Eltek Ltd. Q3 FY2025 earnings call

• Financial results were affected by the sharp depreciation of the U.S. dollar against the Israeli shekel, increasing NIS-denominated expenses and reducing gross profits. The total impact of currency erosion on operating profit was ~$800,000 compared to Q3 2024. - Operational front: experienced instability in production processes related to new equipment ramp-up and integration of new staff; key contributors to operational results in this quarter included higher depreciation expenses, increased raw material consumption, and higher energy costs; expect these effects to gradually be modest as new line stabilizes, process matures, and team reaches full proficiency. - Market perspective: demand remains strong led by defense sector; new foreign competitors entering the market limit price increase in certain segments; facing pressure from large Israeli customers to extend credit terms; recent improvement in regional security has positive effect on logistics, allowing gradual reduction of inventory level.

Third quarter sales were $13.3 million, with first 9 months totaling $38.6 million. Gross profit for the quarter was $1.6 million, operating income was breakeven, and net loss was $0.2 million. From the market perspective, demand for products remains strong, led by the defense sector which represents 63% of the quarterly sales, alongside 9% for the industrial and 6% from the medical customers. Rigid flex products accounts for 66% of the quarterly sales and 65% of the first 9 months of this year.

• Expect positive impact of revised pricing beginning in coming quarters as new quotations issued after end of Q2 2025 take effect. - Expect to complete integration of new coating line by mid-2026, which is expected to streamline core manufacturing processes, expand production capacity, stabilize production processes, and improve gross margin. - Increasing sales volume is expected to have a significant positive impact on profitability.

• Sharp depreciation of the U.S. dollar against the Israeli shekel increases reported NIS-denominated expenses and reduces gross profits; impacts financial expenses related to U.S. dollar-denominated assets. - Instability in production processes related to ramp-up of new equipment and integration of new staff. - Entry of several new foreign competitors into the market limits price increase in certain segments. - Pressure from large Israeli customers to extend credit terms increases working capital requirement and financial expenses.

Q: It's pretty low quarter for you. So I wanted to understand because last quarter, you said that your all operational issues was almost behind you. So how, again, you speak about the operating issues? And then when we will see the improvement of your pricing lift due to USD depreciation?

A: What was reported last quarter was about end of construction etc. now instability is due to engineering and manpower. Usually, it takes 6 to 9 months until quotation is mature and translated to profits.

Q: Regarding when we will see the effect of price increases due to the lower USD?

A: Usually, it takes 6 to 9 months until quotation is mature and translated to profits.

Q: And when you think you will be behind your operational difficulties?

A: It's tough to say as it depends on absorption rate of employees and engineering forces.

Q: You guided for '26, '27 gross margin in the middle term. When approximately we'll be able to reach those gross margins?

A: Expect to complete integration of new coating line scheduled to arrive soon by mid of 2026, which is expected to streamline core manufacturing processes and expand production capacity, and hope to stabilize production processes and improve gross margin.

Q: Can you elaborate more about the negative impact from new competition? About the price pressure you said you felt this quarter? And can we assume the negative impact from currency and foreign exchange to U.S. dollars will continue this quarter?

A: Competition from abroad (not China) entering defense sector; price pressure in high-volume production limited our pricing; as long as dollar keeps eroding, will have additional financing expenses and NIS-denominated expenses affected