Eltek Ltd. (ELTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. Third Quarter 2021 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 release, beliefs and expectations of the company. Actual events or results may differ materially. Eltek undertakes no obligation to publicly release revisions to the 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 2021 Third Quarter 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 the third quarter of 2021, 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 earnings press release, which was released earlier today. The release was also available on our website at www.nisteceltek.com. This quarter was very challenging, both operationally and business-wise. In addition to the COVID-19 pandemic that was affecting us, our results were affected by the reduced number of working days during the quarter compared to the number of working days in the third quarter of 2020. In addition, our results were impacted by the strength of the new Israeli shekel compared to the U.S. dollar during the third quarter. Nevertheless, we were able to maintain operation -- operating profitability. Also our revenue declined from $9.3 million in the third quarter of 2020 to $8 million in the third quarter of 2021. The spread of COVID-19 was still affecting some of our customers in India. While during Quarter 3 2021, we had partially recovery of the Pyralux AP supply compared to the short shortage that we faced during Q1 2021. This showed created operational and business challenges, during the 9 months ended September 30, '21, which required quick adjustment to enable us to maintain production and deliveries of PCB to our customers. Due to the raw material worldwide shortage. We purchased during Q3 2021, a sufficient amount of inventory ahead of time and also alternative raw materials that were preapproved 2 years ago as a backup plan for our production of PCBs in Q4 2021 and the beginning of 2022. During the third quarter, we were able to obtain authorization from the majority of our customers to use the alternative raw materials. Once the alternative raw materials is fully approved by all our customers, we'll accept a reduction of the cost production, which will give us the flexibility to offer our customers more options for production as well as better pricing and more secure sources of raw materials. During the third quarter and to date, we faced significant price increase of some of our raw materials on top of the extra logistic cost of raw material freight. In addition, some of our operation expenses are dominating new Israeli shekels and were negatively affected by the devaluation of the U.S. dollar against the Israeli new shekel. Nevertheless, we were able to maintain our gross margin at 20.2% in the 9 months for the period of 2021 compared to 20.3% in the 9 months period of 2020 by keeping our operational costs under tight control. As we said in the past, we see an opportunity to grow our business in the U.S. due to the shift back to the production in the Western world by defense, aerospace, space and communication PCB sectors as a result of the cyber threat by China and the lack of production capacity in the United States, Europe and Israel. To date, we have financed our growth strategy from our own internal resources and through right offering to our shareholders. During the first 9 months of 2021, we invested $1.4 million in new equipment, and we plan to continue investing in sales activity that will enable us to grow revenue with a focus on the U.S. market. We continue to invest in new advanced manufacturing equipment that will strengthen our manufacturing capability and increase our competitiveness by implementing improved production processes and adoption of the Industry 4.0 technologies. We believe that this recent investment and planned future investment will strengthen our manufacturing capability and increased our competitiveness by implementing improved production processes. As previously reported, we applied to the Israeli Land Authority for allocation of land in the north of Israel where we intend to build a second production facility. This is a major part of our long-term strategic road map to facilitate and accelerate the expansion of our business. We intend to continue our long-term machinery investment program into 2022 and 2023, with the purchase of new and modern machinery and our focused on investment that will increase our total yield and increase our production capacity. As we have previously reported, we are conducting several R&D programs in order to maintain our position as an innovative industry leader. Our 2021 R&D program is designed to enable Eltek to achieve a significantly faster production rate and reduce scrap. If successful, this R&D program will enhance our ability to offer high reliability print -- printed circuit board in shorter production time and reduced costs. I'm glad to report that this R&D program is progressing as planned, and approximately 60% of the program has been completed and the demo machine is already in testing mode. There is still more milestone to pass in order to declare on full success. We are continuing to pursue new business opportunities and increased customer design engagement activities that will leverage our advanced innovative and 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 global supply chain crisis. We are continuing to work delightedly on expanding our business while maintaining operational efficiency and continue to trend in the improved operational results. We are focused on business growth and now we have consistent positive cash flow and strong working capital. We expect to future -- to further increase our future investment program as long as we get a clear and high positive return on investment. 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 third quarter of 2021. 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. Now I will go over the highlights of the third quarter of 2021 compared to the third quarter of 2020. As Eli mentioned, revenues for the third quarter of 2021 were $8 million compared to revenues of $9.3 million in the third quarter of 2020. Gross profit was $1.4 million or 17.5% of revenues in the third quarter of 2021 compared to $1.8 million or 19.7% of revenues in the third quarter of 2020. During the third quarter of 2021, we had an operating profit of $65,000 as compared to an operating profit of $638,000 in the third quarter of 2020. Net loss was $26,000 or $0.00 per share in the third quarter of 2021 compared to net profit of $598,000 or $0.14 per share in the third quarter of 2020. EBITDA was $553,000 in the third quarter of 2021 as compared to EBITDA of $1 million in the third quarter of 2020. During the third quarter of 2021, we had positive operating cash flow of $598,000 compared to net cash provided by operating activities of $873,000 in the third quarter of 2020. During the 9 months of 2021, our operating cash flow was $3.4 million as compared to operating cash flow of $3.7 million in the first 9 months of 2020. During the second quarter of 2021, we obtained a loan of ILS 10 million or approximately $3.1 million from Bank Leumi that enables us to support our growth plan. The loan is a term of 10 years with favorable terms, including a repayment schedule that starts after 12 months grace period and interest, which is waived for the first year of the loan. As previously announced, we filed a shelf registration statement during the third quarter of 2019 to provide us with the ability to raise additional funds to support our plan to grow and expand our business. As Eli mentioned before, we remain focused on operational excellence and financial discipline as well as our long-term strategic growth goals. We are now ready to take your questions.

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

I just have a question about the reduced working days. So could you please give me more detail about what is that?

Can you please repeat the question, reduction in what?

The working days, the reduction of working days. So what is that? I don't get it actually.

Okay. During September, the Jewish holidays that unfortunately happened during the working days and not over the weekend, and this is a rare situation. And we've faced significant amount of working days that we were not able to work because of these holidays, Jewish holidays.

So it's -- I mean you have kind of a reduction of the revenues solely from that? Like, I mean, it's like $1.2 million or $3 million less revenue. Is that cost base or totally by that or?

The number of working days that we lose during this time was approximately 10% of the days.

That's quite a bit. Okay. So you don't lose any customers or any contracts or something? It's just, yes, less working days, right?

No. There were 2 effects. First of all, Eltek didn't work during these days and also our Israeli customers didn't work during these days.

Okay. Okay. That's great. So I cannot find your SG&A increase that much, compared to last year, just like $100,000. So basically, you think that's just because of the currency fluctuation?

In general, during the third quarter, we had a negative impact on the profitability since salaries, the bidding lease, energy costs are dominated in New Israeli shekel that was reevaluated in Q3 as compared to the U.S. dollar. The financial expenses we present you during Q3 is mostly related to the effect of the devaluation of the U.S. dollar and the euro against the New Israeli shekel.

Okay. That’s great. So about the margin. So it's down a little bit. Is that because of the reason you're talking about or if not?

It doesn't impact our margin because we try to pass some of this devaluation cost on our customers in slow mode.

Yes. So yes, my question is, it's a little bit lower. I mean, this quarter, it's around like 17.5%, like gross margin, right? Last year, it was like 19.7%. So what is that the reason for the...

The main reason is that we had some fixed costs included in our cost of revenues and whenever the revenues are down, this has become a larger part in our expenses as a percentage.

Okay. Great. So how about this quarter? So I mean, in the fourth quarter, so your working days should be, I mean, the same as last year, right? So I assume like you're working full time. So it should be -- I mean, there shouldn't be lost any revenues because of that, right?

During Quarter 4, there is no lost day because of Jewish holidays. It's going to be a full quarter.

In the fourth quarter, right?

Yes. Quarter 4 is full quarter.

The next question is from [ Dean Chan ] of RU Group International.

Alon, I want to thank you for your service. I noticed that your past 6-K that you're resigning from your position of CFO. So I want to thank you for your service. We're working very, very long term for Eltek. But my question is, there is no reason for your resignation stated in the 6-K. And I was just kind of curious on why you chose to resign.

In the last 3 years, that I've been part of Eltek management, the company implemented significant turnaround plan, raised funds and improved the financial position. I'm very proud of this achievement, and I'm sure that the company will go ahead with the long-term growth plan. I personally decided to pursue other business opportunities. But again, I will follow Eltek and look forward to its success. Dean?

Dean, is there any other question? [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 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 their efforts that make Eltek possible again even of these challenging times. I would like to thank once again to our customers, partners, investors and Eltek team for their continued support. I also personally would like to thank Alon Mualem, our CFO for 3 years of service, in which implementing together with the management team, the turnaround plan and improve the company's financial position. Thank you all for joining us on today's call. Have a good day.

This concludes the Eltek LTD Third Quarter and Full Year 2021 Financial Results Conference Call. Thank you for your participation. You may go ahead and disconnect.