Earnings Call Transcript - ELTK Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Limited 2023 First 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'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, everyone. Thank you for joining us and welcome to Eltek's 2023 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 a summary of our principal factors that affected our results during 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. The trend of high demand for our company products that we witnessed in 2022 continues into the first quarter of 2023. I'm pleased to report that the efforts of our dedicated employees and the strong demand have resulted in record sales of $11.5 million during this quarter. Our backlog today is 10% higher than at the beginning of the year. We are currently experiencing a significant trend we identified in recent years, which is the shift back of PCB manufacturing to western countries. In the segments in which we operate, mainly the military, defense, aerospace, and medical markets, this policy of shifting manufacturing back to western countries began in recent years due mainly to security considerations. This trend supports our forecast of sustained high demand and is the reason for our significant efforts to enhance our operations and efficiencies, as well as for our ongoing accelerating investment plan. During the first quarter of 2023, we completed issuing orders for all the machines and production lines planned to be purchased as part of the first phase of our accelerated investment plan. Some of these machines are already operational and contributing to our production capacity, while the rest of the machines are scheduled to arrive by the end of 2025. It is important to note that the installation of these machines will take place gradually through this period, resulting in a gradual contribution to our sales and profitability. The increase in our gross profit margin to 26% in Q1 2023 is mainly attributed to the growth of our sales. Our fixed expenses, such as rent, municipal taxes, and insurance, do not vary in the same ratio as sales. As a result, the higher our sales, the greater our company's gross profitability. We ended the first quarter of 2023 with record pretax income of $1.9 million and net income of $1.6 million. This result and the high profitability during the last quarters of 2022 resulted in high cash flow from operating activity. In light of this, we decided to repay $1.6 million of long-term loans in order to reduce our financial expenses, given the high prevailing interest rates. 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 first quarter of 2023. 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 2023's first quarter. All numbers mentioned are in U.S. dollars. Revenues for the first quarter of 2023 were $11.5 million compared to $9.8 million in the first quarter of 2022. Gross profit increased by 54%, reaching $3 million compared to a gross profit of $2 million in the first quarter of 2022. The increase is mainly due to the increase in revenue and the fixed component of part of the expenses included in the cost of revenues. Operating profit amounted to $1.6 million in Q1 2023 compared to $0.7 million in Q1 2022. We recorded financial income of $0.3 million during Q1 and $0.1 million in Q1 2022 due to the devaluation of the NIS against the U.S. dollar. Profit before income tax amounted to $1.9 million in Q1 2023 compared to $0.8 million in Q1 2022. Net profit was $1.6 million or $0.27 per share in Q1 2023 compared to a net profit of $0.6 million or $0.11 per share in Q1 2022. EBITDA was $1.9 million compared to $1.1 million in Q1 2022. During the first quarter of 2023, we enjoyed positive cash flow from operating activities of $2.8 million compared to $0.3 million in Q1 2022. As of March 31, 2023, we had cash and cash equivalents of $8 million compared to $7.4 million at the end of 2022. We are now ready to take your questions.

Operator, Operator

Thank you. The first question is from Thomas Kerr of Zacks Investment Research. Please go ahead.

Thomas Kerr, Analyst

Good morning, everybody. First question is on gross margins. That 26% seems to almost exceed one of your long-term goals or near-term goals. Do you feel that's sustainable in the coming quarters or coming years? And can it improve from there?

Ron Freund, CFO

Yes, we think that we achieved this goal and we are targeting this gross profit margin. We hope that we can improve our efficiency and even reach higher, although currently, we are satisfied with this percentage.

Thomas Kerr, Analyst

Okay. Thank you. And on the capital, the accelerated investment plan, kind of where are we in terms of spending? And then related to that, what does that show up on the financial statements? Because capital expenditures were $305,000. So where are we on sort of the timeline for the accelerated investment plan and where does that spending show up?

Eli Yaffe, CEO

Thank you, Tom. Good morning. As I mentioned before, we have committed ourselves already to most of the investments, and it's in the form of POs. So nothing is still yet on our books. But the planning is done, and most of the critical machines are already defined, and POs have already been issued. We started to get some of the machines earlier, and that resulted in some of our sales increase during Q1. We can assume that this will conclude by the end of 2025. This is the plan.

Thomas Kerr, Analyst

Okay. And one more question. Any thoughts on paying the remaining debt balance since the cash balances have become so high?

Eli Yaffe, CEO

I didn't fully understand your question.

Thomas Kerr, Analyst

Plans to repay the remaining amount of long-term debt.

Eli Yaffe, CEO

Yes. As you saw, we have a balance of 6 million shekels in long-term debt. We have a plan for financing the accelerated investment plan. However, we will consider repaying this amount during the current quarter and decide whether we stay with the long-term loan or repay. We have utilized our credit line, so that shouldn’t be a difficult decision.

Thomas Kerr, Analyst

Okay. Thank you. I'll get back in the queue.

Eli Yaffe, CEO

Okay. Thank you, Tom.

Operator, Operator

The next question is from an unidentified analyst. Please go ahead.