Eltek Ltd Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd Fourth Quarter and Full-Year 2021 Financial Results Conference Call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. 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 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 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 ended 2021 with $1.5 million of pre-tax income. Based on the fact that we have been profitable during the last three years and several other factors, we concluded that it is more likely than not that we will utilize our tax losses carry forward. Therefore, we recorded a one-time 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 operating activities totaled $3.9 million and contributed to our strong balance sheet. As of 2021 year-end, our cash balance totaled $9.3 million. The outbreak and spread of the coronavirus during 2021 created operational and business challenges, including shortages of certain key raw materials. This shortage required us to make quick adjustments to enable us to maintain production and deliveries of PCBs to our customers. We purchased alternative raw materials that we had pre-approved two years ago as a backup plan and managed to obtain authorization from the majority of our customers to use these alternative raw materials in our products. The use of alternative raw materials provided a reduction in our production costs, offered more production options, better pricing, and a secure source of raw materials. It should be noted that currently we are not suffering from any delivery delays from DuPont, our key suppliers, as we faced during the first quarter of 2021. To avoid such a situation in the future, we’ve also increased our raw material inventory levels. During the second half of 2021 and to-date, we faced significant price increases for some of our raw materials, on top of the extra logistics cost of raw material freight. In addition, a majority of our operational expenses are denominated in new Israeli shekels. The continued effect of the devaluation of the U.S. dollar against the Israeli shekel negatively affected our results of operations. Nevertheless, we were able to maintain our gross margin of 20%, similar to our 2020 gross margin. This was achieved mainly by 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 new machines and equipment. We invested $1.5 million during 2021 as part of our plan to invest in new advanced manufacturing equipment, which will enhance our manufacturing capability and increase our competitiveness. We have also continued to implement improved production processes and the adoption of Industry 4.0 technologies. As we previously reported, we are conducting several R&D programs to maintain our position as an innovative industry leader. Our R&D program is designed to enable us to achieve a significantly faster production rate that reduces scrap. This R&D program will enhance our ability to offer highly reliable printed circuit boards, with shorter production times and reduced costs. I should note that there are still more milestones to pass in order to declare full success. Eltek, like many companies, faced problems with recruiting and retaining employees. So far, our efforts have borne fruit with a slight increase in wages. During 2021, we continued to allocate resources to automation and advanced working methods. We are continuing to pursue new business opportunities and increase customer design engagement activity that will leverage our advanced innovative technology capability. We continue to make efforts to increase our global presence and sales in North America, Europe, and Far East markets. We received a $1.4 million purchase order from a defense customer, which we reported on earlier this year. Our policy to expand our customer base as much as possible and to accept current orders without relying only on large production projects, which come in every few years, has allowed us to maintain a stable level of revenue and not to depend solely on large project orders. As for the current situation in Europe, we believe that governments will increase their military project spending, which will positively reflect on our revenue as about 50% of our revenue is defense and aerospace-related. During the fourth quarter of 2021 and the beginning of 2022, our book-to-sell ratio increased significantly, resulting in a strong backlog. Therefore, we have decided to accelerate our planned capital investment, implementing it over two years instead of five years. We are also investing significant efforts in recruiting new employees.

Thank you, Eli. I'm glad to have joined Eltek and look forward to contributing to 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 also discuss 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 reason 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 profit of $7.7 million in 2020. This decrease is the outcome of the decline in revenues and the devaluation of the U.S. dollar against the NIS. Operating profit amounted to $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 three quarters of 2021. The impact on prior years was immaterial. The devaluation of the U.S. dollar against the NIS contributed to an increase in our dollar reported expenses of $1.2 million. We recorded tax assets of $3.5 million in 2021, according to U.S. GAAP, as management estimated that it was more likely than not that the company would utilize its tax loss carry-forwards. The company has to record a deferred tax asset in that regard, resulting in our recording a tax benefit in the same amount. Net profit was $5 million or $0.86 per share in 2021 compared to 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 10 million NIS loan from Leumi Bank. The loan is for a period of 10 years with an interest rate of 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 an EBITDA of $1.4 million in the fourth quarter of 2020. Cash flows from operating activities were $0.4 million compared to $0.5 million used in operating activities in the fourth quarter of 2020.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. The first question is from Ron Dror. Please go ahead.

Hi Eli, good morning. I have a few questions. First, I want to confirm that all the issues with raw materials from 2021 have been resolved. Secondly, could you provide more details about the backlog in 2022? Lastly, even though you don't provide specific guidance, could you maybe share some insight on how we might model for 2022, considering the announcements regarding plant and equipment, and potential growth we might anticipate?

Thank you, Ron. Good morning. To address your first question about raw materials, that issue is now resolved. As I mentioned earlier, there is no problem with DuPont raw materials, and we currently have sufficient inventory in our warehouse for at least six to seven months. Of course, we will continue to purchase raw materials. While there are some supply disruptions from China and Taiwan, our inventory is adequate to manage these challenges. Regarding the backlog, I cannot provide specific numbers, but it is currently higher than what we've experienced in recent years. The book-to-sell ratio has been notably high over the last six months. As for our plans for 2022, while we do not provide forecasts, the strength of our backlog indicates growth potential. This is why we've decided to expedite our investments from five years to two years to enhance our growth capabilities.

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

Same as before.

Okay. Thank you.

Thank you.

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. 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 also like to thank our customers, partners, investors, and the 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.