Q1 2023 IPG Photonics Corporation Earnings Call

Speaker 1: I.

Speaker 1: The.

Speaker 2: Today's call is being recorded and webcast. At this time, I'd like to turn the call over to your host, Eugene Fedorov, IPG's Director of Investor Relations, for introductions. Please go ahead, sir.

Speaker 3: Thank you, Robin. Good morning, everyone. With me today is IPG Photonics CEO Dr. Eugene Sherbakov and Senior Vice President and CFO Tim Mamin.

Speaker 3: Let me remind you that statements made during the course of this call that discuss management or the company's 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.

Speaker 3: from those projected in such forward-looking statements.

Speaker 3: These risks and uncertainties are detailed in IPG Photonics Form 10K for the period ended December 31, 2022, and are reports on file with the Securities and Exchange Commission.

Speaker 3: Copies of these filings may be obtained by visiting the investors section of IPG's website or by contacting the company directly.

Speaker 3: You may also find copies on the SAC's website.

Speaker 3: Any forward-looking statements made on this call are the company's expectations or predictions as of today, made second, 2023 only. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please visit our website.

Speaker 3: Please refer to the earnings press release, earnings call presentation, or the Excel-based Financial Data Water Book posted on our investment relations website.

Speaker 3: We will pause this, prepare your remarks on how in the Desk Relations website following the completion of this call. With that, I'll now turn the call over to Eugene Sherbrooke.

Speaker 3: Good morning everyone. We are pleased with our results this quarter.

Speaker 3: which were about our guidance range despite macroeconomic uncertainty that continue to negatively impact demand in general industrial applications such as cutting and marking.

Speaker 3: We put another quarter of solid revenue growth in welding that was driven by record sales and applications and all time high revenue for our handheld welder LightWeld.

Speaker 3: Additionally, we saw strong results in cleaning and solar cell manufacturing.

Speaker 3: Demand for this product is driven by global macro trends and increasing investment in renewable energy and eco-friendly solutions.

Speaker 3: IPG is a development innovative technology that enables manufacturing of these products.

Speaker 3: and improve speed and efficiency with benefits to society and environment.

Speaker 3: Recently we published our 2020 annual sustainability report.

Speaker 3: on our website, providing information on many of these trends and how IPG delivers on our new mission statement.

Speaker 3: Keep lying light in ways that improve life.

Speaker 3: IPG has been making good progress in diversifying our revenue and reducing our exposure to cyclical and economically sensitive industrial markets.

Speaker 3: While these markets and applications are still account for a major portion of IPG revenue, we have been investing on our R&D, sales and operating resources to support growth of emerging products.

Speaker 3: and to drive further diversification of our revenues. As the first quarter emerging growth product sales grew both sequentially and year over year, and accounting for 45% of total sales.

Speaker 3: Many of these products are benefiting from global investment in immobility and renewable energy.

Speaker 3: We saw another quarter of record sales in AMV lasers driven by growth in EV battery welding as global EV battery capacity build-out continued.

Speaker 3: We also saw increased demand for our green lasers that are used in solar cell manufacturing applications.

Speaker 3: Improving efficiency of these solar cells.

Speaker 3: We expect investment in solar cell capacity globally.

Speaker 3: to drive increasing demand for our green lasers in the future.

Speaker 3: Additionally, our revenue fund lasers used and linear applications grued significantly in the first quarter.

Speaker 3: Laser cleaning solution provide sustainability benefits by reducing the use of abrasives and harmful chemicals.

Speaker 3: For example, a customer is evaluating and replacing acid etching with our clinic lasers.

Speaker 3: In addition to environment benefits, laser cleaning can significantly reduce cost of storage, transportation and handling toxic chemicals and eliminate reliance on consumables, which leads to reduced operating expenses.

Speaker 3: Our resistance will introduce laser drying and heating solutions.

Speaker 3: by placing the less efficient infrared bulbs.

Speaker 3: The solutions are well received by customers and are gaining market acceptance because they cut down on energy consumption and environment impact.

Speaker 3: We expect orders for this system in the second quarter and anticipate the strong demand for drying system in the future.

Speaker 3: I'd be sitting in the water for the second.

Speaker 3: record sales for inability applications. We are seeing customers accelerating investment in the military capacity in North America, Europe , Japan and Korea.

Speaker 3: in addition to the investment being made in China. Our immobility business in the United States has increased substantially in the first quarter as the customers shifted investment into the region to take advantage of garment and sensitive.

Speaker 3: We offer a broad range of solutions to customers from laser source to complete production in a naturaloft for existing and emerging memoraya technologies.

Speaker 3: Our real-time wealth monitoring solutions and adjustable mode beam lasers create an industrial region combination.

Speaker 3: and addresses customers' challenges and provides superior weld quality for hundreds of welds in each battery pack.

Speaker 3: We continue to explore additional opportunities for welding components and electrical motor assembly.

Speaker 3: With a strong pipeline of opportunities, we are expecting our global sales force focused on immobility applications.

Speaker 3: We expect the PV investment cycle to continue and immobility sales to remain strong in the next three to five years.

Speaker 3: Also demands can fluctuate depending on the pipeline of projects and regional capacity additions.

Speaker 3: Our medical business has a good quota and grew year over year.

Speaker 3: driven by the continued adoption of our laser system and consumable fibers for orology applications.

Speaker 3: However, we expect medical sales will be softer in the second quarter as a large customer adjusts its buffer inventory.

Speaker 3: We are working on multiple new opportunities to broaden our medical portfolio and to further grow the business. So it becomes a more meaningful contributor to epigenetic cells in the next 2-3 years.

Speaker 4: I would like to send our.

Speaker 4: employers for their dedicated work. We believe that an engaged

Speaker 4: and diverse workforce is a great strength of our organization.

Speaker 4: IPZee has always focused on inclusion and employs a large number of women and workers from diverse backgrounds.

Speaker 4: To further improve our diversity, for the first time we announced targets in our recent CSR report to increase gender diversity and minority representation in the global workforce and management roles.

Speaker 4: We strongly believe that an inclusive workplace creates a better future for our company and the community we operate in.

Speaker 4: I will now turn the call over to the team to discuss fine highlights in the quarter.

Speaker 5: Thank you Eugene and good morning everyone. My comments generally will follow the earnings call presentation which is available on our Investor

Speaker 5: I will start with the financial review on slide 4.

Speaker 5: Revenue in the first quarter was 347 million, a decline of 6% year over year due to foreign currency headwinds, which accounted for approximately 4% of the decline, and the telecom divestiture that reduced revenue by approximately 1%.

Speaker 5: Revenue from materials processing applications decreased 8% year over year, while revenue from other applications increased 10%.

Speaker 5: GAAP gross margin was 42.3%, a decrease of 410 basis points year over year due to increased manufacturing costs, higher inventory reserves, as well as higher shipping costs and tariffs, which was partially offset by an improvement in absorption as a percentage of sales.

Speaker 5: On a sequential basis, gross margin did show some improvement.

Speaker 5: FX also had a negative impact in the quarter.

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 $15 million higher and gross profit to be $8 million higher.

Speaker 5: GAAP operating income was $75 million and operating margin was 21.7%.

Speaker 5: Net income was $60 million or $1.26 per diluted share.

Speaker 5: The effective tax rate in the quarter was 28%.

Speaker 5: and was impacted by certain discrete items. Foreign currency transaction gains related to remeasuring foreign currency assets and liabilities to period and exchange rates.

Speaker 5: had a positive impact on operating income of $3 million and positively benefited earnings per share by six cents.

Speaker 5: Thank you.

Speaker 5: operating expenses declined year over year.

Speaker 5: primarily in research and development as we reduce spending on telecom product

Speaker 5: as well as reduced expenses from the sale of the corporate aircraft last year.

Speaker 5: Moving to slide 5.

Speaker 5: Sales of high power CW lasers decreased 8%.

Speaker 5: and represented approximately 44% of total revenue. Cells of ultra high power lasers above 6 kilowatts

Speaker 5: represented 42% of total high-power CW laser sales. The decline was primarily due to lower demand in high-power cutting applications.

Speaker 5: due to softer demand and competition in China, which was only partially offset by growth in welding.

Speaker 5: Pulsed laser sales decreased 16% year-over-year.

Speaker 5: as strong growth in cleaning and solar cell applications was offset by lower demand in cutting and marking applications.

Speaker 5: System sales increased 20% year over year, driven by growth in laser based systems and LightWorld.

Speaker 5: Medium power laser sales decreased 42%.

Speaker 5: While QCW laser sales were down 12% year over year, negatively impacted by lower sales to consumer electronics applications. Other product sales increased driven by strong medical sales.

Speaker 5: and increased revenue in advanced applications. Looking at our performance by region on slide 6.

Speaker 5: Revenue in North America decreased by 1% due to the telecom divestiture.

Speaker 5: Growth in welding, cleaning, advanced applications and medical applications was strong in the quarter and offset lower cutting revenue.

Speaker 5: In Europe , sales decreased 7% as a result of difficult comparisons.

Speaker 5: as some growth in the first quarter of the prior year was attributed to pull forward of demand from the second quarter due to supply chain concerns.

Speaker 5: However, European revenue increased sequentially despite overall uncertainty in the economy.

Speaker 5: Revenue in China decreased 22% year over year as growth in welding for EV battery applications and cleaning applications was offset by continued softness in the cutting market and lower demand in marking applications.

Speaker 5: Moving to a summary of our balance sheet on slide 7, we ended the quarter with cash, cash equivalents and short-term investments.

Speaker 5: of $1.1 billion and total debt of $16 million. Cash provided by operations.

Speaker 5: was $37 million during the quarter and capital expenditures were $33 million in the quarter. The first quarter cash provided by operations is typically low due to bonus and tax payments.

Speaker 5: Our inventory stabilized in the quarter and we continue to target a reduction in inventories during the year.

Speaker 5: our inventory is stabilized in the quarter and we continue to target a reduction in inventories during the year. While maintaining a strong balance sheet, we are now going to target a reduction in inventories during the year.

Speaker 5: We have been returning a significant amount of capital to shareholders over the last year and continue to do so in the first quarter. During the first quarter we repurchased shares for a total of $113 million, completing our existing authorization.

Speaker 5: IPG has returned a significant amount of capital since the beginning of 2022, repurchasing over $600 million in shares outstanding. Moving to outlook on slide 9, first quarter book to bill was one. We continue to see uncertain macroeconomic conditions and soft demand in general industrial markets. Despite relaxing COVID restrictions in China, demand remains relatively muted.

Speaker 5: However, we are still seeing solid activity and orders in e-mobility and renewable energy across all geographies.

Speaker 5: Furthermore, Lightworld has been gaining traction in the US, Europe and Asia. We believe these trends and continuing efforts to diversify our revenues will make IPG more resilient and drive our growth. For the second quarter of 2023, IPG expects revenue of $325 million to $355 million. The company expects the second quarter gross margin to be between 41.5% and 43.5%.

Speaker 5: IPG anticipates delivering earnings per diluted share in the range of $1.05 to $1.35 with approximately $47.5 million.

Speaker 5: Diluted common shares outstanding.

Speaker 5: Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release, and is subject to risks outlined in the safe harbor and the company's reports with the SEC. With that, we will be happy to take your questions. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

Speaker 2: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Hi, thank you. Tim, I was wondering if you could expand a little bit on the commentary around demand in China remaining relatively muted. Recently you characterized some of those applications in China that have been weak like cutting as you know sort of near or at trough level and just wondering at this point if you think there might be a further leg down based on what you're seeing from the order environment or you know with reopening I know there's been some mixed TMI data recently but you know as you think about the second half do you think that we might see a little bit improvement off of what potentially could be a trough level. Thank you. I mean I think at the moment demand remains.

relatively muted as we've said, the expected traction from a recovery is taking longer.

to really crystallize. I still think we're running relatively speaking on some of the older industrial applications like cutting and marking and engraving at that sort of trough level, but continuing to perform very well on EV and some of our precision applications which now are...

a dominant part of our overall revenue there. I think our commentary is in line with what other people are seeing, right? You're not just seeing a very strong rebound post COVID.

restrictions being lifted, the PMI data...

is not particularly strong. But you know, for example, in Q1, relative to our guidance.

China did outperform a little bit, so that was a positive. So there was some evidence of a little bit of strengthening and their Q2 guidance is reasonable. It doesn't show any material pickup compared to Q1. It's relatively flat, but it does point to stability.

I think it's way too early to say where the second half of the year really ends up at this point in time. Understood, that's helpful. Thanks, Tim. As a quick follow-up, I wanted to touch on some of the emerging markets, which obviously are doing very well, and specifically around EV. And how to think about that marketplace. You doubled revenues 20...

21 to 22, order rates continue to remain very strong. Eugene talked about a little bit of a slowdown in medical as one of your large customers adjusted against buffer inventory. I'm wondering how to think about EV and the order book going forward. Do you think some of the new applications that you're addressing are going to continue to be a little bit more

drive momentum or new customer diversity, etc. Or, you know, is there a period that we might see coming up where you have some equipment utilization and pause in spending that market is kind of wondering how we should think about that, you know, for the rest of this year.

So overall the EV demand environment remains...

quite resilient in that area, but even if there is a bit of a slowdown in one of those geographies, we expect it to be continued to be strong in some of the other areas. There's demand we're expecting and we're seeing in some other areas in Southeast Asia as well, like South Korea and even in Japan. The other benefit is that I think we're going to start to see orders for the drying equipment materialized during the second quarter and that should continue to diversify that revenue stream. So I think we have to look at it more on a global basis rather than just specific geographies and we believe that the puts and takes around that will make this still a very sustainable revenue stream.

applications.

Thank you, Eugene. Thank you, Tim, for all the detail. No problem. Thank you. Our next question is from Jim Rochuti with Needham & Company. Please proceed with your question.

Hi, good morning. This is actually Chris Grenga on for Jim. Europe and Germany in particular saw sequential revenue growth. Could you provide some additional color on what you're seeing in that region?

I think actually Europe was performed very well in the first quarter given the challenges of that.

that area has faced, I think you started to see really the energy issues that were a key...

headwind in the middle and third quarters and even into the end of last year started to abate. So the overall demand environment was quite strong. Some of that was EV, but there was also good demand for some of the cutting applications, particularly in southern Europe , which helped some of that outperformance. So.

Yeah, I think the economic data is really stabilized. PMIs are still not very strong there, but at least the underlying demand was certainly stronger than we'd expected and the overall tone in the business.

for the first quarter was quite positive and that carries on even in the second quarter with the guidance that we received from the individual entities.

And especially for EV applications, we see such kind of trend that our main potential customer for battery production, they are shifting this production close to their real manufacturing, car manufacturing. And of course for us it's much more advanced because we are using...

our portfolio for different kinds of ways and options for such kind of production. With respect to the battery applications, is this a good solution for the battery?

Is there any carryover or overlap with stationary battery storage that would be in use in a residential or a utility scale solar application or is it mostly relevant for EV batteries?

now but definitely it will be growing in the future. The storage battery is a very important part of this production.

But on the first time now, it's on the first place. Of course, definitely it's better for electrical cars. The application set would be very similar, whether it's on the welding, cleaning, all of that. It's basically pretty standard across those two.

On the first time now, it's on the first place. Of course, definitely it's better for electrical cars. The application set would be very similar, whether it's on the welding, cleaning, all of that. It's basically pretty standard across those. Yep.

Thank you. And just perhaps one more. So with respect to the migration of the production of components that were formerly in Russia, just could you provide a status update on where that stands and perhaps any of the large remaining items on that effort?

First of all, it is not migration of production.

We are expanding our production in Germany because it is our standard product for many many years. By the way, we introduced from Germany to Russia this production for some simple blocks. All technology is working in Germany.

Yes, we first of all increase our production in Germany but also install the new manufacturing place in Poland and also in Italy.

And from this manufacturing, now we will have the possibility to eliminate any reliance to the Russian production. Many different kinds of components including the fiber block, fibers, especially fiber-based components. And as we have talked about with thesk Who actually has some components that aren't

Thank you very much. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions.

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

Thank you for the question. Did you discuss the automotive market excluding EV?

What do we mean to explainar a now EAs substantial parts of this production?

All investments by the way, all investments for example, European car production company, mainly are going to EV production, not to standard car production.

And I'm not gonna... Excuse me. I'm gonna cut this, excuse me.

Immersion applications, was that roughly 45% of sales last quarter?

Yes.

Okay, thank you.

Okay, thank you.

We have reached the end of the question and answer session. I would now like to turn the call back over to Eugene Fedorov for closing comments. Thank you for joining us this morning and your continued interest in IPG. We will be participating in a number of investor events this quarter and looking forward to speaking with you over the coming weeks. Have a great day everyone. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.