Eltek Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd First Quarter 2022 Financial Results Conference Call. All participants are 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. 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 Eltek's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. These forward-looking statements are projections and reflect the current beliefs and expectations of the company. Actual events or results may differ materially. 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 like to turn the call over to Mr. Eli Yaffe. Mr. Yaffe, would you like to begin, please?

Thank you. Good morning, everyone. Thank you for joining us, and welcome to Eltek's 2022 first 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 in the first 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 also be available on our website, at www.nisteceltek.com. In the first quarter of 2022 we recorded revenue of $9.8 million despite the challenging supply chain and labor environment. This revenue reflects an annual increase of 15% relative to our revenue in 2021. Our forecast is that the defense aerospace and space sectors will perform better in 2022 than in the last year. Our employees did an excellent job of maximizing the production by maximizing throughput per hour, resulting in increased efficiency. During the first quarter of 2022, we mitigated all of the material price increases through additional cost savings, adjustment in the mix of raw materials used during the manufacturing process, and product price adjustments. The first quarter of 2022 reflects the continued increase in orders received from our customers. We ended the quarter with a backlog 50% greater than the backlog of 2021 year-end. Our PCB book-to-bill ratio was 1.4 for the first quarter of 2022, which means that our accumulation of new orders was higher than our revenue recognition. The significant increase in the backlog is due to several factors. Factor number one; the current status of the COVID-19 pandemic enabled most of our customers to return to normal levels of business operation, including our customers in the Far East, particularly in India. In Israel, we did not face significant absence of employees due to isolation requirements. In addition, the resolution of the COVID-19 pandemic in China created a shift of manufacturing orders of non-defense PCBs to the western market. Factor number two; during Q1 2022 we had no delays in raw materials supply, and our increase in inventory levels allowed us more flexibility in our production cycles. Factor number three; the political and security situation in Europe caused governments to increase their military budgets, and Eltek, as a supplier of significant components to defense system manufacturers, has been positively influenced by it. In addition, the inflationary pressures and the continued labor challenges in North America help us to remain competitive in price and lead time. Factor number four; increase in demand due to the continued strength of shifting back to the western PCB manufacturing, previously performed in the Far East, due to heightened security considerations. Furthermore, some of our customers suffered from the lack of critical components which forced them to redesign their PCB using available components. This redesign led to further requests for quotations, some of which we won. All of these four factors contributed to our backlog and revenue growth during the first quarter of 2022. I should also mention that we recently won a new sales order wherein we will provide a fully turnkey product to one of our tier 1 customers by outsourcing the assembly service requested. We will further investigate this need and its potential for the future. The increased demand for the company's products has led us to decide to accelerate our investment program. During the first quarter, we began the first phase of the program, which includes an investment amount of $9 million. This phase is expected to last two years. The program includes investment in new production lines as well as in infrastructure in order to enable us to increase the company's production capability and efficiency. We expect that the first phase will allow us to increase our yearly sales by $5 million to $8 million, based on the continuity of the increased demand for our products. The total investment program amount is $15 million. During the first quarter, we continued to experience a significant increase in the price of raw materials. We communicated this increase to our main customers and adjusted our selling prices. Nevertheless, we continue to invest efforts in improving our manufacturing processes and our efficiency in order to be more flexible in our pricing policy. Demand for employees continues to be high in our industry and in similar ones. The situation impairs our production capability and sometimes forces us to raise wage levels in order to achieve our targets. Our investment program mentioned before includes automation components in order to help us deal with this difficulty. Eltek’s long-term strategy remains unchanged, focused on high technology PCBs in order to maintain our differentiation capability and serve as a highly valued partner to our customers. I will now turn the call over to Ron Freund, our CFO, to discuss our financial statements.

Thank you, Eli. I would like to draw your attention to the financial statement for the first quarter of 2022. During this call, I will 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. Now, I will go over the highlights of Q1 2022. Revenue for the first quarter of 2022 totaled $9.8 million, compared to $7.2 million in Q1 2021; an increase of 35%. The increase in revenue is mainly due to the shortage of raw materials in 2021 and the negative effect it had on our sales in the first quarter of 2021. We recorded a gross profit of $1.1 million in the first quarter of 2021. The outcome of the increase in revenues led to an operating profit amounting to $0.7 million in Q1 2022 compared to $0.1 million in 2021. Fluctuations of the U.S. dollar against the Israeli Shekel contributed to our Q1 2022 results. We recorded a financial income of $0.1 million. We have recorded for the first time a deferred tax asset in the amount of $0.1 million due to the deferred tax asset we recorded at 2021 year-end. This was recorded based on expectations that it is more likely than not that the company will utilize cash flow carry forward in future years. Net profit was $0.6 million or $0.11 per share in Q1 2022 compared to a net profit of $0.2 million or $0.04 per share in Q1 2021. EBITDA was $1.1 million in 2022 compared to $0.6 million in 2021. As of March 31, 2022, we had cash and cash equivalents of $1.9 million. This cash balance and the anticipated cash flow from operating activities provide flexibility in operating our business and financing our accelerated investment program that Eli mentioned earlier. We are now ready to take your questions.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. The first question is from Michael Wood. Please go ahead.

Hello. Hi, thanks for taking my questions. So, my first question is do you guys have any estimate of revenue you got from this quarter because of the manufacturing issues in China, as they cannot ship orders to you?

Hi, Mike. And how are you? No, we don’t have exact numbers, but we estimate that it is significant due to the shift back from China to Israel because we got approached by customers that ask us to move back to Israel. But I don’t have the exact number.

Okay, that’s fine. Do you see this trend continuing with more customers trying to address the manufacturing issues in China?

Yes. As I mentioned during my previous comments, I forecast that the shift will continue.

Okay, great. Thank you. The second question is how is the manufacturing capacity running? Are you guys at full capacity right now?

No, not yet.

Not yet. So, what is the remaining capacity? I mean if you can run enough for a capacity basis, what can you achieve?

We adjust our manpower according to the level of orders that we have. If we rely on more employees, we can produce more.

Or you can do a little bit more?

If it is justified, we'll hire more employees, and we'll increase our sales by manufacturing more products, yes.

Okay. So, I have another question about the new CapEx. You said totally it is $15 million for the complete spend over two years?

No, the $9 million is over two years. That's the first phase. The $15 million is for the whole program.

Oh, okay, okay, that's great. Once you fully invest, when do you expect the capacity will be fully set up and running? Is it like in stages, or do we have to wait for two years and then get the facility up and running?

That's a very good question. We will go slowly between now and the end of the program, but there will be a jump at the end of the program.

Okay. So basically, you’re like incrementally adding capacity during this year as well, right? That’s my understanding?

The capacity right now is dependent on manpower. If we would like to increase output, we have to invest in new equipment which we are incorporating in the program.

So, basically, you're adding the program, adding more equipment, right? I mean, you don't need to wait until the end of two years to use the new equipment, correct? You can increase capacity along the way?

It's more about equipment that will replace old equipment.

Okay, what's the difference, why I mean?

It's about efficiency and quality; less manpower is required for the new equipment, which will be more automated, more precise, and better adapted to market demand.

Okay, so basically once you replace the old equipment, you also increase the capacity, right? Is that my understanding?

Exactly, with the new equipment, we will be able to produce more panels.

Okay, that also increases efficiency, right?

Exactly, as I mentioned before.

That's great. So do you have any kind of details on the defense contract? Could you provide more information?

Well, usually we don't disclose the names of our defense contractors. On the 28th, you can see some of the names there and the activities that we mentioned with them, but with all our defense contractors, the market is strong due to the security situation in Europe.

How big is the trend you see? What is the amount and percentage increase you see in the order inflows?

As I mentioned, the order flow right now, the backlog is 10 times greater than the end of last year, and the book-to-bill ratio is currently 1.4. So we gained 40% more orders than what we produced.

Okay, that's great. Thank you for that information. My last question is about inflation pressure; can you see any inflation pressure affecting your ability to pass on prices to your customers if you have labor expenses?

Yes. Yes, as I mentioned before, there is a difference in the inflation rate between Israel and the United States. In the United States, it’s easier because inflation in Israel is lower than in the United States, so it's easier to increase prices in the United States. In Israel, we do it with more difficulty, but we have managed to push the prices up based on the cost adjustments.

Sorry, I didn't get it. Are you able to increase the price for customers?

In the United States, we do it easily because the inflation rate in the United States is higher than in Israel. In Israel, we do it because it's accepted in Israel, and we do it up to the inflation rate that exists in Israel.

Okay, got it. That's all my questions. Thank you very much for taking my questions. Congratulations on a good quarter.

Thank you, Michael. Thank you.

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 Eltek's website, www.nisteceltek.com. Mr. Yaffe, would you like to make your concluding statement?

Before we conclude our call, I would like to thank all of our employees for their efforts in continuing the company's growth. I would also like to thank our customers, partners, investors, and the Eltek team for their continued support. Thank you all for joining us on this call today. Have a good day.