Eltek - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2024 second 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. For operator assistance during the conference, please press star zero. 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 Ltd.'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 undertake no obligation to publicly release revisions to such forward-looking statements to reflect events or circumstances occurring subsequently to this date. I will now turn the call over to Mr. Eli Yaffe. Mr. Yaffe, please go ahead.

Eli Yaffe (CEO)

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 two to 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 also be available on our website. Today, I'd like to address two 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 and accelerate 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 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 profit or profitable mix from the prior period, and orders and more complex, higher-margin PCB were pushed to the end of Q2 2024 and Q3 2024. Moreover, as mentioned in the previous call, our current bottleneck is manpower. During the second quarter, we continued to face production delays due to the manpower-related capacity constraints.

During the quarter, we had 59 working days compared to 60-90 days in Q2 2023, a decrease of 5%. The shortage of manpower and decrease in work days prevent us from producing and delivering some of the high-margin PCB orders we had on end for Q2 delivery. This unfavorable mix had negatively impact 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 cost remains consistent with the previous quarters, but the average sales price was lower, leading to 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 Q2, 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. Increasing 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 two 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 issue, with the manpower issue. We are continuing our accelerated investment plan with a significant focus on three new coating lines. The first coating line, which is called via fill Line, is already installed and operational. During the quarter, we reviewed the status of our suppliers and confirmed that the installation of the remaining two 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 space within our building to accommodate the required construction for the remaining two coating lines. By the end of the second quarter, we had issued purchase order 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 $2-3 million per year. Regarding manpower, we are navigating the challenging market with a strong demand for employees. In response to this demand and our forecast for the increased order flow, we have adjusted our recruitment policy, primarily by increasing direct labor salaries. This action have already had 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 third 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 (CFO)

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, sold.

Operating profit amounted to $0.4 million in Q2 2024, compared to $1.4 million in Q2 2023. We recorded financial income of $0.5 million during Q2 2024, including income from the devaluation of the NIS 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 $0.8 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 shorter bank deposits of $18.3 million, with no debt outstanding. We are now ready to answer your questions.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be answered in the order that they are received. Please stand by while we poll for your questions. The first question is from Tom Kerr of Zacks. Please, go ahead.

Tom Kerr (Analyst)

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

Ron Freund (CFO)

Hi, Tom, how are you?

Tom Kerr (Analyst)

Good.

Ron Freund (CFO)

The reason for this unfavorable mix was a timing of production that was required by our customers for lower technology than the regular mix. And as Eli said, we produced more than 40% rigid instead of the average of 30%. It was a requirement by our customers, and usually we try to support our customers and change the manufacturing plan according to their requirements.

Tom Kerr (Analyst)

Okay, and you indicated it, 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?

Ron Freund (CFO)

Yes.

Eli Yaffe (CEO)

... Hi, Tom, it's Eli. Yeah, 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 toward the Q3, 2024.

Tom Kerr (Analyst)

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

Ron Freund (CFO)

Most of it.

Tom Kerr (Analyst)

Most of it? And, what can we expect that in the next-

Ron Freund (CFO)

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

Tom Kerr (Analyst)

Oh, okay. Sorry, I thought that was the other one. So where do you expect that on the second half of the year?

Ron Freund (CFO)

So-

Tom Kerr (Analyst)

In terms of capital expenditures?

Ron Freund (CFO)

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

Tom Kerr (Analyst)

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

Ron Freund (CFO)

Yes.

Tom Kerr (Analyst)

One more. Are you guys still looking for a presence in North America? Any progress on that?

Ron Freund (CFO)

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

Tom Kerr (Analyst)

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

Operator (participant)

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

Michael Wu (Analyst)

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

Eli Yaffe (CEO)

The defense sector is approximately 60%... Was 60% in Q3, Q2, 2024.

Michael Wu (Analyst)

It's the same, right? Around.

Eli Yaffe (CEO)

Yes. Yeah. It, it does not change. What will change is the mix of the product within the defense sector.

Michael Wu (Analyst)

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

Eli Yaffe (CEO)

No, the mix is going to change back to 30/70, as we mentioned, and not 40/60 as it was in Q3. As it was in Q2, sorry.

Michael Wu (Analyst)

Okay. So will go up a little bit, right?

Ron Freund (CFO)

Yeah, it will go up.

Eli Yaffe (CEO)

It will go up. High margin PCBs will go up.

Michael Wu (Analyst)

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

Ron Freund (CFO)

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

Michael Wu (Analyst)

Okay, great. Thank you. That's all my questions. Thanks.

Operator (participant)

If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. The next question is from Tom Kerr of Zacks. Please go ahead.

Tom Kerr (Analyst)

Hi, 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'll be hiring 50 people? And maybe just explain the manpower issue one more time.

Eli Yaffe (CEO)

Right now, the current situation in the manpower labor market in Israel is very tough. So we increased in 1 July , to increase the 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.

Ron Freund (CFO)

We will, we are hoping to do it by year-end. You know, it's a very tough market, but our steps shown performance, that means that once we raise the salaries of direct labor, we could recruit more employees, and we are recruiting on a daily basis.

Tom Kerr (Analyst)

Are those all primarily manufacturing employees, or are there other areas to me?

Ron Freund (CFO)

Manufacturing employees.

Eli Yaffe (CEO)

Direct employees and manufacturing employees, yes.

Tom Kerr (Analyst)

Great. Okay, thanks.

Eli Yaffe (CEO)

Thank you, Tom.

Tom Kerr (Analyst)

That's all I had.

Operator (participant)

The next question is from Ran Zur. Please go ahead.

Ran Zur (Analyst)

Hi, everyone. First question is regarding this potential future deal, North America. How do you going to finance this kind of deal? Do you consider, like, future offering as you did in the $16 per share offering, or do you consider financing with a bank loan or a 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.

Ron Freund (CFO)

Hi, Ran. So in regard to your first question, any financing plan for the purchase will depend, of course, on the scope of the 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.

Eli Yaffe (CEO)

Regarding your second question, Ran, regarding the mix of product in Q2, as I said in our PR, the mix of the quarter contained more technology requirements 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 two, 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. When there is a demand for change priorities, we support our customers and change our manufacturing plan accordingly.

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. For long term, we still forecast 27% gross margin.

Ron Freund (CFO)

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

Ran Zur (Analyst)

Okay. Thank you.

Eli Yaffe (CEO)

Thank you.

Operator (participant)

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. Mr. Yaffe, would you like to make a concluding statement?

Eli Yaffe (CEO)

Before we conclude, I want to express my gratitude to our employees and their unwavering dedication in 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 (participant)

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.