Q4 2022 IPG Photonics Corp Earnings Call
Speaker 2: Good morning and welcome to IPG Photonix Fourth Quarter 2022 Conference Call. Today's call is being recorded and webcast.
Speaker 2: At this time, I'd like to turn the call over to Eugene Federov, IPG's Director of Investor Relations for Introductions. Please go ahead, sir.
Speaker 3: Thank you, Robin. Good morning, everyone. With me today is IPJ Patoying CEO , Dr. Eugene Sherbacov, and Senior Vice President, CFOTim Momon.
Speaker 3: Let me remind you that statements made during the course of this call that discuss management of 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 deform materially from those projected.
Speaker 3: may be obtained by visiting the Investors section of IPG's website or by contacting the company directly. You may also find topics on the SCC's website.
Speaker 3: Any forward-looking statements made on this call are the company's expectations or predictions of today, February 14th, 2023 only. The company assumes no obligation to publicly release any updates or revisions during such statements. For additional details on our report results.
Speaker 3: Blizzard referred to the Eurings Breast Revease Eurings Code presentation and the Excel-based financial data Warbook was the Donado Invest relations website.
Speaker 3: We will pause these prepared remarks on the Invest Relations website following the completion of this call. With that, I will now turn the call over to Eugene Sherbukov.
Speaker 3: Good morning, everyone. I am pleased to report that we continue to see strong momentum in our focus areas such as immobility, welding and medical. In the first quarter and finishing the year, we are really near above our guidance range.
Speaker 3: in despite of challenging operating environment and currency had been.
Speaker 3: Our strategy to diversify very well as evidence by performance of our emerging products and applications is paying off. As we have moved through the year, we continue to do so, see record sales and immobility medical.
Speaker 3: and well-gimp, including the hands well-triending applications.
Speaker 3: Our team has done an outstanding job, diversifying the business and finding the growth opportunities.
Speaker 3: Immersion growth product sales were 46% of total revenue in the first quarter. Demand for many of these products was driven by global investment in immodility and renewable energy.
Speaker 3: IPG is well positioned to benefit from accelerating global EV battery capacity expansion and our EV sales contributed close to 20% of total revenue of 2022, up from around 10% a year per fisherman community, 17ves inside of 16 viral sites.
Speaker 3: We believe that the battery capacity built out will actuate in North America.
Speaker 3: Europe and we will continue to increase in China in the next several years to support a growing EV sales.
Speaker 3: More recently, customers shifted investment into the US to take advantage of government and sensitive.
Speaker 4: which drove higher level of activity in the return.
Speaker 4: Our leading facility by a position in fiber lasers with broad range of solutions, including welding, cutting, cleaning and processing monitoring, is allowed us to capture the growth in these markets.
Speaker 4: The efficiency introduced high-volt, low-capacity system, laser-drying solution for use and battery for manufacturing. The largest CO2 producing.
Speaker 4: process step of battery manufacturing. This solution replaces less efficient infrared bulbs and environments that unfriendly gas-fired often over tidbit.
Speaker 4: It can significantly reduce energy cost and increase dry and speed for our customers.
Speaker 4: The particle is bleached.
Speaker 4: with our growth in welding applications in frost water. The world is now accounting for 30% of our material processing revenue, and we are approximately 40% year-over-year, surpassing in size, flat sheet cutting revenue. A milestone for us.
Speaker 4: This growth was driven by strong demand for our welding solution in immobility and medical device welding.
Speaker 4: Continued adoption of laser welding in general industrial markets.
Speaker 4: in the laser based system and the roll out of light weld.
Speaker 4: in the laser-based system and the roll out of light weld.
Speaker 4: and even better manufacturers have quickly adopt
Speaker 4: Later building as it provides high quality and high speed it will link with real time processing and monitoring capabilities.
Speaker 4: The rest of the 20 billion welding market is still early in the adoption of laser technologies.
Speaker 4: But we are starting to see a more meaningful shift.
Speaker 4: towards acceptance of laser and believe that it
Speaker 4: This will continue.
Speaker 4: The last portion of the welding market is using traditional manual welding, primarily with meat or a tig devices.
Speaker 4: Traditional welding is very limited in types of materials. It has a joint and requires highly skilled welders to do the job.
Speaker 4: Light weld addresses many of these challenges with an ability to join a broad range of materials including some craft to weld metals like aluminum alloys, copper, titanium and zinc foils. Light weld can also increase welding speed up to four times and thus not require extensive training.
Speaker 4: According to American Welding Society, there is a deficit of 375,000 welders.
Speaker 4: Light weld is easy to use and comes with presets for different types of materials, which can result in faster training for unskilled welders required to fill the employment gap.
Speaker 4: We are working with a number of trainees who are going to increase awareness of an adoption of laser welding. We also continue to build a flight-wheel organization and to have established.
Speaker 4: distribution partners to support international sales. We should drive the growth of our light world sales in 2023.
Speaker 4: Our laser cleaning solutions have been gaining traction and we have a strong backlog of customer orders when you system that we are providing the full automated cleaning and can significantly reduce the time and use of harmful materials.
Speaker 4: for surface preparation as well as the rust and paint removal. This process typically uses harmful chemicals such as acids or sores that are being bent around the bolt.
Speaker 4: I always can do surface preparation quicker and is less harm to the environment.
Speaker 4: Finally, our medical business deals record revenue in the first quarter.
Speaker 4: finishing a very stunky year on a high note.
Speaker 4: Who here are leaving you, Grillo or 60% in medical?
Speaker 4: driven by higher adoption of our Tullium laser used primarily in or all its applications.
Speaker 4: Our consumer fiber business now accounts for feasible portions.
Speaker 4: of Rienio and we expect it to increase SOTA and we enroll the install base of the devices.
Speaker 4: We continue to expand medical space internationally.
Speaker 4: And we are working on the next generation of these devices as well as the new medical applications for our fiber lasers.
Speaker 4: While 2022 was a challenging year for IPG.
Speaker 4: We successfully mitigated the jolted wet waters.
Speaker 4: Before continuing the soft demand in the high power cutting China.
Speaker 4: Currently sedies due to the strong year's dollars.
Speaker 4: supply chain disruption as well as the restriction of the shipment of components from our manufacturing facility in Russia.
Speaker 4: IPGs performance in 2022 is tribute to a dedicated team of employers and partners throughout the world and their efforts, agriculture supply chain constraints and complex regulatory environment device production. Code blue to skim the input on IPGs On theut Guide
Speaker 4: and customers come. And while this is still uncertainty in the operational environment with fears of slow down in North America and fears of weakness in Europe , we believe that IPG is well positioned to benefit from investment in mobility, renewable energy, and automation.
Speaker 4: This is reflected at our record backlog which gives us the reason to be optimistic for Europe .
Speaker 4: reflected our record backlog which gives us the reason to be optimistic for Europe . We are hopefully to see.
Speaker 4: Recovery in the demand in China this year as a quality related restrictions are the less.
Speaker 4: We believe customers are choosing our way to the system because they are customers energy.
Speaker 4: And more sustainable solutions, is less environment impact.
Speaker 4: Then, competing processes and technologies.
Speaker 4: With that, I will turn the call over to team to discuss financial highlights in the quarter.
Speaker 4: Thank you Eugene and good morning everyone. My comments generally will follow the earnings core presentation.
Speaker 5: which is available on our Investor Relations website.
Speaker 5: I will start with the financial review on slide 4.
Speaker 5: Revenue in the fourth quarter was $334 million.
Speaker 5: down 8% year over years due to foreign currency headwinds.
Speaker 5: which accounted for approximately 7% of the decline. A divested chair of non-core telecom product lines negatively impacted revenue growth by approximately 2%.
Speaker 5: We also saw lower sales in general industrial applications in China and Europe .
Speaker 5: which were nearly offset by strength in emerging growth products.
Speaker 5: Revenue from materials processing applications.
Speaker 5: decreased 6% year over year and revenue from other applications decreased 23%.
Speaker 5: with strength in medical offset by weaker advanced application sales and the telecom divestiture.
Speaker 5: During the quarter we conducted a review of our Russian operations.
Speaker 5: and recognize significant charges related to inventory, long lived asset impairments and restructuring.
Speaker 5: If charges are a result of the lower level of activity, we expect given the increasing limitation of sanctions.
Speaker 5: Capgroge margin was 18.2%, a decrease of 2,730 basis points year over year due to a $74 million of inventory write downs and other charges related to our Russian operations. Excluding...
Speaker 5: These inventory related charges gross margin was approximately 40%.
Speaker 5: We provide adjusted results in the appendix on slide 11 of the presentation.
Speaker 5: Please note that adjusted results are non-GAAP items and while we believe they may be meaningful.
Speaker 5: These results should not be considered a substitute for GAAP measures .
Speaker 5: Gross margin was also negatively impacted by higher inventory provisions.
Speaker 5: in the rest of the world.
Speaker 5: the strong dollar
Speaker 5: Scrap shipping costs and import duties. These were partially offset by increased absorption of manufacturing costs in the quarter.
Speaker 5: as we continue to build our inventories of safety stop.
Speaker 5: We are working to offset the impact of changes in the supply chain and manufacturing footprint on our gross margins.
Speaker 5: by investing in automation and investing in locations with lower costs in Germany and the US, such as Poland or Italy. The remain committed to our long-term gross margin target of 45% to 50%.
Speaker 5: Additionally, both revenue and gross margin.
Speaker 5: were impacted by currency translation headwinds.
Speaker 5: If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $25 million higher and gross profit to be $16 million higher.
Speaker 5: Foreign currency transaction gains related to remeasuring foreign currency assets and liabilities to period end exchange rates.
Speaker 5: benefited operating expenses by $7 million or 12 cents per diluted share.
Speaker 5: Gap operating loss was $88 million.
Speaker 5: an operating margin was a negative 26.5%. And net loss in the quarter was $93 million, or $1.91 per diluted share. As mentioned above, we had a number of unusual items impacting our operating income and earnings per share in the quarter.
Speaker 5: There was a $74 million or $1.21 per diluted share impact from inventory-related charges.
Speaker 5: $79 million or $1.30 share impact from impairment of long-lived assets in Russia.
Speaker 5: and other restructuring charges of $10 million or $16 cents per diluted share.
Speaker 5: There was also a game on sale of our corporate aircraft of $10 million.
Speaker 5: there was also a gain on sale of our corporate aircraft of $10 million or 16 cents per diluted share.
Speaker 5: Excluding these special items and the discrete tax impact of these items.
Speaker 5: adjusted diluted EPS with $1.8.
Speaker 5: Moving to slide 5.
Speaker 5: Sales of high-power CW lasers decreased 13% and represented approximately 39% of total revenue. Sales of ultra-high-power lasers above 6 kilowatts represented 47% of total high-power CW laser sales. The decline was primarily due to lower demand and cutting applications in
Speaker 5: into solar cell manufacturing. System sales increased 19% year-over-year, driven by growth in laser systems and higher sales of light-world. Medium-power laser sales decreased 37% while QCW laser sales were down 21% year-over-year.
Speaker 5: negatively impacted by lower cells to consume electronics and general industrial applications.
Speaker 5: Other product sales were nearly flat. As growth in medical was offset by the divestiture of the telecom business and lower revenue in advanced applications. Looking at our performance by region on slide 6.
Speaker 5: Revenue in North America decreased modestly by 3%.
Speaker 5: with growth in cutting, welding and medical applications offset by lower sales in non-layser systems.
Speaker 5: advanced applications as well as the telecom divestiture.
Speaker 5: In Europe sales decrease 21%.
Speaker 5: as a result of LERD demand across all major materials processing applications.
Speaker 5: due to weaker macroeconomic conditions.
Speaker 5: Currency translation also negatively impacted sales in the region.
Speaker 5: Revenue in China decreased 15% year over year as growth in welding primarily for e-leabatrio applications was more than offset if I continued softens in the cutting market.
Speaker 5: increase local competition and currency headwinds.
Speaker 5: We estimate that COVID-related restrictions in China impacted fourth quarter revenue by approximately $7 million and bookings by approximately $14 million.
Speaker 5: Moving to the summary of our balance sheet on slide 7, we entered the quarter with cash equivalents and short-term investments of $1.2 billion in total debt of $16 million.
Speaker 5: Cash provided by operations was $42 million during the quarter and capital expenditures were $26 million in the quarter.
Speaker 5: During the quarter we repurchased shares for a total of $117 million.
Speaker 5: While continuing to maintain a strong balance sheet, we have returned 500 million of capital to shareholders with our ongoing stock repurchases in 2022, which represents more than a half of our total share repurchases since 2016.
Speaker 5: Our inventories declined due to the inventory right down in Russia. With some improvements to the electronics supply chain, a decrease in required safety stockers we continue to increase production of components in Europe and North America. And a focus on improving our inventory management. We plan to stabilize and then reduce the investment in inventory during 2023.
Speaker 5: Our capex was 26 million in the quarter and 110 million for the full year.
Speaker 5: We expect 2023 capex to be in the range of 140 to 160 million.
Speaker 5: The expected expenditures in 2023 are at a higher rate than we expect longer term as we add buildings and equipment for production.
Speaker 5: capacity expansion to increase production outside of Russia.
Speaker 5: Capix also includes investments in R&D sales and service in North America, Germany and Asia.
Speaker 5: Capix also includes investments in R&D sales and service in North America, Germany and Asia. Moving to Outlook on slide 9.
Speaker 5: Fourth quarter book to build was slightly below one.
Speaker 5: We saw continued softness in orders in Europe and China primarily due to uncertain macroeconomic conditions which impact demand in general industrial markets leading macroeconomic indicators for Europe China and the US remain subdued
Speaker 5: but conditions appear to be more stable in Europe and the US. And there is an expectation of increasing activity in China later this year.
Speaker 5: Additionally, we are benefiting from growth opportunities created by major macro trends.
Speaker 5: such as electric vehicle battery manufacturing and renewable energy.
Speaker 5: The thing continued strong orders in E-mobility and welding applications.
Speaker 5: which are not being impacted by the economic uncertainty. Furthermore, light world and medical products continue to ramp up presenting future growth opportunities for IPG. For the first quarter of 2023, IPG expects revenue of $310 million to $340 million.
Speaker 5: The company expects the first quarter tax rate to be approximately 26%.
Speaker 5: IPG anticipates delivering earnings per diluted share.
Speaker 5: in the range of 90 cents to $1.20 with approximately 48 million diluted common shares outstanding. Continue to expect currency headwinds.
Speaker 5: and estimate that the first quarter revenue guidance
Speaker 5: is reduced by about $9 million.
Speaker 5: Due to the strength of the US dollar
Speaker 5: in the current quarter as compared to the first quarter of 2022.
Speaker 5: As discussed in the safe harbor passage of today's earnings press release, our guidance is based upon current market conditions and expectations. It assumes exchange rate reference in our earnings press release.
Speaker 5: and is subject to risks outlined in the safe harbor and the company's reports with the SEC.
Speaker 2: With that, we'll be happy to take your questions. Thank you. At this time, we'll be conducting a question and answer session.
Speaker 2: If you'd like to ask a question, please press star one on your telephone keypad.
Speaker 2: A confirmation tone will indicate your line is in the question queue. You may press start 2 if you'd like to remove your question from the queue. For a participant who's a speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: One moment please while we poll for questions. Our first question comes from Jim Rishuidi with Native and Company. Please proceed with your question. Hi, thank you. Good morning. First question I have is just a general question on the EV related business that you're looking at.
Speaker 2: being more beneficial in 2024.
Speaker 5: Hi, Jim. It's a term here. So we remain very optimistic about the EV business globally in 2023 and expect that to continue to grow. If you look at the sort of medium to longer term trends in terms of battery capacity additions, we don't have final numbers for last year, but between 2022 to 2025. STEM
Speaker 5: expecting to see a tripling of battery capacity and then another doubling of it beyond then. So we remain optimistic about that. With regard to the second question around the inflation reduction act, we've actually seen some significant order that was delivered in Q4 that went into the US and may have gone into another
Speaker 5: geographic region if that hadn't or part of it may have gone into another geographic region without the act. And even then the first quarter of the first few weeks of this quarter we've actually. Books from significant EV related orders.
Speaker 5: in North America. So there's certainly some, the inflation reduction act has seen, you can point to some specific evidence of orders strengthening in the US. They may not be solely related to that, but certainly in some to some degree are. I would like to add something. For us, if the application is very important, why?
Speaker 4: Because for such kind of applications, our customer use not only one over second two products from IPG, no. It's a lot of product, including the different kinds of lasers, CW, QCW, your palm of lasers, which I use using for different kind of production. For example, welding, battery, catching forals.
Speaker 4: cleaning and so on. This is why for us it's very important because we can present to all the customer different kind of product, again different lasers, different kind of subsystem and finally systems.
Speaker 2: Got it. The follow-up question just relates to China with the reopening there. I'm wondering how much for the benefit do you see in the legacy business? Or are you looking at the improvement in...
Speaker 2: from reopening, being more of a tailwind that comes from the emerging areas of the business in China.
Speaker 5: With the reopening, you will see some improvement in the legacy business, right? We still participate in the higher end of the cutting market, which is not necessarily defined by power, right? So the investments on that side, on the in general industrial side, have been...
Speaker 5: With the reopening, you will see some improvement in the legacy business, right? We still participate in the higher end of the cutting market, which is not necessarily defined by power, right? So the investments on that side, on the in general industrial side, have been pretty weak over the last. Thank you.
Speaker 5: 18 months or so. So we expect to see some improvement that, but really in addition to that we want to see and drive, continue to drive strong performance from the other applications where we clearly have a significant advantage and where the competitive dynamics are.
Speaker 5: are less. So the major outperformers were improvement probably coming from non-legacy but legacy contributing to some degree on that. The cutting businesses at a very low level in China and Q4.
Speaker 2: Thanks a lot. I'll jump back in the queue.
Speaker 2: Our next question is from Ruben Roy with Steeple. Please proceed with your question.
Speaker 6: Oh, hi, thank you. Tim, I guess just to follow up right on that point, can you give us an idea of where cutting is as a percentage of your China revenue? And, you know, with China reopening, I guess this is a question that also incorporates sort of the restructuring in Russia. So China reopening, cutting, where is it today?
Speaker 5: My China cutting was well below a third of total revenue in Q4.
Speaker 5: As you saw China cutting revenue was only about 34% of the total. So as exposure to the consolidated base it's like less than 10%. So that's both a positive and a negative, right? You've got a lot of diversification away from it. You'd obviously like that business to be a bit stronger because it provides a foundation or a ball work on the baseline of revenue.
Speaker 5: In terms of the cost structure and gross model, there's a lot of different aspects to that question, even not just the China supply chain. We've started to already supply a significant number of the lasers that were produced in Russia, the lower power levels, the really supplying the medium power to lower.
Speaker 5: power kilowatt lasers to China. We're already supplying a significant quantity of those out of Europe . We're already supplying at the lower power level the ultra compact laser that has a significantly reduced bill of material cost. We're transitioning that up to not just one and half and three kilowatt that already started on the six kilowatt.
Speaker 5: the cost structure of the business, and I said that I'd be able to talk about this more clearly this quarter. When we get into the second half of the year and assuming some increase in revenue, we actually see a good improvement in gross margins from this point forward, so long as the macro stays relatively positive, and we actually don't see a...
Speaker 5: a fundamental shift in the gross margin cost structure related to those operations because the total number of people that were required to take on to replace the core products is significantly less than the total headcount that existed.
Speaker 5: Russia, we're starting to source some products from third-party suppliers where we've qualified them for quality and the cost of those actually is equal to or even below what our internal cost was. And then we've got, you know, we're looking and ramping up.
Speaker 5: manufacturing for example of some of the more labor intensive components in Poland. We're making very good progress on that. The labor costs actually in Poland are very competitive to what we would incur in Russia. And even with a smaller scale, but even our Italian manufacturing operation, who are very good at producing optical components and even finished optical devices.
Speaker 5: around automation, not just on components, but even subassemblies, is continuing to be invested in. So, despite this crisis, I'm actually pretty optimistic about the cost structure this business is ultimately going to have. But...
Speaker 6: Well, yeah, thank you Tim for all that detail. That's great to hear. I guess just a quick follow up then. You mentioned lower level of activity. It's just kind of obvious with the Russian operations. Can you give us sort of a rough idea of where Russia stands today as a percentage of production and kind of, you know, is there more to do? You know, how low is it going to get?
Speaker 5: activity and that operation is going to be significantly lower. So that review incorporated a significant substantial restructuring plan, which we've made really good headway on even in the last eight weeks or so. That restructuring plan goes through Q1 and Q2 and then we're continuing to evaluate different options for that business. But we're ready.
Speaker 5: We don't have any options right now because you need to get through the restructuring But really the viewpoint is that because of the restrictions on what you can do Into and out of Russia is that business has to be self-sustaining on its local sales At the moment they can supply some you know basic medical devices to some of our regions around the world, but
Speaker 5: The whole plan that we looked at was to make it a self-sustaining business based upon local sales and given that level of sales, which they're optimistically about increasing, but
Speaker 5: The total capacity that's needed is got to be adjusted. Right. That is being adjusted. Thanks, Tim.
Speaker 2: Our next question is from Mark Miller with the Benchmark Company. Please proceed with your question. I'm just looking at your backlog. Can you estimate what percent of sales are even related in the backlog? That wouldn't be dissimilar to the total revenue.
Speaker 5: that we reported last year, so probably about 20% of it. I mean, it will depend upon the timing of shipments as well. I know, for example, in the last couple of weeks, we've had a significant order for some EV related products, so it wouldn't be dissimilar to the total.
Speaker 5: so we will share an EV on revenue last
Speaker 5: So we'll share a VV on revenue last year Mark.
Speaker 7: Okay, terms of how the backlog rolls out through in the year, would you expect an improving margin picture based on the current backlog?
Speaker 5: Yes, because you've got some of the, you know, we continue to expect not just the current backlog but future order flow as well, right? We've talked about having a strong year on EV applications. We're rolling out the ultra-compact lasers at higher power levels.
Speaker 5: We're expecting, you know, obviously, that given the improvements in the China business and generally speaking, we're optimistic about growing revenue during the year. So if you get some scale back in the business, that will also drive an improvement in gross margins. You've got other cost reduction initiatives that we're working on.
Speaker 5: things like the automation area that I talked about. So as I said overall, it's interesting you go through these crises, but when you come out of them, the degree in depth of work that's done actually sometimes leads you to a, certainly a much stronger organization.
Speaker 5: You know, coming into the second half of the year, we believe that we're going to see some meaningful improvements in gross margin.
Speaker 5: And the emerging products typically carry above average margins, is that correct? Yeah, in general, yeah, you got all the A and B, the high power pulse, green lasers, a good margin, the medical's got good margin, light well margins have improved a lot over since the product was first introduced both with, you know, new options and capability on that product and reduction in the bill limit.
Speaker 5: primarily welding applications.
Speaker 5: The other thing out there is that we expect some better performance on advanced applications this year. Last year was a pretty weak year on advanced applications. We've got a good pipeline of potential orders there and advanced applications have a good margin profile to them as well. Thank you. Our next question is from Michael Fenager with bank.
Speaker 6: US, just thinking about that second half, like how much of a percentage increase are we seeing in those areas versus where we were, you know, in Q4 right now by regions? Or any sense to see which one, capacity's ramping up higher than where we were a year ago? We really do need to pay attention to the patterns ofiff b
Speaker 4: about components. First of all, of course, we are a transfer to this production in different areas in Poland, Italy, Germany, and also expanding our production in the United States. Comparisons are difficult because we are producing different components in different areas. For example, in the United States, we are producing components especially for the US markets.
Speaker 4: for our US applications. In Europe , it's much more broader, because in Italy and Poland, also they produce different kind of components. It's not the same. Then in Germany.
Speaker 4: And from this point of view, of course, we have a good opportunity to optimize production. First of all, taking in mind the...
Speaker 4: But from this point of view, of course, we have a good opportunity to optimize production. First of all, taking in mind the much more optimal process.
Speaker 4: to introduce a lot of automation. It's one of the primarily goals for organizing this production, first of all components, but also in some cases final devices.
Speaker 4: And from this point of view we have a good opportunity to increase our production outside Russia. Much more effective, much more cost effective.
Speaker 4: Let's mag homoe imprisoner. Serving
Speaker 5: I think I'm getting your question. The benefit on like the Polish lower cost Polish manufacturing is not, that's really starting to ramp now, right? We didn't have any benefit from that in Q4 that was meaningful. The expansion, we did have some benefit from Italy, but that's going to be expanded. So a lot of the additional capacity that was initially put in because the capability existed there was in North America and just.
Speaker 5: We expect the restructuring process to take up until about May. So that's why I say that you come into the underlying gross margins in Q1 and Q2 will be able to explain pretty clearly. There may be some...
Speaker 5: What's the word I'm looking for? A bit of murkiness around the reported margins, and then when you get into the second half of the year, you've adjusted the cost structure in Russia, and you've got the full of benefit from some of the Polish and Italian operations coming through and some of the other cost reduction initiatives. Very helpful. And just welding in EV is obviously a very strong area for you guys.
Speaker 4: So our first introduction of different kind of lasers for welding, including our latest development laser was AMD, adjustable mode diameter.
Speaker 4: But now our situation is different because it was such kind of application we delivered not only lasers but also our monitoring system, our scanners or special welding fans, and also now we are working to
Speaker 4: to introduce our customer, the full integration solution, including all these components, much integrated, it's the same design and the same software. And for future, also see...
Speaker 4: to penetrate the EV market.
Speaker 4: by producing some components like lasers or some other subsystem to our customer.
Speaker 4: Our main goal is to introduce and deliver to our customer subsystem and systems.
Speaker 4: for well-denk applications, but also for cut-in applications, but also very promising application is cleaning applications also for EE market. And we have good opportunity to use our high-power power-piles lasers and also our system based on this power-pile power-pile lasers.
Speaker 5: for clean applications for EV market. And competitively, it's really no competition still in China from anybody on the welding side. The company will compete with most on EV, continues to be the large German manufacturer. So the competitive dynamics haven't changed in that end market. An online world.
Speaker 5: You know, globally this really continues to be a very leading edge product. If you look online you'll see there are some handheld welders.
Speaker 5: They're advertised in China but they're pretty large devices, they've got different cooling requirements that they're not really even equivalent to what we're producing. They have only one important parameter, very low price.
Speaker 6: and companies and those are our brothers. So perfect. And I guess just to translate, like I, you guys have done a lot of, like you said, and there's been a lot of work being done and diving deep into how you guys have handled a lot of these challenges. Is there any product, I know this was touched on earlier, but is there any?
Speaker 8: products you guys think about, you know, longer term maybe shifting more your capacity towards the U.S. or I know it came up earlier about servicing the cutting market, the low end in China. Just curious with how you guys have transformed or transitioned away from Russia, is there a different
Speaker 8: profile that you guys may be able to service going forward. Has that come into the picture?
Speaker 5: Quite getting a question, but there's a lot of, for example, all of our diode manufacturing has been always and will be not always will be, but it's still primarily in the US right all of semiconductor most of the packaging.
Speaker 5: There's no specific on the finished product is you're basically assembling different components together. So you can even change that depending on where your demand is. If we had excess capacity in the US and wanted to supply a greater number of lasers to China from the US because European demand for finished product was very strong, we could easily do that.
Speaker 5: You know, the finished product side is very flexible as to where you actually make the end product. I say the US does a lot, obviously they're producing all the light-well product at the moment. They produce all the green lasers for the solar cell and other applications. So a lot of the newer products.
Speaker 5: is coming more primarily out of North America, but we're not the hold into that. You could add capacity elsewhere on that finished product. So it's really the component side of it that we've been looking at over the last few months and all the different things we've been talking about on that, offset some of the capacity that we're losing.
Speaker 5: primarily out of North America, but we're not the hold into that. You could add capacity elsewhere on that finished product. So it's really the component side of it that we've been looking at over the last few months and all the different things we've been talking about on that to offset some of the capacity that we're losing.
Speaker 4: But there's a lot of flexibility on finished products To where you produce them and based on this This ability is very simple because Manufacturing of final is a final assembly or final manufacturing. Manufacturing is very easy process It can be easy to store any any facilities is not a problem. The main no-house and the main
Speaker 4: No house festival, of course in components. And this is the why we are producing components and selected area, for example, the diamonds practically are produced only in the United States.
Speaker 4: No reason to expand this production for other countries because already install the automation production very Hickchip if you check check cost for the one what it's much less in Compared to all others and the same for other components fiber components of course it's not
Speaker 4: any sense to produce outsize the Germany because we are all gay. It's installed, stable, production, and now I introduce the automated production for these
Speaker 2: Our next question is from Jamie Wang with City Group Hong Kong. Please proceed with your question. And thank you.
Speaker 8: We recently talked to the your cooperative, cooperative partner in China, has laser and they said, they'll see your ex likely to go back to 2021 level. So that's about 15% of the year course. So it's just one on our stand. Are you seeing, Jamie, can you just speak up and we can't really hear your question at the moment?
Speaker 8: Yeah, forget about those questions. So there's something wrong with the maple from. Yeah, that's all.
Speaker 2: It's a bit. Jamie are you still there? Yeah, but can you guys see the TV? A little bit better. We'll try. Let's try one more time. Yeah, sorry. Yeah.
Speaker 8: Let's deal with one question first and then the second one after that. Yes, the first question was on Okay, okay, so they didn't do that the first question Regarding the rush our impairment a mostly impairment in charge is one of so that we won't see these expenses
Speaker 5: just a year on going forward. Thank you. There may be some smaller restructuring charges related to severance and things like that, but in terms of like the impairment of long lived assets and the inventory, we think we did a very, very thorough review of those and that would be the only, we don't expect any significant charges related to that. Thank you.
Speaker 8: Okay, thank you. Okay, the second question is regarding China business. Recently we talked to your cooperative partners in China, Hans laser, and they said that it's likely, revenue industry is likely to go back to 2021 level. So that was about 15 billion year course.
Speaker 8: So just one more milestone, would you guys are seeing the similar next to the Reving Recovery in China? Yeah, just one more milestone, the recovery in China. Thank you. You're saying hands to the said they expect revenue to go back to 2021 levels. Yeah, which is about a 15% recovery from 2022.
Speaker 8: Roughly, roughly, and there are particularly the positive on their high power recovery, recovery from a high power laser equipment.
Speaker 8: And there are particularly the positive on their high power recovery, recovery from a high power laser equipment for your reference.
Speaker 5: We expect we're not getting specific guidance on China but you know Q4 and Q1 revenue are China is at a pretty low point. You saw last quarter it was 34% of revenue less than $100 million. So we are our forecast during the year expects a meaningful pickup in China revenue. Where do we get back to?
Speaker 5: peak levels is probably a bit unlikely because we still do have the competitive dynamics around the cutting business, right? We're driving a lot of that growth from other applications. We don't expect cutting to be 40 or 50% of China revenue growing forward, but we do expect a recovery in China during the rest of the year. Got it. Okay. It's clear. Thank you. Thank you very much.
Speaker 8: They say that despite the fact that the visibility, the older visibility is quite low right now, particularly from their AppleGhosts, particularly from the PCB business, but they expect their revenue to recover maybe from a second quarter, a second half of this year in China. Yeah, thank you. Thank you.
Speaker 2: As a remind of you like to ask a question, please press star one on your telephone keypad. One moment please, when we pull for additional questions. Our next question comes in a line of Jim Rishuori with Needham and Company. Please proceed with your question.
Thanks. Just a follow up on the EV market. You cited some of the market data out there, which is fairly bullish. You've certainly shown strong growth in this market. Would you be dis-... Because you, I assume, have some line of sight to this business, would you assume this business is capable of growing 25%, 30% this year or more?
I mean, I'm not going to give a number on it, Jim, because I kind of like, ends up in a surveyor guidance on it. But we're expecting meaningful growth out of that business, and it to be geographically globally based, not just sort of China-based, but strong growth in North America and Europe as well.
Okay, and on light weld, I know you made some commentary earlier in the call, but I think you've suggested that it was at a last quarter, I think a 40 million or so run rate business that you thought could grow 80%. Is that still the kind of expectations you have for the business?
We've got very strong expectations that business are now rolling it out in Europe more broadly. We're not actually focused really on China on it, but we've got very good demand out of Japan and Korea for that business and continue to expect it to grow extremely robustly.
Going forward. Got it. Thank you very much. We have reached the end of the question and answer session. I'd now like to turn the call back over to Eugene Federov for closing comments. Thank you for joining us this morning and you're continuing the interest in IPG. As usual, we'll...