Eltek Ltd Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. First Quarter 2021 Financial Results Conference Call. As a reminder, this conference is being recorded. Before I turn over the call 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 our non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and the 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 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 2021 First 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 a summary of the principal factors that affected our results in the first 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 first quarter earnings press release, which was released earlier today. The release will also be 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 certain areas where some of our customers are located, we quickly addressed the shortage of key raw materials. And yet, we were able to maintain operational efficiency and record both operational and net profit for the ninth quarter in a row. Our revenue declined from $9.2 million in the first quarter of 2020 to $7.2 million in the first quarter of 2021. The spread of COVID-19 continues to affect some of our customers, and the shortage of Pyralux AP, the laminate produced by DuPont, used in the production of flexible and 3D printed circuit boards, presented new operational and business challenges that required quick adjustments to enable us to maintain our production and delivery of PCBs to our customers. We are making the necessary adaptations to meet customer demand and maintain our operational efficiency. The pandemic has created operational difficulties, and we are facing a continued slowdown in orders from some of our customers in India due to the ongoing negative impacts of COVID-19 in that territory. Eltek is prepared for the point when the Indian market will recover and is ready to react operationally to the expected high demand that has been accumulating in India in recent months. Due to the raw material shortage, we have purchased enough inventory of alternative raw materials that were preapproved by Eltek two years ago as a backup plan for our production of PCBs and introduced it to our customers. We expect that revenues will rebound during the remainder of the year, and the lost sales of Q1 2021 will be recovered upon the expected availability of Pyralux AP and the authorization of the alternative raw material by our customers. Once the alternative raw material is fully approved by all our customers, we anticipate some reduction in our cost of production, which will give Eltek the flexibility to offer our customers more options for production as well as better pricing and more secure sources of raw materials. Eltek's sales force has shifted its focus to non-flex PCBs, which will contribute to our future revenue growth as soon as the interruptions in flex raw material are eliminated. As we've stated in the past, we also see an opportunity to grow our business in the U.S. due to the shift back to Western production by the defense, aerospace, and communication PCB sectors, driven by cyber threats from China and the lack of production capacity in the U.S., Europe, and Israel. So far, we have financed our growth strategy from our internal resources and through right offerings to our shareholders. During 2021, we plan to continue investing in sales activities that will enable us to grow revenue with a focus on the U.S. market, as well as continue investing in new equipment and the expansion of our facility and infrastructure to support our long-term sales growth. In yesterday's Board meeting, our Board of Directors approved obtaining a loan of NIS 10 million, approximately $3.1 million from Bank Leumi, Israel. The loan has a term of ten years with favorable returns, including a repayment schedule that starts after a 12-month grace period and carries an interest rate of prime plus 1.5, which is waived for the first year of the loan. As we have previously reported, a major portion of our investment program that is under a grant program is expected to be completed and become operational by mid-2021. This recent investment and the planned future investment will strengthen Eltek's manufacturing capability and increase our competitiveness by implementing improved production processes and the adoption of Industry 4.0 technologies. Additionally, as we have already announced, Eltek received final approval from the Israeli Innovation Authority for 50% royalty-bearing participation in the R&D program that started on March 1, 2021, and we already closed its first milestone by having the full technical definition. This R&D program for 2021 aims to enable Eltek to achieve a significantly faster production rate and reduce spread. If successful, this R&D program will enhance Eltek's ability to offer highly reliable printed circuit boards at a shorter production time and reduced cost. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities. Furthermore, as we have already announced, Eltek applied to the Israeli Land Authority for allocation of land in the north of Israel, where Eltek intends to build the second production facility. This is a major part of our long-term strategic roadmap to grow and accelerate the expansion of our business. We remain focused on operational excellence by using advanced technology and maintaining financial discipline while making all the necessary adjustments to address the challenges we face from the widespread crisis and the shortage of raw materials. We are continuing to work diligently on expanding our business while maintaining operational efficiency and profitability. 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 first 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 first quarter of 2021 compared to the first quarter of 2020. Revenues for the first quarter of 2021 were $7.2 million compared to revenues of $9.2 million in the first quarter of 2020. Gross profit was $1.1 million in the first quarter of 2021 compared to $1.8 million in the first quarter of 2020. Net profit was $223,000 or $0.04 per share in the first quarter of 2021 compared to a net profit of $541,000 or $0.12 per share in the first quarter of 2020. EBITDA was $577,000 in the first quarter of 2021 compared to approximately $1 million in the first quarter of 2020. Cash flow provided by operating activities was $2.5 million in the first quarter of 2021 compared to $1.5 million in the first quarter of 2020. As previously announced, we filed a share registration statement during the third quarter of 2019 to provide the company with the ability to raise additional funds to support our plan to grow and expand our business. We expect that any proceeds will be used, in part, for additional investments and to accelerate our long-term growth. As Eli mentioned earlier, 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.

Yes, I have a question about the alternative material. So currently, what's the percentage of customers that currently approved the new material? Could you give us some color on that?

As you know, we don't provide looking for statements. We are facing a shortage of key raw material that is used in the production of flexible and 3D printed circuit boards. However, we do expect that revenues will rebound during the rest of the year and lost sales will be recovered from the full availability of Pyralux AP, which has been in short supply. With the utilization of the alternative raw material by our customers, as I mentioned earlier, we have the alternative raw material in stock right now, and we're already working with this raw material.

Yes. My question is about how many customers have accepted the new material? Like what is the percentage of customers that have agreed to use this new material? Is there anyone that doesn't want to use it?

I would say, in this world, the majority of customers have already accepted it.

Okay. That's great. So you expect it by the end of the year, mainly. Could it be similar to what has been previously agreed upon, right?

Yes. Alternatively, Pyralux AP will continue to supply raw material. And then the remaining customers that haven't approved the alternative raw material will receive Pyralux AP.

Okay. Great. So do you have any detailed plans regarding the new factory? What is the target for the second facility, and what is the timeline?

It's still very early stages. At this point, the Board of Directors of Eltek has allowed us to purchase the lots. It's in the north of Israel, on very nice lots. It's a long-term plan. Our first milestone is buying the land, and then we'll start the progression from there. We don't have a full budget approved as of yet.

Okay. So it's still pretty early, right?

Yes. We have made applications to the Israeli authority for land management. The application is in process. We have received a recommendation from the government to get the land at a subsidized cost, which will help in the development costs. I hope we'll finalize this soon.

Okay. Great. Can you give some rough numbers on the current capacity running in your existing factories?

Right now, the existing capacity is approximately two-thirds, around 66%.

Okay. Do you see any interruptions due to the current situation in Israel?

No, not at all. I'll say Eltek is considered a sectional enterprise and so far, we are operating without any impact. We are closely monitoring the security situation and hope that life will soon return to normal. However, it's important to remember that a large portion of our revenue comes from the security and defense sectors, so we cannot predict if it will influence orders received in the future.

There are no further questions at this time. Before I ask Mr. Yaffe to go ahead with his closing statements, 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, please?

Yes. Before we conclude our call, I would like to thank all our employees for their efforts to make Eltek profitable again, even in these challenging times. I would like to extend my gratitude to all our customers, partners, investors, and the Eltek team for their continued support. Thank you all for joining today's call. Have a good day.

Thank you. This concludes the Eltek Ltd. first quarter and full year 2021 financial results conference call. Thank you for your participation. You may go ahead and disconnect.