Earnings Call Transcript - ELTK Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Ltd. Second Quarter 2020 Financial Results Conference Call. All participants are 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 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 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 would 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 2020 second quarter earnings call. With me is Alon Mualem, our Chief Financial Officer. We will begin by providing you with an overview of our business, a summary of the principal factors that affect our results in the second quarter of 2020, and then update how COVID-19 has impacted our business, 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 second quarter earnings press release, which was released earlier today. The release will also be available on our website at www.eltek.com. This is the sixth consecutive quarter that we achieved both operating and net profit. Our revenue in the second quarter of 2020 rose to $8.8 million from $8.2 million in the second quarter of 2019. Revenues for the first six months of 2020 were $17.9 million, compared to $16.9 million in the first six months of 2019. This growth is a result of 11% growth in sales to customers in Israel and reflects year-over-year growth in sales to defense segments in the contract electronics manufacturers. I'm also pleased with the continued improvement in production efficiency that is evidenced in our improved gross margins and operating profits. Our diversified end-market allowed us to grow revenue year-over-year despite the weakness in Indian markets. In addition, strong operational execution overcame production inefficiency and extra costs due to COVID-19. The COVID-19 pandemic has created operational difficulties, macroeconomic uncertainty, and employee concern. I'm extremely proud of how Eltek’s employees have worked to deliver excellent performance despite challenging environments. We have had three employees who tested positive for COVID-19 this year, with others returning to work after being cleared following existing quarantine protocols. We continue to use contact tracing and quarantine individuals who are in close contact with the infected team members, in addition to the deep cleaning of affected work areas. We also continue other measures such as extensive internal communication, masking, temperature checks, and proper distancing in our facility. Because of the preventive measures in place and our culture of transparency and communication, these events have had minimal impact on our manufacturing operations to date. The outbreak of the coronavirus has created new operational and business challenges, which required quick adjustments to enable us to maintain our production of PCB while ensuring the safety of our workforce. We see both risks and new opportunities in the existing business environment and are making the necessary adjustments to meet customer demands and our revenue and profit margin goals. As we said in the past, we also see an opportunity to grow our business in the U.S. market due to the worsening relationship between the U.S. and China. The impact of any trade war between the U.S. and China will also impact the Israeli market since we see U.S. pressure on the Israeli government to reduce Israeli-Chinese trade activities. At the same time, we are also facing a slowdown from some of our customers in India due to the continued negative impact of COVID-19 in this territory. So far, we have financed our growth strategy through our positive operating cash flow and our own internal resources. During 2020 and 2021, we plan to increase our investment in new equipment and the expansion of our facility and infrastructure to support our long-term sales growth. The increase in our top line in 2020 reflects the continued market recognition of our high quality and reliable products, mainly in the flex PCB sectors. Our revenue from the defense sector and contract electronic manufacturers grew from $13.8 million in the first half of 2019 to $15.3 million in the first half of 2020, representing 11% growth year-over-year. The medical sector contributed 9.7% of our revenue during the first half of 2020, representing 4% growth year-over-year. Our customers continue to see the value proposition of our product, and there is great interest in our company and its capabilities. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capability. We remain focused on operational excellence and financial discipline, as well as our strategic growth goals. We are all focused on addressing the challenges that are widespread as crises affect us and are working diligently to expand our business while maintaining the trend of improved growth and operational results. 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 second quarter of 2020. During this call, I will also 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 reason for its use. Now, I will go over the highlights of the second quarter of 2020 compared to the second quarter of 2019. As Eli mentioned, revenues for the second quarter of 2020 were $8.8 million, up from revenues of $8.2 million in the second quarter of 2019. Gross profit increased from $1.3 million or 15.3% of revenues in the second quarter of 2019 to $1.9 million or 21.6% in the second quarter of 2020. During the second quarter of 2020, we had an operating profit of $809,000, as compared to an operating profit of $7,000 in the second quarter of 2019. Net profit was $704,000 or $0.16 per share in the second quarter of 2020, compared to a net profit of $790,000 or $0.19 per share in the second quarter of 2019. The results of the second quarter of 2019 were positively affected by non-recurring other income of $871,000 as a result of a receipt of an insurance payment associated with damage incurred to one of our manufacturing machines. EBITDA was approximately $1.2 million in the second quarter of 2020, as compared to EBITDA of $1.25 million in the second quarter of 2019. During the second quarter of 2020, we had positive operating cash flow of $1.4 million, compared to net cash used in operating activities of $301,000 in the second quarter of 2019. During the first half of 2020, the company achieved a positive operating cash flow of $2.9 million, as compared to positive operating cash flow of $1.3 million in the first half of 2019. As Eli mentioned before, we remain focused on operational excellence and financial discipline, as well as our long-term strategic growth goals. As previously announced, we filed a registration statement during the third quarter of 2019 to provide the company with the ability to raise additional funds. The company is also considering different options for fundraising to support our plan to grow and expand our business. We are now ready to take your questions.

Operator, Operator

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

Unidentified Analyst, Analyst

Hello. Hi. Thanks for taking my question. So I have a question about the insurance claim you mentioned last year. Based on your filing, you said during 2018 you had two pieces of equipment that were damaged. You received the claim for one piece of equipment. My question is whether the claim is over, or are you still waiting for negotiation with the other claim?

Eli Yaffe, CEO

Hi, yes. We indeed received payment from insurance for one manufacturing machine. We still have a pending claim with our insurance company, but we cannot predict or know how this claim will end up. So far, there's no provision in our financials for it.

Unidentified Analyst, Analyst

Okay, so can you give us a little detail on what the incident was? I mean, what's the impact on your margins based on that incident? How is that affecting your operation now?

Eli Yaffe, CEO

These machines were affected by water damage in our plant. We overcame this damage relatively fast in the third quarter of 2018, and by now we have resolved the issues.

Unidentified Analyst, Analyst

Okay, great. Thank you. My second question is about your biggest customer. Based on last year's numbers, you roughly had 30% from your two biggest customers. But I checked your filings, and you mentioned there's a group of customers, which can have – I'm not quite sure what the two groups are? Is that just one customer that is too big, or what is your relationship like with them?

Eli Yaffe, CEO

Indeed we have a group of major customers related to companies that are all in one group, presented as one group in our filings.

Unidentified Analyst, Analyst

So they place orders differently, or do they order just through one channel? I mean, do they act like one entity, or can they change their orders at different times?

Eli Yaffe, CEO

This is a group of companies that is combined of a few companies within it.

Unidentified Analyst, Analyst

How do they place their orders? I mean, I'm probably asking too much, but do they place orders in one batch, or are there multiple orders from different divisions?

Eli Yaffe, CEO

It's not a single company with a few divisions. Theoretically, they are one company, but we get the PO from different divisions. So, we combine it because at the end of the day, it's one company.

Unidentified Analyst, Analyst

Can you tell me about the order process? Do they order from the U.S. to Israel?

Eli Yaffe, CEO

Their headquarters are based in Israel, but we receive a majority of orders from Israel and some from other parts of the world, including Brazil, the United States, and Israel.

Unidentified Analyst, Analyst

Okay, great. That’s really helpful. I have another question about your capital expenditures. It was around $1.6 million, right? But there’s an indication in the annual report that you spent $1.7 million on equipment. Can you expand a bit on that? What is that $1.7 million in equipment spending?

Eli Yaffe, CEO

You were cut off in the middle of your question. Can you repeat, please?

Unidentified Analyst, Analyst

Sure. In 2019, your CapEx was around $800,000 to $900,000, but I see in the annual report you spent $1.7 million on equipment. Can you clarify the difference?

Eli Yaffe, CEO

I think the $1.7 million you refer to is over the last three years altogether. I'm not sure, but we will need to look into it.

Unidentified Analyst, Analyst

So, it’s basically consistent that you have spent around $800,000 to $900,000 for the last year?

Eli Yaffe, CEO

Yes. You’re right.

Unidentified Analyst, Analyst

Okay. Your report also indicates $2 million, but that number seems off, right? So this year, what’s your plan for capital expenditures? How much can you spend on equipment?

Eli Yaffe, CEO

We do not provide forward-looking statements, so we cannot provide the numbers for the second half. However, as you can see in our cash flow for the first six months, we added approximately $450,000 in cash investment in fixed assets.

Unidentified Analyst, Analyst

Okay, that’s great. I remember in the last quarter, you indicated that you wanted to increase your spending. Do you have any plans to buy new equipment, or are you just maintaining the current capacity?

Eli Yaffe, CEO

Yes, as I mentioned in my discussion, we have the goal, and we have the means and we are clearly looking at increasing our capacity based on our internal resources. If we raise funds, we will accelerate that. We prefer organic growth, but we're willing to use external resources if needed.

Unidentified Analyst, Analyst

Okay. I would like to ask about your capacity. Are you running at full capacity, or can you add like 10% more revenue with new machines or equipment?

Alon Mualem, CFO

Right now, we work in some of our departments two shifts, and some of our departments are running three shifts.

Unidentified Analyst, Analyst

Are you operating at full capacity?

Alon Mualem, CFO

It's close to full capacity. We operate five days a week, so we still have the opportunity to go over the weekends.

Unidentified Analyst, Analyst

Thank you so much. That's all my questions. Congratulations.

Alon Mualem, CFO

Thank you, Michael.

Operator, Operator

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.eltek.com. Mr. Yaffe, would you like to make your concluding statement?

Eli Yaffe, CEO

Before we conclude our call, I would like to thank all of our employees for their efforts during this difficult period and their contribution to renewing our position as a leading high-end PCB manufacturer and making Eltek profitable again. I would like to thank once again all our customers, partners, investors, and the Eltek team for their continued support. I wish everyone good health. Thank you for joining us on today's call. Have a good day.

Operator, Operator

This concludes the Eltek Ltd. second quarter 2020 financial results conference call. Thank you for your participation. You may go ahead and disconnect.