Q1 2020 Earnings Call

Today's call is being recorded webcast.

I'd like to turn call over to James failure, I P. Genies, Vice President Investor Relations for introductions. Please go ahead Sir.

Thank you, Doug and good morning, everyone.

With us today is I'd be cheaper tonic, the chairman and CEO Dr. balanced coupons <unk>, Chief operating officer, Dr., Eugene Sharp, Oh, Gee, Vice President and CFO Tim bombing.

Statements made during the course of this call that discussed management's where 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 with the impact of the cobot 19.

Pandemic on our business those detailed and I'd be do photonics form 10-K for the period ended December 31, 2019. Another reports on file with the Securities and Exchange Commission.

So these filings may be obtained by visiting investors section of I think he's website or by contacting the company directly.

We also find copies only as he sees website any forward looking statements made on this call or the company's expectations or predictions only as of today may 2020, the company's assumes no obligation to publicly released any updates or revisions to any such statements for additional details on a reported results. Please refer to the earnings press release, and B cell based financial data work.

Posted to our Investor Relations website.

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

I'll turn the call over the balance.

Good morning, everyone.

Well you forgot how what is out.

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Oh, Yeah, no covenant why it is I wouldn't buddy.

The way would be no Pablo people, our customers and partners. If I went crazy, but are you already cheap.

Hi, Good G employees.

And work from home.

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You know what it should we continue to menu frictions, maybe it's Alex solution.

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Somebody city action to U.S. production, the impact could be because no one being material you in Iowa and whatnot.

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In Germany, we did doesn't stop walk you go we could do in menasha. Its fourth one do you want to be Colocation and units. These two months.

In order to say, we've got our people.

Employee to you shouldn't I would just been season and clean in ways that you know twice you'd be cheese for companies that was going must for you. If you know production.

With that I'd use where do you think to be you'd be means.

What I would you didn't fictional yeah, you're not all production on what you saw rooms in Tampa and then put out maybe you can do you see wages for our R&D employees.

Who continued to walk insight.

Yes. It is I would to be we are proud to report that I P.G. didn't know the cable and you would be nice Jim.

50, P. she is going.

Oh won't locations in spite of more than eight you could spend.

All this stuff probably won't be more concise brick Chico with all of these two months.

I did you want to try and <unk> 0.2, located to local communities.

Communities somewhere anywhere.

In China, we kind of the need to put all too much 1 million RMB two kroger drove.

Affected the buys this won't Dwight <unk>.

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In the U.S., we haven't done agent many of them. So that was my.

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And the Russia, We then Egypt and want to see team it didn't sheets Demarco what.

As a bill its masks and other means.

Eugene will discuss the embarked <unk> Nigerian in our operation in Great you do.

I wouldn't do I sure you did it then P.G., we're doing all we can to cope they've dropped out with people and communities.

[music] you Didnt do style.

Uncertainty.

Which is under way Penny that we feel we waived the pool it's unclear.

What do you happen to mobile would you mind I want to comment on weeks and months it.

Based on fit then he makes too.

Well cost in our businesses, where do you feel engine is in near to medium term.

No that when.

Our strong balance sheet ample capacity there.

Lenient no debt.

All right that's predictability in that wouldn't you to kinda <unk>.

Got it wouldn't abide instead of waiting to disruption.

And to emerge from the.

Crashes.

With the ability to do I used the many opportunities we expect to see.

We plan to continue investment you said it gives you could you switch and keep it don't divorced.

We will describe the knicks and back well Mark you check capture what I will fight, but ways that technology.

Because our fiber ways that Uh huh.

A key enabler.

Enabler.

Well, let them wage, but it's you didn't when you picked shouldn't we expect to just put a portion they will need to be when if you grow more and then when so.

I didn't cover <unk> indicated <unk> cycle.

Hi, I'm into results, we didn't want to put this quarter I know when you.

Got you and we'll follow on guidance range.

But the then expect you've got four months in China instruments in new products.

Yes buys if you could do you mind environment.

We have two strong customer interest in a number if I would lead you need to raise it solutions.

Got you know, where we didn't applications, Oh, I'm kind of high power lasers as well.

12, 15 or 20 kilowatts.

[laughter] do you might switch is superior it that he views to competing products, including five to catching and where we didn't speeds were to be importer. I mean, that's kind of won't walk you piece in cheap and see significantly Brett do why you'd beauty.

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Are you <unk> catch in <unk> and electric vehicle wet that he brought in their applications.

I P.J.D. means yeah, one lialda weibo ways that sports Sept, why Oh least <unk>.

And we continue to do you expect.

Through one good old for the NZ simplification during the year.

Well the continuation that remain the core I P.G. pool to I.P.G. success during the fiscal <unk> and medicine well done.

And implications here was where which he said he has spent the what that would revenue input into the more didn't win cheap good sense, yet I'm going to year. Despite the softer demand in the body month quite good Jumei. This you since.

During two quite nicely cheating.

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Increased by more than 50% year job ready skills. So.

Oh kind of Pasquale somebody's it increased modestly Scott Im acceptance in production was.

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The onset than you might do you mind tend to widen.

Hi, we've continued to tell you more than 15, you put <unk>.

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But worsened since last ceramic fit subject to board.

Well actually G P items, but that is and saw what.

Phil.

There was so maybe you can ways as well and I couldn't do in million in Q1.

In conclusion maus in probably <unk> percent year I Wonder Yeah, we've continued to ramp phase so far what truly amazing solution for all the Gi and others well she she application.

From the partnership so we see did you say over the years ago and in every G. It put all though I'm late last year.

I will make 'em ways. The business includes sales so cutting fuel bill consumable five watts.

Regarding revenue stream that will grow as in non but what we installed system increases.

And the once implication revenue more than doubled year over year, we took on good old single month semiconductor means and keep applications.

We'll continue to in wet AMD.

How much you new products include you even when you go to each month, we didn't put out. It then we just what's stricter must compete in sprint inspection and said.

Sensing the publication.

Oh tenants Highpower single mode delays as well and it's a place and you friends.

This new solutions to Bill you can sell a good olefin margins not flying and provides greater geographic and end market U.S. <unk>.

Finally.

I want to express my gratitude to the LPG team for their outstanding performance you didn't see most challenging.

I believe that exit fusion combine that with our laser technology leadership and throw up but the balance sheet.

We will enable like P.G. to capitalize once a month term shop your way growth in ways that technology and to deliver on our music to my you Coa fiber laser technologies that boot choice in mass production.

Visit <unk> tons, a quote I want to Eugene.

Thank you are willing to him and good morning, everyone.

I'll begin my this cross sells a six so call it nine Jim on our production.

Currently Olson automaker production facility in Germany.

Yes, and Russia remain open.

Oh, we have scaled back production, Massachusetts, So that's probably critic wide to support assessment on businesses.

These include lasers, and laser system used because it drop Israel medical our culture Communications and defense end markets among them.

All the Joe My personal opinion on more normalized basis, albeit with social this doesn't matter is in place.

In Russia already employers are working on our Peyton basis, but im its contact.

Oh, hi, they order to them as the safety of already Blair their fremitus, our business partners and community.

And then why don't you noted we put in place additional health safety and workplace My first to safeguard the health and wellbeing.

Oh, <unk> employers and supportive.

Oh reticle integration production model continues to provide us this critical advantages and this time or supply chain disruption.

Also it's also a silicon role mosquitoes from South Park to reenter ordinary produces the more complex components and modules used in our technology.

Oh, religion edge components and moderate.

The the critical technical performance and cost a differentiator between <unk> and our competition.

You continue to leverage this is well understood around for a more than 20 years for investment in technology people and processes.

Many of our third party suppliers, what I meant open but I wanted to ask a company so we need.

The supply chain scale stay in your face.

Primarily to deliveries to include the wearable air cargo space and higher freight right.

Yeah, well, what kind of race on flights between the U.S. and the Europe and in Europe, and Asia is more limited.

So a seat belt, taking a long ago.

In addition, seamlessly in Europe.

Limited music comp it is worth effective but call it nine Jim and expenses some delays in other places you to check at 'em border crossing.

Recognizes that this idea of cetacean is pretty weird and subject to change. We believe we have the ability for me near term demand for our products.

In total manufacture a person expenses were approximately into middle lower in Q1 component because it kicked <unk> and Q2 2019.

Also some of this reduction is due to their role mailed hockey me too it is but I'm going to attribute because of course the reduction in excess.

The book as a second problem at 29 too.

We remain committed to manage our cost structure and working capital to the business environment.

Hi, good running in our performance by region or even in China decreased 40% year over year and they represented approximately 28% of total sales.

[laughter] performance was impacted by weaker demand uses an old color on any of those outbreak.

Well, we did see a strong recorded in order new units. The later couple of March and <unk>.

We continue to France, the greater price competition.

Joel However, pricing was more stable in the second sequential basis.

In Europe, there industrial demand environment remains very challenging revenue decreased 15%.

Yes.

But anyway in North America increased 4%.

Yeah, what do you have the stronger Olson medical liaison added while applications.

Our girls in North America. This there's a benefit.

Our diversified portfolio strategy here, what I am kaizens adoption of medicine laser solution and application offset softness is industrial markets.

Sales in Japan decreased 12% the yellow here.

I'm going like Mark <unk> economic weakness already do.

Sales in can you just went to 6% year over year.

Do you does it system called it right Jim maybe there is anything.

Sales in target there could you sort of 6%.

<unk> wireless and other microeconomic journalism effective cutting business in the region.

With that I looked at all.

The call Olympic team produced GAAP financial highlights as a quarter.

[noise]. Thank you you Jeanne and good morning, everyone.

Revenue in the first quarter declined 21% year over year $249 million.

Revenue from materials processing applications decreased 28% year over year and revenue from other applications increased 123%.

Sales of Highpower, CW lasers decreased 33% year over year.

And represented approximately 48% or total revenue.

Sales of Ultra high power lasers at six kilowatt spoke greater.

Represented nearly 50% or total highpower CW laser sales.

Pulsed laser sales increased 1% year over year.

With growth in Green and high power pulsed lasers, partially offset by lower sales of lower power pulse lasers for marketing applications.

Systems sales decreased 43% year over year.

As growth insist Dennis for medical device manufacturing was offset by lower sales of other I.P.G. laser systems.

Genesis non laser systems.

Medium power laser sales decreased 28% on continued softness in additive manufacturing.

The transition to killer watsco lasers in cutting.

Well Q CW laser sales decreased 30% year over year.

Other product sales increased 38% year over year.

Driven by growth in medical laser sales and total service revenue.

Q1, GAAP gross margin was 41%.

Which declined 600 basis points year over year.

Compared with a year ago period, a year over year decline in gross margin was driven by the following factors.

200 basis points from less favorable absorption of manufacturing expenses.

190 basis points from higher inventory reserves 90 basis points from an increase in shipping costs.

20 basis points from foreign exchange and 100 basis points from other factors.

Including lower product pricing.

First quarter GAAP operating income was $45 million and operating margin was 18%.

During the course <unk>, we recognized a foreign exchange gain of $20 million, primarily related to the revaluation of U.S. dollar cash and other assets in Russia, given the depreciation of the ruble first is the U.S. dollar.

Excluding this foreign exchange gain operating margin was 10%.

Q1, net income was $36 million or 68 cents per diluted share.

The previously referenced foreign exchange gains increased EPS by 28 cents.

The effective tax rates in the quarter was 23%.

If exchange rates relative to the U.S. dollar had been the same as one year ago, we would've expected revenue to be $5 billion higher and gross profit to be $3 million higher.

We ended the quarter with cash cash equivalents in short term investments at $1.2 billion.

Total debt at $41 million.

As volunteer noted earlier, our strong balance sheet provides us with ample flexibility in responding to corona virus related disruptions.

Typically around investing for future growth opportunities.

Effective operational execution resulted in cash provided by operations are $57 million during the quarter.

Capital expenditures were $18 million in the quarter and are trending below our targets of 115.

Billion dollars to $125 million 2020.

During the quarter, we repurchased 109000 shares for $13 million.

Today I P.G. also announced that its board of directors has authorized the purchase of up to $200 million of I.P.G. common stock.

Open market transactions or otherwise.

Subject to market conditions and other relevant factors.

This new authorization is in addition to the Companys existing a 125 million stock repurchase program.

Authorized in February 2019, all of which approximately 60 million remains available under that Pride program.

In March and April we extended our credit lines with Bank of America, and Deutsche Bank for five and three additional years respectively.

Bank of America also increased the total unsecured availability to $75 million from $15 million.

First quarter book to Bill was meaningfully greater than one and above normal seasonality, reflecting solid bookings growth and the weaker revenue quarter in China.

Normally this would have translated into stronger guidance for the second quarter.

The global demand environment remains very uncertain, given the effects of cobot 19 on manufacturing facilities and customer confidence around the world.

Well, we have seen a rebound in China based order volumes in the latter half of March and April.

This has coincided with declining bookings in other regions, including Western Europe.

North America and other countries in Asia.

As such visibility into a recovering global demand remains uncertain at this time.

Despite the onset a near term demand environment, we continue to target significant longer term growth opportunities in laser welding electric vehicle battery processing.

And our portfolio of new products.

Our strong balance sheet will help us through the crisis.

And emerge with the ability to capitalize on the many opportunities we have ahead.

For the second quarter of Twentytwenty IP G expects revenue of 260 million to $290 million.

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

Hi, P.G. anticipates delivering earnings per diluted share in the range of.

40 to 70 cents with 53.1 million basic common shares outstanding and 53.7 million diluted common shares outstanding.

But actual guidance provided this quarter is subject to greater risk and uncertainty given the covert 19 pandemic.

And its associated impact to the global business environment and government policies.

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 terrorists trade policies health epidemic and general economic conditions.

Our guidance is based upon current market conditions in 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 bouncing in Eugene and I will be happy to take your questions.

Thank you.

Ladies and gentlemen at this time, we will be conducting a question answer session.

I'd like to ask your question you May press Star one on your telephone keypad a confirmation total indicate your line is another question. Sir you May proceed start to feel like to remove your question from the Q.

For participants using speaker equipment, and maybe necessary to pick up your handset before passing the starkey.

First question comes from the line of John much I'd with Stifel. Please proceed with your question.

Thanks, very much I was just wondering bouncy and if you could comment a little bit or add some color tigger pricing commentary about the China market. It sounded like a you know pricing there at least as a little bit more stable on a quarter over quarter basis. I'm curious if you think that is something that somewhat more sustainable or if it has to do more with the.

You know restrictions that what we saw in place in during the March quarter.

Okay Chinese market to isn't it now Jim or three more stability isn't it was two years.

HM.

Tim.

Sure no much within that therefore bought two prices did come in.

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More stable and do so it should trade show, a quote sort of where the uncertainty. So one but it's really important trend for us now moved sweaty a much more breadth of then we expect to so during the quarter example left a month, we did see what the Permian myth fall in ways that.

Much much more than viewpoint. The time, it's the wonder with Jordan full month weighted toward the <unk> you're.

A couple <unk> last year.

So it's too soon you for its part of our more on that same program. So we've kind of Greg to double the views in the in the mid problem raises this year two compared to an ATM.

Situation on certain nobody can predict what happen next month, but you one where do you.

Please see me securities.

So where do you put on.

No I didn't know about this deal wins that you would tell you, especially well producing over being in FY, two compared to our genius confusion.

Yeah.

Second the cost this year when we introduce new generation amid follow me that much more perfect as much more higher functionality and that will allow them.

<unk>.

Your family, which weird there will not 18, not always feel wouldn't do market.

So.

In addition, I fall within China also growing five departure from what we're more and more falling resin, though would more than 10 kilowatt hour Wawa is threshold framework that suits are you, which you told what you know.

So, let's see where is still.

Yes, it is owed to our no production facility in Nazis graduate in Germany, and but Russia, which fair genius might you know over.

As busy as so we are now we're watching it puts indoor people wouldn't be working on site and we see overtime over time not enough keep people who feel one got in order for new product. We were going right you will see minded where we'll put in the U.S.

No introduce now is that we've got the view with new production Allied world markets, except where did well, but now we still got put all of them to producing them. William we are working to everywhere.

New product.

Especially in China.

Where do well.

Great and then can maybe just a quick one for you you know last quarter, you talked about an expected impact of around 45 million I'm curious how that not actually played out in the quarter.

Were above below that are already in line there and maybe you know with the guidance that you're given if you can maybe quantify a little bit would you actually the revenue impact and maybe the U.S. impact.

The ongoing virus situation is thank you.

<unk>.

So given that we came in at the top end to the guidance range, we gave for Q1.

Actual impact in the first quarter was slightly below the 45 million that we had framed Q1 guidance around.

That really was based upon.

Strong rebound in demand in China in March having really last February as a month that was a characterize it as a last month and overall demand actually in Europe was was reasonably strong in in Q1 with total order flow and as you saw given North America fresh grew a little bit year over year, particularly.

With the strength on the new medical applications that demand environment held up reasonably well within our Q2 guidance number we're not going to give a specific.

Estimates that how much it's impacted it's more difficult to do because whilst you are seeing strength and significant strength of ounces just talked about in Europe.

The demand environment at least at the moment.

Significant strength in China, the demand environment in Europe, and order flow there as we mentioned has weakened it's also a weaker in North America, and there's a bit more uncertainty as well for China, Japan relative to the original for costs that we had that so the overall impact on Q2 is more than.

The 45 million that we guided to for Q1, but we're not going to go and give a specific number around it.

The drop through to.

S is probably a bit more difficult to quantify.

Given that we're not giving a specific revenue number but it will result in gross margins being lower than they would otherwise have been and certainly earnings per share.

Being reduced below the level that we were expecting in the second quarter.

Thanks very much.

Our next question comes from the line of General Security with Needham and company. Please proceed with your question.

Regarding the pick up that you saw demand in China in March and April is that do you think too.

Support the current demand for these manufacturers as they emerge from from locked out or is this appear to be a them, adding additional manufacturing capacity for business there, perhaps assuming it's coming in in Q2 Q3.

Jim I mean, some of the is the rebound from.

Very little demand happening for a a six week period.

I think it's in part it's not necessary new capacity coming on board if that.

Oh, probably at all of the economies that have gone through the Corona virus and Cobot 19, China went into it earlier, China is certainly exhibiting at this point in time more of perhaps a V shaped recovery in terms of the letters that everyone is talking about it's probably about handset total demand for some of the lower or.

Kilowatts scale lasers has rebounded very strongly we've seen also good demand from high about pulse lasers for TV I apologize for welding referenced the a and B I think like everybody.

It's not entirely search and how sustainable this can be mountains comment was that if it is sustained it does point to a nice recovery at our business over the reasonable recovery in Q2 and potentially that picking up in Q3, I think there's just so much uncertainty out there at the moment about whether a V shaped recovery in China will be.

Sustained or what kind of recovery, we'll see in Europe, North America, and other Asian countries as we get out of this is something we've been surprised by the strength of the demand and it's been a positive thing coming into this quarter from China.

Got it with respect to the.

Systems business down pretty significantly in Q1, I guess is it fair to say this is mainly a U.S. business to a lesser extent European is this how was the decline.

More concentrated in medical device manufacturing and you've got some tougher comps as you look out of the back half exist.

An area that business that perhaps has more uncertainty to it or do you see some recovery all these low levels.

No sorry in fact, the demand for the medical device systems used to manufacture medical devices toward distinction between not in the medical.

Lasers, we sell for medical procedures right as the loyalty acquisition, which services medical device manufacturing demand within that application is actually held up reasonably well demand frost more specialized multi access systems that are used in fine processing is also held up well the weakness has really been on the system side for this.

Smaller form compact cutting system, where that has certainly been impacted by people pushing out investment decisions. So that would be used more on the job shop, and less more or less advanced applications and with with Genesis welding systems uptick the on the non laser side, where again, it's it sounds.

So I was a significant investment decision certainly that business has shown a slowdown so I'd characterize just some of the non laser welding applications for Genesis.

The more basic cutting systems small form compact cutting systems no. We use this in my mind system business, which engine. We see you would see in there we just indices we changed the time.

New product Hawaiian which include in ways that.

Throughout fiscal two and it's all one in could you shed thought though system shift them with ways that you too. For example, you there will be used in our new awards that are caught some ways. This new duration of machine Tim.

Then we can and do you see viewpoint there wasn't what is small cell. So it will afford them up work without somebody the now with some ways the new with somebody that now with this fund if you kind of going where did well wait now we see in one well start to grow where do you, possibly as much in second bone. So what are your with your putting them before they.

That said, we thought it was in a U.S., yeah, and then and now we extend the are you cheat and Marta kitchen are you Tcs into Europe quote.

If you were up you know Gordon you wouldn't.

Yes.

What's newer generation such machine when it comes with a few Dick I'm in a way to compete in warranted in okay.

Well come Korea towards these local manufacturer.

So it sounds like you're suggesting this business, maybe bottoming here should improve with the new products.

And the backup.

I think what we're saying we're seeing strength from some of the more advanced a newer products that we're introducing and as we introduce more of those newer products, that's really being the target of that business strategically is to drive that growth from from those areas. So it is to introduce more laser based welding systems with Genesis and to grow the medical device Manny.

Faction capability that when we acquired as well.

So, perhaps slight nuanced, what you're saying Jim but.

Okay. Thank you.

Research and you see some more won't get to make this new Radisson machine.

In the mobile and go but Didnt grosses going where do we all would so we're expecting.

And to the CNXC it will be.

No the market you, where do you feel really effective.

But almost as much.

We will spend away today.

[music].

Our next question comes on the line of Tom definitely with D.A. Davidson. Please proceed with your question.

Yes. Good morning, Thanks for taking the call I'm just wondering your based on the cost cutting that Eugene referenced earlier I was wondering Kim.

The change to the long term target model has problems Arsone point of view stood at 45 to 50 range do you think.

Appointment, we're not taking the law change in the long term target model, where clearly operating at revenue levels below.

Or even medium and longer term targets and that's really why the current performance is below that range at this point in time, well still trying to manage the business and definitely targeting trying to get back to the 45% range.

Okay and then yeah. Just another question on the cobot impact that capacity sounds like it's not really impacted new right now as much as a big it would be if you're at full production series.

I want to quantify the impact to your capacity through having to do social Stacy or on the supply constraints.

You change you want to address that question from an operations perspective, yes.

In principle I wonder dimensions that we didn't get any big any problem in Germany, because our capacity was were reduced approximately 90% of our capacity.

There's a there's out some of stroke limitations.

In other countries also I mentioned that then Massachusetts yeah.

Only produce products, which are required to support this absolutely businesses.

And then also of course, it's other situation, but I would I mean production all in Germany, I know there I think.

I want to today.

Orders and so they definitely they will ship this order thing time, its nor nor a mercedes.

And probably the future. It we'll see if it will be administered every kind of in part due some additional measures like.

Second stream some additional people and so again for production weren't there for you I don't see any decrease.

Only one is it's a disease.

Maybe in future he will not have enough orders, but if waterfield <unk> are different than your possibilities for others.

Okay.

Nor did they get it do you get in each pool for cotton what are ones that we're careful now a couple questions. Okay.

It will.

So on it or one four new promote the winter I'd use now with this same but visible good in ways that you'd be in ways that we put our short term ways. Its full one we still don't understand when I've got parts that you have to deal with working with people and create new production line.

Is it pretty well usage as she did this year next year, we've got was sold with you and what.

Then you need to do we wouldn't be a yellow lights or potential.

I would kind of cut price, you're not able to support these.

Do you mind.

Okay. Thank you.

If we think Thats why were.

Once you're on you were doing your degree of month, we don't need the quite Sealy see Wolfcamp B, we need people need to a real trend you people are you in the Indictor one you're seeing there did.

Okay, Yes engineers can use in high quality in the U.S. the in Germany as to where it is difficult.

Waiver that people. So we transfer more in what is production, though you have to eastern Europe, Russia, and we'd be a new where do you watch mass production capacity in b or what else you mean.

Right.

Our next question comes on line of Michael Feniger of Bank of America. Please proceed with your question.

Hey, guys. Thanks.

Taking my my question and apologies. If this question is already answered in addressed the gross margin actually picked up in Q1 first fourth quarter, even with the sequential drop in revenue I go back a few years your Q1 margins sequentially actually goes down.

So I was hoping you can kind of address some of the measures you were able to put in place that actually show that improvement and with what the revenue recovering in Q2 and hopefully in Q3 I'm just wondering if on that target gross margin has the revenue that you need to get you had.

Not changed in terms of hitting 300 million or 350 million or or 400 million Mark has that changed the a the paradigm in terms of what gross margin ranges could be.

[noise], Michael the first part of the questionnaire about.

Q1 gross margin I think we were pleased given the revenue level.

The gross margin that we achieved.

Particularly given that we also had some higher inventory provisions so the performance even relative to our guidance was better.

I've already attracted us to comparable to what gross margin does Q1 to Q4 I don't tend to focus on that so much what I will say is in Q1, we've referenced that we've had no. These cost reduction initiatives that was started really in Q3 2019.

Accelerated in Q4, so one of the benefits we had in the first quarter was that those cost reduction initiatives flowed more completely in fully through the business model.

As Eugene mentioned, the total amount of expenses that we incurred in the first quarter, where both manufacturing operation. We haven't split out between the two was was $20 million love a significant part of that compared for example to the middle of last year was on the manufacturing sites, partly due to lower activity, but lower headcount.

Because some of the restructuring fewer contracts is used in certain locations.

So it's really around the way that we try to move.

Manage the cost.

Based of the business and some of that wasn't even really clearly because we started this last year. It wasn't related to the pandemic taking hold these were operational initiatives that we had started to execute upon over the last six and nine months.

With regard to the future. Thank the thing that's most putting into that so we're not fundamentally changing the range of revenue that needs to be achieved for the business model to show.

Decent leveraging it I think as we get back above 300 million transition to 330 350 million, we got into a much more comfortable position and if we can grow revenue to 370 or 400 million. We think that we will be again getting back towards close to 50% margin in particular.

If some of that growth comes from our leading edge products that we're introducing to the market whether it's not just the high accommodated for cutting but some of the a and b laser welding, the new product and ultra fast the green lasers, the more advanced systems the medical devices.

That does the devices for medical procedures. So all of those as those has started to show strength and then some of the defense applications.

We shipped to another 100 kilowatt laser this quarter. These are all things that over time should benefit the business model.

So there's no fundamental change and seeing some accretion and leverage out of.

Gross margin, we expect to happen as revenue starts to recover your wouldn't even want to promote their coal put order cotton rather like mid power millions, that's kind of falling ways as one might get on the range. As he is this year, we introduce new generation, we live with <unk>.

When you Frac student cost would be 20 usage with sent the weather then got an uproar the part well performance would be if we have time, but to be.

Of course to would be when should fit you put into it. So we expect so there was this project we wouldn't could you.

We don't smashing the essential rumsey.

Mark Gordon.

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That's helpful and longer term I'd love to get a sense of how you think cove it impacts.

You know your customer base with manufacturing facilities, but also just the supply chain.

But social distance in Q2, new facilities need more automation and laser technology for safety concerns.

Do you see with what we've seen play out in other markets with supply chains do you got to do we have to she didn't get reoriented and maybe some manufacturing facilities.

I have to move out of China or or be rebuilt locally in other regions.

Just curious if you've seen any of that.

I think from a productivity perspective within our own systems, the safety and cleaning and even some of the valves and referenced as sort of you V.

Like planting that we're using we're not seeing.

A fundamental change in the ability to use our space for the productivity from it some of the things that you reference our actions and initiatives that we've already taken and been investing in for several years. So increased use of automation and in died manufacturing and packaging are all part of our strategies is one of the reasons that.

We have a supply chain that is really focused in either North America, Germany will rush and why we don't use lower cost labor and other areas around the world. So certainly automation is an area, where we think that potentially IP GE will use more of it over time and some of our customers. We use more out of time that continued transition towards automation.

Will help laser based sales, particularly as they are integrated within robotic and other systems.

Some of your other questions I think a broader based economic and supply chain strategic and logistics decisions. The companies may make one of the outcomes or this is given the disruption to be able to get components from different places around the world is that you may see a reversion from just simply concentrating manufacturing.

In low cost countries like China or in other areas in Asia, because the actual cost of doing so.

Is higher than having your supply chain more distributed so you may well see some investments around component manufacturing.

In North America in Europe, and I'm, not again, maybe over the longer term a benefit JBG.

And I was trying to teach you could.

Strategic dive you thought what is it must production, we certainly make you more and more you know I would tell you don't waste in eastern Europe, you see unum, meaning that I shouldn't be a warehouse you where do you watch production facility, it which I didn't know for the you will move product too so.

For a bumpy I'm, where do you kind of U.S.U.S.M.T.D., Jim when you wouldn't be amazed with the way will walk you put on the introduction to the market is what the qualification. It's all on do seem to be said.

Yes.

Well for Europe, and I'm glad you can watch quantity, but must production all will move well move Corp.

Oh production for example, now would be one answer would be cheap, but then in China, it's much more productivity to much more well cardiac Willie tea and people, who and where do we want it got nice.

I would slow due to my silly to we'd be all told we already do you.

50000.

So you kind of thought was ins create a few we view we've got.

I'm docs and but no yeah. It will start the woken full.

So did the will help us to or do you must products news.

Are you, making them, we took William will cost weighted high quality, it's going to will execute against the end you politico another problem.

Thank you.

Our next question comes on the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.

Hi, Thanks, and I, it's nice to to see a a positive outlook here I guess.

You know question regarding the uptick with respect to.

What I presume is pent up demand from a from things being shut down over in China.

China I'm curious if we look at a it's China is sad GDP being largely export and we look at the rest of the world largely seeing a decline in GDP from a consumption perspective I'm just curious how you reconcile the oh the pickup in manufacturing capacity.

Just a function of utilization, where you see spis or is it a upgrades.

In existing facilities that is attributing to the demand. Thanks.

So first of all I think that continues to be uncertainty as to how global GDP.

China, GDP North America European GDP will recover over the next six to nine months I think.

That remains the onset and question and some of the outlook that with regard to the China rebound and demand specifically, yes, some of the China or investments relate to exports, but don't forget.

Chinese government has been pursuing a strategy of trying to drive local consumption in demand. So that may be driving part of this recovery. Many of the industries. We also saw a not so much export oriented whether it be.

Electric vehicle manufacturing supply local demand.

Housing sector consumer durable goods.

Of course, some of the consumer electronic stuff is exports it but there's also strong local demand there as well so I think perhaps some of the supply chains that we set a are not just solely export focused they are also driven by.

Internal China Tomorrow, I think over the medium term totally the data points that we're going to be looking at all how you know regional and global P.M. ice trend.

Export data looks like for robotic orders coming out of.

Out of other Asian countries, and you know machine tool dates for exports. So.

Whilst we're pleased with the overall performance in Q1 with revenue coming in the top end of the range Im pleased to be able to guide at least sequentially higher it's not as though we all the global economy is out of the woods, yet I think there remains some uncertainty on that yet.

That's helpful. Thank you just as a follow up a and you may have missed this I jumped on a little bit late on the call but the.

With the price stabilization, particularly in the low to mid power range, where we've seen intense or a price pressure over the past a year or so is that.

Do you attribute the the stabilization to less competitors. You know are we seeing attrition. That's finally, playing out or are you seeing you know we just hit at you know a bottom in terms of that pricing or maybe just a little bit more color on not the pricing dynamic.

Second in what was a more.

Competitive segment to the market.

Well first of all we're doing all price. It soon so with China steam away just throw up right to win.

This is my kitchen wisdom market worldwide, what I'm going to watch it when we do Chile and we are also grew up right. It's quite old products much kinetic when did you much broader weibo. It's also but our prices too close to Chinese prices, especially <unk> forget with Europe, where do you can show.

Yeah.

I'll agree the design Nick.

Yeah, No <unk> and now I will price is where do you moved price where do you come to continue could not drop more big what's you're not because they need a button.

When you then we've got would governments. So what you have been caught up to now where do you go more gross margin in how to TV show you. When you put to do you get off Madison much wins, then you report to you when.

Most of them because the government support from the compensation, but we're without then you can get station that put out why didnt seem at a will not be different right.

Why is the way from the point any human MPN any I'm waiting and can be done I can put it that now we will use im not able to compete with you normally it with our quality, but no price, it's more predictable shutting that in weighed on the compared to third party did you use the sea area and the way they could not drop prices.

More you Sam so you're going to be absolutely.

Oh, what am I in the why into so there you generate the one deal more I didn't fit Acorn TV.

If you certainly supports you Tom.

What's it like 50.

Since you probably put some gotten smarter, but the GP so not that you would mark.

So no more ways to do a go down.

Got it. Thank you that's really helpful color.

Oh, that's why should we.

Well, we just.

Yes, well you win with these prices we now with you I would you guys. We our gross margin we increase the good news dropped like which if you put so now we entered into getting up to fix you put them to you and then when do you puts and so are you going off margin. So one so.

Are you waited compared to its you've now where you wouldn't be such credits in the persistent.

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

Thank you for taking my question I just was wondering about the supply chain together are you seeing any impact you mentioned air shipments.

In terms of <unk> component supply.

Where are you being impacted by some of your customers there are problems related to the to the virus.

Usually do you want to take that question on.

Supply chain and compares.

One other point of hook aren't component supply, we didn't get any problem because they made some.

Imagine before I mean, something you know components or continuous operational stock.

I mean components and for of course is Colgate licenses in France and for our customers, sometimes and these are why.

Some of them they delay orders.

And also to ask us to donate treatment for some existing orders.

<unk> main problem up in principle.

But in principle, we don't see any big problems today connected to the <unk> nine sensors her supply chain.

I just wonder if we could estimate.

Do you have to our little what it should be well that's helpful. We yeah. She's been outside my true. Its components, then any our kind of did you more with component sequentially. It's way too. We saw one political we put out you will see <unk> Oh, no, but I do want to go into not only once you go elected to go live Mad dog, but.

Any sense, it's all a a sooner, but maybe if you put said, 90%, but we will buy in making insight well it 10% to 15% that would site.

Number one so come to we'd hope to out with typical pointed you to quote the mom shortage. So she is part of what that also scope for the one month shortage Dumont shortage. We paid for now most cases have popped up in calls.

I thought it so it's a one news when if you put all of <unk> and you would know who's come.

The way too.

Especially when you put on that but not for.

Oh My God.

You mentioned on <unk> ultra fast lasers.

You mentioned ultrafast lasers were strong I just wonder if we could estimate what percent of recently introduced products were.

What percent do they represent a total sales was around 20%.

Yes, the ultrafast product as a percentage of total sales are still relatively.

Relatively small mark I think what bouton was referencing with.

That's good progress being made on numerous different projects you mentioned one specifically that's.

TG subsidiary aisle team has developed a new system for stent cutting using our own ultrafast lasers.

The numerous projects we have there are a moving well ultrafast was was reasonably a form reasonably in the quarter, but it's certainly nowhere near the level, we wanted to get too.

Well I know a broad.

Oh product, we do intend to use market. When do you anticipate what are you getting into this year. It used to all fixed income and where we were in pretty well cost them or where do you like more than what we put all right.

Where do I did want to see real promise to a really serious well the but that will probably going out to install mass production I would tell you. It's not enough for you when I got in the month. During this year, we wouldnt gold production up to the couple that we've done well yet then it would be ideal who will become she just be isn't it but it's still.

It's too complicated seemed a new today.

Where does it trended people it so on Monday.

This is your problems with people, who know nor did it.

But we must production.

Well I was actually referring to all new product sales not just ultrafast lasers.

We introduced a those were 23% to total revenue.

Okay. Thank you.

Year to go away to worth wasn't then.

Got remember exactly but it's yeah, it's a share its current yes.

Sure.

Our next question comes from the line of questioning car with Cowen and company. Please proceed with your question.

Hi, Thanks for taking my question I've told them, Tim I, just wanted to get your thoughts on.

The Commerce Department building from last week, expanding the scope of the exposure drones given the fact that you guys have quite a bit of exposure to China. How do you think about it do they extend that you understand and interpret those rules and then at a follow up.

Hi, Chris I caught on to that question is point in time I haven't done enough work on it to be able to.

So look at it and see how it might affect us. So I don't have an answer to that question right now.

Got it noise.

Second question I, just wanted to find out on the June quarter sequential uptick can you just tell us which product line, so going to grow more than others.

Seeing your typical seasonal uptick you seen pulse lasers because of the consumer electronics end market.

And we don't know when he got background there on it we expect that obviously just see <unk> I'll pick up because of the demand from China QC Davidi, we'll see some increase but it's not.

It's not a fundamental investment cycle that we normally see from consumer electronics, but that would expect to see some pickup.

How.

Maybe some additional mocking but again, it's not you haven't got him a major consumer electronics investment cycle that is driving our sequential improvements in Q2, it as I said.

Even though it's great to see a bit of a sequential improvement compared to what guidance may have been without kind of it in the demands that we were seeing it's still a relatively weak performance.

Got it thanks, Tim.

That is all the time, we have for questions I'd like to turn the call back to management for closing remarks.

Great. Thanks for joining us this morning for your continued interest in I.P.G., we look forward to speaking with you over the coming weeks or participating in a number of virtual investor conferences. This quarter I have a great day and thanks, 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.