Eltek Ltd Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd 2025 First Quarter Financial Results Conference Call. 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&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'll 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. Thank you for joining us for our 2025 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 during Q1 2025. 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. During the first quarter, we concurred in stabilizing and calibrating our new equipment installed in our recently launched Solder Mask Application Department, as well as machinery relocated to this facility. This was a complex and time-intensive process, further complicated by the unavailability of certain technical support personnel, who declined to travel to Israel for the on-site installation and calibration. As a result, we faced challenges in optimizing machine performance and compelling the precise technical adjustment required. This collectively contributed to a lower production yield and negatively impacted our profitability for the quarter. The good news is that since the beginning of May, these processes are functioning much more smoothly. Production has resumed at a stable pace and efficiency levels have returned to where they were prior to the transition. We are continuing the construction work on the basement floor to prepare it for the installation of our new plating lines. While our European supplier is making progress with the production of the equipment, they recently informed us of a delay of approximately 2 months in the delivery of the first and most significant coating line. Despite this delay, we remain on track to complete our accelerated investment plan by mid-2026. On the human resource front, we have continued our efforts to recruit production workers and engineers. The Israeli labor market remains highly challenging, particularly when it comes to attracting qualified candidates in these fields. We are hiring at a modest pace within our existing salary structure following a significant wage adjustment we implemented at the end of Q2 2024, as many of you may recall. In terms of market dynamics, we continue to experience strong demand for our products across all segments. Due to this elevated demand, we are seeing an increase in lead time for customer delivery, not only at Eltek but also across the industry and among our competitors. At this stage, there is still no clarity regarding the tariff rate that may apply to products originated from Israel under the new U.S. tariff policy nor whether defense-related equipment will be included within this framework. However, the company's competitive position in the U.S. market may benefit from the higher tariffs on products from other exporting countries such as Canada. Additionally, tariffs on imposed raw materials could affect the cost structure and competitiveness of the U.S.-based manufacturers. We estimate that it will take years to establish sufficient domestic production capacity in the U.S. to meet the customer demand for the high-end product that we sell. Accordingly, we do not anticipate any material impact on demand for our products in the U.S. market over the near to medium term. We are actively working to diversify our supply base in the Far East to support our goal of expanding our commercial activity. This initiative includes also exploring opportunities for partial production abroad with final processing and completion taking place in our facility in Israel. The objective is to leverage our reputation and technological know-how to increase revenue even during the period of production capacity constraints. At the same time, this model enables us to offer our customers more attractive pricing while maintaining the high quality standards associated with Eltek. During the first quarter, we also began a company-wide process to replace our core information system. This transformation is expected to take approximately 18 months and will involve replacing most of the IT software currently in use across the organization. As part of this transition, we aim to optimize our internal workflow and implement industry standard efficient work methodologies. A key focus of this project is to develop a structured centralized digital process that will capture and preserve critical knowledge previously held by key personnel. This will allow us to unify production procedures, retain organizational know-how and ultimately improve operational efficiency across the company. 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 first quarter of 2025. 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 first quarter of 2025, all numbers mentioned in U.S. dollars. Revenues for the first quarter of 2025 totaled $12.8 million compared to $11.8 million in the first quarter of 2024. Gross profit decreased to $2.2 million, down from $3.3 million in the first quarter of 2024. The decline was primarily driven by higher labor costs and lower yields during the quarter, resulting from the ramp-up of new production equipment, as Eli mentioned earlier. Operating profit for the quarter was $0.7 million compared to $1.7 million in the same period last year. We recorded financial income of $0.5 million in the first quarter of 2025, primarily due to the devaluation of the Israeli Shekel against the U.S. dollar, and interest earned on our interest-bearing accounts. Net income for the quarter was $1 million or $0.15 per share compared to $1.7 million or $0.27 per share in the first quarter of 2024. EBITDA for the quarter was $1.2 million compared to $2.1 million in the prior year period. Cash flow from operating activities totaled $0.1 million during the first quarter of 2025. As of March 31, 2025, we had $15.7 million in cash, cash equivalents and short-term bank deposits with no outstanding debt. We are now ready to answer your questions.

The first question is from Guy Mualim of Analyst.

Regarding the new line that you expect to end the implementation in mid-2026. Will this line also impact the profitability of the company? Or, now that in the next few months, you're going to finish the implementation of the current line, will you get back to the profitability we've seen in 2023?

I'm not sure that I understood your question, but the line that we are going to install, which is going to be fully operational in mid-2026, is positively going to impact our profitability because it's going to increase our production significantly. The marginal contribution of any additional sales is going directly to the bottom line, which is a big number.

No, this is what I understand, of course. But I'm saying you had your profitability because during this time you have increased the capacity of the current existing lines, and you said that this helped a little bit of manufacturing production. But now the next line that you're going to implement, is going to be a new line and it's not going to interfere with the existing line?

Yes, now I understand. You're right. The new line is not going to interfere with the current production.

So will we see you get back to the profitability we've seen maybe in 2023?

As you know, we don't give forecasts.

There are no further questions at this time. Before I ask, there is an additional question from Ethan Etzioni of Etzioni Portfolio Management.

You mentioned that in Q1, you were held back by operational difficulties and people refusing to travel to Israel. Once these difficulties are resolved, how do you see sales picking up? Or to what extent was the hold back in Q1?

The holdback in Q1 was that we suffered from reduced yield, which affected our gross margin. But we overcame the problem with our local engineers and local support. The constraint of some people not arriving in Israel still exists. But the main production line, which I mentioned before, the plating line, is going to come from the Republic of Czechoslovakia, and they have notified us that they are going to arrive.

That's the '26 project that you were talking about earlier?

It's during 2025. We expect them to arrive by, as we said, around August. And then it will take us several months to install the first plating line, which is the most significant one. And we hope that by the end of 2025, it will be in a good position and then stable and we can increase our capacity and efficiency.

So an additional line at the end of '25 and another line in '26? And how many existing lines do you have, again, please?

We currently have two plating lines, very old ones. And we are now building in the basement floor an area where we will install the two new ones. One is going to arrive by August and the second one will arrive, I think, during 2026 in the first half. And these lines will stabilize and calibrate as we produce in the old ones. Once finished installation, we'll start to produce or manufacture with the new lines and stop manufacturing with the old lines.

So will the new lines only help operational efficiency? Or will they also help increase revenues?

They will significantly increase capacity and improve quality and efficiency. They give us momentum to upgrade to new technologies. It is state-of-the-art lines with higher technology than existing ones.

And do you see demand to support the increased capacity?

Yes, we see demand.

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 concluding statement?

Yes. Before we conclude, I would like to take a moment to thank our dedicated employees for their exceptional efforts during what we see as a particularly demanding period. The successful stabilization of our new Solder Mask application production lines, alongside the initiation of the IT transformation and ongoing expansion efforts, would not have been possible without their commitment and reliance. I would also like to thank our shareholders and partners for their continued trust and support. Our confidence in Eltek enables us to pursue our long-term strategy and invest in the infrastructure, technology, and people that will drive our future growth. Thank you for joining us on today's call. Have a good day.

Thank you. This concludes Eltek's 2025 first quarter financial results conference call. Thank you for your participation. You may go ahead and disconnect.