Q3 2019 Earnings Call
Today's call is being recorded and webcast.
Sorry, I would like to turn call over to James Hillier, Rpgs, Vice President Investor Relations for introductions. Please go ahead Sir.
Thank you, Doug and good morning, everyone.
With us today I'd be cheaper tonics is chairman and CEO , Dr. Mountain coupons, and senior Vice President and CFO Tim on it.
Statements made during the course of this call to discuss management or the company's intentions expectations or predictions of the future are forward looking statements.
These forward looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward looking statements.
These risks and uncertainties include those detailed and I could you photonics its Form 10-Q for the quarter ended June 32019, another reports on file with the Securities and Exchange Commission.
Copies of these filings may be obtained by visiting investors section, if I could use website or by contacting the company directly meal to find copies of the as he sees website.
Any forward looking statements made on this call or the company's expectations or predictions only as of today October 29 2019.
The company assumes no obligation to publicly release any updates or revisions to any such statements for additional details on a reported results. Please refer to the earnings press release and Excel based financial data were posted to our Investor Relations website Youre post these prepared remarks on our Investor Relations website. Following the completion of [noise].
I'll now turn the call over the balance.
[noise] wouldn't ordinarily do.
I would say headquartered here, though to wait in line with our expectations.
Why is the change in my market economic.
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Yes, it is complete ways this season.
States you probably are in a competition is in China cotton Mark.
Dissolved in there, but it could then average price decline.
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However, we continue doing with.
In New York, you and you can put all that and application those sub 10, so even with our kind of good stupid mission and they did you put all that core.
I wanted.
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Fiberblaze up to 20 meters.
In the six kilowatt, Kuwait, this but otherwise I woke up them.
With more than 70% value productivity and gotten seen them live.
With us the it competes in places in candidates Mike.
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I'd say opportunities as well.
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Hey, Candy 20 kilowatt fiber laser or.
But all my lead in the European that is really kept valuation.
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We also talked to in order for expanded kilowatts, CW fight, but with the boy another I just thought show publication.
This domains that food to represent approximately 6 million or whatever Neil.
Fourth quarter.
In addition to Whittle coordinator for 60, and if you give up look CW basis.
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[laughter] system sales increased 14% year over the year. It it's glued incidences that I didn't buy stood at one of the growth in I'd be giamatti exits in the ways acute system are you do you see since one what made you go your way its manufacturing and sales of our CFO .
But I'm sure that trend.
System.
There was so foot would put our plastic pallets unless they were growing year over year also as we continued to put opus you flip chip Watsco warts brought had a good work their way the Rancho Michael importance in application, we believe that our government.
I mean introduction opened new branded walk run picosecond laser and new cramped a second product will help expand our presence in this market.
Despite the challenging environment, we continue to demonstrate progress in driving adoption of our laser technologies in our core market.
And in Newport, what the creative that expands our addressable market opportunity.
So do I would educated walks pork thought optical power sleep.
Exceeded 17 megawatts in their Zip code.
Yes, that's my answer to the acceptance of our fiber laser technology into the market.
We remain confident in that BG IP GE said ability to execute during this period PDL Wood and you may have put on the downturn in the drone compared to two position.
One with ample wouldn't tell him opportunity to make our whether the technology. This tool of choice in the manufacturing.
With that are you done to go over to achieve.
Thank you valves and good morning, everyone.
Revenue in the third quarter declined 8% year over year to $329 million.
Revenue from materials processing applications decreased 8% year over year.
Revenue from other applications increased 5%.
Revenue in China decreased 24% year over year and represented approximately 37% or total sales.
As we had expected performance was impacted by weaker demand due to the U.S., China trade conflict and greater than average price declines.
Overall price declines in Q3 moderated from the prior quarter.
In Europe revenue decreased 10% year over year.
Primarily due to softness in cutting additive manufacturing, marking partially offset by growth in welding.
Demand environment in Europe remains very challenging evidenced by weakening trends among key indicators of macro economic health in the region.
In North America revenue increased 32% year over year, driven by the acquisition of Genesis.
Excluding Genesis sales in North America increased 2% year over year with strong growth in welding surgical and cutting applications offset by declines in our Menara communications business.
Sales in Japan were flat with growth in welding and marking offset by weaker performance in cutting.
Sales in Korea decreased 8% year over year, but increased 10% sequentially has strengthened battery welding was offset by softness and cutting in marketing.
Q3 revenue in Turkey decrease twentys, 20% year over year, given macro economic pressures in the region.
Sales of Highpowers, CW lasers decreased 19% year over year and represented approximately 56% or total revenue.
Reduced revenue from high power CW lasers in cutting and to a lesser extent welding was partially offset by strength in other materials processing applications.
Pulsed laser sales decreased 4% year over year with growth in high power pulsed lasers offset by reduced sales for marketing applications.
System sales increased 124% year over year, including Genesis and 14% year over year, excluding Genesis driven by growth consistent as for welding and other materials processing applications.
Medium power laser sales decreased 38% on softness in additive manufacturing and the transition to kilowatt scale lasers in cutting.
Well Q CW sales declined 32% year over year due to softness in fine welding for consumer electronics versus a year ago period.
Other product sales increased 28% year over year.
Driven by growth in beam delivery accessories and service revenue.
Gross margin of 46.4% declined 830 basis points year over year.
Compared with a year ago period, less favorable absorption of manufacturing expenses.
And foreign exchange reduced gross margin by 270 basis points.
The acquisition of Genesis reduce gross margin by 170 basis points.
Higher inventory reserves reduce gross margin by 150 basis points.
Lower product pricing and other factors reduce gross margin by approximately 240 basis points.
In light of the current macro economic challenges.
Additive landscape and are increasing systems revenue, we believe it is appropriate to moderate our target gross margin range to 45% to 50%.
We are responding to the current business environment challenges with a multi pronged strategy of product cost reduction.
Implementing differentiating features on our core products.
And leveraging the largest R&D investment in the laser industry to launch leading edge laser products for new markets.
These measures in conjunction with modest market recovery should increase the company's industry, leading margin profile as compared with our current expectations for the fourth quarter.
Third quarter operating income was $74 million or 22.5% of sales.
Excluding a foreign exchange loss of $1 million operating margin was 22.8%.
Excluding foreign exchange operating expenses as a percentage of sales increased 410 basis points year over year.
Due to lower revenue acquisitions and investments in engineers salespeople and I T systems.
Net income was 57 million an earnings per diluted share were one dollar and seven cents.
Foreign exchange losses reduced EPS by one cents.
If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $8 million higher and gross profit to be $4 million higher.
The effective tax rate in the quarter was 26%.
Which included certain discrete tax items.
We ended the quarter with cash cash equivalents in short term investments of 1.08 billion and total debt of $43 million.
Effective operational execution.
Resulted in cash provided by operations of $92 million during the quarter.
Capital expenditures were $21 million in the quarter and 108 million so far this year.
As part of our operational review, we are reducing our annual outlook for capital expenditures to less than $150 million from prior guidance to $170 million to $180 million.
We also expect the level of capital expenditures to moderate next year.
During the quarter, we repurchased 181000 shares for $24 million.
During the fourth quarter IP GE began implementing a cost reduction program.
In response to continued global macroeconomic competitive and geopolitical headwinds.
The company expects to reduced annualized operating expenses by approximately $13 million.
With the full impact being achieved as it exits the fourth quarter of fiscal 2019.
Hi, PG is performing its annual assessment of goodwill impairment, which occurs in the fourth quarter each year.
While this process is not yet complete the currently company currently expects that impairment charges.
I will be recorded in the fourth quarter, primarily related to the communications business.
The goodwill and other long lived assets within the communications business that are subject to assessment.
Total approximately $60 million.
Turning to guidance as widely reported demand for industrial automation equipment remains subdued.
This market softness impacted our third quarter book to Bill ratio, which was under one below normal seasonality.
Looking forward, we will rely on our core scientific strengths and strong cash flow to optimize investment in strategic initiatives critical to the long term success of the company.
Including a greater mix of high power lasers differentiated features and new solutions.
Furthermore, we intend to focus our highly trained workforce workforce on our new leading edge higher margin products as they gain market acceptance, while reducing the resources deployed to manufacture lower margin products.
When combined with planned cost reductions. We believe this strategy will enable us to better can be today and to capitalize on the eventual rebound in end market demand.
For the fourth quarter 2019, we expect revenue of 270 million to 300 million.
We expect our fourth quarter tax rate to be approximately 26%.
We anticipate delivering earnings per diluted share in the range of 55 cents to 95 cents.
Our EPS guidance range includes approximately two cents impact from restructuring charges in the fourth quarter.
This guidance excludes any EPS impact from charges that might arise from our annual assessment of goodwill impairment.
As discussed in the Safe Harbor passage of todays earnings press release actual results may differ from our guidance due to factors, including but not limited to goodwill and other impairment charges product demand order cancellations and delays competition tariffs trade policies and.
General economic conditions.
Okay. Our guidance is based upon current market conditions and expectations.
Assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the company's reports with the FCC.
With that validation and I will be happy to take your questions.
Thank you.
Your question answer session.
Good question you May proceed star one on your telephone keypad a confirmation.
Your line is any question Q.
Hey Press Star too if you would like to remove your question from the Q4 participants using speaker.
Maybe necessary to pick up your handset before pressing the star.
Our first question comes from the line.
And with Edgewater Research. Please proceed with your question.
Hi, Good morning, first off I was hoping you could provide further details on the product cost reduction strategy.
Specifically what is different with these new initiatives compared to what I consider the company's persistent focus.
On on building materials reductions and if you could talk to the approach on onboard presumably these new lower priced products I think it would be interesting. Thanks [noise].
So I just didn't get the first part of the questions. Your products do you say cost reduction initiatives our development.
Correct the cost over overall the company continues to.
Really execution pursuit, it's continued excellent surround taking cost down out of products. Sometimes this can results and fundamental changes in product design.
It also can focus on lateral thinking in terms of bill of materials.
Mitch types of materials, the amount of power that we get out of.
Individual optical components redesigning electrical and mechanical components. So we just havent stopped.
Pursuing those initiatives across a broad based.
Sets of the products that we've introduced to the market whether it be the lower end to the kilowatt scale lasers transitioning some of those cost benefits.
To the higher enter the market.
Enter in even introduced in the introduction of some of the newer products.
Pursuing those initiatives.
In conjunction with the ultra fast technology, and its robustness and compactness looking at the ways to reduce and enhance the value of systems that are being sold. So it's also not just a cost reduction initiative. It also focuses on the.
The different processes and technology that can be delivered in conjunction with the lasers in that respect draw your attention shed some of the progress we've made with selling the real time, well melt monitoring capability in conjunction with the scanners and the high power lasers, where there's a true.
Mendis amount of value being delivered to the end customer and that's been reflected in the pricing that we've been able to a chain.
I'm sorry, it's no fundamental change it's a continued pursuit of what we believe were very good at doing.
And we enter a you know the 10, new devices, which were new application. Each of them is it always is there why don't headwind in networks in the market much higher quality in new or predict opened new application episodes. So I would tell you.
During the one three years, 50%, though when you abuses made with new had a pretty cage, nor does it bill probably pockets and weight over prolexic. So no one of the with.
Instead, we have implied by the way the emitter Cape always there'd be no question, our new business more though the more than 50% or thought though revenue will grow moderate application is compensate our war you took provides the rope in.
Instead of being in ways that and we'll walk whatnot, new opportunities for probably a decade ago.
The gross.
Thanks for that and then as a follow up on I'm wondering if you could see competitively what you're seeing in ultra high power and how you expect competition to trend going forward.
There has been historically, you've been pretty insulated that certainly at a eight kiloton above and even at six kilowatt and above so how do you expect that to change.
Over the course of of the next year do you think there are core technological difficulties that some of the some of the low price competitors will continue to struggle, which.
Or will they continue to in shop and therefore the on this is on IP GE to do the same thank you.
Well it is skews it said still five kilowatt 10 kilowatt they could be kiesel, Deutsche and it's not dogs. They yeah I did see they don't fail competitive solution for such.
The power or where do I want to Cuba, what makes to the Rico Awards. The urea went live with where did it come would fit where do you.
Well coordinated Jim ways that they want some market.
Sure this pressure in China, when Chinese government, making every all support so it made in China product break Chico were without Copel changes going on Monday, when not able to India. You compete you wouldn't see Syria, five six kilowatt than fiber the theme.
Neglect fuel, though they don't have any a bunch student to compete with our from lasers.
And then you get on days in time, although I would share goes there are ways that new with somebody uses for always break Chico will come or they are working all new few months fully be many times to repair did so on quality is extremely wet so are they not to deal with broad accordingly.
Oh Boy supermarket, Jim that some claim nordson, though.
Thanks, Doug there's lots of and one other quick.
Affrication team has any of that 30 million of cost reductions included within beyond the fourth quarter EPS guidance.
[noise], some small benefit factored in on a pro rata basis through.
Some a little bit less on manufacturing some of the operating expenses.
But the full benefit really will come through the end of the.
Enter the year.
Great. Thank you everyone.
Our next question comes from the line of Tom definitely from D.A. Davidson. Please proceed with your question.
Yes, good morning, I sound like in your earlier comments that.
Your seems to relative strength in welding versus cutting and I'm wondering when you look at just the the softness in the industrial market today, what's driving that difference.
So yeah, certainly there's been some significant wins on the on the welding side. It it often happens in this way Tom wet despite macroeconomic weakness it can be.
A time when companies look at how to improve processes by driving improvements.
In productivity and quality they want to enhance what they're doing and when that demand cycles can be weaker some of the focus on the R&D and development side is in that area in other instances. Some of this is coming from transitions in industrial.
Manufacturing output. So for example battery welding not just in China, but in different countries around the world is a growth a very significant growth driver welding applications and we expect it will continue to be so and some of those investments by the way.
We're also it's interesting on the we all source I called this out previously.
Even when the automotive cycle can appear to be weak on the outside some of the investments that go into welding programs on automotive can actually pick up a bit.
Okay. That's helpful and you also mentioned that some of the other material processing applications were fairly healthy how big is that category. What are the biggest pieces of that category right now.
So I mean, the main ones would be in obviously, the welding side the weaker ones in the quarter, we're cutting an additive manufacturing. There's continued good growth in some of the cleaning applications, which we've highlighted over multiple years, we expect to be a very strong growth driver.
Revenue, particularly with higher power pulsed lasers, which is where we have a significant advantage.
You basically by the deposition, joining separating or ablative processes. So it's the joining and ablative processes that was stronger in in this quarter.
Outside of materials processing. The defense revenue is strong the medical revenue was strong.
Those were two key drivers on on on that side outside the materials processing.
The as you guys, Jim Ziv, where would you an application it's I.
Said before contributed so much more complicated than catching got units euro very everybody would they would you can buy jets ways. They do it somewhere to stem the design entail, though introducing market, but where would you break cheekily yeah for each.
Broader peach bottom should be the where we'll Jupiter technology different you Jim operation It so on what different wet.
But in the movies and so on its absolutely new business more than you'd be a pool, we sold quite such application only.
He is as every day.
It is a laser through all the MTR cuts somewhat the right to the will be itself relative to where would you put offices you talk us north where do you shouldn't that go in where this will not would change the business model now we're going to sign of his menu, where do you see us where do you watch customers put all that our multi year, but.
Program or change in the wellpoint automation or is there well Jim Oh process. It's in there corporations, we felt dance such customers Jupiter Idiots and we'll do the work together with them full Chinchilla took Norwegian Belgian technology in there.
Platform. It would go in that same way with many of them would you.
Company, you for a oh than what you wouldn't that city right away in that study in aerospace industry agreed couch in that city. So it's much more complicated new more though it seems much mobile.
But it's back to such a way you. We believe will next to today, Yes, where would you an application will grow dramatically and nobody able to compete in serious is a case where that no changes to any of it because it's much more complicated now a benefit and Oh. It went it should we say when Carlos practical.
Oh optical solution outside access cities. All these electronic solution and also when wait for these companies prototype must since more than 20 different guide two machines, which is machine will produce but does that open markets up right to customers, but your weight them folk.
I see a year with throw them huge opportunity with parents would take loads you don't laser will United PG put works.
Only RPG patented process.
Okay, great well appreciate all the extra color.
Our next question comes in a line of Andrew Degasperi.
Aaron Berg. Please proceed with your question.
Thanks for taking my question, maybe first could you provide us if I missed that I'm, sorry about the six kilowatt and over next in terms of <unk> percent of high power revenue and specifically could you maybe tell us how pricing has held up and the six to 10 kilowatt.
So six kilowatt for approximately 50% of total Highpower sales.
Pricing has been more resilient.
At those levels.
Basically because of the competitive advantages to some degree as pricing changes on a per kilowatt bases at the lower level. It does feed through but has generally been being being better at those other certainly on a sequential basis was pretty good at at the higher power levels.
Got it and I'm just generally speaking are you seeing a substitution effect, where maybe someone who want to purchase Sunday kilowatt goes what a five because they're uptime is not as high as our customers.
No we haven't really seen that that change.
If anything in this quarter some of the sales of the five and the for a bit lower whereas the mix at the 123 was a bit higher and then you had the strength and more than six gigawatts and taken my it's a five kilowatt, what's not doing six five perhaps give awards overcome drove as its 70% to 80%.
Mike you Didnt situated shouldn't change up to now we're controlling 70 to 80 center. This Mike did thought though our competition billboards.
Hi, Scott coherent for them with Roy Hill, or Toronto put another not cheney's, but Geotech company now practical moves in market because with new provide somebody will twice within viewpoint, but one kilowatt power they not able it all to compete in this market tends to codes in product you go this.
We remain only supplier or such kind told from laser which will dominate in the market. Brett you could we want to get you wouldn't want to kilowatt hour new solution will drop essentially.
Very low cost it will produce now in market also three to four kilo what do you could go changes that them here. When you say is similar to you when compared to Q, we see some wizard to you. It solution. So practical we saw a drop of pricing the yield started doing good this again and with it.
Can work, but it's also a a loyal market segment. When there were five belows wealthier whatever works in the business here, but with the one to two siddique about what also will be done work our friends at market now it dropped to put you put them now I would tell you didn't.
To 60%, we fill up by 22 makes its floor.
Got it and one last question for me is a I noticed in your release you mentioned that facility consolidation at some point maybe could explain that went along with your gross margin trajectory I mean as that is that going to change at this point. It should we expect it to stay about 40 550 for the medium term our <unk> I would target always we prudently.
I will support whether this a shift you ask concerned the gross margin and as to when do you plan to say, 2% net income.
We our targeted towards quotes is oh it with the it is out and put on born in future wells and we made their bodies into the into we'd be able to next year will return back to these numbers.
Got it thank you.
Our next question comes from the line of Jim Ricchiuti with Needham and company. Please proceed with your question.
Hi, Thanks, good morning.
I know that mix can.
Impact gross margins as well as volume, obviously, but I'm just wondering that the gross margin range. So you're talking about 40, 550% is there a way to think about what level of quarterly revenues, we need to be at to see a those kind of margins at the high end.
Sure.
Okay, let's step back of agenda first of all if you look at actually this last quarter being and were 330.
If you strip out the inventory provisions being a bit higher.
The under absorption you guys should be close to 50%. So if you recover those two amounts getting back above.
353, 60, probably sees you towards the top end of that range. If you see Mac mix benefits starting to to flow through for example.
<unk> increased sales of high power lasers increased sales of newer products.
Ultra fast that you'd be higher power pulsed lasers accessories, those would be a benefit if you saw tremendous growth obviously in systems, even though we target improving assistant gross margin you probably see some dilution of that impact.
I think in order to get back about a 50% you still have to see very significant growth in rebound in the total business.
And the numbers, we run still show that are being in the 380 to 400 million.
Revenue range in the last quarter as I mentioned on the previous question.
We did see relatively speaking quite a high mix of the one of three kilowatt lasers in the less than six kilowatt range of that probably out a bit of an impact as well.
Coming into this quarter, despite under absorption of fixed costs, you've got these ultra high power lasers were shipping so there maybe some benefit related to that so there's there's some some very positive stuff that you see the product mix shift.
Going towards where our rail capability is.
Being able to to recover some of the gross margin in conjunction with a market rebound.
Yeah. That's helpful. Tim can you quantify the price pressure that use your you experienced in the quarter in the sub six kilowatt category.
The probably first sequentially wasn't that much it was pretty much the same pricing if anything on ASP was more of an impact related to FX sequentially, but the just the mix. If you looked at the less than six kilowatt was quite heavily weighted in the quarter to the lower end to the market.
In fact, if you look to our relative change in China revenue compared to one of our biggest competitors in China. We actually think we picked up some share in the quarter relative to that performance.
They talked about that China revenue being down closer to 35% and the quarter and we were only down 26%.
Clearly have is one of our main customers was was weak, whereas the other customers in China or actually held up relatively speaking, okay. So that would be another another sort of positive in terms of competitive dynamics.
Are you seeing any variability variability around bookings by region or is it was it below one pretty much across the board.
Hi, I was weak across for the U.S. was strong backlog in the U.S. is very strong.
Europe continues to be week.
Japan is a struggle at the moment.
Overall tone in Korea, given the diversity of applications is a bit better.
And then you've obviously got a lot of geopolitical stuff going on and Turkey, Western Asia, which has a bit of.
A challenge so you are grappling with weak macro in.
A whole bunch of different locations that's I.
I mean, it's similar to what everybody else on the industrial markets. As has has alluded to couple of companies that are reported over the last couple of days the challenges facing and the tone of their commentary was right in line with what we're saying.
Understood. Thanks, a lot.
Our next question comes from the line of Mark Miller with the Benchmark Company. Please proceed with your question. Thank you for the question any impact of tariffs have you seen any pull ins or push outs and.
Or the tariff concerns.
At the trade war on terror issues.
Continued to make.
Decision, making within the whole business environment, very uncertain and Thats the.
The biggest issue that people face there's a lot of talk mark about people starting to make investments in manufacturing capacity outside of China and companies like.
Countries like Vietnam, other southeast Asia, or even India, but that's a longer term trend right building, a factory and making the capital equipment investments isn't something that happens and in one or two months, they're certainly talk about that being a driver in.
The medium to longer term as people reconfigure some of their supply chains, but we had no particular impacts in the quarter of anything being pulled in and that the macro economic uncertainty was really what drives.
Our lack of visibility at this time, the general macroeconomic uncertainty, which is exacerbated I think by that the China trade war entire situation.
You heard from multiple sources that in China Besides pricing.
Chinese manufacturers actually would prefer it seemed seem to prefer having more local sales.
People in China, rather than buying Oh laser that might have superior reliability, which might not have the same number representatives and sales in China do you agree with honored.
Contested.
With OEM custom work, where do you will need good quality on wages, we don't don't pay wouldn't be big change in China, all the OEM cheney's owned in your one or what you without laser regarding the say with two family companies, which huge oh portfolio market for them will go into in China.
Let's say for with the brand from the government policy credit Board into January when since over all this limited door or with their forecast now would require and went to widen out the why on BORCO manufacture. It's all this government policy, it's not drive success or someone or one or two stepped up.
It's a without such but support all these are equipped and now the poor one can update immediately who one kind of immediately this government policy, but group, who don't view, where almost time I'd be GE of what's included in this strategic technology by Chinese government 20 years ago.
They know wesco huge money to do well more fiber lasers. So.
So no one do you recently started from will go into you win some.
With that said you will come more did you not strong enough.
The is they support the white house, but the temporary where China auto big market, but no forecast to know as the market did start to grow.
Easier putting them growing I will start to grow very pathmark viewpoints, what where it's more in other Asian countries as an Arab countries. It now go into South America everywhere. It's got huge markets also so no we're not going to change our policy and also Chinchillas east.
But do you in Chinese market to how we look into today were very good weather station in future because they are not able to complete good quality that same well see this oil up to now sell wouldn't the caught up in China, Nobody able to compete with you know what BMW is skewed a little end cars.
They are you also own but I am kind of the they use from the chip.
Outside.
Mike It's the same story here with some weakness.
Thank you.
Mark just specifically on that we we have a very broad based footprint in China of sales and service people that is is unparalleled probably within the laser industry, we have not shied away from making those investments very broadly geographically within the company no. One way is a which is introducing the market now it's made you go for it.
Vincent on my Virginia never Crab and now in the same whatever you want to Kevin Yost five years. So we're now with signing the equips contract for medical application Chinese customers. For example, the main Yodlee tool that we entered into your near term I can say a lot of new in a way to products.
Nobody that won't notably China Nobody's World.
No where near the time, we'll have something similar so its new market put us well have to go because this low power a low and is there would be on whether become in commodity it's not more <expletive> you talked a with time, where would it but each would wonder could the golden age that's in the case deck with.
Mary Kay brought you do but you didn't affect you raised them going down and because of auto quickly and so we introduce new engineered solution. It's our.
What did see under we took very successful. This it now we chincherro product away with new actual much more sophisticated new application in new quality on it.
The most Casey unique nobody can you put it.
To the near but.
Thank you.
Our next question comes from the line of Nick Joseph with Longbow Research. Please proceed with your question.
Hi, good morning, guys.
Tim the spread and the EPS guidance of 40 cents is wider than been typically 20 or 30 sounds like you guys Yep.
So can you talk about the underlying drivers and that is that the lack of visibility or is that mostly tied to the goodwill impairment charges that you said were not included.
No. It's got nothing to do it the goodwill impairment charges is just that at these revenue levels you see greater degree of de leveraging relative to the ability to adjust expenses right. We are we have made a.
Good start producing and making cost adjustments and reductions, but we're not going to dismantle the entire manufacturing capability of the company at this point in time, and the investment and employees and training and all of the other.
Advantage is that that have made IP GE leader within the market.
These revenue levels, you just struggle to.
To to get an accretive business model Guy you need to get that recovery coming back up to 333 40 350.
And as we've shown in the last couple of quarters. Even this last quarter, you get pretty solidly above a dollar in earnings right at the lower levels, particularly if you got to the bottom end of that range to 70.
You are dealing with a different set of issues and it's.
There's two or three companies that have announced in the last two days where.
Exactly the same issues faced them around their business model and the level of expenses.
Today that they carrier at the moment.
So that that's really where it is it just it that's the mechanics of the business model.
But okay and then on the buyback can you. Please.
So on how much you have left in can you talk about is it's in why not not getting more aggressive here, given where the stock price.
And given how much cash you guys have on the balance sheet and this or just curious to know what's kind of your plans or to do that yeah sure.
Sure.
So.
First of all and we continue to have wide ranging discussions around capital allocation to focus is obviously on funding.
The most important part of our investments as R&D capital expenditures.
The remaining amount on the buyback at the moment I think is about $100 million.
At lower valuations, we have in the past and would going forward property buyback ahead of dilution, but that is a specifically anti diluted buyback that has been put in place and was approved that.
The thing is the April Board meeting we had.
Huh.
So we'll continue to evaluate things on a.
On a regular basis and how to.
In Haas and refine our capital allocation.
Policy, we want to maintain a very strong balance sheet, but we've also come a long way from where we watch over three years ago, we think there'll be opportunities that continue to arise as we develop products for the newer markets and start to grow sales there that we want to have the firepower to.
Pursued over the coming periods.
Okay and last question for me can you just talk about relatively brought home on the gross margin profile of the high peak hour lasers. As you saw you talked about giving some tractions with orders in China is bad relatively in that 45% to 50% range or is that.
The margin profile of that laser is it's a little bit below that.
The higher power stuff the.
The high Big power Oh, no that does that has very strong margin profile on it.
The product margin off the product is significantly above the 45% to 50% or tanks, you down to those levels as the under absorption of manufacturing expenses. Another period cost side HBP lasers for example, as well as the 100 hundred 20 kilowatt. The 50 kilowatt lasers 60 kilowatt lasers, the single mode lasers.
Hi power pulsed lasers. These all our product that have very high and strong margin profiles, because the competitive dynamics are very different.
Okay got it thank you.
Our next question comes from the line of Krish Sankar with Cowen and company. Please proceed with your question.
Hi, Thanks for taking my question I had two of them Tim.
Most of the to look at that Jim Giertz Gilts trend. It looks like you know most geographies exit the U.S. seem to have either macro all competition issues. Just kinda can you just based on your visibility do you expect to strengthen us to continue or getting the next shoe to drop.
We still see as I said order flow in the U.S. has continued to be robust.
Strong does the diversity of applications here, which is only probably equal then in Korea, which is the other area, where I said that you tend to see continued relatively robust side you know competitively the issues are faced primarily in China. So it's more the macro in Europe and.
Japan that affect things.
My visibility into an insight into what's going to happen in the U.S. is as good as yours, Chris I mean, I look at all the same data points and all the same discussion points and you know what the federal reserve is expected to do it's clearly, though the strongest economy in the world at the moment it depends whether a soft land.
Being or even you know not even a landing a touched down as achieved on all and how that proceeds into next year, where you have an election cycle going on and a host of other things My Crystal ball is not any better than yours or is that a situation.
Got it.
Thanks, Tim to then just another quick follow up if I looked at it over the last 10 plus years, you guys had technology leadership and you know the lowest cost and you know not a whole lot of competition. So 50 plus percent goes body made a lot ascend navio competition systems more than the mix just going to Q does it at 40 for the steel better than most of your peers.
But if I look at it and log built like five years out.
As for let's say the 50 still the right. Peter do you think it should be more the low fortys put the gross margin.
I think valve and answer that question earlier, we're focusing on really leading edge technologies processes applications.
And moving the real strategy is to shift away from the the more competitively driven areas of the market to deliver value to the end customer and if we execute around that we will be back in a position of significant technology leadership and targeting getting back to the 50% gross margins.
That we had historically so there's a lot of execution, but there's also a significant amount of.
R&D, that's going into that and by the way momentum in different product introductions in areas that we're starting to to actually achieve whether it be in in the in the higher power levels on the more integrated welding solutions.
At the ultra high power lasers within the medical.
Yesterday, we had very strong sales of green lasers.
The ultrafast product. These these are all products that are extremely sophisticated have very.
Significant technology advantages.
But there's also amounts of execution that's required to get into really growing no sales valves and said that target is to.
To grow the companies have up to 50% of revenue from non medical applications. In if you succeed in that regard you return to being at a very dominant leader within the industry. Most visibly occasionally you said it into Europe , and the U.S. Norton cadence, so our dependence from China.
Situation or will we will decrease that are much go.
Got it thanks, Jim Thank Doug.
Thanks, Chris.
Our next question is the final question and as a follow up from Joe and then with edge.
What a research. Please proceed with your question.
Thanks, I just wanted to ask on on kind of your midterm outlook for two applications. One easy battery projects going forward are there any large projects within your forecast timeline or or are we getting past larger projects and that that demand is more durable.
And then second on on the TCW side I'm curious on your thoughts for 2020 on the potential for significant Fiveg driven.
Retooling the TCW run rate is down by about half from the peak from a few years back so I'm not sure. If it's too early but curious if you think you get.
Nice recovery on the C.
The cycle next year. Thanks.
First of all on the battery welding attend still to be project driven joke about it is pretty broad based it's not just China reinvestment as European investment going on there's some European investment the drives China.
You got significant investment on battery going on in in Korea, but it is still on even from period to period, but it's a significant driver and we continue to think that this is a.
Decade long investment cycle right.
Electric vehicles are really going to transition to being 40 or 50% of the total vehicle demand at output the amount of investment that that is required over the next decade continues to be very significant the welding cleaning process is a very sophisticated in that area that in conjunction with some of the cable Gerard Ltd puts us probably at the fee.
More fun to that market has come back.
Any of the other suppliers within the market on the consumer electronics side. It. It's just we don't have any significant feedback or information or where the demand cycle will be next year.
Even with Fiveg.
[noise] potentially being a growth driver, it's a bit early on that we'd expect to know something towards the end of the first quarter or during the first quarter.
Makes sense. Thank you.
That concludes our question and answer session I'd like to end the call back to management for closing comments.
Thanks for joining us this morning for your continued interest in AG, we look forward to speak with you over the coming weeks into next quarter's call have a great to everyone.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.