Eltek Ltd (ELTK) 2024 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. 2024 annual and fourth quarter financial results conference call. (Operator Instructions) 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 forecast 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 2024 annual year earning 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 be also available on our website.

In 2024, we generate revenue of $46.5 million consistent with our 2023 levels, but below our expectations. While demand for our products remains 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 a citation or delays in visits from foreign tech 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 behind domestic needs.

Additionally, in the industrial sectors, we have observed a slight uptick in activity over the past two months. Our strategy focus remains on maintaining a well-balanced portfolio across these three coal market segments: defense, medical, and industrial.

Growing tension between the US and Europe have promoted several European Nations to accelerate increasing 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 the backlog in the pricing level. Competition remains a factor both on 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 corn pricing does not yet reflect the anticipated rising 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 the customer responsiveness, over the past six months, we have placed a 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, as those that must remain local due to the security considerations.

On the operational front, we are making steady progress in executing our accelerating investment plan, as reflected in our case law, capital expenditure on machinery and equipment total approximately $10 million during 2024, and we anticipate a similar level of investments in 2025.

In 2024, our primary investments were directed toward the new solder marking application department, the expansion of the cooling and the air infrastructure of our facility, and the reallocation and reconstruction of the office space to facilitate the planned expansion to 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 a new machinery along with the need to relocate, reinstall existing equipment according to the new production layout has presented significant operational challenges. Maintaining normal production level while responding to the increased demand, while simultaneously reallocating equipment, integrating new machinery and carrying out construction work has required precise timing and high level of expressional 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 the equipment due to the ongoing conflict in the region.

Delays in the equipment delivery, the absence of installation technician, and the disruption of our ongoing manufacturing operational led to production stoppage, and increase in defect rates and setback of in execution of the investment plan according to the schedule.

On the most critical component of our investment plan is the installation of the new plating line, which form from the core of our production process and have significant impact on our quality in our products. The first new plating line, a smaller scale one was delivered by our suppliers at the beginning of 2024 and now is fully operational.

The primary line is currently being assembled at the supplier facility in Europe and expecting to be shipped to us during the second quarter of 2025. The cell line is scheduled to deliver at the end of 2025 or early 2026.

The installation and the 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 operation to meet the customer's demands. The extensive workload faced by our dedicated workforce both in the ongoing production and in the integration and the installation of the new machinery as a result, a labor shortage and production capacity constraints.

We are actively working to recruit additional employees and engineers to support the expansion of efforts. 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 ending 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 and its definition and the reason for its use.

I will now go over the highlights of 2024. All numbers mentioned are in US dollars. Revenues for the year ended in 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 the 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 the 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 for 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 in a total amount of $17.2 million.

I will now go over the highlights of the fourth quarter of 2024 compared to the first quarter of 2023. Revenues for the fourth quarter of 2024 were $10.8 million compared to $12.3 million in the first 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.

Thank you, ladies and gentlemen. At this time we will begin the question-and-answer session. (Operator Instructions) 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.

In closing, I would like to extend my sincere gratitude to our investors, to their continued trust and support. Your confidence in our vision and the strategy drives us to push forward even in the face of challenges. I would like to thank and dedicate our dedicated employees whose hard work and commitment is even instrumental in engaging their complex period. Their reliances and expertise are the foundation of our success. As we move forward, we remain focused on executing our strategy, drinking our market position, and delivering long term value.

Thank you for joining us today.

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

Yes.

Okay. Ariel Lifschitz.

Yes, hello, good afternoon and good morning. My question relates to competitive pressures that you mentioned very briefly. You explained quite clearly the operational challenges related to the new equipment and to the difficulties of certain suppliers to travel to Israel during the war period.

My first question is related to these travel difficulties. Are they behind you? Do you get all the technical support you expected from these suppliers at this time and are these new installations proceeding as expected?

The second question is related to these competitive pressures. I was not clear if you face this competition in the Israeli market or in the European market and who are these new competitors? You mentioned that you don't believe their lower prices can be sustained long term, but more clarity would be welcome about that. Thank you.

Yeah, thank you Ariel for your questions. Regarding question number one, regarding the technical support, most of the travel restrictions for you to Israel is not exist anymore. Most of the technicians already coming -- there are right now two machines that we didn't get online support. But we didn't get support directly, but we get online support, and our engineers succeed to solve the problem with remote support.

So to summarize the issue, I think that most of the problem is behind us on the current equipment that we have. There is still equipment to come, and time will see if we have problems with traveling to Israel or not in the future.

Regarding the competition in Europe, the competition that I mentioned is the competition in Israel with European companies that were not in Israel before, they come and with very aggressive pricing not in limited but in very limited capacity but it has happened before the tension that started between the United States and Europe that doubled the budget of the Defense in Europe. So we believe that they will make a U-turn and we go back to Europe with high prices, and they will leave the Israeli market. That's our estimate.

Yes, if I may follow up. Would you summarize that your challenges are operational rather than demand? In other words, do you believe that, currently and for the next year or two, your challenges are on your internal operational, installation of the machinery and new employers, training, etc.? Or are the difficulties external in terms of demand in revenues?

100% sure of operational issues. No demand. Demand is not the issue now.

All right. You also mentioned in the past the new facility in the North of Israel, in Galilee, I believe. Is there any -- given this demand that you expect to remain or increase, do you envisage any further capacity extension beyond Petah Tikva?

No. Hi, this is Ron. We are not progressing our plan to open a new facility in the North. However, we are starting to think about the new investment plan which will come after we end the current one, the accelerated one. But as we said, we think that it will take us towards the end of 2025 or the beginning of 2026 to finish the current investment, and only then we will see if we are making another plan.

Yeah. That's clear. And on the employment side, do you have -- how do you proceed with hiring the additional, or replacement employers that you mentioned in the past you had some problems also related to the war, of course, that's understood, but also related to the new capacity and to the increased costs with salaries because you mentioned in the past that you had to raise salaries because of competitive pressures on the employment market, on the labor market. So could you comment on that?

Yes, so the recruiting employees is a continuous effort which will be with us along 2025. We think that the raising salaries that we made during towards the second quarter of 2024 was good. It allows us to keep employees and to tribute new ones.

However, the labor market in Israel is very tough, and it requires a lot of efforts to recruit engineers and also manufacturing employees. We are succeeding in it, but it goes not quickly. And as I said, it is a continuous effort along the year.

Yeah, all right. Thank you for all this clarification. Have a good day now.

Thank you.

Dan Zafrir.

Hello, thank you for taking my question. So I've one on the gross margin. The latest quarters and on the earnings calls, you came and guided in around 27% on the gross margin, and this quarter you only came at 18%. So should we see this trend continue to 2025?

We believe that in the near term, which means the next two to three years, it will be around 26% to 29% somewhere there. We had some difficulties as Eli explained before on the operation side. We had also an unfavorable mix of several flex rigid orders with a big volume and relatively low average price due to its level of sophistication. We are targeting to meet this for this guideline and to reach the 26% to 29% gross margin.

Can you talk about the timeline again? You said two or three years or two or three quarters?

Two to three years, the midterm.

Okay. And what about 2025? Do you have some guidance to give about it?

No, I cannot give.

Okay. Thank you very much.

Thank you, Zafrir.

There are no further questions at this time. This concludes the Eltek Ltd. 2024 financial results conference call. Thank you for your participation. You may go ahead and disconnect.