Earnings Call Transcript - ELTK Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eltek Limited Fourth Quarter and Full Year 2020 Financial Results Conference Call. All participants are at 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 Alon Mualem, Chief Financial Officer, I'd like to remind you all 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 over the call 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 fourth quarter and full year 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 2020, 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. This is the eighth quarter in a row that we achieved both operating and net profits with cumulative 12 months EBITDA of $4.6 million. We achieved this result despite higher financial expenses due to the valuation of the US dollar against the New Israeli shekels during 2020. Our revenues in the full year of 2020 increased to $36.7 million from $34.8 million in 2019, representing a 5.5% growth in revenue year-over-year. Our revenues in the fourth quarter of 2020 rose to $9.5 million from $8.6 million in the fourth quarter of 2019, representing a 10.5% increase. We are glad that the fourth quarter results continued to reflect the growth in our revenues and the continued improved operational efficiencies. The outbreak of the Coronavirus has created new operational and business challenges, including a shortage of Pyralux raw material that we are dealing with in 2021. Eltek qualified alternatives to the Pyralux at this time but this will take time for customers to approve. Eltek sales that we cannot produce due to the Pyralux shortage will be delivered in the near future. We successfully managed through the COVID pandemic in 2020 because we made necessary adjustments to increase revenue from the defense sector, raised additional funds through the rights offering, and obtained loans with preferred terms. I'm also pleased with the continuing improvement in production efficiency that is evident in our improved operational profit, which more than doubled year-over-year. Our diversified end market allowed us to grow revenue in those areas, mainly in the Israeli market and the Netherlands. In addition, strong operational execution helped overcome production inefficiencies and extra costs due to COVID-19. The COVID-19 pandemic created operational difficulties and employee concerns. I'm extremely proud of our employees’ efforts to deliver excellent performance despite the challenges of this environment. We continue to invest in new equipment in order to benefit from the soft market in capital equipment for manufacturing. During the second half of 2020, we installed and began to operate a new state-of-the-art baseline, which is one of the main PCB production lines, and four new optical oriented drilling machines are now in operation. In order to benefit more from the soft market of capital equipment, Eltek applied for and was awarded a grant from the Israeli Investment Authority that will fund 15% to 20% of Eltek's expected $1.5 million adjustment investment in advanced manufacturing equipment. As we already notified, the major portion of Eltek's investment program that is under the grant program is expected to be completed and become operational by the middle of 2021. The recent investment and the planned future investments will strengthen Eltek's manufacturing capability and increase our competitiveness by implementing improved production processes and adoption of Industry 4.0 technologies. Additionally, as we already announced, Eltek received final approval from the Israeli Innovation Authority for a 50% royalty-bearing participation in approximately $250,000 for the 2021 R&D program. This 2021 R&D program is meant to enable Eltek to achieve a significantly faster production rate and reduce scrap. The 2021 R&D program, if successful, will yield a growth in manufacturing capacity with minimal investment. The fruits of the 2021 R&D program, if successful, will enhance Eltek's ability to offer highly reliable printed circuit boards with shorter production time and reduced costs by the end of 2022. The two prior programs that were approved in 2017 and 2020, together with the newly 2021 program, are part of the technology roadmap that Eltek launched as part of its strategic plan to become an innovative industrial leader in low-quality, low-quantity production of high-performance printed circuit boards. I'm proud that the fruits of the 2017 R&D program already contributed to Eltek's sales during 2020 and going forward, while the fruits of Eltek's 2020 R&D program will arrive, if successful, in 2022. During 2021, we plan to continue 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 sector. Our revenue from the defense sector and contract electronic manufacturers grew from $28.1 million in 2019 to $31.6 million in 2020, a 12% growth year-over-year. Our customers continue to see the value proposition of our products and have a great deal of trust in our company and its capability. We are continuing to pursue new business opportunities and increase customer design engagement activity that leverages our advanced technology capabilities. We remain focused on operational excellence by using advanced technology and financial discipline, while making the necessary adjustments to address the challenges we face from the widespread health crisis and the shortage of raw materials. We'll continue to walk diligently on expanding our business while maintaining the trends of improved operational margins and 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 for the full year and the fourth quarter of 2020. 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 reason for its use. First, I will go over the highlights of the full year of 2020. As Eli said, revenues for the full year of 2020 went up to $36.7 million from $34.8 million in 2019, an increase of 5.5% year-over-year. Gross profit increased by 28.3% in 2020, reaching $7.7 million or 21% of revenues, compared to gross profit of $6 million, or 17.3% of revenues in 2019. Operating profit was $3 million in 2020 compared to an operating profit of $1.4 million in 2019. Net profit was $2.6 million or $0.58 per share in 2020, compared to a net profit of $1.8 million or $0.48 per share in 2019. EBITDA was $4.6 million in 2020 compared to EBITDA of $3.8 million in 2019. During 2020, we enjoyed positive cash flow from operating activities of $3.3 million, compared to operating cash flow of $2.6 million in 2019. As of December 31, 2020, we had cash and cash equivalents of $4.7 million, compared to $1.6 million at the end of 2019. Now, I will go over the highlights for the fourth quarter of 2020, compared to the fourth quarter of 2019. Revenues for the fourth quarter of 2020 were $9.5 million, up from revenues of $8.6 million in the fourth quarter of 2019. Gross profit increased by 46.7% to $2.2 million in the fourth quarter of 2020 from $1.5 million in the fourth quarter of 2019. Net profit was $766,000 or $0.16 per share in the fourth quarter of 2020, compared to net profit of $370,000 or $0.08 per share in the fourth quarter of 2019, an increase of 107% year-over-year. EBITDA was $1.4 million in the fourth quarter of 2020, compared to EBITDA of $817,000 in the fourth quarter of 2019. Cash flow used in operating activities was $497,000, compared to $141,000 of cash used in operating activities in the fourth quarter of 2019. During the fourth quarter of 2020, we completed a rights offering to our shareholders and raised $5.6 million net. The proceeds from the offering were used in part to repay the loan from our controlling shareholders, as well as for working capital and other general corporate purposes, including investment in fixed assets. This fundraising, together with the positive operating cash flow we achieved in 2020, improved our current ratio from 0.92 at the end of 2019 to 1.94 at the end of 2020. As of December 31, 2020, our short-term credit and loans were down from 24.5% of the balance sheet at the end of 2019 to 1.9% at the end of 2020 and our equity to total balance sheet increased to 43.4% at the end of 2020, compared to 27.5% at the end 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 indicated, we have an outstanding shelf registration statement that provides the company with the ability to raise additional funds to support our planned growth and accelerate the expansion of our business. We are now ready to take your questions.

Operator, Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. The first question is from Michael Woo, a Private Investor. Please go ahead.