Eltek Q1 2023 Earnings Call Transcript

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May 18, 2023

Key Takeaways

  • Record sales of $11.5 million in Q1 2023 (up from $9.8 million a year ago) and a backlog 10% higher since the start of the year underscore continued strong demand.
  • The strategic shift of PCB manufacturing back to Western markets—particularly in military, aerospace, defense and medical segments—drives sustained high demand due to security considerations.
  • Eltek has issued purchase orders for all Phase One machines in its accelerated investment plan; equipment arriving through end 2025 is already incrementally boosting production capacity.
  • Gross profit margin improved to 26% in Q1 2023 as fixed costs were spread over higher sales, leading to an operating profit of $1.6 million (vs. $0.7 million in Q1 2022).
  • Robust operating cash flow of $2.8 million enabled repayment of $1.6 million in long-term debt, leaving cash and equivalents at $8 million as of March 31, 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Eltek Q1 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Limited 2023 First Quarter Financial Results Conference Call. All participants are at present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.

Operator

Before I turn the call over to Mr. Eli Yafed, Chief Executive Officer and Roan 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 forecasts, 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.

Operator

We'll also be referring to non GAAP measures. LTACH 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.

Operator

Yaffe, please go ahead.

Speaker 1

Thank you. Good morning, everyone. Thank you for joining us, and welcome to Eltek's 2023 Q1 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 our principal factors that affected our results during the Q1 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 www.nistekeltec.com. The trend of high demand for our company products that we witnessed in 2022 continue into the Q1 of 2023. I'm pleased to report that the efforts of our dedicated employees and the strong demand have resulted record sales of $11,500,000 during this quarter.

Speaker 1

Our backlog today is 10% higher than in the beginning of the year. We are currently experiencing a significant trend we identified recent years and we have prepared to. The shift back of PCBs manufacturer to Western countries. In the segments in which we prepared mainly the military, defense, aerospace and medical market, this policy of shifting manufacturing back to the Western countries began in recent years due mainly to the security consideration. This trend supported our forecast of sustained high demand and is the reason for our significant efforts to enhance our operation and as well as for our ongoing investment plan.

Speaker 1

During the Q1 of 2020 3, we finished issuing orders for all the machines and production lines planned to be purchased as part of the first phase of our accelerated investment plan. Some of these machines are already operational and are contribute to our production capacity, while the rest of the machines is scheduled to arrive by the end of 2025. It is important to note that the installation of these machines will take place gradually through this period, resulting in a gradual contribution to our sales and profitability. The increase in our gross profit margin to 26% in Q1 2023 is mainly attribute to the growth of our sales. Our fixed expenses such as rent, municipal tanks and insurance do not vary in the same ratio as sales.

Speaker 1

As a result, the higher our sales, the greater our company gross profitability. We ended the Q1 of 2023 with record pre tax income of $1,900,000 and net income $1,600,000 This results and the high profitability during the last quarters of 2022 resulted in high cash flow from operating activity. In light of this, we decided to repay $1,600,000 of long term loans in order to reduce our financial expenses given the high prevailing interest 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 Q1 of 2023. During this call, I will also discuss certain non GAAP financial measures. Astec uses EBITDA as a non GAAP financial performance measurement. Please see our earnings release for its definition and the reasons for its use.

Speaker 2

I will now go over the highlights of 2023 Q1. All numbers mentioned are in U. S. Dollars. Revenues for the Q1 of 2023 were $11,500,000 compared to $9,800,000 in the Q1 of 2022.

Speaker 2

Gross profit increased by 54%, reaching $3,000,000 compared to a gross profit of $2,000,000 in the Q1 of 2022. The increase is mainly due to the increase in revenue and the fixed component of part of the expenses included in cost of revenues. Operating profit amounted $1,600,000 in Q1 2023 compared to $700,000 in Q1 2022. We recorded financial income of $300,000 during Q1 $100,000 in Q1 22

Speaker 1

due to

Speaker 2

the devaluation of the mix against the U. S. Dollar. Profit before income tax amounted $1,900,000 in Q1 2023 compared to $800,000 in Q1 2022. Net profit was $1,600,000 or $0.27 per share in Q1 2023 compared to net profit of $600,000 or $0.11 per share in Q1 2022.

Speaker 2

EBITDA was $1,900,000 compared to $1,100,000 in Q1 2022. During the Q1 of 2023, we enjoyed positive cash flow for operating activities of $2,800,000 compared to $300,000 in Q1 2022. As of March 31, 2023, we had cash and cash equivalents of $8,000,000 compared to $7,400,000 at the end of 2022. We are now ready to take your questions.

Operator

Thank you. The first question is from Tom Kerr of Zacks Investment Research. Please go ahead.

Speaker 3

Good morning, everybody. The first question is on gross margins, that 26% seems to almost exceed one of your long term goals or near term goals. Do you feel that's sustainable in coming quarters or coming years? And can it improve from there?

Speaker 2

Yes. We think that we achieved this goal and we are targeting this gross profit margin. We hope that we can improve our efficiency and even reach higher, although currently we are satisfied with this percentage.

Speaker 3

Okay. Thank you. And on the capital, the accelerated investment plan, kind of where are we in terms of spending? And then related to that, does that show up on the financial statements, because capital expenditures were $305,000 So where are we on sort of the timeline of accelerated investment plan and where does that spending show up?

Speaker 1

Thank you, Tom. Good morning. As I mentioned before, we commit ourselves already to most of the investment and it's in the form of PO. So nothing still yet on our books. But the planning is done.

Speaker 1

Most of the critical machine is already defined and PO already issued. We start to get some of the machine earlier, and that results some of our sales increase during Q1. And we can assume that linearly or in it will be ended by the end of 2025. This is the plan.

Speaker 3

Okay. And one more question. Any thoughts on paying the remaining debt balances since the cash balances have become so high?

Speaker 2

I didn't understand your question fully.

Speaker 3

Plans to repay the remaining amount of long term debt.

Speaker 2

Yes. So, yes, as you saw, we have a NIS 6,000,000 balance of long term debt. We have a plan for financing the accelerated investment plan. However, we'll consider repaying this amount during the current quarter and decide whether we stay with the long term loan or we pay We have unutilized credit lines, so that shouldn't this would be a pretty easy decision.

Speaker 3

Okay. Thank you. I'll get back in the queue.

Speaker 2

Okay. Thank you, Tom.

Operator

The next question is from Michael Wu. Please go ahead.

Speaker 4

Hello. Hi. Congrats for a great quarter. So my first question is, can you give some color on the product revenue mix? What is the percentage of the revenues from the defense segment?

Speaker 1

I didn't analyze it, but I can estimate it. There's approximately 60% is aerospace and defense.

Speaker 4

Okay, great. So any like updates going forward? Do you have any on the sector like any color on this?

Speaker 1

Sorry, I didn't get your last sentence.

Speaker 4

Yes. Just like what's the like the trend, do you see any trend on the defense sector?

Speaker 1

We believe the defense sector will only grow and will not decline in the coming years.

Speaker 4

Okay, great. Thank you very much. So a follow-up question from the capital expenditures. So you said it will be fully invested until like 2025, right?

Speaker 1

Yes.

Speaker 4

Okay. So it's sort of like a linear investment or for all those accelerated investment plan, right?

Speaker 1

Yes. As I said, we commit ourselves and issued PO for the balance of the equipment that is going to arrive step by step between now and the year 2020 5. Some of the equipment already arrived in Q1 2023 and it's partially reflected in our results.

Speaker 4

Okay, great. Any update on the labor side? Do you have like you would be able to enough to acquire enough workers for you guys?

Speaker 1

Yes. We decided that in the next month, we will decide if we will continue to grow the growth only in the facility that we have here or we'll go to the other facility. Most of it because the market is very strong and we would like to react to the market as fast as possible and not and we don't have time to build something that it will take longer. But there was no final decision about it yet. But in the next weeks, we will decide about it.

Speaker 4

Okay. So it's clear. Do you have numbers on how many like any targets you have right now, like whereas last year, how many added?

Speaker 2

Yes. We added approximately 50 employees during 2022, and we maintained the same amount of employees as we were in the end of 2022.

Operator

The next question is a follow-up from Tom Kerr of Zacks Investment Research. Please go ahead.

Speaker 3

Just a quick follow-up on the backlog or the components of backlog. Is it still the majority of FlexRigid or did those components make up change?

Speaker 1

Yes, it's the same mix.

Operator

There are no further questions at this time. Before I ask Mr. Yassa 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.

Speaker 1

Before we conclude our call, I wish to thank our employees for the continued to contribute to Eltek and our critical mission of inspiring innovation for our customers. I would also like to thank all our customers, partners, investors and Deltek team for their continued support. Thank you all for joining us on today's call. Have a good day.

Operator

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

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