Eltek (ELTK) Q1 2025 Earnings Call Transcript

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DATE

Tuesday, May 20, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Eli Yaffe

Chief Financial Officer — Ron Freund

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RISKS

CEO Yaffe disclosed, "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."

CEO Yaffe stated, "The Israeli labor market remains highly challenging, particularly when it comes to attracting qualified candidates in these fields."

Management identified a two-month delay in delivery of critical new plating line equipment from its European supplier.

TAKEAWAYS

Revenue: $12.8 million in revenue for Q1 2025.

Gross Profit: $2.2 million in gross profit for Q1 2025 as results were impacted by lower yields and increased labor costs during the transition to new equipment.

Operating Profit: Operating profit was $0.7 million for Q1 2025.

Financial Income: $0.5 million in financial income for Q1 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: Net income was $1 million for Q1 2025, or $0.15 per share.

EBITDA: $1.2 million in non-GAAP EBITDA for Q1 2025.

Liquidity: $15.7 million in cash, cash equivalents, and short-term bank deposits as of March 31, 2025 with no outstanding debt as of quarter-end.

Production Stability: CEO Yaffe stated, "Production has resumed at a stable pace and efficiency levels have returned to where they were prior to the transition."

Solder Mask Equipment Ramp: CEO Yaffe reported recent stabilization after earlier technical disruptions.

Plating Line Expansion: CFO Freund confirmed one new plating line arrival around August 2025, to be installed on the basement floor, with a second expected in the first half of 2026.

Capacity and Technology: CFO Freund noted, "They increase capacity significantly and increase quality and efficiency. Give us momentum to upgrade to new technologies."

Production Transition: CFO Freund clarified that existing old plating lines will cease operation after full installation of the new equipment.

Demand Backdrop: CFO Freund stated, "The demand, yes, we see it" in support of increased capacity.

Lead Times: CEO Yaffe described an "increase in lead time for customer delivery, not only at Eltek, but also across the industry and among our competitors."

Tariff Uncertainty: CEO Yaffe highlighted the lack of clarity on new U.S. tariffs for Israel-origin products, particularly regarding defense-related equipment.

Market Strategy: Management is diversifying its supply base in the Far East and evaluating partial offshore production with final processing in Israel.

IT Transformation: A company-wide overhaul of core information systems began in the quarter, with an expected duration of 18 months.

Hiring Constraints: Recruitment for production workers and engineers remains slow in challenging labor conditions, even after wage adjustments made at the end of Q2 2024.

SUMMARY

Profitability was attributed directly to technical difficulties during the ramp-up of new Solder Mask equipment and elevated labor costs. The company offered clear operational recovery signals, indicating stabilized production since the start of May and stated its efficiency has realigned with pre-transition levels. Management acknowledged that its new plating lines, with staged installations through mid-2026, are expected to materially expand capacity, enable technology advancements, and increase future profitability without disrupting current production, as discussed during the Q1 2025 earnings call. Despite a two-month delay in equipment delivery from the European supplier, the company asserts its overall expansion plan remains on schedule. The ongoing lack of clarity regarding U.S. tariffs on Israeli products was acknowledged, but management does not foresee a material impact on near- or medium-term U.S. demand.

CEO Yaffe stated, "The new line is not going to interfere the current production," confirming expanded capacity will be additive rather than disruptive.

Demand across all segments remains "strong" suggesting increased capacity could be absorbed by the market.

CFO Freund noted that new plating lines are "state-of-the-art lines with the higher technology existing now," positioning the company to upgrade its product offerings.

Eltek initiated an 18-month overhaul of its information systems to centralize operational knowledge and improve digital workflow, distinct from the physical production capacity expansions.

INDUSTRY GLOSSARY

Solder Mask Application Department: A dedicated section within the PCB manufacturing facility where a protective lacquer (solder mask) is applied to circuit boards to prevent solder bridging and protect the circuits.

Plating Line: Automated machinery used for electroplating metallic layers onto PCBs, critical for conductivity and reliability in advanced circuit board fabrication.

Full Conference Call Transcript

Eli Yaffe: 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 calibration of our new equipment installed in our recently launched Solder Mask Application Department as well as a machinery relocated to this facility.

This was a complex and time-intensive process, further complicated by the unavailability of certain technical support personnel, who decline 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 collectivity contribute 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 on 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 by 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 material 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 customers' demand for the high-end product as well 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 aboard with final processing and completion taking place in our facility in Israel.

The objective is to leverage our reputation and the 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 of 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 and methodologies.

A key focus of this project is to develop structured centralized digital process, that will capture and preserve critical knowledge previously held by a key personnel. This will allow us to unify production procedure, 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.

Ron Freund: 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 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.

Operator: [Operator Instructions] The first question is from [ Guy Mualim ] of Analyst.

Unknown 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 implementation, will you get back to the profitability we've seen in 2023?

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

Unknown Analyst: No, this is what I understand, of course. But I'm saying, you had your profitability it is 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 -- the implementation of it, is not going to be interfering with the existing line?

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

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

Eli Yaffe: As you know, we don't give forecast.

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

Ethan Etzioni: 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?

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

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

Ron Freund: 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.

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

Ron Freund: We have currently, we have two plating lines, okay. Very old ones. And we are now building in the basement floor and area, which we will install in it, the two new ones. One which is going to arrive by August and the second one will arrive I think during 2026 in the first half. And these lines will stabilized and calibrated, as we produce in the old ones. Once finished installation, we'll start to produce or manufacturing in the new lines and stop manufacturing the old lines.

Ethan Etzioni: So will the new lines only help operational efficiency? Or were they also helping increase revenues?

Ron Freund: They increase capacity significantly and increase quality and efficiency. Give us momentum to upgrade to new technologies. It is state-of-the-art lines with the higher technology existing now.

Ethan Etzioni: And do you see demand to support the increased capacity?

Ron Freund: The demand, yes, we see it.

Operator: 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.

Eli Yaffe: Yes. Before we conclude, I would like to take a moment to thank our dedicated employees for their inspectional efforts during what we see in a particular demanding period. The successful stabilization of our new Solder Mask application production lines, alongside initiation of the IT transformation and ongoing expansion efforts would not have been possible without their commitment and their reliances. I would also like to thank our shareholders and partners for their continued trust and support. Our confidence in Eltek enable 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.

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

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