Q4 2019 Earnings Call

[music].

Good morning, and welcome to IP, Chief Photonics fourth quarter 2019 conference call today's call is being recorded and webcast. At this time I would like to turn the call over to James Hillier IP Genies, Vice President of Investor Relations for introduction. Please go ahead Sir.

Thank you Daryl and good morning, everyone.

With us today, because I could you Protonix is chairman and CEO Dr. Belterra Park.

Chief operating officer, Dr., John Scheurer.

Senior Vice President and CFO, Tim on it.

Statements made during the course of this call that discuss management split the company's attention expectations or predictions of future are forward looking statements. These forward looking statements are subject to risks and uncertainties that could cause the company's actual results could differ materially and those projected in such forward looking statements.

These risks and uncertainties include those detailed light BG Protonix form 10-Q for the quarter ended June 32019, and other reports on file with the extreme Securities and Exchange Commission.

Because of these filings may be obtained by visiting investors section like he's website or by contacting the company directly and they also find copies of the Fccs website.

Any forward looking statements made on this call are the company's expectations or predictions only as of today February 13 2020.

The company so 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, an excel based financial data work.

Posted to our Investor Relations website.

Post these prepared remarks on our Investor Relations website following the completion of the call.

I'll now turn the call Overdeveloped.

Good morning, everybody well.

We didn't do what are the fourth quarter revenue of White city in both our guide them rent trends.

The U.S. market and you could work.

Well Mark are you, calling me because that'll.

On the competitive landscape in China, what's that doing when challenge.

Well, we're disappointed you know we want to quote for deduct from India Pinochet into two new P. chips.

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This New York solution, which represent about one people bought them say in concert with good old in margin profile and put away, it's great that geographic and market you read SIFI Grace.

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We have to wait to see it competes Jim.

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Which we acquired in December 2018.

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Approval in China, and the U.S.

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Hi, good AJ mix, so keep our ways that I'm going with differentiated features and solution in your markets and applications.

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With that <unk> tons, a quote our tool Eugene.

Thank you Valentina and good morning, everyone I'm pleased to be dry AMD, you today and on future calls.

So just cause operational trends and our business.

I could you remind shows a clear markedly doing fine finally, as long as hundreds of megawatts of installed capacity.

And thank you like there were shipping shifted to make a lots of total optical power.

Increasing 14% year over year.

They continue to see aggressive process emote China.

Our based competition, which intensified total adult towards the end of the second quarter last year.

Sounds uptime pricing would be more stable.

And for Yeah, a decline of average price per kilowatt [laughter] effect as a don't have any off units sold.

Our ability to rapidly reduced cost because limited the gross margin impact.

For all of these price reductions.

Our team is focused on a pause on a cost reduction so all of their manufacturing process that we've been able to significantly reduce the cost of our high power laser solutions from warm up to six kilowatt.

Which accounts for a majority of our Highpower unit units sold.

When combined with a full benefit those of course excellence.

The took in the second half of a dream Tonight and videos that these measures we will help us sustain our industry, leading margin profile and cash adults.

They will continue to manage our cost structure to business environment targeting gross margin of four to five up to 50%.

Excluding around three per usual. So you are at the bottom of this region ration during the fourth quarter.

It was occurs at the well income Troy manufactured expenses degrees in them by more than 10% from South corridor.

The benefits was mostly offset by a reduction of course upsell into invented it given the lower ER.

Production level.

Our position enabled us to generate cash from invented here as a reduction of the early of inventory on hand.

That was greater than inventory provisions.

It was any of our performance by region.

In China decreased 21% year over year and the represented approximately <unk> percent of our total sales.

[laughter] perspective, the foremost was impacted by weaker demand do you know the U.S., China trade conflict. So.

Slow down as a capital investment and the greater than average price declines.

In Europe for anything you'd agree it's a 17% <unk> yeah what are you.

The demand environment in Europe remains very challenging as a key mark macro economic indicators remain weak in the region.

Revenue in North America increased 30% yellow area.

Even by English lajeunesse.

Excluding janeda sales in North American could you just trying to sell parse out 3%. The other way are very strong gross in the building surgical and communications applications.

Our girls in North America is testament to our diversified portfolios threat at strategy, what increased adoption of our BMW would accessories.

And completely as a solution that was augmented by but also in advanced applications communications and medical laser products.

Sales in Japan degrees, so to 7% the other way here.

Similar to Europe, as a macroeconomic in Japan remains weak.

However, we continue to work and have a number of substantial laser welding project and that either.

Sales in probably increased 2% the other way here.

On staff and battery welding and sales in talking to decreased 80% year or you're getting a macroeconomic pressures affecting cutting business in that region.

Does that.

Turning the call or do you put discuss financial highlights in the quarter.

Thank you Jane and good morning, everyone.

Revenue in the fourth quarter declined 7% year over year to $307 million.

Revenue from materials processing applications decreased 11% year over year and revenue from other applications increased 42%.

Sales of Highpower, CW lasers decreased 15% year over year and represented approximately 51% to total revenue.

Reduced revenue from a high power CW lasers in cutting and welding was partially offset by strength in other materials processing applications.

Pulsed laser sales decreased 33% year over year.

With growth in Green and ultraviolet pulse lasers, offset by lower sales of pulse lasers for marking and find processing applications.

System sales increased 69% year over year, including Genesis and increased 43% year over year, excluding Genesis.

Medium power laser sales decreased 32%.

On the softness in additive manufacturing and the transition to kilowatts scale lasers in cutting.

Well Q CW sales increased 14% year over year.

Other product sales increased 6% year over year, driven by growth in beam delivery accessories and service revenue.

For the full year 2019 revenue declined 10% year over year.

And 10% on an organic constant currency basis.

Q4, GAAP gross margin was 40.5%.

Which declined 1000 basis points year over year.

Excluding higher inventory reserves.

Q4 gross margin would have been 45.2%.

Normalizing for a full bonus accrual gross margin would have been 44.1%.

Compared with a year ago period.

Higher inventory reserves reduced gross margin by 570 basis points.

Thats favorable absorption of manufacturing expenses reduced gross margin by 250 basis points.

And the acquisition of Genesis reduce gross margin by 100 and by 80 basis points [noise].

[noise] fourth quarter GAAP operating income was $243000, an operating margin was 0.1%.

Excluding higher inventory reserves foreign exchange and charges related to asset impairment and restructuring.

Q4 operating margin would've been 20.9%.

And normalizing for a full bonus accrual operating margin would have been 17.8%.

As a reminder, how fourth quarter expenses did not include.

An accrual for employee bonuses because of 2019 underperformance relative to our budget.

For modeling purposes, you should assume quarterly bonus expense of approximately 4 million in cost of sales.

And 5 million operating expenses in Twentytwenty.

Net loss was $4 million or eight cents per diluted share.

Higher inventory reserves and charges related to impairment of goodwill and other long lived assets and restructuring.

Reduced TPS by 99 cents.

In addition, foreign exchange losses reduced TPS by a further eight cents.

And discrete tax items benefited EPS by eight cents as well.

Exchange rates relative to the U.S. dollar happy in the same as one year ago.

We would have expected revenue to be $4 million higher and gross profit to be $2 million higher.

The effective tax rate in the quarter was 245%.

The effective tax rate was increased by non deductible charges related to impairment of goodwill and other long lived assets and restructuring.

And decreased by certain discrete benefits in the quarter.

On a non-GAAP basis, excluding these effects the underlying fourth quarter tax rate was approximately 27%.

We ended the quarter with cash cash equivalents and short term investments of $1.18 billion and total debt of $42 million.

More than 60% of our cash is held in the U.S. with most of the remaining cash balance in Germany.

Effective operational execution.

Resulted in cash provided by operations of $130 million during the quarter.

Capital expenditures were $26 million in the quarter.

And 134 million for the year versus our revised target of less than 150 million.

During the quarter, we repurchased 105000 shares for $15 million.

For the full year 2019, we repurchased $41 million stock.

I'd have 84 million remaining on our current buyback authorization [noise].

We ended the year with 285 million of shippable backlog.

Down 16% year over year total backlog, including frame agreements have 693 million down 3% year over year.

Fourth quarter book to Bill was one.

In line with normal seasonality.

Turning to guidance, we believe we have significant long term growth opportunities in laser welding fine processing.

The electric vehicle batteries and to our portfolio of new products addressing opportunities and micro processing medical systems and beam delivery solutions.

Current demand for our leading edge laser solutions remains mixed with strength in North America, and emerging regions, such as India and Southeast Asia.

Offset by ongoing macro softness in Europe and Japan.

Prior to the government extended lunar new year holiday.

There were signs that business in China was firming.

With order flow, having picked up in December and January.

However, ongoing business disruption related to the Nobel novel Corona virus outbreak makes all makes forecasting our business in China.

And the impact on global demand very challenging at this point.

China is a large and important market for IP Gee with repercussions for other markets and we continue to monitor the situation closely.

For the first quarter of Twentytwenty.

Hi, P.G. expects revenue of 220 million to 250 million.

The company expects the first quarter tax rate to be approximately 26%.

Hi, P.G. anticipates delivering earnings per diluted share in the range of zero cents to 30 cents with 52.9 million basic common shares outstanding.

And 53.6 million diluted common shares outstanding.

This guidance assumes approximately $45 million in reduced revenue.

And 45 cents lower EPS from business disruption related to the Novell Corona virus outbreak.

This estimate is based upon the facts and understandings we have at this time.

As discussed in the Safe Harbor passage of today's 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 health epidemics in general economic conditions.

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 balancing Eugene and I will be happy to take your questions.

At this time will be conducting a question and answer session.

We'll have to ask the question. Please press star one on your telephone keypad.

Confirmation Tony will indicate your line is in the question Q.

You May press star to appeal would like to remove your question from the Q.

Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

[noise], our first questions come from the line of John Marchetti of Stifel. Please proceed with your question.

Thanks, very much I was hoping we could just spend a minute on some of the commentary that you talked about seeing some strength in the order book, obviously in December and January out of China, recognizing that that's.

Likely very much up in the air right now given everything that's going on there, but just hoping you could spend a couple of minutes talking about where you were seeing some of that strength and and then maybe as we look out a little bit further into 2020, you may be looking around maybe geographically where do you see some of the bright spots and some of the risk.

<unk> ex China as we go through the year. Thank you.

I think that peanut general pickup in demand in China in terms of order flow.

A little bit we sold out in December that help the book to Bill equal one and then certainly in January before the lunar new year run and and the Corona virus.

Disruptions the order flow in China is really being.

Pretty positive across our Oems for cutting applications.

Had a chart to look at the detailed aware that was really coming from yet we've looked at the total number so we'd have to pass that through in a bit more detail, but it was certainly a good start for the year.

And was showing significantly better.

Tone than we've seen over the previous.

Four or five months in terms of the rest of the geographic regions. I mean, we look at the same macroeconomic data that you would add we continue to see that the underlying strengthened in the local economies is largely driven by strength in the U.S., which continues to hold up well.

Sentiment, perhaps isn't quite as strong as it was a year ago, but we've also got the benefit in the U.S. with a much more diverse product line with new applications coming on stream referenced some of the cinema in medical opportunities are expected to grow.

Very strongly so I think the U.S. is a reflection of where we'd like to see that the whole business CLO globally with that diversification some of the medical will also.

We're selling some of the medical lasers for example, in India and China.

Starting to sell them in China, so that should be a bit of a benefit there I'd say globally.

Europe looks more at least it was looking a lot more stable an order flow in Europe at the beginning of year has been reasonable.

Europe is obviously at a key they will on a lot of export.

Driven industry, so it's going to be interesting to see whether.

Some of the impact to China, which is really uncertain at the moment.

Offset some of the the stabilization if not even a bit of strength in Europe I was quite pleased to see why European order flow it being in the first six weeks of the of the quarter.

Japan remains weak, but orders in January we are reasonable that Korea was reasonable.

I think macroeconomic wise, Japan is the other week area at the moment.

Thank you.

Our next questions come from the line of Tom Dibley of D.A. Davidson. Please proceed with your questions.

Yes. Good morning, So I was curious on the orders that picked up in December in early January have you sense in those quarters pushed out or cancelled or is it just a lack of new orders filling the void.

We haven't had you mean in relation to that the shutdown told over the last two weeks in China correct.

So now we just don't have any indication of whether that just kind of be pushed out or.

Delayed and taken later, it's a very fluid and changing situation where people back in a major offices only on Monday.

So we don't know whether it's going to lead to a big pickup in Q2, because demand recovers or whether it is a permanent push out.

For the year.

We also have not had any orders cancelled and the general feeling I mean, one of the comments from our general manager in China is that people are keen to get back to work to offset the losses that are incurring whether that can happen on or is is an open question right. This is a very changing situation even overnight, there's a bit more negativity around.

The way that diagnosing the virus and certainly that's having an impact on on on the U.S. market today in Europe.

Thanks, just such a changeable situation.

It's not really possible to give you anything more definitive than the estimates we've made as of today.

Okay. That's helpful. As a follow up just little bit more maybe on the battery auto battery market, what type or size of laser is used in that space and what do you think the long term prospects are.

From a market point of view.

There's a wide variety of lasers used in battery processes talk show because most a lot about this I hope you cover some of that yeah that makes this a different kind of applications for better or whether they are relevant and so one of implications. The second along its really think also case for battery.

And for this a applications our customer using different kind of lasers Bob.

Oh left lasers, we should apply to our.

Existence, and some potential customer with this options Abby MPB options adjust them almost beam diameter and.

Just a is ultimately if it's a very good result.

Yes experiment the mathematical result, Avalon. This point of view is she is a future follower.

Hi, Paul agents Festival for.

For us the growing Dimont all foreseen for you are catching all would say you to ready square, so where do you can supercuts Pete gotten into their use our good even ways and I would to easily fit you need it's been so byproducts new required, but so and we will resist requiring with what you to deal with by the good ROI So business.

[noise] Ultra system uses for our Didnt automation all the production where did you put a doctor and also we're talking with some major well over one third tier one waste in this market.

And also important without a such kind of but they are now using the different outdoor automotive customers and for example, we.

Receives a very big enough orders, while the lasers and together with our online money taught out but I'd use by LG.

In this case, it's a very important applications and we see that also big enters simple such kind of combinations I mean, our lasers.

<unk> online money talk will determine it or especially from buttoning up production.

Okay. Thank you for the color.

And Tom the other part of your question was this is continues to be a decades long a decade long decades, perhaps long investment cycle, if really to transition to electric vehicles is going to happen in the volumes that.

Everyone is expecting.

We're going to get to 25, a 30% of vehicles as you know probably over a billion dollars of laser based investment that's required over.

At a 10 year period.

So thats still hasn't changed at all at this point in time.

Okay. Thank you Tim.

Our next questions come from the line of Jim maturity of Needham and company. Please proceed with your question.

Thank you good morning.

What are the things that then it was kind of struck by other quarter was the the strength you're seeing in the ultra high power segment of the market and so.

So what does that reflect just they this shift and in demand within China too to move.

At an accelerating pace to two ultra high power.

Of course, there is some trends.

First of all in China and of course in China. This customer much more flexible in comparison to the other countries.

And so we'll just.

Our custom already used our for example, 20 kilowatt laser for cutting applications they produce special machines.

But for US it's a much we're also very interesting because they are not supply and on the lasers and supply and also our older had optical [laughter] for this high power lasers and in this combination that also special.

I've used fiber.

Okay, and then as a good early renewal, but also some cost them a announced that the ask about certain such a five kilowatt laser for cutting applications.

And such kind of France also we saw in Japan.

And.

We have some delay also in Europe.

Got it and Tim if I may just with respect to to the Q1 guidance.

Tim This is gonna be a considerable headwind from under utilization impacting gross margins. In Q1 is there any way to think about a about gross margins in the near term.

Yeah, I mean I. Unfortunately, this quarter is probably one of the most difficult quarters that we would have had since 2009. So the gross margin that we're factoring in that guidance is below.

40%, we're using operating expenses and there'll be a bit higher than they were in Q4.

In the sort of 76 to 78 million.

If you're if we if you exclude the impact related to the reduction in demand for China gross margin would have been closer to the 45% would've been slightly below at the top end of the range 45%.

And at the bottom end of the Q1 range it would've been about 40%. So Q1, even even if you add back in the impact of Corona devices or is it going to be a.

A difficult quarter for us we would have expected that if that the order trends it held up to really transition into a stronger Q2.

Based upon what we've seen on order flow. So it is a difficult.

Q1, and probably as I said, one of the more difficult quarters, we've had for the last.

10 years in that context.

Last question for me is just with respect to the U.S. business ex Genesis was there anything unusual in terms of larger pieces of business that contributed to that growth.

There was some battery welding projects, we talked about that went into your ultimate custom was a European.

Automotive entity that was a nice order that we took that was with the L.D.D. that Eugene mentioned.

Those are a U.S. generally we'll see a pick up into Q4 right. So you had that benefits similar to some in a similar way that we had before that was probably the largest single order I can reference you had some benefit coming from a pickup in medical but that's going to carry all we've already got.

Significant large order that was booked in January for the medical business for this year.

Those are the two things I can think up we had 100 kilowatt laser order in the U.S. that didnt actually ship is going to ship in January.

And one of the other benefits by the way on the Ultra high power.

Was the.

[noise] talking about the overall ultra high power to the 120 kilowatt in Germany by the way did ship so that benefited some of the ultra high power numbers as well.

Got it thank you.

Appreciate it thanks a lot.

No problem.

Your next question, it's come from the line of Michael Feniger of Bank of America Merrill Lynch. Please proceed with your question.

Hey, guys. Thanks, Sara Thanks for taking my question just I'm just first off can you just help US I know you talked about order flows picking up in December and January obviously, it's difficult to forecast I'm just.

Is that something that you sequentially see can you help us understand what gave you comfortability. There you know I know, it's reassuring that order flows were affirming I'm just curious did that like how we see that seasonally just how the business typically trends or do you feel like there was actually some pick up more than 10 seasonality given the depressed markets before that.

The interesting question normally January is a week month for order flow.

In the last two years or the beginning of 18 coming off a depressed sorry, the beginning of 19 coming off a depressed end to 18, we also had quite strong order flow in January.

In China and other areas that drove the overall strength in the business in the first half of last year.

Which then obviously tailed off when you got to the end of June she saw a similar strength.

It's not even a bit more positive I think the last year overall in the first few weeks of this year.

Obviously.

Your last you on a little bit. So this positivity or we are you want to see those trends carry on we'd want to see those trends carry on through.

Q1 and into Q2, we wanted we wouldn't want to see obviously, a slow down half halfway through the year, we want to maintain this momentum, but the general tone was was was pretty good.

That does that help with plans to do you go this venue to weaker episode did you quote.

No pool much higher than any other.

Before but what fourth quarter whatsoever practical stopped the little that total.

We expect that generated wouldn't be with the way because of about four that book compared to eight years.

To that.

That's helpful and just if I understand Q1 is difficult.

Just with the cost savings that's occurring now we can all try do you have our own forecast on the macro but with how you're managing the business just what the cost savings you're trying to achieve if we see a revenue base of 350 million and work through the inventory.

Charges, Yeah, Tim <unk>, you know how can we think about maybe a gross margin range at does that type of revenue number.

So the 350 I'm comfortable being back into the midpoint of the 45% to 50%.

If you can get back up to like the 400, which seems a long way off at the moment, it's closer to 50%.

And then you know operating expenses at that level would probably be around $18 million a quarter. So.

I'm a bit above 20% and an operating margins.

Trending to cite the around 25% I should think so we're comfortable with.

At this point in time without I think the big caveat around that is.

Okay. So long as there isn't a massive change in pricing again.

We continue to make some cost reductions that we've caught.

Rolling into the business model.

Over the next two quarters also.

That's great News Corp.

If I could squeeze one more in just the on on inventories I think you mentioned I believe for that for the quarter. You. It was over a 550 million of 550 basis points hit to gross margins on inventories are you came with where you are now obviously, there's no crystal ball in the macro but like how are you feeling with your inventory position right now.

Now you know and how how we should or we do you think we're through some of those those charges.

Yeah I, we we went through a really detailed review of inventory not just in Q4 would you saw that you'd seen elevated provisions even in Q2 in Q3 compared to normal.

We believe that we have we've dealt with potentially access items and certainly the slow moving items that we'd identified.

We'd be targeting being more in a normal range of 1% to 1.5% provisions per quarter.

Of course, if demand doesn't come back at you have to caveat that statement win with relative to where demand was but if you're getting back to like 300 to 350 or three started to 350 in revenue I'd be very comfortable with where we start to ramp on inventory I think the other good thing was it wasn't just inventory provision.

As a took inventory down there was really good execution by.

The manufacturing groups around the world So that we actually generated.

20 million a of cash from inventory in the quarter, which was.

A great thing to see.

Appreciate it thank you.

Our next question comes from Joe What China Edgewater. Please proceed with your question.

Thank you I just some product questions for me trying to understand how much a tailwind rising power levels could be in 2020.

It sounds like the Twelves are finally coming to market.

In the west it's been a while coming and then in China I'm wondering if you're seeing.

Continued extent, you know kind of the highest and of ultra high power Twentys et cetera.

Three questions about the shift continuing shift to higher power, which will benefit it can be.

[noise] benefited definitely appeal to the looking on benefit for us and first of all Indiana does I don't know competition for such kind of high power lasers as clear.

And.

Yeah.

Also for.

From a different kind of applications or I'm already told them out.

Cutting applications, but also for Willdan application special material welding applications also as Margaret possible use only high power lasers, this kind of fusion Samsung.

From different kind of for politicians high power Trent differently, they will give us additional benefit.

Okay. Thank you and then IP telcos tell you taken might wouldn't I would say a dime. When this year. We expect she is a growth in aside power demand for advanced applications.

There were much more budget potential customer with whom we walk in the received this year much higher margin did before you wind for ER volume introduction to the yield spreads Chico, we use type I would tell you put in solutions wouldn't be working for.

And what are those <unk> advanced applications could you elaborate further on those within macro cutting and welding still.

No no no it the other application.

Especially on material process aerospace Munyaneza application not to you might see dopeless.

Understood.

Thanks, and then switching gears to die peak power TCW Quals. There I would assume are still in your Wayne and I think you said you shipped one something you had some more insights.

Into the market acceptance so as that product is fully commercialized what sort of kinda you know penetration are you expecting throughout the broad cutting business I mean could could that product be.

Half of half of your cutting sales in the future once fully rolled out more or less.

Any help there would be great. Thanks.

So I think on H.P.P. those continues to be a number of different customers that are evaluating the product within that cutting applications, it's still relatively unclear as to what percentage of.

Total sales it can end up being Jay.

I think we'll have more clarity on that as we go through.

This year and customers start to introduce products incorporating that feature within it.

There's a bit more clarity I'd say over and be particularly for welding applications, where there's a lot of acceptance of that we've always said the A.M.B. would be.

A very strong performer on on welding, given the reduce splatter and and an improvement in quality that sir.

Okay, Great and then you want to winter I'd use new families over the.

Mid problem laser with HBP auction, you to where will the absolute newell wherever we can be didn't infant formula to compare a decent garland.

Let's see I work MPG snow, but do you from China. So don't want clip nordson similar to what we did deal would be where would you do a good all where do you plan is HBP option for nugen duration or the mid power lasers.

In conclusion, but both annual performance and new quality, but with the sale, but we'll have to each BP auction.

And also much more quickly than exist in no way. This won't that will allow us to increase the gross margin, but essentially for mid power needs that see ideal duty down to where do you feel you the profitability, which you want to in spite of local price.

Oh interesting finally from me on on the consumer electronics portion of your business, especially the <unk> fine welding piece.

I have you received any indication on you know orders for the mid part of the year.

Related to smartphones prior to the holiday Inn quarantine I'm I'm trying to assess how prudent it is for our models to.

I assume an uptick in those investments in that part of the supply chain. You know given I think everyone believes it's going to be a a stronger year for for smartphone production from a unit perspective coming off of a few quite years.

Yeah, No we don't have any indication, yes on unlikely orders.

The general view is from the laser supply side is probably going to not be.

I had a huge catalyst in terms of a typical biannual there should be some pickup, but it's not going to be a massive driver as it was in 17. For example, they continue to repurpose some of the existing lasers into production lines, even for newer phones. So it's not as there's going to drive like yes, doubling of Q CW sales when it.

That the CHF.

Okay Super helpful. Thanks It.

<unk>.

Our next question comes from the line of Mark Miller of the Benchmark Company. Please proceed with your question.

Thank you for taking my question just wanted to look at looking at the backlog and framing agreement went up year over year, but orders were down can you provide some color on that.

Yeah.

Although I think the total backlog mark was down 3%, so it including frame agreements that.

Thanks to being a.

Got reasonable starts a year, but still a little bit uncertain I think we focus a lot on the shippable side. So there's still some underlying demand there in terms of the frame agreements. There's a lot of frame agreements that have input for example to get particularly higher power to ultra high power licenses. So there's clearly if the economy stabilize I see that's the biggest.

Trend that come out of that is that you will see the demand cycle for those ultra high power lasers, which require licenses increase that would be the biggest read through I would go with on the on the frame agreement side of it but it's still requires.

More certainty on the macro and clearly resolution on on no resolution, but some stability in relation to the the current situation in China.

I think what we were more focused on rather than what the closing backlog. The bookings in Q4 will the book to Bill was one so that was reasonable given that we're at a slightly above our guidance range, our real focus on on bookings, though it being on the positive trends we've seen in January and even the first week of of federal.

Sorry, first week of February excluding China, obviously.

HM.

In terms of the backlog too in terms of the mix is this a higher margin mix or summer what you're seeing the week somebody expect some improvements from the backlog in terms of margins.

I referenced that some of the frame agreement backlog will be driven by licenses getting for ultra high power lasers in the 10, 12, 20, and even in China moving towards potentially hop out levels. That's all got a margin benefit to us in Q4, you actually I think so.

Valves and reference this as well the low end of the cussing market remained relatively stable in Q3 in Q4 that would have been a margin impact to us. So you see a recovery at ultra high power.

Then you see some orders coming from some of these are the advanced applications that ultra high power that has a margin benefit we're selling more AMBI lasers into the.

Battery welding application that has a benefit we're combining for the welding with the L.D.D. that has a benefit and then.

Key to everything as well as driving growth of ultra fast technology in green lasers.

Which also have extremely high margin on them they wouldn't be significant volumes are those in backlog at the moment the growth of those business. During the year is a target for the company.

Thank you.

Our next question will come from the line of Nick <unk> of Longbow Research. Please proceed with your question.

Thank you good morning, guys.

Can you highlight it does trend in welding can you talk about mix within that maybe I'm assuming it's.

Yeah.

I'm sorry in M.B. I'm, we're lasers, but is it systems are lasers can you can you give us any color on Nixon welding.

There's some benefit on on systems, but there was also the the significant order I mentioned for battery processing in the U.S. that benefited the welding that wasn't actually a and b, but it was a order that was supplied with the L.D.D. that real time, well monitoring and welding heads as well.

No.

There was some pickup in Q CW in Q4 that would have been outside assistance that would've been a driver as well as some of the welding performance in the fourth quarter. There was some revenue recognized on some other welding.

Systems, though as well, which benefited stuff a lot of the stuff that goes through Genesis, though is that is obviously welding faced application not exclusively but largely welding based applications agriculture.

Okay got it.

Okay I understand that.

In other markets like Europe in China, it's difficult to forecast, but North America seems a little bit more stable are you willing to take a hit on the what does the outlook you can see from North America, particularly in the core cutting markets for 2020.

I think I referenced earlier in the call. It we continue to see a reasonably robust demand environment not just across the core cutting applications, but across.

Numerous different applications in the U.S. and were targeting.

Significant reasonable growth on the U.S.

For this year across all of these not just that the cutting and welding, but some of the newer applications such as medical.

Semiconductor advanced applications.

Deposition technologies for example, like high power cladding applications.

And then the systems business as well as largely focused even outside of the acquired business. The organic systems business. The medical devices. For example performed very well last year.

There's a new system this being introduced.

ER stent crossing, which we think enhances our competitive dynamics in that market as well, there's a lot of diversity in the U.S. business.

That would be helped by a stronger macro environment here compared to the rest of the world.

And now we did too yeah, well last year second a couple last year and wage grade rope now we'll go into a new set a label poke operation is a implementation, where we didn't do a ways, where we didnt ignore would you do the maybe.

Segment over the industry, we sign it says now we'd say where did she didn't go interim agreement with where do you Big Gen. One way it's in its place in the transportation in so we began the ideal is gone better and partner in many indeed, the way will one day.

He joined the way, we opened a new where we didnt.

And once this is included in food or not only to sell made is that bill for them.

But to provide them full complete solution for what new put what's the sportswear filled by each guy dopa, yet, we'll get a mosquito parts. It's all want them no full automation system input or white them and then finally at AG.

Production lines, it's a momentary preparation with no.

With some but not moines more such watch.

[noise] genuine in the cut is born Didnt segment to market it weighs into the market in the U.S. into Europe.

And so on in what you know D.C. you know I've the north to limit open once it's in where we didn't but also you might go out the material, but whats Hudson and also on it's not that said retail sales so great.

And for the Corporation.

In terms of Corporation, where do you see that partnership with biggest plays into that Mike.

It opened for October two new opportunity.

Understood. Thanks, guys. Good luck.

The final question comes from a line of Krish Sankar of Cowen and company. Please proceed with your question.

Yes, hi, Thanks for taking my question I'd like to pick questions. One is Tim on your commentary on gross margin I understand the biggest impact to gross margin yesterday. Some under absorption. So when you look at it revenue than just see under $200 million quarterly basis.

Gross margins put up 45% to 50% is the inherent assumption service a system.

A similar percentage of slow that total revenue that it is today and then a quick follow up what Dr. show, because it's easy opportunity mainly on the building site.

Thank you.

So in terms of gross margin.

Youre in terms of a recovery to 350 or 400 million you'd actually expect the.

Laser business to perhaps recover a bit more quickly than proportional growth consistent is even though we're targeting very strong growth in system. So maybe a little bit of a margin benefit, but the systems would still be a drag.

Relative to the top end to that range like on a.

Equivalent basis compared to where we were before if you executed the systems you'd be above 50 slightly above 50%.

Okay, well, even nickel or of course, a applications are not only connected so but that he will do or cutting coil or also though it is some big opportunity to use our high power laser for welding body in white welding for here vehicle.

From this point or here also issue.

The season lender group perspective for lasers.

Thank you very much books.

Thank you at this time I will turn the call back to James Hillier for closing remarks.

Thank you for joining us this morning and for your continued interest in Nike Gee, We're looking forward to speak with you over the next few weeks and our next quarter's call have a great to everyone.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.