Earnings Call Transcript - ELTK Q4 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2024 Annual and Fourth 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. 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.

Eli Yaffe, CEO

Thank you. Good morning. Thank you for joining us for our 2024 annual 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 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. In 2024, we generated revenue of $46.5 million, consistent with our 2023 levels, but below our expectations. While demand for our products remained strong, revenue growth was constrained primarily by the operational challenges associated with the construction and installation of the new equipment, as well as the ongoing regional conflict, which led to hesitation or delays in visits from foreign technical experts. Despite these challenges, we closed the year with a net profit of $4.2 million and maintained a solid cash position of approximately $17 million even after capital expenditure of approximately $10 million. In today’s call, I will first focus on revenue and growth before addressing operational aspects. We continue to operate in a strong market environment with sustained high demand. In recent months, we have received a request to participate in both local and international bids for large-scale defense tenders, including opportunities related to domestic needs. Additionally, in the industrial sectors, we have observed a slight uptick in activity over the past two months. Our strategic focus remains on maintaining a well-balanced portfolio across our core market segments: defense, medical, and high-end industrial. Growing tension between the U.S. and Europe has prompted several European nations to accelerate increases in their defense budgets. This trend presents additional growth opportunities in the defense sector, reinforcing our position in this expanding market. Despite the strong market and ongoing tender activity, we have yet to see a significant increase in backlog at the pricing level. Competition remains a factor both from local and European companies. However, we view competition from European firms as relatively limited, primarily driven by their efforts to penetrate the Israeli market. These companies have set initial pricing benchmarks that we believe are unsustainable beyond the market entry phase, as current pricing does not yet reflect the anticipated rise in demand across Israel and Europe. While we continue to receive short-term orders, discussions around long-term agreements are gaining momentum. Securing such agreements would enhance operational efficiency and provide greater production stability. Additionally, we are actively working to obtain large-scale production orders which would further support sustained and efficient manufacturing. As part of our growth strategy and our commitment to enhancing customer responsiveness, over the past six months, we have placed significant emphasis on expanding our commercial activities. Successful implementation of this strategy will allow us to increase sales volume while leveraging our high-end manufacturing capability for complex production stages that must remain local due to security considerations. On the operational front, we are making steady progress in executing our accelerated investment plan. As reflected in our cash flow, capital expenditure on machinery and equipment totaled approximately $10 million during 2024, and we anticipate a similar level of investments in 2025. In 2024, our primary investments were directed toward a new solder masking application department, the expansion of the cooling and air infrastructure of our facility, and the reallocation and reconstruction of office space to facilitate the planned expansion of our production capacity, including the installation of 68 meters of plating lines, one of the core components of our accelerated investment plan. The large-scale acquisition of new machinery, along with the need to reallocate and reinstall existing equipment according to the new production layout, has presented significant operational challenges. Maintaining normal production levels while responding to increased demand, while simultaneously reallocating equipment, integrating new machinery, and carrying out necessary construction work requires precise timing and a high level of exceptional complexity. Unfortunately, we faced difficulties and delays in some of our tasks, particularly toward the end of the year when we launched the Solder Mask Application department. One of the main challenges stemmed from the inability of overseas technicians to travel for the installation of equipment due to the ongoing conflict in the region; delays in equipment delivery; the absence of installation technicians; and the disruption of our ongoing manufacturing operations led to production stoppages, an increase in defect rates, and setbacks in the execution of our investment plan according to schedule. One of the most critical components of our investment plan is the installation of the new plating line, which forms the core of our production process and has a significant impact on the quality of our products. The first new plating line, a smaller scale one, was delivered by our suppliers at the beginning of 2024 and is now fully operational. The primary line is currently being assembled at the supplier's facility in Europe and is expected to be shipped to us during the second quarter of 2025. The third line is scheduled for delivery at the end of 2025 or early 2026. The installation and stabilization process of the lines is expected to take several months. To ensure continuous production, we are installing the new lines alongside the existing ones, allowing us to maintain uninterrupted operations to meet customers’ demands. The extensive workload faced by our dedicated workforce in both ongoing production and in the integration and installation of new machinery is a result of labor shortages and production capacity constraints. We are actively working to recruit additional employees and engineers to support the expansion efforts. 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 year ended December 31, 2024, and for the fourth 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 reason for its use. I will now go over the highlights of 2024. All numbers mentioned are in U.S. dollars. Revenues for the year ended December 31, 2024, totaled $46.5 million, compared to $46.7 million in 2023. Gross profit reached $10.3 million, compared to a gross profit of $13.1 million in 2023. Gross margin was 22%, down from 28% in 2023. The decrease in gross profit and gross margin was primarily driven by higher manufacturing employee compensation costs in 2024, as well as a shift in our product mix. Operating profit amounted to $4.4 million in 2024, compared to $7.3 million in 2023. In 2024, we recorded financial income of $0.7 million compared to $0.4 million in 2023. The increase is a result of increased interest income on our bank deposits. Net profit was $4.2 million or $0.63 per share in 2024, compared to a net profit of $6.4 million or $1.07 per share in 2023. EBITDA was $5.9 million in 2024, compared to $8.6 million in 2023. During 2024, we enjoyed positive cash flow from operating activities of $4.5 million, compared to $8.9 million in 2023. As of December 31, 2024, we had cash and cash equivalents and short-term bank deposits totaling $17.2 million. I will now go over the highlights of the fourth quarter of 2024 compared to the fourth quarter of 2023. Revenues for the fourth quarter of 2024 were $10.8 million compared to $12.3 million in the fourth quarter of 2023. Gross profit amounted to $1.9 million in the fourth quarter of 2024 compared to $3.5 million in the fourth quarter of 2023. Net profit for the fourth quarter of 2024 was zero compared to net profit of $1.3 million or $0.22 per share in the fourth quarter of 2023. EBITDA was $0.8 million in the fourth quarter of 2024 compared to EBITDA of $2.4 million in the fourth quarter of 2023. We are now ready to take your questions.

Operator, Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. There are no 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, please go ahead.

Eli Yaffe, CEO

In closing, I would like to extend my sincere gratitude to our investors for their continued trust and support. Your confidence in our vision and strategy drives us to push forward even in the face of challenges. I would like to thank our dedicated employees whose hard work and commitment have been instrumental in navigating this complex period. Their reliance and expertise are the foundation of our success. As we move forward, we remain focused on executing our growth strategy, strengthening our market position, and delivering long-term value. Thank you for joining us today.

Operator, Operator

Mr. Yaffe, there is a question. Would you like to take a question?

Eli Yaffe, CEO

Yes.

Operator, Operator

Okay. The question is from Ariel Lifschitz. Please go ahead.