Eltek Ltd. (ELTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before I turn the call over to Mr. Eli Yaffe, Chief Executive Officer, and Alon Mualem, Chief Financial Officer, I'd like to remind you that Eltek's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934 as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release as well as review our latest filings with the SEC for important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. These forward-looking statements are projections and reflect the current beliefs and expectations of the company. Actual events or results may differ materially. 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, everyone. Thank you for joining us, and welcome to Eltek's 2020 Second Quarter Earnings Call. With me is Alon Mualem, our Chief Financial Officer. We will begin by providing you with an overview of our business, a summary of the principal factors that affected our results in the second quarter of 2020 and an update how COVID-19 has impacted our business, 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 second quarter earnings press release, which was released earlier today. The release will be also available on our website at www.nisteceltek.com. This is the sixth quarter in a row that we achieved both operating and net profit. Our revenue in the second quarter of 2020 rose to $8.8 million from $8.2 million in the second quarter of 2019. Revenues for the 6 months of 2020 were $17.9 million compared to $16.9 million in the first 6 months of 2019. This growth is a result of 11% growth in sales to customers in Israel and reflects year-over-year growth in sales to defense segment and the contract electronics manufacturers. I'm also pleased with the continued improvement in production efficiency that is evidenced in our improved gross margins and operating profits. Our diversified end market allowed us to grow revenue year-over-year despite the weakness in the Indian markets. In addition, strong operational execution overcome production inefficiency and extra costs due to the COVID-19. The COVID-19 pandemic has created operational difficulties, macroeconomic uncertainty and employees' concern. I'm extremely proud how Eltek's employees have worked to deliver excellent performance despite challenging environments. We have had 3 employees who had tested positive for COVID-19 this year with other returning to work after being cleared following existing quarantine protocols. We continue to use contact tracing in quarantine individuals who are close -- who are in close contact with the infected team members in addition to the deep cleaning effected work area. We also continued other measures such as extensive internal communication, masking, temperature checks and proper distancing in our facility. Because of the preventing measures in place and our culture of transparency and communication, these events have a minimal impact on our manufacturing operational to date. The outbreak of the coronavirus has created new operational and business challenges, which required quick adjustments to enable us to maintain our production of PCB, while maintaining the safety of our workforce. We see both risk and new opportunities in the existing business environment and are making the necessary reductions to meet customers' demand and our revenue and profit margin goals. As we said in the past, we also see an opportunity to grow our business in the U.S. market due to the worsened relationship between the U.S. and China. The impact of any trade war between the U.S. and China will also impact the Israeli market since we see U.S. pressure on the Israeli government to reduce the Israeli-Chinese trade activities. At the same time, we are also facing a slowdown from some of our customers in India due to the continued negative impact of COVID-19 in this territory. So far, we have financed our growth strategy by our positive operating cash flow and our own internal resources. During 2020 and 2021, we plan to increase our investment in new equipment and expansion of our facility and infrastructure to support our long-term sales growth. The increase in our top line 2020 reflects the continued market recognition of our high-quality and reliable products, mainly in the flex PCB sectors. Our revenue from the defense sector and contract electronic manufacturers grew from $13.8 million during the first half of 2019 to $15.3 million in the first half of 2020, 11% growth year-over-year. The medical sectors contributed 9.7% of our revenue during the first half of 2020, representing 4% growth year-over-year. Our customers continue to see the value proposition of our products, and have a great deal of interest in our company and its capabilities. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capability. We remain focused on operational excellence and financial discipline as well as our strategic growth goals. We are all focused in addressing the challenges that are widespread as the crisis is on us and are working delicately to expanding our business while maintaining the trend of improved growth and operational results. I will now turn the call over to Alon Mualem, our CFO, to discuss our financials.

Thank you, Eli. I would like to draw your attention to the financials of the second quarter of 2020. During this call, I will also be discussing 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. Now I will go over the highlights of the second quarter of 2020 compared to the second quarter of 2019. As Eli mentioned, revenues for the second quarter of 2020 were $8.8 million, up from revenues of $8.2 million in the second quarter of 2019. Gross profit increased from $1.3 million or 15.3% of revenues in the second quarter of 2019 to $1.9 million or 21.6% in the second quarter of 2020. During the second quarter of 2020, we had an operating profit of $809,000 as compared to an operating profit of $7,000 in the second quarter of 2019. Net profit was $704,000 or $0.16 per share in the second quarter of 2020 compared to a net profit of $790,000 or $0.19 per share in the second quarter of 2019. The results of the second quarter of 2019 were positively affected by nonrecurring other income of $871,000 as a result of a receipt of an insurance payment associated with damage incurred to one of our manufacturing machines. EBITDA was approximately $1.2 million in the second quarter of 2020 as compared to EBITDA of $1.25 million in the second quarter of 2019. During the second quarter of 2020, we had positive operating cash flow of $1.4 million compared to net cash used in operating activities of $301,000 in the second quarter of 2019. During the first half of 2020, the company achieved a positive operating cash flow of $2.9 million as compared to positive operating cash flow of $1.3 million in the first half of 2019. As Eli mentioned before, we remain focused on operational excellence and financial discipline as well as our long-term strategic growth goals. As previously announced, we filed a self-registration statement during the third quarter of 2019 to provide the company with the ability to raise additional funds. The company is also considering different options to fundraising to support our plan to grow and expand our business. We are now ready to take your questions.

[Operator Instructions] The first question is from [ Michael Wu ].

So I have a first question about the insurance claim in terms of last year. So just on your filing, so you said during 2018, you had 2 equipment repairments. So you received claim for 1 equipment. So my question is like the claim is over or settled or you are still waiting for a negotiation with the other claim?

Yes. We indeed received payment from insurers for 1 manufacturing machine. We still have a pending claim with our insurance company, but we cannot predict or know how this claim will end up. So far, there is no provision in our financials for it.

Okay. So can you give us a little bit detail on what was the incident? I mean is that -- what does happens when -- does it -- your margins come or affecting your -- I mean how that incident affect your operation now?

These machines were affected by water damage, including our plant. We overcome this damage relatively fast in the third quarter of 2018 and -- a long time ago, we are over it.

Okay. Okay, great. My second question is about your biggest customer is based on the last quarter -- last year's, 2019's number, roughly has like 30% by 2 biggest customers. But I take your filing, and you said there's 2 groups of customers, which kind of -- I'm not quite sure what are the 2 group customers. Is it 1 customer or 2 big customers? Also what's your relationship with them?

Indeed, we have a group of major customers, related companies, that are all in 1 group and they are presented in 1 -- as 1 group in our 20-F.

So that's -- the order is different or the order just through 1 channel? Like, I mean, they act like different or they can change order? Do they make 1 order or they make, I mean, different orders from different companies?

This is one group of companies that are combined with a few companies in it.

So how the order goes here? I mean, maybe I'm asking for -- like, they're ordering like in 1 batch or something like 1 kind of person or something?

So. It's another company that has a few divisions. And theoretically, they are 1 company, but we get the POs from different divisions. So we combine it because at the end of the day, it's 1 company.

Okay. Can you [indiscernible] there from U.S. and Israel?

Their headquarter is based in Israel, but we get their order -- majority of it from Israel and some of it from other parts in the world, including Brazil, United States and Israel.

Okay. Great. That's really helpful. I have another question about your capital --your CapEx is around $1.6 million, right? Or no, not that, it's like $800,000 to $900,000. But I -- there's an indication in the annual report says you have spent $1.7 million on equipment. So basically your cash CapEx is around $800,000. So it's kind of a little bit different. So can you explain a little bit on that, like what is the $1.7 million on the equipment spending?

You were cut in the middle of your question. Can you repeat, please?

Okay. Sorry about that. So in year 2019, so your CapEx -- cash CapEx is around $800,000, $900,000. But the annual report says you spent $1.7 million on equipment -- for new equipment. So any explanation on that, just the different numbers?

I think the $1.7 million that you refer to is in the last 3 years altogether. I'm not sure, but we will need to look into it.

Okay. So it's not right? So you're only around $800,000, $900,000 for last year of the CapEx.

Yes. Correct.

Okay. So this year, it also says $2 million. So the same number [indiscernible], it's not like that, right? So this year, what's your -- I mean what's your CapEx like? How much you're going to spend on your equipment stuff?

We do not provide the looking forward statements, so we cannot provide the numbers for the second half. But as you can see in our cash flow for the first 6 months, we had approximately $450,000 in cash investment in fixed assets.

Okay, that's great. So basically [indiscernible], I mean I remember last quarter, you indicated that you want to increase spending. So do you have any plan to, I mean, buy new equipment? Or you're just basically maintaining the current capacity?

Yes. Yes. As I mentioned in my discussion, we have the goal and we have the means, and we clearly look on increasing our capacity based on our internal resources. If we'll raise money, we'll accelerate it. We'll not money, we'll do it in organic growth without our own resources.

Okay. I just asked about the capacity. So you're running more like, I mean, full capacity? Or you can add like 10% more revenue with new machines or new equipment?

Right now, work in some of our departments, 2 shifts, some of our departments, 3 shifts.

Okay.[indiscernible], right?

Sorry, again, I didn't hear your last question, you were cut.

I mean you're running full capacity?

It's close to full capacity. It's 5 days a week, so we still have opportunity to grow over the weekends.

[Operator Instructions] 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 the participants that a replay of this call will be available tomorrow on Eltek's website, www.nisteceltek.com. Mr. Yaffe, would you like to make your concluding statement?

Before we conclude our call, I would like to thank all of our employees for all their efforts during the difficult period and their contribution in renewing our position as a leading high-end PCB manufacturer and making Eltek profitable again. I would like to thank once again to our customers, partners, investors and the Eltek team for their continued support. I wish everyone good health. Thank you for all joining us on today's call. Have a good day.

This concludes the Eltek Ltd. Second Quarter 2020 Financial Results Conference Call. Thank you for your participation. You may go ahead and disconnect.