change priorities, we support our customers and change our manufacturing plan accordingly. And that's the reason that we know that it was an event because of the situation in the defense sector in Israel, and we support them.

But for long term, we still focused 27% gross margin.

[Eli Yaffe, executive]

And as for the balance of the year, we don't give guidelines, as you probably know. We believe that we will make better than this quarter. And at this point, I will stop.

[Operator]

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 the website. Would you like to make a concluding statement?

[Eli Yaffe, executive]

Before we conclude, I want to express my gratitude to our employees and their unwavering dedication and executing our strategy. I also extend my thanks to our customers, partners and investors for their ongoing support.

Thank you all for joining today's call. Have a great day.

[Operator]

Thank you. This concludes the Eltek Limited 2024 Second Quarter Financial Results Conference Call. Thank you for your participation. You may now go ahead and disconnect.