Eltek Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2023 Third 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

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 and 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.

Operator

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.

Operator

Mr. Yaffe, would you like to begin?

Speaker 1

Thank you. Good morning. Thank you for joining us for the Q3 fiscal year 20 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 Q3, followed by the details of our financial results.

Speaker 1

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 the outset, I would like to express our condolences on behalf of the company management and its employee to the families of those skilled in a murderous terrorist attack that occurred on October 7, 2023. Our outs go out to the grieving families and we hope for the speedy recovery of the injured and the safe return of the kidnap soon.

Speaker 1

We also share the grief of the families of the IDF soldiers who were killed in the battles that have begin 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 maintain 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 effects. As of our supply chain, we have implemented several measures including bolstering our stock of acessional raw material, securing advanced deliveries and engaging in active communication with our primary suppliers to ensure continuous flow of resources.

Speaker 1

The ongoing conflict in Israel the critical significance of domestic PCB industry. Such an industry not only offer advanced technological solution, but also produce intrigued circuits tailored to specific defense requirements, employing state of the art technologies and ensuring the highest quality standards. Additionally, it enabled swift delivery to meet the immediate demands to the defense sector. Eltec holds a status of a sessional enterprise as designated by the Israeli government granting us permission to operate around the clock 3 65 days a year as needed. We see that the Israeli Defense Sector Companies are beginning to place orders including those for PCBs.

Speaker 1

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. Constrictionally, 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.

Speaker 1

The orders for this project are received throughout the life of the project. Therefore, we expect a stream of income from these projects 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 countries, mainly in Europe, increased in such a way that the lead time for production were more than double, which caused price to become a secondary factor. As for our Accelerate investment plan, the current situation in Israel may lead to a limited delay in the pace of the employing new machines.

Speaker 1

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 workplace 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 position more easily and increase our production capacity accordingly. And now, Q3 results.

Speaker 1

We ended the Q3 of 2020 3 with revenue of $11,900,000 at a net profit of $2,100,000 For the 1st 9 months of 2023, we had revenue of $34,400,000 $5,000,000 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 the high margin of profitability and try to maximize the consideration of the profitability with operational efficiency consideration. I am glad that this policy has proven itself during the last quarters. With gross profit of $3,700,000 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.

Speaker 1

We are keeping our medium term target of 27% gross margin. During the Q3, the dollar rate against the NIS continued to rise. As a result in the 3rd quarter, we recorded exchange rate income of amount of $200,000 As of September 30, 23, our cash balance amounted to $11,300,000 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 edge risk range from a sharp drop in the dollar exchange rates. I will now turn the call over to Ron Freund, our CFO to discuss our financial results.

Speaker 2

Thank you, Eli. I would like to draw your attention to the financial statements for the Q3 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.

Speaker 2

I will now go over the highlights of the 2023 Q3. All numbers mentioned are in U. S. Dollars. Revenue for the Q3 of 2023 were $11,900,000 compared to $10,300,000 in the Q3 of 2022.

Speaker 2

Gross profit increased by 51% reaching $3,700,000 compared to a gross profit of $2,400,000 in the Q3 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 $2,300,000 in Q3 2023 compared to $1,100,000 in Q3 2022. We recorded financial income of $300,000 during Q3 and $100,000 in Q3 2020 2, mainly due to the devaluation of the NIS against the US dollar. Profit before income tax amounted to $2,600,000 in Q3 2020 3 compared to $1,200,000 in Q3 2022.

Speaker 2

Net profit was $2,100,000 or $0.36 per share in Q3 2023 compared to net profit of $1,000,000 or 0.17 dollars per share in Q3 2022. EBITDA was $2,600,000 compared to 1 $400,000 in Q3 2022. During the Q3 of 2023, we enjoyed positive cash flow from operating activities of $3,600,000 compared to $1,700,000 in Q3 2020 2. The increase is mainly due to the increase in net income. As of September 30, 2020 3, we had cash and cash equivalents of $11,300,000 compared to $7,400,000 at the end of 2022.

Speaker 2

We are now ready to answer your questions.

Operator

Thank you. The first question is from Michelle Wu. Please go ahead.

Speaker 3

Oh, is that me? Yes. Okay. Sorry. Could you just disclose what is the percentage of the military revenue for this quarter?

Speaker 1

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

Speaker 3

Oh, so probably the same, right?

Speaker 1

Yes.

Speaker 3

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

Speaker 1

As we mentioned before, we grow slowly in our capacity based on the presentation that we made a quarter ago. And will gradually by the end of 2025, beginning of 2026, we would like to be in the range of $55,000,000 sets.

Speaker 3

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

Speaker 1

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.

Speaker 3

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

Speaker 1

We don't disclose it.

Operator

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

Speaker 4

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?

Speaker 4

Just trying to get more color on that.

Speaker 2

Yes, it was a very item. It was a very unique quarter. We enjoyed a 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.

Speaker 4

Okay. And on the business mix, any information on the FlexRigid versus Rigid? Is it still vast majority is FlexRigid?

Speaker 2

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

Speaker 4

And that was about 2 thirds or 60% Flex Rigid, correct?

Speaker 2

Yes, correct. Yes.

Speaker 4

Okay. Also any other information on entry into the U. S. Markets? Are you still looking for capacity there?

Speaker 1

Yes, we're still looking for M and A there, but there is nothing to report as of now. Okay. In

Speaker 4

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

Speaker 2

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

Speaker 4

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

Speaker 1

Thank you,

Operator

This concludes the question. The next question is from Shuky Hazan of Hazan Capital Markets. Please go ahead.

Speaker 5

Hi, hello guys. Very good quarter. I wanted to ask about the needs of the IDF Army. Obviously, because of the all the 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

Operator

And if

Speaker 5

we are talking about the situation in Israel, so you at the moment prefer to sell to local security companies than to foreign companies?

Speaker 1

Hi Shuky, 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.

Speaker 1

If it's another customer that the speedy process, they pay the premium as well. We don't differentiate between the 2. Now regarding the 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 Israel even faster and ahead of time to be sure that they will be satisfied.

Speaker 1

Right now, the government when they gave us the Sessional 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.

Speaker 5

Okay, and did you feel the change in the business since the 7 October?

Speaker 1

The answer is yes.

Speaker 5

Okay. Thank you very much.

Speaker 1

Thank you. Good luck. Thank you.

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

Speaker 1

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

Operator

This concludes the Eltek Ltd. 2023 Q3 financial results conference call. Thank you for your participation. You may go ahead and disconnect.

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Key Takeaways

  • In Q3 2023 Eltek posted $11.9 million in revenue and $2.1 million in net profit (first nine months: $34.4 million revenue, $5.0 million profit), reflecting strong top-line growth and operational efficiency.
  • Eltek achieved a 31% gross margin in Q3—above its 27% medium-term target—by selectively accepting high-margin orders amid capacity constraints.
  • Operations have continued smoothly despite the conflict in Israel, leveraging sessional enterprise status to run 24/7 and implementing inventory and supply-chain safeguards.
  • Defense sector demand has surged, with priority given to urgent government orders, and the company expects sustained revenue streams from long-term defense projects.
  • As of September 30, 2023, Eltek held $11.3 million in cash, generated $3.6 million of operating cash flow in Q3, and recorded $0.2 million of FX income while hedging exchange-rate risk.
AI Generated. May Contain Errors.
Earnings Conference Call
Eltek Q3 2023
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