Eltek Ltd. (ELTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Limited Third 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 earnings release today and this call includes forward-looking statements within the meaning of 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 2020's third quarter earning 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 factor that affected our results in the third quarter of 2020 and an update on 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 third quarter earning press release, which was released earlier today. The release will be also available on our website at www.nisteceltek.com. This is the seventh quarter in a row that we achieved both operating and net profits. Our revenues in the third quarter of 2020 were $9.3 million, consistent with our revenue in the third quarter of 2019. Revenues for the first 9 months of 2020 were $27.2 million compared to $26.2 million in the first 9 months of 2019. This increase is mainly as a result of 15% growth in the sales of customers in Israel and reflects growth of 8% in sales to the defense segment and to the contract manufacturers with 22% decline in the Indian and Italian market as a result of customer shutdown due to the COVID-19. I'm also pleased with the continued improvement in production efficiency that is evidenced in our improved operation profit, which is more than double year-over-year. Our diversified end market allowed us to grow revenue year-over-year despite the weakness of the Indian and Italian market. In addition, strong operational execution overcome production inefficiencies and extra cost due to the COVID-19. The COVID-19 pandemic has created operational difficulties, macroeconomic uncertainty and employee concern. I'm extremely proud of our employees' efforts to deliver excellent performance despite that formidable and unexpected challenges of this environment. We also had 4 employees who had tested positive for COVID-19 this year with other returning to work after being cleared following testing and quarantine protocols. We continue to use contact tracing and quarantine individuals who are in close contact with an infected team member in addition to the deep cleaning affected area -- areas. We also continue to employ other measures such as extensive internal communication, masking, temperature check and proper distancing in our facility worldwide. Because of the strict preventive measures we -- in place and our culture of transparency and in communication, COVID-19 has had minimal impact in our manufacturing operation to date. I would like to remind you that Eltek was declared as essential enterprise, therefore, we fully continue our operation and did not lose any working day since the beginning of the pandemic. The outbreak of the coronavirus has affected new operational and business challenges, which required quick adjustments that allowed us to maintain our production of PCBs while maintaining the safety of our workforce. We see both risk and new opportunities in the existing business environment and are making the necessary production to meet customers' demand and our revenue and profit margin growth. As we said in the past, we also see an opportunity to grow our business in the U.S. market due to the worsening relationship -- relations 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 a U.S. pressure on the Israeli government to reduce the Israel-China trade activity. We believe that the new administration in the U.S. will continue the same route as the previous administration, at least in the military and communication PCB segment. At the same time, we are facing slowdown from some of our customers in India and Italy due to the continued negative impacted of COVID-19. Eltek continues to invest in the new equipment in order to get the benefits of soft market in the capital equipment manufacturing. During quarter 3, Eltek started the installation of a new and fast modern desk line, which is one of the main PCB production lines, and the new line is now running and testing mode in parallel to the old one. 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 continue our investment in new equipment and the expansion of our facility and infrastructure to support our long-term sales growth. The increase on -- in the top line of 2020 reflects the continued market recognition of our high quality and reliable products, mainly in the flex PCB sector. Our revenue from the defense sector and contract electronic manufacturers grow from $21.7 million during the first 9 months of 2019 to $23.5 million in the first 9 months of 2020, 8% growth year-over-year. The medical sector contribute 8.7% of revenue during the 9 months of 2020, representing 13% growth year-over-year. Our customers continue to see the value proposition of our products and have great deal of trust in our company and its capability. We are continuing to pursue new business opportunities and increase customer's design engagement activity with -- that will leverage the advantaged technology capability. We remain focused on operational excellence and financial discipline as well as our strategic growth goals. We are all focused on addressing the challenges that the widespread health crisis have upon us, and we are working delightedly on 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 financial.

Thank you, Eli. I would like to draw your attention to the financials of the third 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 the -- for its definition and the reasons for its use. Now I will go over the highlights of the third quarter of 2020 compared to the third quarter of 2019. As Eli mentioned, revenues for the third quarter of 2020 were $9.3 million, consistent with our revenues in the third quarter of 2019. Gross profit increased from $1.75 million or 18.9% of revenues in the third quarter of 2019 to $1.82 million or 19.7% of revenues in the third quarter of 2020. During the third quarter of 2020, we had an operating profit of $638,000 which are 6.9% of revenues as compared to operating profit of $568,000 or 6.1% of revenues in the third quarter of last year. Net profit was $598,000 or $0.14 per share in the third quarter of 2020 compared to net profit of $391,000 or $0.09 per share in the third quarter of 2019. EBITDA was approximately $1 million in the third quarter of 2020 as compared to EBITDA of $940,000 in the third quarter of 2019. During the third quarter of 2020, we had a positive operating cash flow of $873,000 compared to $1.4 million during the third quarter of 2019. During the 9 months period of 2020, the company achieved a positive operating cash flow of $3.7 million as compared to positive operating cash flow of $2.7 million in the 9 months 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 shelf registration statement during the third quarter of 2019 to provide the company with the ability to raise additional funds to support our planned growth and accelerate the expansion of our business. In addition, last week, we issued a prospectus to our shareholders of record on November 9, 2020. Shareholders received 1 nontransferable subscription right for each 3 ordinary shares held or deemed held on the record date. Each right entitles the holder to purchase one ordinary share at a subscription price of $3.90 per ordinary share. The subscription rights are nontransferable and may be only exercised during the period ending 5 p.m. Eastern Time on December 2, 2020. We are now ready to take your questions.

[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 the participants that a replay of this call will be available tomorrow on Eltek's website at 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 this difficult period and their contribution in renewing our position in 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 of their continued support. I wish everyone good health. Thank you for all joining us on today call. Have a good day.

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