Eltek Ltd. (ELTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. Fourth Quarter and Full Year 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 would like to remind you all that Eltek's earnings release today and this call including forward-looking statements within the meaning of the Private Security 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 decision, 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 of 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 over the call 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 fourth quarter and full earnings call. With me is Alon Mualem, 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 in 2020, followed by the detail of our financial results. After our prepared remarks, we will happy to answer any of your questions. By now, everyone should have access to our fourth quarter press release, which was released earlier today. The release will be also available on our website at www.nisteceltek.com. This is the eighth quarter in a row that we achieved both operating and net profit with cumulative 12 months EBITDA of $4.6 million. We achieved this result despite higher financial expenses due to the devaluation of the U.S. dollar against the Israeli -- new Israeli shekels during 2020. Our revenues in the full year of 2020 increased to $36.7 million from $34.8 million in 2019 that represents 5.5% growth in revenue year-over-year. Our revenues in the fourth quarter of 2020 rose to $9.5 million from $8.6 million in the fourth quarter of 2019 that represents 10.5% increase. We have believed that the fourth quarter results continued to reflect the growth in our revenues and the continued improved operational efficiencies. The outbreak of the spread of the coronaviruses created new operational and business challenges, including the shortage of Pyralux raw material that we are dealing with in 2021. Eltek qualified ahead of time alternatives to the Pyralux, but this take time very big customers to approve it. Eltek is -- Eltek that -- Eltek sales we cannot produce due to the Pyralux shortage will be delivered in the near future. We have managed successfully through the COVID pandemic in 2020 because of the made necessary adjustment, increased revenue from the defense sector, raised additional funds through the right offering and obtained loans with preferred terms. I'm also pleased with the continued improvement in production efficiency that is evidenced in our improved operational profit, which more than doubled year-over-year. Our diversified end market allowed us to grow revenue year-over-year, mainly in the Israeli market and the Netherlands. In addition, strong operational execution, overcome production inefficiencies and extra costs due to the COVID-19. The COVID-19 pandemic created operational deficiencies, difficulties and the employees' concern. I'm extremely proud of our employees' efforts to deliver excellent performance despite of the challenges of this environment. We are continuing to invest in new equipment in order to benefit from the soft market in the capital equipment for manufacturing. During the second half of 2020, we installed and began to operate a new state of the art DES line, which is one of the main PCB production lines and 4 new optical oriented drilling machines where in -- now are in operation. In order to benefit more from the soft market of capital equipment Eltek applied and was awarded a grant from the Israeli Investment Authority that will fund 15% to 20% of the Eltek expected $1.5 million adjustment -- investment in the advanced manufacturing equipment. As we already notified, major portion of Eltek investments program that are under the grant program are expected to be completed and become operational by the mid of 2021. The recent investment and the planned future investment will strengthen Eltek manufacturing capability and increased our competitiveness by implementing improved production processes and adoption of Industry 4.0 technologies. In addition, we are already -- as we already announced, Eltek received final approval from the Israeli Innovation Authority for a 50% royalty bearing participation in an approximately $250,000 for 2021 R&D program. This 2021 R&D program is meant to enable Eltek to achieve significantly faster production rate and reduce scrap. The 2021 R&D program, if succeeded, will yield a growth in manufacturing capacity with minor investment. The fruits of 2021 R&D programs, if succeeded, will enhance Eltek ability to offer by the end of 2020 -- 2022, higher -- highly reliable printed circuit boards in a shorter production time, at reduced cost. The 2 prior programs that were approved in 2017 and 2020, together with the newly 2021 program are part of technology roadmap that Eltek launched as part of its strategic plan to become an innovative industrial leader for low quality -- low quantity production of high-performance printed circuit boards. I'm proud that the fruits of 2017 R&D program already contributed to Eltek's sales during 2020 and going forward. While the fruits of Eltek 2020 R&D program will arrive, if succeed, in 2022. During 2021, we plan to continue our investment in new equipment and the extension of our facility and infrastructure to support our long term sales growth. The increase in our top line in 2020 reflects the continued market recognition of our highly -- high-quality and reliable products, mainly in the flex PCB sector. Our revenue from the defense sector and contract electronic manufacturers grew from $28.1 million in 2019 to $31.6 million in 2020, 12% growth year-over-year. Our customers continue to see the value proposition of our products and had a great deal of trust in our company and its capability. We are continuing to pursue new business opportunities and increase customer design engagement activity that will leverage our advanced technology capabilities. We remain focused on operational excellence by using advanced technology and financial discipline and in making the necessary adjustment to address the challenges we face from the widespread health crisis and the shortest of raw material. We are continuing to work diligently on expanding our business while maintaining the trends of improved operational margins and 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 for the full year and the fourth quarter of 2020. During this call, I will 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. First, I will go over the highlights of the full year of 2020. As Eli said, revenues for the full year of 2020 went up to $36.7 million from $34.8 million in 2019, an increase of 5.5% year-over-year. Gross profit increased by 28.3% in 2020, reaching $7.7 million or 21% of revenues compared to gross profit of $6 million or 17.3% of revenues in 2019. Operating profit was $3 million in 2020 compared to an operating profit of $1.4 million in 2019.

I'm sorry for the interruption. There is noise from the speaker line. We will reconnect them.

Thank you.

Please excuse the interruption. Ladies and gentlemen, thank you for standing by. Mr. Mualem, please go ahead.

Thank you very much. Sorry for the interruption. Operating profit was $3 million in 2020 compared to an operating profit of $1.4 million in 2019. And net profit was $2.6 million or $0.58 per share in 2020 compared to net profit of $1.8 million or $0.48 per share in 2019. EBITDA was $4.6 million in 2020 compared to EBITDA of $3.8 million in 2019. During 2020, we enjoyed positive cash flow from operating activities of $3.3 million compared to an operating profit -- operating cash flow of $2.6 million in 2019. As of December 31, 2020, we had cash and cash equivalents of $4.7 million compared to $1.6 million at the end of 2019. Now, I'll go over the highlights for the fourth quarter of 2020 compared to the fourth quarter of 2019. Revenues for the fourth quarter of 2020 were $9.5 million, up from revenues of $8.6 million in the fourth quarter of 2019. Gross profit increased by 46.7% to $2.2 million in the fourth quarter of 2020 from $1.5 million in the fourth quarter of 2019. Net profit was $766,000 or $0.16 per share in the fourth quarter of 2020 compared to a net profit of $370,000 or $0.08 per share in the fourth quarter of 2019, an increase of 107% year-over-year. EBITDA was $1.4 million in the fourth quarter of 2020 compared to EBITDA of $817,000 in the fourth quarter of 2019. Cash flow used in operating activities was $497,000 compared to $141,000 of cash used in operating activities in the fourth quarter of 2019. During the fourth quarter of 2020, we completed a rights offering to our shareholders and raised $5.6 million (sic) [ $5.7 million ] net. The proceeds from the offering were used in part to repay the loan from Nistec, our controlling shareholders, as well as for working capital and other general corporate purposes, including investment in fixed assets. These fund raising, together with the positive operating cash flow we achieved in 2020, improved our current ratio from 0.92 at the end of 2019 to 1.94 at the end of 2020. As of December 31, 2020, our short term credit and loans were down from 24.5% of the balance sheet at the end of 2019 to 1.9% at the end of 2020. And our equity to total balance sheet increased to 43.4% at the end of 2020 compared to 27.5% at the end of 2019. As Eli mentioned before, we remain focused on operational excellence and financial discipline as well as our long term strategic growth goal. As previously indicated, we outstanding shares registration statement that provides the company with the ability to raise additional funds to support our planned growth and accelerate the expansion of our business. We are now ready to take your questions.

[Operator Instructions] The first question is from [ Michael Wu ], a private investors.

I have a question about the delay caused by the material shortage. So do you have any estimate volume that was not produced in Q1?

Yes. Thank you, Michael, for the question. As you know, we don't provide looking forward statement. However, as we previously announced, we are facing shortage of key material that is used in the production of flexible and flex-rigid printed circuit boards printed. Therefore, our operation in the first quarter of 2021 will be negatively impacted. We are investing significant efforts in order to compensate for the challenging market condition, and we are continuing to closely monitor the Eltek expenses and started the new expenses reduction plan at the end of 2020, at the beginning in 2021. Also, we have alternative raw material that we already qualified ahead of time, and we offer it to our customers. And we are right now in the process of getting day after day, more and more parts move to -- from the Pyralux raw material to the new raw material that, by the way, is in a cheaper cost. We believe that sales will not be lose. It will not be show up -- some of the sales will not be show up in Q1, but it will be catch up later.

So I can assume that you didn't lost any order from the shortage, right?

We didn't lose orders, but we will delay the sales.

Okay. So just pushed to Q2 or maybe Q3, you think that the delay will be fully recovered by what timeframe?

We offer our customers not to delay and make push outs, but we provide them offer to alternative raw material that we have already in our hands. We have enough inventory of the alternative raw material. Once the alternative raw material, which is qualified by us, will be qualified by each customer separately for each PCB separately, then we can -- not make push out and make the sale immediately. Once the customer is insisting or take time to approve it, then you have to wait until we will get the Pyralux. But we didn't face any other cancellation.

So just one concern, you said the material affect the flexible PCB only, right?

It's only for flexible PCB only. Yes.

Yes. So, based on my understanding, what is the flexible -- so is that for all the flexible PCB -- any like flexible PCB or just partially some of the PCBs?

No, we had some inventory before. So we use the inventory that we have and we have some supply right now, but it's limited supply. So we have faced some difficulties. But by providing alternative, we believe that customers will move to the alternative raw material, and that will compensate for the time delay. And if customers insist of Pyralux, then they have to wait.

So as of today -- so -- I mean have you been able to kind of -- like substitute new material -- the new material, I mean, for any orders? Or you still have kind of these delayed sales ahead into Q2?

The alternative material is already prequalified by Eltek years ago, and we presented to the market immediately when there was a shortness. The shortness is not only for Eltek, it's a worldwide shortness -- shortage. And by showing the customers alternative raw material, I think that we have some advantage.

Yes, just wanting to understand when this going to the end? I mean, would you -- do you have any idea in Q2 -- is there still will be some...

We got announcement from DuPont, who is the manufacturer of the Pyralux. They said that they are going to build a new factory at investment of $250,000. They announced that the new factory will be operational in the second half of 2021. So our belief is that the shortness of this specific raw material -- only this specific raw material will be ended by the beginning of 2022.

Okay.

As I explained, we have alternative raw material. And from day-to-day we sell more and more alternative compared to the Pyralux.

So basically, your customer kind of accepting the new material quite, I mean...

In penetration mode. Yes, it's -- there is a penetration mode. It's not fast.

I won't ask further. So second question is about, do you have any numbers about 2021, the CapEx budget?

We intend to continue investing in equipment and fixed assets in order to bring in a better technology into Eltek. We started it in 2019 and moved faster in 2020, and we intend to increase it also in 2021.

So how about a question about your capacity. So are you on full capacity? I mean, you'd be running on full capacity, what could be achieved? What is the revenue around, like $40 million or something? Do you have an idea?

No, we are not at full capacity. After we installed the DES line last year, and the DES line right now is in fully operation. We don't have constraints.

So theoretically, if you are in full capacity, how -- like what is the revenue kind of [ rate ]? Do you have any estimate there?

It depend upon the prices, and we don't give -- looking forward statements like that.

But do you have any numbers of the -- percentage of the capacity you're running -- currently you're running maybe just from volume size?

Theoretically, we can add on this -- I think, on this equipment we can add another 30% sales.

That's great. So you do have any new equipment this year -- in 2021?

Yes. As I'm mentioning the -- previously, what I described before, we are going to have -- by the mid of 2021, we are going to have more capital investment that we're going to get at very attractive prices because it's soft market, and we get grants also from the government.

So what is the capacity will be increasing? Do you have any like percentage wise?

It will stay 30%. And the equipment that we are going to install is oriented to efficiency increase.

I have no further questions.

Thank you, Michael.

[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 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 their efforts to make Eltek profitable again and capitalize our strengths and renewed our position as a leading high-end PCB manufacturer. I would like to thank once again to all our customers, partners, investors and the Eltek team for their continued support. I wish everyone good health and Happy Passover. Thank you for all for joining us on today's call. Have a good day.

This concludes the Eltek Ltd. fourth quarter and full year 2020 financial results conference call. Thank you for your participation. You may go ahead and disconnect.