Earnings Call Transcript - ELTK Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. Third Quarter 2021 Financial Results Conference Call. All participants are in 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 Alon Mualem, Chief Financial Officer, I'd like to remind you that Eltek's earnings release today and this call includes 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.

Eli Yaffe, CEO

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 a 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 operating profitability. 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, although during quarter three 2021, we experienced a possible recovery of the Pyralux AP supply compared to the shortage we faced during Q1 2021. These shortages created operational and business challenges during the nine months ended September 30, 2021, which required quick adjustments to enable us to maintain production and deliveries of PCBs to our customers. Due to the worldwide raw material shortage, we purchased a sufficient amount of inventory ahead of time in Q3 2021 and alternative raw materials that were preapproved two days 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 these alternative raw materials. Once the alternative raw materials are fully approved by all our customers, we will see a reduction in production costs, 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 increases of some of our materials on top of the extra logistic costs of raw material freight. Additionally, some of our operational expenses are denominated in new Israeli shekels, which were negatively affected by the devaluation of the U.S. dollar against the new Israeli shekel. Nevertheless, we were able to maintain our gross margin at 20.2% in the nine months of 2021 compared to 20.3% in the nine months of 2020 by keeping our operational costs under tight control. As we've seen in the past, we see an opportunity to grow business in the U.S. due to the shift back to production in the western world by defense, aerospace, space, and communication PCB sectors as a result of the cyber threat from 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 a rights offering to our shareholders. During the first nine 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. markets. 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 the adoption of Industry 4.0 technologies. We believe that these recent investments and planned future investments will significantly enhance our manufacturing capability and increase our competitiveness by implementing improved production processes. As previously reported, we applied to the Israeli Land Authority for the allocation of land in the north of Israel, where we intend to build our second production facility. This is a major part of our long term strategic roadmap 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 focus on investments that will increase our total yield and 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 will be scrapped if successful. This R&D program will enhance our ability to offer high reliability printed circuit boards in shorter production times and reduce costs. I'm glad to report that this R&D program is progressing as planned, and approximately 60% of the program has been completed. The demo machine is already in testing mode. There are still more milestones to pass in order to declare full success. We have continued to pursue new business opportunities and increase customer design engagement activities that leverage our advanced and innovative technology capabilities. We remain focused on operational excellence by using advanced technology, financial discipline, and making the necessary adjustments to address the challenges we face from the widespread health crisis and the global supply chain crisis. We continue to work diligently on expanding our business while maintaining operational efficiency, trending towards improved operational results. We are focused on our business goals, and now we have consistent positive cash flow and long-term working capital. We expect to further increase our future investment program as long as we receive clear and positive returns on investment. I will now turn the call over to Alon Mualem, our CFO to discuss our financials.

Alon Mualem, CFO

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's Q3 EBITDA serves 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, revenue for the third quarter of 2021 was $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 compared to an operating profit of $638,000 in the third quarter of 2020. The net loss was $26,000 or $0.00 per share in the third quarter of 2021 compared to a 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 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 nine months of 2021, our operating cash flow was $3.4 million compared to operating cash flow of $3.7 million in the first nine months of 2020. During the second quarter of 2021, we obtained a loan of 10 million new Israeli shekels, approximately $3.1 million, from Bank Leumi that enables us to support our growth plan. The loan term is for 10 years, with favorable terms, including a repayment schedule that starts after a 12-month grace period and interest that is waived for the first year of the loan. As previously announced, we filed a share 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, we remain focused on operational excellence, financial discipline, and our long-term strategic growth goals. We are now ready to take your questions.

Operator, Operator

Thank you. The first question is from Michael Wu. Please go ahead.