Eltek Ltd Q4 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2022 Full Year and Fourth 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. 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 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. 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. Mr. Yaffe, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us, and welcome to Eltek's 2022 full year and fourth 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 2022, 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.eltek.com. 2022 was a year of great growth in the company activities. This year, thanks to the growing demand for our products and the execution of our dedicated team of employees, we were able to achieve sales of almost $40 million. In the last two quarters of 2022, we achieved sales of over $10 million per quarter. These results are the result of our successful plan to keep pace with the increased demand for our products. We ended 2022 with a backlog of 70% higher than the backlog at the beginning of the year. The increase in demand for the company products is mainly due to two trends that have prevailed over the past few years and which we anticipate will continue in 2023. The first one is the shift to manufacturing complex PCB in the manufacturing plants in Western countries from the East due to IP and security considerations. We are mainly active in the military aerospace, aviation, and defense market, which puts importance on these aspects. Therefore, we have benefited and continue to benefit from this trend. The second trend that occurred during last year is the political situation in Eastern Europe, which led many governments to increase their defense budgets and issue orders for defense products. We estimate that about 60% of our revenues are PCBs for the defense industry. We continue to notice high demand from the Indian market for higher reliability flex-rigid PCB. We are constantly working on expanding our range of products while adopting the latest production technologies, using new raw materials and adjusting our range of products due to the changed needs in the market. During 2022, we continued to invest in new machines and equipment as well as in the optimization of our manufacturing processes. In the first quarter of 2022, we decided to accelerate our investment plan and enter Phase 1 of the plan, where we will invest approximately $8 million with the aim to enable us to increase sales. This phase includes the installation of new production lines and machines, which will allow for increased output, increased efficiency, and manufacturing of products at a higher technological level. We expect that anticipated increased efficiency and increase in sales will support our long-term growth plan for a gross margin target of 24%. In June and July 2022, we successfully dealt with the fire that broke out in one of our production rooms. As of today, we have not finished the negotiations with the insurance company to receive full compensation for the damages we suffered. We hope to conclude this negotiation soon. During Q4, we received final approval from the Israeli Innovation Authority for a 40% royalty-bearing participation in approximately $800,000 one-year development program, which started in January 2023. This program is part of our investment in research and development activities to bring new high-quality products to the market and drive future growth. We ended 2022 with a net profit of $3.2 million, EBITDA of $4.5 million, a cash balance of approximately $7.4 million, and net cash provided by operating activities of $3.8 million. Our strong balance sheet and consistent profitability are an excellent starting point for 2023, in which we plan to continue the growth of the company revenue and profitability. I will now turn the call over to Ron Freund, our CFO, to discuss our financial results.

Thank you, Eli. I would like to draw your attention to the financial statements for the year ended December 31, 2022, and for the fourth quarter of 2022. 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. First, I will go over the highlights of 2022. All numbers mentioned are in US dollars. Revenues for the full year of 2022 totaled $39.6 million compared to $33.8 million in 2021, an increase of 17%. The increase in revenues is mainly due to the effect of the COVID-19 crisis on our customers' demand for products during 2021, the shortage in raw materials in Q1 2021, and the increased demand for our products in 2022, as Eli mentioned before. Gross profit increased by 20%, reaching $8.3 million compared to a gross profit of $6.9 million in 2021. The increase is mainly due to the increase in revenues. Operating profit amounted to $3 million in 2022 compared to $1.9 million in 2021. In 2022, we recorded financial income in the amount of $0.9 million compared to financial expense of $0.5 million in 2021. The increased income is due to the devaluation of the NIS against the US dollar. Profit before income tax amounted to $3.9 million in 2022 compared to $1.5 million in 2021. Tax expenses amounted to $0.7 million compared to tax income of $3.5 million in 2021. The tax income in 2021 is due to recording a deferred tax asset in regard to the company's tax loss carry-forwards. Net profit was $3.2 million or $0.55 per share in 2022, compared to net profit of $5 million or $0.86 per share in 2021. EBITDA was $4.5 million in 2022, compared to $3.8 million in 2021. During 2022, we enjoyed positive cash flow from operating activities of $3.8 million, compared to $3.9 million in 2021. As of December 31, 2022, we had cash and cash equivalents of $7.4 million compared to $9.3 million at the end of 2021. This decrease is due to dividend distribution of $1 million, the devaluation of the NIS against the US dollar, and the investment in new machines for which we still did not receive compensation from our insurance company. I will now go over the highlights of the fourth quarter of 2022 compared to the fourth quarter of 2021. Revenues for the fourth quarter of 2021 were $10.5 million compared to $9.5 million in the fourth quarter of 2021. Gross profit amounted to $2.2 million in the fourth quarter of 2022 compared to $2 million in the fourth quarter of 2021. Net profit in the fourth quarter of 2022 was $0.8 million or $0.14 per fully diluted share, compared to net profit of $3.8 million or $0.65 per fully diluted share in the fourth quarter of 2021. In the fourth quarter of 2021, we recorded a tax benefit in the amount of $3.6 million. EBITDA was $1.2 million in the fourth quarter of 2022 compared to EBITDA of $1.1 million in the fourth quarter of 2021. Cash flow from operating activities was $1.3 million compared to $0.4 million provided by operating activities in the fourth quarter of 2021. 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 Suki Hazan of Hazan Capital Markets. Please go ahead.

Hi. Hello. I would like to ask, please, about the penalty of $0.6 million, if the expenses of this penalty, it was in the fourth quarter or you will recognize the expenses in the first quarter of 2023?

Hi, Suki. As we reported in January 2023, we received a notification from the Ministry of Environmental Protection about its intention to impose a penalty of approximately $0.6 million for an alleged breach of the Clean Air Law during the years 2019 and 2020. We invest many resources in compliance with environmental laws and constantly improve what is required in order to prevent future violations. As of today, we believe that we will comply with the laws. We intend to seek a reduction in the amount of the penalty in accordance with provisions of the Clean Air Law. We have recorded in our annual financial statement an allowance regarding the penalty based on management's estimation and its legal advisory opinion.

Okay. And a question about the business. Based on your magnificent backlog, can you say that double-digit growth in 2023 is something that you can predict?

Hi, Suki. As you know, we don't forecast. If you look at all our history, we have never focused on that. As I mentioned during my call, we sound positive about the business, but I cannot give any expectation or estimation about the growth rate that we will be.

Okay. And is there anything about the dividend policy for the next year?

We don't have any dividend policy in hand. So basically, or currently, we do not anticipate any future dividend, unless it is decided otherwise by our Board of Directors.

Okay. Thank you. Good luck.

Thank you.

Thank you.

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

Hello, several quick questions. Can you comment on the backlog components? Like what products comprise that large growth in backlog? Is it spread across all product lines?

Yes. Thank you. It's a good question. It’s spread all over the product line. We focused about 60% on Flex-Rigid type PCB.

Okay, 60%. Okay. Got it. And I think I heard you say gross margin goal is 24%.

Yes.

And I know you don't give projections, but is that a near-term or long-term goal, or can you give us any guidance on when that could happen?

We are on the way to be there once the investment that we announced, about $8 million investment, is accrued and finished, we will be there. But on the way, we will be on the way to 24.

So we anticipate that within two to three years, we will be there.

Okay. That's fair enough. Okay. I think all my other questions have been answered. Thank you.

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.

Before we conclude our call, I would like to thank all our employees for their continued efforts to meet our strategy of increased sales and profitability. I would also like to thank all our customers, partners, investors, and the team for their continued support. Thank you all for joining us on today's call. Have a good day.

This concludes the Eltek Limited 2022 Full Year and Fourth Quarter Financial Results Conference Call. Thank you for your participation. You may go ahead and disconnect.