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 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 Ron Freund, 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 2021 Fourth Quarter and Full Year Earnings Call. With me is Ron Freund, our Chief Financial Officer, who joined us on January 1, 2022. We will begin by providing you with an overview of our business and summary of the principal factors that affected our results in 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 fourth quarter press release, which was released earlier today. The release will also be available on our website at www.nisteceltek.com. 2021 was a very challenging year, both operationally and business-wise. In addition to the COVID-19 pandemic that affected us, our results were affected by the strength of the new Israeli shekel compared to the U.S. dollar and the euro. Nevertheless, we were able to maintain operational profitability, and to the end of 2021, with $1.5 million of pretax income. Based on the fact that we were profitable during the last 3 years and the several other factors, we concluded that it is more likely than not that we will be utilized our tax losses carryforward. Therefore, we recorded a onetime tax benefit in the amount of $3.5 million while reversing the tax valuation allowance recorded in prior years. We ended the year with a net profit of $5 million. Our cash from operation activity totaled $3.9 million and contribute to our strong balance sheet. As of 2021 year-end, our cash balance totaled $9.3 million. The outbreak and the spread of the coronavirus during 2021 created operational and business challenges, including shortage of certain of our key raw materials. This shortage required us to make weak adjustment to enable us to maintain production and deliveries of PCBs to our customers. We purchased alternative raw material that we were preapproved 2 years ago as a backup plan and managed to obtain authorization from the majority of our customers to use alternative raw materials in our products. The use of the alternative raw materials provide a reduction in our cost production flexibility to offer more production option, better pricing and a secure source of raw materials. It should be noted that currently, we are not suffering for any delivery delays from DuPont, our key suppliers, as we faced during the first quarter of 2021. In order to avoid such a situation in the future, we have also increased our raw material inventory level. During the second half of 2021, and to date, we faced significant price increase for some of our raw materials on top of the extra logistic cost of raw material freight. In addition, a majority of our operation expenses are dominating the new Israeli shekels. The continuation effect of the devaluation of the U.S. dollar against the Israeli shekel negatively affect our results of operations. Nevertheless, we were able to maintain our gross margin of 20%, similar to our 2022 -- similar to our 2020 gross margin. This was achieved mainly due to the keeping our operational costs under tight control and implementing steps to increase efficiency in our production lines. Our strong balance sheet and cash balance allowed us to continue to invest in the new machine and equipment. We invested $1.5 million during 2021 as part of our plan to invest in a new advanced manufacturing equipment, which will be strengthening our manufacturing capability and increase our competitiveness. We have also continued to implement improved production processes and adoption of Industry 4.0 technologies. As we previously reported, we are conducting several R&D programs in order to maintain our position as an innovative industry leader. Our R&D program is designed to enable us to achieve a significant faster production rate at reduced scrap. If successful, this R&D program will enhance our ability, offer highly reliable printed circuit boards with a shorter production time and at reduced cost. I should note that there is still more milestone to pass in order to declare its full success. Eltek, like many companies, face problems with recruiting and retaining employees. So far, our efforts have borne fruit with slight increase in wages. June 2021, we continue to allocate resources to automation and advanced working methods. We are continuing to pursue new business opportunities and increased customer design engagement activity that will leverage our advanced innovative and technology capability. We continue to make efforts to increase our global presence and sales in North America, Europe and Far East markets. We received $1.4 million purchase order from defense customer, which we reported on earlier this year. Our policy to expand our customer base as much as possible and to accept current order and not to rely only on large production projects that come in every few years, in June 2020 and 2021, they were known. This policy will allow us to maintain a stable level of revenue and not to depend on the large projects only. Therefore, the current situation in Europe, we believe that governments will increase their spending on military projects, which will positively reflect our revenue. About 50% of our revenue are defense and aerospace-related. During the fourth quarter of 2021 and the beginning of 2022, our book-to-sell ratio increased significantly, which results in a strong backlog. Therefore, we have decided to accelerate our planned capital investment and to try to implement them in a period of 2 years instead of 5 years. We are also investing a lot of efforts in recruiting new employees. I will now turn the call over to Ron Freund, our CFO, to discuss our financial statements.

Thank you, Eli. I'm glad to have joined Eltek and look forward to contributing its future success. I would like to draw your attention to the financial statement for the year ended December 31, 2021, and for the fourth quarter then ended. During this call, I will discuss also 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 2021. Revenues for the full year of 2021 totaled $33.8 million compared to $36.7 million in 2020, a decrease of 9%. The decrease in revenue is mainly due to the effect of the COVID-19 crisis on our customers' demand and to the shortage in raw materials that Eli mentioned before. Gross profit decreased by 11%, reaching $6.9 million compared to a gross $7.7 million in 2020. The decrease is the outcome of the decrease in revenues and the devaluation of the U.S. dollar against NIS. Operating profit amounted $1.9 million in 2021 compared to $3 million in 2020. I should note that we have changed the policy of recording share-based compensation expenses from the accelerated method to the straight-line method, which is the more common practice within our economic environment. In our Form 20-F, we disclosed the restated results of operations for the first 3 quarters of 2021. The impact on prior years was immaterial. The devaluation of the U.S. dollar against the NIS contributed to the increase in our dollar-reported expenses in the amount of $1.2 million. We recorded a tax asset of $3.5 million in 2021. According to U.S. GAAP, if management estimation is that it is more likely than not that the company will utilize its tax loss carryforwards, the company has to record a deferred tax assets in that regard. That resulted in our recording a tax benefit in the same amount. Net profit was $5 million or $0.86 per share in 2021 compared to a net profit of $2.6 million or $0.58 per share in 2020. EBITDA was $3.7 million in 2021 compared to $4.6 million in 2020. During 2021, we enjoyed positive cash flow from operating activities of $3.9 million compared to $3.3 million in 2020. As of December 2021, we had cash and cash equivalents of $9.3 million compared to $4.7 million at the end of 2020. This increase is due to our positive cash flow from operating activities, and the fact that during Q1, we managed to obtain a NIS 10 million loan from Leumi Bank. The loan is for a period of 10 years with an interest rate Prime plus 1.5%, payable from the beginning of the second year. The loan was part of the Israeli government's actions to help businesses deal with the COVID-19 crisis. Now I will go over the highlights of the fourth quarter of 2021 compared to the fourth quarter of 2020. Revenues for the fourth quarter of 2021 were $9.5 million, the same as in the fourth quarter of 2020. Gross profit amounted to $2 million in the fourth quarter of 2021 compared to $2.2 million in the fourth quarter of 2020. Net profit in the fourth quarter of 2021 was $3.8 million or $0.65 per fully diluted share compared to a net profit of $0.8 million or $0.16 per fully diluted share in the fourth quarter of 2020. This increase is mainly due to the $3.5 million tax benefit we recorded. EBITDA was $1.1 million in the fourth quarter of 2021 compared to EBITDA of $1.4 million in the fourth quarter of 2020. Cash flow from operating activities was $0.4 million compared to $0.5 million used in operating activities in the fourth quarter of 2020. We are now ready to take your questions.

[Operator Instructions] The first question is from [ Ron Dror ].

I have a few questions. The first one is just to make sure you solved all the issues with the raw materials that encountered during 2021. The second question is if you can give more color about the backlog in 2022. And the third question is, although you don't give a specific guidance, if you can maybe give us the color of how we can model 2022 because you announced the activity with plant and equipment. And what we can see in the maybe model for growth and footprint in '22?

Thank you, Ron. Regarding your first question, regarding the raw material, the raw material issue is beyond us. And as I mentioned in my statement before, there is no issue on DuPont raw material, and we have enough inventory right now in our warehouse to support at least 6, 7 months from now from 2022. Of course, we'll continue to buy raw material. As you know, there is some hiccups right now in the supply from China and Taiwan. We have enough inventory in our warehouse that we can go over these hiccups. Regarding the backlog, as I mentioned, we don't provide the data, but the backlog that we face right now is above what we see in the last years. And as I mentioned, the book-to-sale ratio is significantly high especially in the last 6 months. Regarding the plan for 2022, we don't provide forecast. But as you can understand from the strong backlog that we have, we will support it with the equipment that we have. And that's the reason that we decided to accelerate our investments, instead of 5 years to invest everything in 2 years and to accelerate our capability to grow.

My last question, if it's possible to ask is, what is like the net contribution of new incremental sales and the net profit?

Same as before.

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

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