Q4 2023 IPG Photonics Corp Earnings Call
Operator: www.marcoparet.com, Non-Verbal Hypnotism Good morning and welcome to IPG Photonics' fourth quarter 2023 conference call. Today's call is being recorded for webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, and Peanut, Director of Vest Relations, for introductions. Please go ahead.
Okay.
Speaker Change: Good morning, and welcome to IPG Photonics fourth quarter 2023 conference call today's call's being recorded and webcast at this time I'd like to turn the call over excuse me instead of talk.
Senior director of Investor Relations for introductions. Please go ahead.
Eugene Fedotoff: Thank you, Kevin, and good morning, everyone. With me today is IPG Photonics CEO, Dr. Eugene Shcherbakov, and Senior Vice President and CFO, Tim Mammen. Let me remind you that statements made during the course of this call that discuss management or the company's intentions, expectations, or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and challenges are detailed in our Form 10-K for the period ending December 31st, 2023 and our reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the investor sections of IPG's website or the SEC's website.
Speaker Change: Thank you, Kevin and good morning, everyone.
Speaker Change: Today's IPG Photonics CEO, Dr. Eugene Szczerba club, and senior Vice President and CFO, Tim Mammen.
Speaker Change: Let me remind you that statements made during the course of this call that discuss management's or the company's <unk> 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.
Speaker Change: These risks and uncertainties are detailed in our Form 10-K for the period ended December 31st 2023, and our reports on file with the Securities and Exchange Commission copies of these filings may be obtained by visiting the investors section of Ipg's website or the Sec's website.
Eugene Fedotoff: Any forward-looking statements made on this call are the company's expectations or predictions as of today, February 13, 2024 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 refer to the Earnings Press Release, Earnings Goal Presentation, and the Excel-based Financial Data Workbook posted on our Investor Relations website. We will post these prepared remarks on our website following the completion of this call. With that, I will now turn the call over to Eugene Stryber. Good morning, everyone, and thank you for joining us today.
Any forward looking statements made on this call are the company's expectations or predictions as of today February 13, 2020 or only.
Speaker Change: The company assumes no obligation to publicly release any updates or revisions to any size statements for additional details on our reported results. Please refer to the earnings press release earnings call presentation, and they excel based financial data workbook posted on our Investor Relations website.
Speaker Change: We'll post these prepared remarks on our on our website following the completion of this call.
Speaker Change: I'll now turn the call over to Eugene to share before.
Eugene Szczerba: Good morning, everyone and thank you for joining us today.
Eugene Stryber: We are pleased to report that fourth-quarter revenue came in at the top of our guidelines. This growth comes from multiple areas, including welding, cleaning, 3D printing, and medical applications, which showed success in our strategy to diversify revenue away from cutting and reduce the amount of sales from China. We remain focused on our strategy to displace legacy technology and processes with highly efficient and environmentally beneficial fiber lasers and laser-based technology. The review of our Immersion Growth product, improved sequentially and accounting for 46% of our total sales. This was driven by growth in hand-held welding, beam delivery, and medical products. However, uncertainty in macroeconomic conditions continued to weigh on sales and many general industrial applications.
Eugene Szczerba: Pleased to report that fourth quarter revenue came in at the top of our guidance, we saw growth in multiple areas, including Belgium cleaning. So did you bring timken medical applications that showed success in our strategy to diversify away from cutting and reduce the amount of.
Eugene Szczerba: All sales from China.
Eugene Szczerba: We remain focused on our strategy to displace legacy technologies and processes. This highly T cells and the antibody mentally beneficial fiber lasers and laser based technology as.
Eugene Szczerba: It is in our American girls product improves sequentially and accounted for 46% of our total sales driven by growth in handheld the building being delivered in medical products.
Eugene Szczerba: However, uncertainty in macroeconomic conditions continue to weight on sales and mainly general industrial applications and some of our large OEM customer around the world, who are managing inventories and induce batches in the quarter.
Eugene Stryber: And some of our large OEM customers around the world were managing inventories and induced purchasing in the quarter. Additionally, we saw soft demand for our lasers and e-mobility in China and solar cell manufacturing applications. Welding sales rebounded strongly in the quarter with growth in North America, more than upsetting the global low revenue in China. Laser adoption is growing in general industrial and automotive applications and not just in e-mobility. The increase in welding this quarter was driven by high sales in our handheld laser welder and growing adoption of our real-time weld measuring tool, which has become the industrial standard for automating processes, monitoring, and quality control. Customers understand the significant value proposition of real-time welding process monitoring, which can significantly reduce scrap and improve yield.
Eugene Szczerba: Also you saw the soft demand for our lasers and it might be like in China, and solar cell manufacturing applications.
Eugene Szczerba: Well it himself.
Eugene Szczerba: Clinton strongly in the quarter as growth in North America more than offsetting lower revenue in China.
Eugene Szczerba: Laser adoption is growing in general industrial and automotive applications.
Eugene Szczerba: And not just in E mobility.
Eugene Szczerba: The increase in welding this quarter was driven by higher sales in our handheld laser available and growing adoption of our audio time well measuring tool.
Eugene Szczerba: This is the kind of industrial standout for automating process monitoring and quality control.
Eugene Szczerba: Cost him understand a significant value proposition of real time welding process monitoring, which can significantly reduce scrap and improve yields.
Eugene Stryber: We are also seeing high sales of integrated laser welding systems that are easy to integrate into the manufacturing process. I am happy to report another quarter of strong growth in handheld laser welding. Lightwell sales benefitted from the rollout of the tool in Europe and increased 50% in 2023. We expect that the adoption will continue this year and... I am excited about the new partnership with Miller Electric to promote laser welding among the large network of MIG and TIG welders. Miller Electric is the leading worldwide manufacturer of arc welding products.
Eugene Szczerba: We're also seeing is as high as say also for integrated laser welding systems.
Eugene Szczerba: And complete solution for high speed automated laser welding, which includes laser scanner adhesion and controllers.
Eugene Szczerba: Is that are easy to integrate into the manufacturing process.
Eugene Szczerba: I am happy to report another quarter of strong growth in Congo laser welder.
Eugene Szczerba: Light well sales beneficial from a rollout of that tool in Europe and increased 50%.
Eugene Szczerba: 'twenty to 'twenty three.
Eugene Szczerba: We expect them that the adoption will continue this year.
Eugene Szczerba: I'm excited about the new partnership is Miller electric.
Eugene Szczerba: But I'm all plays out to be able to take them all very large network of MC and <unk>.
Eugene Szczerba: <unk> electric is a leading worldwide manufacturer of arc welding products.
Eugene Stryber: We believe that most welding applications can be addressed by lasers, including the hand-held market, and there is a tremendous productivity improvement that lasers enable. Welding is a large addressable market for our lasers, and we are in the initial stage of developing it. Indicative of success. We are generating and welding IPG for our largest customers; larger applications increased 13% year-over-year and accounting for 36% of our total revenue in 2023. IPG remains well-positioned in the immobility market, providing welding, cleaning, cutting, and now drying solutions for most major EV battery manufacturers around the globe. However, our immobility cells were negatively impacted by a showdown in new capacity additions in China.
Eugene Szczerba: We believe that most welding applications can be addressed by laser including the handheld market as it is a tremendous productivity improvement that lasers enable.
Eugene Szczerba: Well there is a large addressable market for our lasers and we are in the initial stage of development.
Eugene Szczerba: Indicators.
Eugene Szczerba: All success.
Speaker Change: And welcome to IPG.
Eugene Szczerba: Those customer.
Eugene Szczerba: Obligate 11 applications increased 13% year over year and accounting for 36% of our total revenue in 'twenty three.
Eugene Szczerba: IPG remains well positioned in it might be lithium market, providing welcome clean and cutting and now drying solution for most major EV battery manufacturers at hours of what lobe.
Eugene Szczerba: While our he might be lithium sales were negatively impacted by a slowdown in new capacity additions in China.
Eugene Stryber: We saw an increase in sales in North America, Japan, and Korea during the quarter. Overcapacity in Battery Production in China, after a strong investment cycle in 2021 and 2022, will continue to provide a short-term drag on our growth, but we remain optimistic about future revenue for these important applications as new electric vehicle sales continue to grow worldwide. We are also looking to increase our exposure by integrating more adjacent laser technology around our current offering to further penetrator mobility applications. We successfully shipped the first order of laser, drying solution for battery foil manufacturing. The solution we offer is the less efficient infrared bulbs and environmentally unfriendly gas fired furnaces and can significantly increase drying speed and reduce energy costs for our customers.
Eugene Szczerba: So an increase in sell in North America, and Japan, and Korea during the quarter.
Eugene Szczerba: Overcapacity in battery production in China.
Eugene Szczerba: After a stroke in the basketball cycle in 'twenty to 'twenty, one 'twenty to 'twenty two.
Eugene Szczerba: Continued to provide a short term drag on all of that growth, but we remain optimistic in the future revenue for this important applications as a new electric vehicle.
Eugene Szczerba: Vehicle sales continue to grow worldwide.
Eugene Szczerba: We are also looking to increase our exposure by ADT more at Jacinth laser technology around our current offering.
Eugene Szczerba: Uh huh.
Eugene Szczerba: Penetrate the E mobility applications.
Eugene Szczerba: We successfully shipped the first order or laser.
Eugene Szczerba: I am solution for battery foil manufacturing side.
Eugene Szczerba: Suddenly plays and last if he sent in for.
Eugene Szczerba: The red box in the bottom of pit unfriendly, Gasifier, valassis and can significantly increase dry and speed.
Eugene Szczerba: And reduce energy costs, well and our customers.
Eugene Stryber: For the full year, our EV sales increased modestly to a new record value level and accounted for over 20% of total revenue. Additionally, we are looking at new growth opportunities in the laser cleaning market. Laser cleaning solutions, while still a small contributor in our overall sales, have been growing at a high rate, and there is an increased interest in the market to replace traditional cleaning processes, which use abrasive materials and chemicals, whether it is paint or rust removal. Our laser can do the work quicker, more safely for the operator, and with less harm to the environment.
Eugene Szczerba: For the full year, our E sales increased modestly due to the new record.
Eugene Szczerba: And collagen or 20% of total revenue.
Eugene Szczerba: Additionally, we are looking at new growth opportunities in laser cleaning market.
Eugene Szczerba: As a cleaning solution, while still a small contributor in our auto sales.
Eugene Szczerba: We have been growing.
Eugene Szczerba: At high rate.
Eugene Szczerba: Increased interest in the market to replace traditional cleaning process.
Eugene Szczerba: This uses abrasive materials and chemicals.
Eugene Szczerba: Whether it is it is Spain or last three malo.
Eugene Szczerba: Aldo laser can do their work quicker more safely what was the operator and his last column in the vitamins.
Eugene Stryber: Finally, our medical business delivered strong results in the fourth quarter. Full-year revenue grew slightly to a new record level despite some desk stocking by large customers in the second quarter. We have benefited from growth in single-use fibers and some additional demand in aesthetic applications. We believe that there is a large installed base of old laser technology that can be replaced with fiber lasers over time.
Eugene Szczerba: Finally, our medical business delivered a strong result.
Eugene Szczerba: In the fourth quarter.
Eugene Szczerba: Full year revenue.
Eugene Szczerba: Slightly to a new record level, despite some desk stocking by large customer.
Eugene Szczerba: The second quarter.
Eugene Szczerba: We have benefited from growth in our single use fibers and some additional demand.
Eugene Szczerba: State of applications.
Eugene Szczerba: We believe that there are.
Eugene Szczerba: The larger installed base of old laser technology that can be replaced with fiber laser laser overtime.
Eugene Stryber: As you can see from our guidance, which will be covered by Tim later in this call, we are looking at a slow start to the year as industrial demand remains weak. However, we are focusing on what we can control to offset this headwind. We are targeting a number of large addressable markets where fiber lasers can replace existing laser or non-laser technology by taking advantage of several novel trends, including automation, increasing efficiency, and reducing environmental impact.
Eugene Szczerba: As you can see from our Gaza guidance issue, but covered by team later in this call.
Eugene Szczerba: We're looking at slow start to the year as the <unk>.
Eugene Szczerba: Demand remains weak.
Eugene Szczerba: However, we are focusing on what we can control to offset these headwinds.
Eugene Szczerba: We are targeting a number of large addressable markets.
Eugene Szczerba: We have fiber laser cannot replace existing laser or non laser technology by taking advantage of several knows trends.
Eugene Szczerba: Included in automation, increasing efficiency and reducing their environmental impact.
Eugene Stryber: We expect that these trends to continue and help diversify our revenue. We also are focused on operational improvement, such as lower costs and reducing inventories in 2024. We are investing in future growth and continue to maintain a strong balance sheet. Our cash flow generation remains strong and benefits from inventory management.
Eugene Szczerba: We expect these trends to continue and help diversify our revenue.
Eugene Szczerba: We also are focused on operational improvements such as lower cost and reducing the inventories in 2024.
Speaker Change: Well I mean, there's some in the future and growth and continue to maintain strong balance sheet.
Speaker Change: Our cash flow generation remains strong and benefited from inventory management.
Eugene Stryber: And I would like to thank you, our employers, for their contribution to 2024. And we'll turn the call over to Tim to discuss financial highlights from the quarter. Thank you, Eugene, and good morning, everyone.
Speaker Change: And I would like to thank you all right employers.
Speaker Change: They are a contributor contributions the 'twenty to 'twenty four.
Speaker Change: And we will turn the call over to the team.
Speaker Change: Financial highlights in the quarter.
Speaker Change: Thank you Eugene and good morning, everyone. My comments generally will following the earnings call presentation, which is available on our Investor Relations website.
Timothy P. V. Mammen: My comments generally will follow the earnings call presentation, which is available on our investor relations website. I will start with the financial review on slide four. Revenue in the fourth quarter was $299 million, down 10% year over year, but it came in at the top of our guidance. Revenue from materials processing applications decreased 12% year-over-year due to lower general industrial demand, which impacted revenue in cutting applications, partially offset by growth in welding, cleaning, and 3D printing. Revenue in other applications increased 4%, driven by the strength in medical.
Speaker Change: Start with the financial review on slide four.
Speaker Change: Revenue in the fourth quarter was $299 million.
Speaker Change: Down 10% year over year.
Speaker Change: And at the top of our guidance.
Speaker Change: Revenue from materials processing applications decreased 12% year over year due to lower general industrial demand, which impacted revenue in cutting applications.
Speaker Change: Partially offset by growth in welding cleaning and three D printing.
Speaker Change: Revenue in other applications increased 4% driven by strength in medical.
Timothy P. V. Mammen: Gap gross margin was 38.2%, an increase from last year due to a significant decrease in inventory provision and other charges related to our Russian operations that impacted results in the fourth quarter of 2022. You can find details of these items in the financial tables of the press release. Additionally, gross margin benefited from lower shipping costs and tariffs, but these benefits were mostly offset by lower absorption of manufacturing costs and slightly higher cost of product sold. As we focused on reducing inventory, we estimate that the impact of production shutdowns to work down our inventories reduced manufacturing cost absorption and reduced gross margin by approximately 4 percentage points in the fourth quarter as compared to the third quarter of 2023. Additionally, both revenue and gross margin were negatively impacted by foreign currency translation.
Speaker Change: GAAP gross margin was 38, 2%.
Speaker Change: An increase from last year due to a significant decrease in inventory provision and other charges.
Speaker Change: Related to our Russian operations that impacted results in the fourth quarter of 2022.
Speaker Change: You can find details of these items in the financial tables of the press release.
Speaker Change: Additionally, gross margin benefited from lower shipping costs and tariffs, but these benefits were mostly offset by lower absorption of manufacturing costs and slightly higher cost of products sold.
Speaker Change: As we focused on reduction of inventory, we estimate that the impact of production shutdowns to workout, our inventories reduced manufacturing cost absorption and reduced gross margin by approximately four percentage points in the fourth quarter as compared to the third quarter of 2023.
Speaker Change: Additionally, both revenue and gross margin were negatively impacted by foreign currency translation.
Timothy P. V. Mammen: If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $5 million higher and gross profit to be $4 million higher. However, operating expenses came in above our guidance range, driven by continued investments in R&D and the sales organization to support our strategic initiatives and new applications. In 2023, we created numerous new and important sales roles globally that we expect will drive our sales and deepen customer relationships for the future. We also had higher stock-based compensation and some one-time expenses that increased operating costs in the quarter. Foreign currency transaction losses related to remeasuring foreign currency assets and liabilities to period end exchange rates had a minor negative impact on operating expenses of $0.4 million, or 1 cent per diluted share, in the quarter. Gap's operating income was $29 million, and its operating margin was 9.6%. Net income in the quarter was $41 million, or $0.89 per diluted share. The effective tax rate in the quarter was 2% and benefited from certain discrete items, including closing tax orders.
Speaker Change: If exchange rates relative to the U S. Dollar had been the same as one year ago, we would have expected revenue to be $5 million higher and gross profit to be $4 million higher.
Speaker Change: Operating expenses came in above our guidance range.
Speaker Change: Driven by continued investments in R&D.
Speaker Change: And sales organization to support our strategic initiatives and new applications.
Speaker Change: In 2023, we've created numerous new and important sales roles globally that we expect will drive our sales deepen customer relationships for the future.
Speaker Change: We also had higher stock based compensation and some onetime expenses that increased operating costs in the quarter.
Speaker Change: Yeah.
Speaker Change: Foreign currency transaction loss related to re measuring foreign currency assets and liabilities to period end exchange rates had a minor negative impact on operating expenses <unk> $4 million.
Speaker Change: <unk> per diluted share in the quarter.
Speaker Change: GAAP operating income was $29 million.
Speaker Change: Operating margin was nine 6%.
Speaker Change: Net income in the quarter was $41 million or.
Speaker Change: <unk> <unk> per diluted share.
Speaker Change: The effective tax rate in the quarter was 2% and benefited from certain discrete items, including closing tax audits.
Timothy P. V. Mammen: Moving to slide five, sales of high-power PW lasers decreased 19% due to lower sales and cutting applications in China and Europe as a result of lower industrial demand and OEM customers working down inventories as well as increased competition from Chinese players in cutting applications. Cells of ultra-high power lasers above 6 kilowatts represented 48% of total high-power CW laser cells.
Speaker Change: Moving to slide five.
Speaker Change: Sales of high power CW lasers decreased 19% due to lower sales in cutting applications in China and Europe as a result of lower industrial demand Adobe have customers working down inventories as well as increased competition from Chinese players in cutting applications.
Speaker Change: Sales of ultra high power lasers above six kilowatts rep.
It represented 48% of total high power CW laser sales.
Timothy P. V. Mammen: Pulse laser sales decreased 40% year over year due to lower demand in solar cell manufacturing and battery foil cutting applications, driven by reduced industry demand. System sales decreased 1% year-over-year, with strong growth in light weld, offset by lower sales in other laser systems. Medium power laser sales increased 5%, while QCW laser sales were up 6% year over year, driven by higher sales to consumer electronics, 3D printing, and e-mobility applications. Other product sales are up meaningfully on strong growth in medical applications and Beam Delivery. Looking at our performance by region on slide six, revenue in North America decreased 3% due to lower demand in cutting applications, which is partially offset by higher sales in welding, mostly driven by strong revenue in e-mobility applications.
Speaker Change: Pulsed laser sales decreased 40% year over year due to lower margin solar cell manufacturing and battery foil cutting applications driven by reduced industry demand.
System sales decreased 1% year over year with strong growth in our light world.
Speaker Change: Set by lower sales in other laser systems.
Speaker Change: Medium power laser sales increased 5%, while Q CW laser sales were up 6% year over year, driven by higher sales to consumer electronics, three D printing and E mobility applications.
Speaker Change: Other product sales were up meaningfully on strong growth in medical applications.
Speaker Change: Beam delivery.
Looking at our performance by region on Slide six revenue in North America decreased 3% due to lower demand in cutting applications.
Speaker Change: Which was partially offset by higher sales in welding, mostly driven by strong revenue in E mobility applications.
Timothy P. V. Mammen: In the face of a widespread economic slowdown in Europe, sales increased 1% as the region continued to perform better than expected, with higher sales across most applications except for cutting. However, revenue in China decreased 25% year-over-year due to lower demand in general industrial markets. Due to continued competitive pressure in cutting applications and reduced investments in electric vehicle battery production, China represented 24% of total sales in the quarter, the lowest level in the last 10 years. Moving to a summary of our balance sheet on slide 7, we entered the quarter with cash, cash equivalents, and short-term investments of $1.2 billion and no debt. Cash flow generation remained strong, with cash provided by operations of $106 million in the fourth quarter.
Speaker Change: In the face of widespread economic slowdown in Europe sales increased 1% as the region continued to perform better than expected with higher sales across most applications except for cutting.
Speaker Change: Revenue decreased 25% year over year due to lower demand in general industrial markets continued competitive pressure in cutting applications and reduced investments in electric vehicle battery production.
Speaker Change: China represented 24% of total sales in the quarter its lowest level in the last 10 years.
Moving to a summary of our balance sheet on slide seven we ended the quarter with cash cash equivalents and short term investments.
Speaker Change: At $1 $2 billion and no debt.
Speaker Change: Cash flow generation remained strong with cash provided by operations of $106 million.
Speaker Change: In the fourth quarter.
Timothy P. V. Mammen: Our CapEx was $25 million in the quarter and $110 million for the full year. Net of asset Divestitures, our CapEx was $79 million. Our inventory declined in the quarter and decreased by more than 10% during 2023 as we continue to focus on managing inventory and reducing our investment in working capital. We will remain focused on lowering our inventories during 2024, which may have a short-term impact on margins but will benefit our cash generation. While maintaining a strong balance sheet, we continue to return capital to shareholders with our ongoing stock repurchase program. We repurchased shares for a total of $64 million in the fourth quarter and $223 million in 2023. The board has approved an additional $300 million in share repurchases.
Speaker Change: Our capex was $25 million in the quarter and $110 million for the full year.
Speaker Change: Net of asset divestitures, Capex was $79 million.
Speaker Change: Our inventories declined in the quarter and decreased by more than 10%. During 2023, as we continue to focus on managing inventory and reducing our investments in working capital.
Speaker Change: We will remain focused on lowering our inventories during 2024, which may have a short term impact on margins, but will benefit our cash generation.
Speaker Change: While maintaining a strong balance sheet, we continue to return capital to shareholders.
Speaker Change: With our ongoing stock repurchases.
Speaker Change: We repurchased shares for a total of $64 million.
Speaker Change: In the fourth quarter and $223 million in 2023.
Speaker Change: The board has approved an additional $300 million in share repurchases.
Timothy P. V. Mammen: We've returned over $850 million to shareholders via share repurchases in the last three years and continue to buy back shares opportunistically. Moving to the outlook on slide nine, fourth quarter book-to-bill was below 1.
Speaker Change: We've returned over $850 million to shareholders via share repurchases in the last three years and continue to buy back shares Opportunistically.
Speaker Change: Moving to the outlook on slide nine.
Speaker Change: Fourth quarter book to Bill was below one.
Timothy P. V. Mammen: Continued economic uncertainty with low PMI numbers in Europe, North America, and Japan is impacting industrial demand and capital investment. We're also seeing customers cut OEM customers, manage inventory, and reduce purchases, which may not restart until the second quarter. In China, demand has remained soft, and some of the mature markets, such as cutting and marking, are facing severe competition.
Speaker Change: Continued economic uncertainty with low PMI numbers in Europe, North America, and Japan is impacting industrial demand and capital investments.
Speaker Change: We're also seeing them cutting OEM customers, managing inventory and reducing purchasing which may not restart until the second quarter.
In China demand has remained soft in some of the mature markets such as cutting and marking.
Speaker Change: Facing severe competition.
Timothy P. V. Mammen: We expect e-mobility investments to pick up in China in 2024, but only in the second half of the year. While it will be a challenging start to the year, we believe demand will improve as the year unfolds. We continue to focus on emerging growth applications and our strategy to continue to drive laser adoption in new markets and applications in 2024. For the first quarter of 2024, IPG expects revenue of $235 million to $265 million. IPG anticipates delivering earnings per diluted share in the range of 30 to 60 cents, with approximately 46 million diluted common shares outstanding. The company expects the first quarter tax rate to be approximately 25%.
We expect E mobility investments to pick up in China in 2024, but only in the second half of the year.
Speaker Change: While it will be a challenging start to the year, we believe demand will improve as the year unfolds.
Speaker Change: We continue to focus on emerging growth applications and our strategy to continue to drive laser adoption in new markets and applications in 2024.
Speaker Change: For the first quarter of 2020 for IPG expects revenue of $235 million to $265 million.
Speaker Change: IPG anticipates delivering earnings per diluted share in the range of 30 to 60.
Speaker Change: With approximately 46 million diluted diluted common shares outstanding.
Speaker Change: The company expects the first quarter tax rate to be approximately 25%.
Timothy P. V. Mammen: We expect 2024 CAPEX to be in the range of $120 to $130 million, net of Disposal of Assets as we continue to invest in additional manufacturing capacity in Germany, the U.S., and other locations. Significant amounts of the spending in 2024 relates to replacement of fiber and other critical component capacity that we no longer have access to in Russia. We expect capital expenditures at a significantly lower level in 2025 and beyond, as discussed in the Safe Harbor passage of today's earnings press release.
Speaker Change: We expect 2020 for capex to be in the range of $120 million to $130 million net.
Speaker Change: Net of disposal of assets as we continue to invest in additional manufacturing capacity in Germany U S and other locations.
Speaker Change: Significant amounts of the spending in 2024 relates to replacements of fiber and other critical components capacity that we no longer have access to in Russia.
Speaker Change: We expect capital expenditures.
At a significantly level lower level in 2025 and beyond.
Speaker Change: As discussed in the Safe Harbor passage of today's earnings press release.
Operator: 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 said, we'll be happy to take your questions. Thank you. We will now be conducting a question and answer session. If you would like to be placed in the question queue, please press star 1 on your telephone keypad. 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 line.
Speaker Change: And this is based upon current market conditions and expectations.
Speaker Change: Assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the safe harbour and the Companys reports with the SEC.
Speaker Change: With that we'll be happy to take your questions.
Speaker Change: Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
Jim Ricchiuti: For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question is coming from James Ricchuti from the Edelman Company. Your line is now live. Hi, thank you. Good morning.
Speaker Change: Before pressing star one one moment. Please while we poll for questions. Our first question is coming from James Ricchiuti from Needham <unk> Company. Your line is now live.
Jim Ricchiuti: Hi, Thank you good morning, so it sounds like the.
Timothy P. V. Mammen: So it sounds like the non-China EV-related business held up better in the quarter. Is that your expectation still as you think about the early part of 24, just given some of the signs of slowing in the Western markets as it relates to EV and the impact that might have? Capital Investments may be shifting to the right.
Jim Ricchiuti: The non China EV related business held up.
Jim Ricchiuti: Better.
Jim Ricchiuti: Quarter is that your expectation still as you think about the early quarter 24, just given some of the <unk>.
Jim Ricchiuti: Signs of slowing in the western markets as it relates to <unk> and the impact that might have on capital investments may be moving shifting to the right.
Jim Ricchiuti: Okay.
Timothy P. V. Mammen: So Jim, you're right, EV outside of China in the fourth quarter was quite strong, with good sales in North America, Korea, and Japan. Clearly, given the guidance we've got for the first quarter, at least, there is a sort of lower level of EV sales in, say, North America in the first quarter, particularly expected. I don't think there's going to be a big pickup in the first half of the year.
Speaker Change: So you Jim Youre right EV outside of China in the fourth quarter was quite strong with good sales in North America.
Korea and Japan.
Speaker Change: Clearly given the guidance we call for the first quarter at least.
Speaker Change: There is there is sort of lower level of EV sales in let's say north.
Speaker Change: North America in the first quarter in particular expected.
Speaker Change: I don't think Theres any big pickup in the first half of the year. We've mentioned that we do we think we will start to see some capacity investments in China in the second half of the year. There are a lot of R&D projects that we're working on both in North America and in Europe with a number of the larger automotive manufacturers.
Timothy P. V. Mammen: We've mentioned that we think we'll start to see some capacity investment in China in the second half of the year. There are a lot of R&D projects that we're working on, both in North America and in Europe, with a number of the larger automotive manufacturers. There's a significant, I'd say, not a rebound, but an increase in interest.
Speaker Change: As a significant I'd say not rebound, but increase in interest.
Timothy P. V. Mammen: Given the success of some companies utilizing this sort of subsystem incorporating laser weld measurement technology, there's a renewed or increased interest from a broader base of some of the large automotive manufacturing companies. So we remain optimistic about it, but I think it's going to be a slow start to the year. We've got a fairly robust number for, for example, the new drying application. We expect that to grow strongly. We had a good win for some EV motor applications and some hairpin welding applications as well, so that was positive. But yeah, it's been a difficult start to the year, and I think EV is part of that as well.
Speaker Change: Given the success of some companies utilizing the sort of.
Speaker Change: Sub system, incorporating the laser world measurement technology is a renewed or increased internet product from a broader base of some of the large automotive manufacturing companies. So we remain optimistic about it but I think it's going to be a slow start to the year.
Speaker Change: Yeah, we got a fairly robust.
Speaker Change: Number for example, the new drawing application, we expect that to grow strongly we had a.
Speaker Change: Good win for us.
Speaker Change: EV motor applications and have been.
Speaker Change: Welding applications as well so that that was a positive but yes, it's a difficult stock the year and I think even as part of that as well.
Speaker Change: Got it.
Timothy P. V. Mammen: And Tim, you mentioned some of the impact on Q4 gross margins from the production shutdowns. Has that, as we think about the early part of Q1, also been a headwind that has factored into the, presumably, the Q1 gross margin guidance? Yeah, part of Q1 is continuing to try and work down inventories. I was actually really pleased with the progress and the pretty definitive progress we made on that at the end of the year and the way that translated into really strong cash flow generation. I'd say in Q1, it's a combination of continuing to want to manage inventories closely with also a level of revenue guidance that starts to fundamentally impact our fixed cost absorption relative to, say, a $300 million revenue run rate. There's quite a combination of the two things, Jim.
Speaker Change: Can you size some of the impact from.
Q4 gross margins from the production.
Speaker Change: Production shutdowns has that.
Speaker Change: When you think about the early part of Q1 has that also been a headwind that has factored into the <unk>.
Speaker Change: Presumably the Q1 gross margin guidance.
Speaker Change: Yes part of the Q1 is continuing to try and work down inventories.
Speaker Change: I was actually really pleased with the progress there pretty definitive progress we made in that in the end of the year and the way that translated into really strong cash flow generation I would say in Q1, it's a combination of continuing to want to manage inventories closely with also a level of revenue guidance that starts to more fundamentally.
Speaker Change: <unk> fixed cost absorption relative to say a $300 million revenue run rate.
Speaker Change: Okay.
Speaker Change: So it's a combination of the two things Jim.
Timothy P. V. Mammen: Got it. I'll jump back in the queue. Thank you. Great. The next question is coming from Ruben Roy from Steeple. Your line is now live.
Speaker Change: I'll jump back in the queue. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Next question is coming from Ruben Roy from Stifel. Your line is now live.
Ruben Roy: Thank you Hi, Tim.
Ruben Roy: Thank you. Hi Tim, I would like to stay on the inventory topic if we could, and then we'll move over to the customer side of the equation. I think you mentioned that you were managing inventory at customers, and I'm wondering if you can give us a little bit of detail around that dynamic versus demand. And I know you don't like to guide for more than a quarter, but you did say, "Probably expect some pickup in the second half."
Ruben Roy: We'd like to stay on the inventory topic, if we could.
Ruben Roy: Now move over to the customer side of the equation. I think you mentioned that you were managing inventory at customers and I'm wondering if you can give us a little bit of detail around that dynamic versus demand and I know you like what you don't like the guide for more than a quarter, but you did say.
Ruben Roy: I would probably expect some pickup second half so when you think about the first half.
Timothy P. V. Mammen: So when you think about the first half, do you think that, uh..., further downside as inventories are digested by customers, or do you think that we're sort of at a level where we could think about it? Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES, Yeah, so I think it's mainly our OEM customers who are managing their inventory levels, and not only are they trying to get those down in the first half of the year, but on the other side of the equation, they're also expecting to see some improvement in their business as we get into the second quarter and beyond. So we don't expect the cutting market outside of China to remain persistently weak for the entire year, so we're looking for some recovery in that.
Ruben Roy: Do you think that.
Ruben Roy: And there's further downside as inventories are digesting that customers in Q2 or.
Ruben Roy: I think that we're sort of at a level, where we can think about sort of a flat revenue outcome and then perhaps a little bit of growth in second half as the inventories come off when you come down at your customers. Thank you.
Speaker Change: Yes, so I think it's mainly our cutting OEM customers, who are managing their inventory levels.
Speaker Change: Not only are they trying to get those down in the first half of the year, but on the other side of the equation. They're also expecting to see some improvement in that business as we get into the second quarter and beyond so we don't expect.
Speaker Change: Cutting market out of.
Speaker Change: Outside of China to remain persistently weak for the entire year. So we're looking for some recovery in that I'd say my sense is we're seeing.
Timothy P. V. Mammen: I'd say, you know, my sense is we're seeing somewhat of a bottom in the demand cycle here. We don't have a great bookings forecast for the first quarter that's been put together, but it's actually relatively stable. January bookings, compared to a very, very weak October, saw some improvement, and January is the first month of the year, so that was quite good. However, it was still down on a year-over-year basis.
Speaker Change: Somewhat of a bottom.
Speaker Change: Volume in the demand cycle here.
We don't have a great bookings forecast for the first quarter, that's been put together, but it is actually.
Speaker Change: Okay.
Speaker Change: Relatively stable now January bookings compared to a very very weak October.
Speaker Change: So some improvement in January the first month of the year. So that was it was quite good it was still down on a year over year basis. So if I'm sort of going to pull together a trajectory here I think the first half of the year. We will continue to be well, we will be we will be very challenged.
Timothy P. V. Mammen: So if I'm going to pull together a trajectory here, I think the first half of the year will continue to be or will be very challenging. But I'd like to target, we are targeting maybe some, moderate growth on a year-over-year basis in the second half of the year. I mean, clearly, given the weakness we had in the second half of last year, that shouldn't be too difficult to do if we see even a basic recovery and things.
Speaker Change: I would like to target and we are targeting maybe some.
Speaker Change: Moderate growth on a year over year basis in the second half of the of the year I mean, clearly given the weakness we had in the second half of last year.
Speaker Change: It shouldn't be too difficult to do if we see even a basic recovery and things, but I think it would be good to get back into some.
Timothy P. V. Mammen: But I think it would be good to get back into some growth on a year-over-year basis. That's certainly what we're trying to target. Very helpful, Tim.
Speaker Change: Some growth on a year over year basis.
That's certainly what we're trying to target.
Speaker Change: Very helpful. Tim I guess, just a follow up on that outside of some of your own inventory work downs et cetera, and obviously on the lower level of revenue. There are these absorption costs that we have to worry about but in terms of.
Ruben Roy: I guess just to follow up on that, outside of some of your own inventory workdowns, etc., and obviously, you know, on the lower level of revenue, there are these absorption costs that we have to worry about. But in terms of some of the other areas that you folks were working on last year, you know, sort of bringing up the expanded factory. You know, manufacturing levels, et cetera, as revenue does recover. Are some of the factories set to go?
Timothy P. V. Mammen: Some of the other areas that you folks were working on last year sort of bringing up the expanded factory.
Timothy P. V. Mammen: Manufacturing levels et cetera, as revenue does recover.
Some of the factories set to go I mean, Germany, Poland in terms of seeing a little more of that.
Eugene Fedotoff: I mean, you know, Germany, Poland, in terms of seeing a little more of an, I guess, inflection in gross margins as those revenues come, come, come back, you know, second half of the year or even looking, you know, sort of exiting this year into next year, should we expect, you know, sort of a meaningful recovery in gross margins as revenues recover, I guess. Yeah, we expect to see that basically as we sort of absorb the fixed cost base better. Yeah, Poland and Italy have made tremendous progress in getting their manufacturing and the scale of their manufacturing increased. Germany has also made a lot of progress on that, and so have the U.S. I'll leave Dr. Chogoth to talk about some of the cost reductions that we're aiming to introduce on some of the high power lasers with new designs there. Yeah, right now, not just now, but last quarter also installed it. The development of a new technological, electromechanical platform for our mid-power and high-power lasers.
Timothy P. V. Mammen: Guess inflection in gross margins as those revenues come come come back second half of the year or even looking sort of exiting this year into next year should we expect.
Timothy P. V. Mammen: Sort of a meaningful recovery in gross margins as revenues recover I guess the question.
Speaker Change: Yes, we expect to see that basically as we sort of absorb the fixed cost base.
Speaker Change: Better.
Speaker Change: Yes, Poland, and Italy have made tremendous progress.
Speaker Change: And getting that manufacturing and scale of that manufacturing increase Germany has also made a lot of progress on that and so as the U S.
I'll leave talk show go to talk about some of the cost reductions that we're aiming to introduce on some of the high power lasers with new designs there.
Speaker Change: Yeah right now.
Speaker Change: But last quarter also installed.
Speaker Change: The development of the newer technological electromechanical platform for our mid power and high power lasers one of the.
Eugene Fedotoff: One of the goals, of course, was a cost reduction, a dramatic cost reduction. Our evaluation... And we will confirm when we start to ship to our first customer this quarter. By our evaluation, this cost reduction will be up to between 15 and 20 percent.
Speaker Change: The goal of course, it was a cost reduction and a month ago.
Cost reduction our evaluation.
Speaker Change: And if you would confirm.
Speaker Change: Is that the shift out of it.
Speaker Change: Customer.
Speaker Change: This quarter <unk>.
Speaker Change: This cost reduction will be.
Speaker Change: Up to between 15% and 20%.
Eugene Fedotoff: But it's only an initial evaluation, and maybe it will be much, not much more, but a little bit more. And this is why one of our cost reduction and optimization of our gross margin in the future also for laser-like components. But we also start to produce a new, for us, a new product. It means... a semi-integrated solution.
Speaker Change: But it's all the initial evaluation, maybe it'll be much not.
Speaker Change: Not much but a little bit more.
Speaker Change: This is why.
Speaker Change: One of our cost.
Speaker Change: Cost reduction and optimization of our gross margin in the future also.
Speaker Change: Cost reduction and optimization of our gross margin in the future also.
Speaker Change: For laser components.
Components.
Speaker Change: But also we start to produce a new for us.
Speaker Change: Product means.
Speaker Change: Ah the CME integrated solution it means.
Eugene Fedotoff: It means that we are proposing today to customers not a list of a set of components like laser, scanner, LDT monitor, and special integrated box. We are proposing to our customers now solutions. For example, if a customer has a problem with copper welding, we definitely, provided by our subsystem, guarantee that the customer will get the optimal result with the copper solution. The same for aluminum solution, the same for other materials.
Speaker Change: We are proposing to cough.
Speaker Change: The two customer or not.
Speaker Change: At least of a set of components like laser scanner.
Speaker Change: <unk> Minotaur special integrated box, we are proposing to our customers and our solutions for example, if customer with prominent copper welding.
Speaker Change: Definitely.
Speaker Change: By our SAP system, we guarantee that customer Youll get the optimum result, copper solution the same for aluminium solutions for other materials.
Eugene Fedotoff: For us, it's a new experience, and we would like to propose to our customers in the future such a kind of product. I mean, a semi-integrated product with a final solution to our customer's process. This is our main goal. From one side, to optimize the development of our product, to minimize the cost. From the other side, to propose a new product for our customers. Understandable. Thank you, Dr. Shcher
Speaker Change: <unk> is a new experience and we would like to.
Speaker Change: But of course, the auto customer in the future such kind of product I mean semi integrated product. This final solution.
Speaker Change: Customer processes.
Speaker Change: This was our main goals from one side.
Speaker Change: Optimize development of auto product to minimize the cost from other sides of the proposed new product for our customers.
Understood. Thank you Dr Shcherbakov for all that detail.
Ruben Roy: As a reminder, that's Star One to be placed into question. Our next question is coming from Scott Graham from Seaport Research. Your line is now live, to say good morning. Thank you for taking my question. I actually have several of them.
Speaker Change: Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Scott Graham from Seaport Research. Your line is now live.
Scott Graham: Yes, Hey, good morning, and thank you for taking my question.
I actually have several of them would you guys be able to tell us what your pricing was for the quarter.
Scott Graham: Would you guys be able to tell us what your pricing was for the quarter? We historically have given some guidance on high power laser pricing, Scott, which has been more sensitive. However, pricing has been very stable for a number of years. For the last 18 months of CIRM, we didn't see any significant change in that in the fourth quarter. So when you say you saw significant competition. You weren't referring to pricing, you were just referring to volume. No, we're referring to the fact that we've had... A lot of Chinese competition in the cutting market for several years. We choose not to compete with them on pricing, which has resulted in a loss of share for IPG within the Chinese cutting market. So the Chinese competitors will price their products at a significant discount to IPG, but we choose to focus on the premium aspect and performance of our product and price it appropriately in that regard. Thank you for that clarification. Um, what would you see?
Scott Graham: Yeah.
Scott Graham: We give some.
Scott Graham: Historically, given some guidance on.
Scott Graham: High power laser pricing in particular, which has been more sensitive pricing has been very stable scope.
Scott Graham: At the last 18 months, some we didn't see any significant change in that in the fourth quarter.
Scott Graham: So when you say you saw significant competition you were referring to pricing you were just referring to volume.
Speaker Change: No we are referring to the fact that we've had.
Speaker Change: Chinese competition around the cutting market for several.
Speaker Change: Yes, now we choose not to compete with them on pricing, which has resulted in a loss of share for IPG within the Chinese cutting market. So the Chinese competitors will price at a significant discount to IPG, but we choose to focus on the premium asps.
Speaker Change: And performance of our product and.
Speaker Change: And price it appropriately in that regard.
Speaker Change: Got it thank you for that clarification.
Speaker Change: What would you see.
Timothy P. V. Mammen: I think you mentioned that the impact on gross margin, quarter over quarter, was about 400 basis points for the production shutdowns. Is that kind of going to stay with us in the first quarter? Is that. Again, using the third quarter as the baseline, is that a reasonable proxy for what's.., what's impacting the first quarter course market? Yeah, we've given gross margin guidance of 37 to 40%. So some of that is, just, well, whether it's you're trying to take inventory down or you've got a lower level of revenue, it has an impact on the absorption of the fixed cost base.
Speaker Change: You mentioned that the impact on gross margin.
Speaker Change: Quarter over quarter was about 400 basis points for the production.
Speaker Change: Shutdowns.
Speaker Change: Is that kind of stay with us in the first quarter.
Is that a yes.
Speaker Change: Again, using the third quarter as the baseline is that a reasonable proxy for what the.
Speaker Change: What's impacting the first quarter gross margin.
Speaker Change: Yes.
Speaker Change: Given <unk> gross margin guidance of 37% to 40%. So some of that is just.
Speaker Change: Well, whether its you are trying to take inventory down or you got a lower level of revenue. It has an impact on the absorption of the fixed cost base.
Timothy P. V. Mammen: You know, in conjunction with that, we are closely managing expenses within the business. So we're taking down things like overtime very dramatically, looking at trying to optimize the cost of the business and also the cost of the product. But basically, whether we're trying to get inventory down or, in the first quarter, coupling that with the relatively low level of revenue, the gross margin guidance is kind of in line with where we reported Q4 at the top end a little bit better. Okay, I guess. And I get that. But I guess what I'm getting at is that if you did not have that item, you know, weighing down the gross margin in the first quarter, it actually looks like your gross margin would be up. And I just wanted to see why.
Speaker Change: In conjunction with that we are closely managing expenses within the business. So we're taking down and things like that.
Speaker Change: Over time very dramatically.
Speaker Change: Looking at trying to optimize the cost of the business and also the cost of the product, but basically whether we are trying to get inventory down or in the first quarter coupling that with the relatively low level of revenue <unk> gross margin guidance is kind of in line with where we reported Q4 at the top end a little bit a little bit better.
Speaker Change: Right I guess.
Speaker Change: And I get that.
Speaker Change: I guess, what I'm getting to is that if you did not have that item.
Speaker Change: Weighing down the gross margin in the first quarter.
Speaker Change: And actually it looks like your <unk>.
Speaker Change: Gross margin would be up year over year.
Speaker Change: And I just want to see why that would be the case.
Scott Graham: No, on a year-over-year basis, with this level of revenue, gross margin would not be up in the first quarter compared to the first quarter of... 2023, when I think gross margin was 42%. You can't just add 400 base salaries. Sorry, I think I get what you're saying. You can't just add 400 basis points back to the range that we've given you. It's a combination of lower revenue in the first quarter, as well as probably a bit more moderate decreases in inventory in the first quarter than we attained and targeted in the fourth quarter. You can't just add 400 basis points to our range. I see what you're saying, Anthony. No, no, and I see what you're saying, Tom. I completely understand.
Speaker Change: No on a year over year basis, even with this level of revenue gross margin would not be up in the first quarter compared to the first quarter.
Speaker Change: 2023% I think gross margin was 42% your call just to add 400 basis, sorry, I think I get what you're saying you cant just add 400 basis points back to the range that we've given you.
Speaker Change: It's a combination of the lower revenue in the first quarter as well as probably a bit more moderate decreases in inventory in the first quarter. Then we attained in targeted in the fourth quarter you Paul just to add 400 basis points to a range of seeing what youre, saying now yep, I see and I see what youre, saying.
Speaker Change: Completely followed last question.
Speaker Change: You know a lot of questions about the outlook for Germany, particularly on the industrial side I know you had a you know an up.
Scott Graham: Last question. You know, a lot of questions about the outlook, https://www.patreon.com. But you see, uh... We are very optimistic about our situation. I mean, there's others and also some of our latest applications in Germany, for example, last year, despite this strong, not good economic conditions, our revenue in Europe, and also included Germany, was a little bit higher, and, You see, of course, Eevee....applications. In Germany, in particular, this is a very strong application for our lasers.
Speaker Change: Quarter.
Speaker Change: However, it was of course against a fairly easy comparison I'm, just wondering what youre seeing in Germany.
Speaker Change: As we start the year.
Speaker Change: But you'll see.
Speaker Change: We are very optimistic about all of them.
Speaker Change: Separation.
Speaker Change: As orders and also some application for our latest in Germany for example last year.
Speaker Change: Despite of this.
Speaker Change: North Dakota, Conoco economical conditions.
Speaker Change: Our revenue in Europe.
Speaker Change: Also included is a Germany was a little bit up.
Speaker Change: And you see of course EV.
Speaker Change: Applications in Germany in particular.
Speaker Change: Very strong application for auto lasers.
Eugene Fedotoff: And we also observed a trend because all manufacturers, existing or potential manufacturers of......electric cars......they would like to produce batteries for their cars, mainly in Europe, including Germany. And this is the one for IPG. It's a very good sign, because our lasers, our other solutions will be acceptable by our customers here. Understood. I'll get back in the queue.
Speaker Change: We're also observing the trend across all manufacturing.
Speaker Change: Our existing or potential manufacturing.
Speaker Change: Electrical cars, they would like to produce metadata for them cars.
Speaker Change: Yes.
Speaker Change: Mainly in <unk>.
Speaker Change: Europe, including also in Germany.
And then otherwise okay.
Speaker Change: IPG is very good sign.
Speaker Change: Because our lasers are.
Speaker Change: <unk> solutions.
Speaker Change: Septimal by our customers here.
Speaker Change: Understood I'll get it.
Scott Graham: Thank you for responding to my question. Thank you. The next question is coming from Keith Housel, from North Coast Research, Related Outlines. Good morning guys, thanks. I appreciate it.
Speaker Change: Back in the queue. Thank you for respond to my questions.
Speaker Change: Thank you. Your next question is coming from Keith Husson from Northcoast Research. Your line is now live.
Keith Husson: Good morning, guys. Thanks, I appreciate it I was hoping you guys could expand on the commentary regarding the hiring of new sales positions in the quarter and expectations going forward can you provide some context in terms of.
Keith Housel: I was hoping you guys could expand on commentary regarding the hiring of new sales positions in the quarter and expectations going forward. Can you provide some context in terms of how much of an investment you guys are making and perhaps where some investments can be occurring? Thank you. So it's occurring on a pretty broad base. Geographically, North America, in Europe, some of our Asian entities as well.
How much of an investment you guys are making and perhaps where some investments can be occurring. Thank you.
Speaker Change: So it's.
Speaker Change: On a pretty broad base.
Speaker Change: Geographically North America.
Speaker Change: In Europe, some of our Asian entities as well.
Timothy P. V. Mammen: We're targeting strategically growing, broad sets of end markets. We've got a tremendous opportunity on the welding side, which covers a very wide diversity of industries, whether it's in automotive or fabrication, other industries as well. So we're investing in key account management and capability around that application. We believe we've got very strong opportunities for example opportunities and continuing to grow cleaning applications, the new drying application Some of the more specialized areas and more advanced applications, such as semiconductor So we would really historically the companies, being very much driven by an OEM customer base across a narrower set of applications. The build out of the sales force is to really add capability, depth, and strength to cover what are Growth opportunities in a broader set of applications for the company. That's how I'd best describe it. All right. Helpful. I appreciate that.
Speaker Change: We're targeting strategically growing.
Speaker Change: Yep broad set of end markets right, we've got tremendous opportunity on the welding side, which covers a very wide diversity of industries, whether it's in automotive or fabrication.
Speaker Change: Other industries as well so we're investing in key account management and <unk>.
Speaker Change: Capability around that application. We believe we have got very strong opportunity for example opportunities and continuing to grow cleaning applications, the new drawing application.
Speaker Change: Some of the more specialized areas in more advanced applications such as semiconductor.
Speaker Change: So we've really historically the companies.
Speaker Change: Being very much driven by an OEM customer base.
Speaker Change: Cross a narrower set of applications.
Speaker Change: Build out of the sales force is to really add capability and depth.
Speaker Change: And the strength to cover what are very significant.
Speaker Change: Gross opportunities in a broader set of applications for the company, that's how I'd best describe it.
Speaker Change: Alright helpful. I appreciate that.
Speaker Change: And as.
Keith Housel: As a follow-up, some of the cost reductions you were referring to in terms of the mid and high-level lasers, at what point during the year should we start to see some of that benefit gross margin? Because I'm sure what we will introduce are medium power lasers. And in the third and fourth quarters, we will start to introduce, to our customers, high power. It means 8 kilowatt up to 20 kilowatt. Great. Thank you. I appreciate it.
Speaker Change: As my follow up some of the cost reductions you were referring to in terms of the mid and high level.
Speaker Change: <unk>.
Speaker Change: At what point during the year should we start to see some of that benefit gross margins.
Speaker Change: The first.
Speaker Change: The results of it will be.
Speaker Change: <unk> demonstrated in the second quarter because of the total lottery introduces.
Speaker Change: Power lasers, and the third and fourth quarter.
Speaker Change: Suffering produce.
Speaker Change: Total customer high power it means for a two hour up to 20 kilowatt lasers.
Speaker Change: Great. Thank you appreciate it.
Eugene Fedotoff: Thank you. The next question is coming from Mark Miller from the Benchmark Company. Your line is now, Can you give us a feeling for your outlook on e-mobility opportunities? I am.
Thank you. Your next question is coming from Mark Miller from the Benchmark Company. Your line is now live.
Mark Miller: Can you give us a feeling for your outlook for E mobility opportunities.
Mark Miller: Overall this year, Mark, as I mentioned at the beginning, we're doing a lot of work outside of China with major automotive companies in Europe. We had a robust pipeline of sales in North America as well last year. It's probably, as I said, that the first half of the year is going to be slow on e-mobility, but we're expecting a pickup. I think when you start to look at some of the data that's out there last year, maybe 400 gigabytes of total capacity was added. That was a slowdown.
Mark Miller: Overall this year Mark as I mentioned at the beginning we're doing a lot of work outside of China with major automotive companies in Europe.
Mark Miller: Robust pipeline of sales in <unk>.
Mark Miller: In North America, as well last year. It is probably as I said, the first half of the year is going to be.
Mark Miller: Slow on E mobility, but we're expecting a pickup I think when you start to look at some of the data that's out there last year, maybe 400 gig of total capacity was added that was a slowdown.
Timothy P. V. Mammen: 400 gigabits is going to come on stream this year, which drove sales last year. In 2023, there will be a significantly higher amount of capacity that comes on stream, which will drive the strength in 2022. As you look out.
Mark Miller: 400 gig is going to come on stream this year, which drove sales last year. In 2023, there was a significantly higher amount of capacity that came on stream, which drove the strength in 2022 as you look out Cessna.
Timothy P. V. Mammen: There's an expectation that, I think, more than a terawatt of capacity has to come on stream in 2025 and 2026. That would imply that towards the end of this year and the beginning of 2025, there should be a meaningful pickup in demand around EVs globally. I'm just wondering about China, especially in terms of EVs.
Mark Miller: It is an expectation.
Mark Miller: I think more than a terawatts of capacity has come on stream in 2005, and 2006 that would imply that towards the end of this year and into the beginning of 'twenty five it should be a meaningful pick up in demand around EV.
Mark Miller: Globally.
Mark Miller: Yeah.
Mark Miller: I'm just wondering in a challenge, especially in terms of the Evs.
Mark Miller: So softness there, how much of it is just attributed to softness for electric vehicle demand versus any competitor? I think it's more the capacity that they have built out and that they're actually growing into that capacity. So EV demand in the first half of last year was pretty weak, you're absolutely right. In the second half of the year, though, it picked up quite meaningfully.
Mark Miller: The softness there how much of it is just attributed to softness for electric vehicle demand versus any competitor competitors are having an impact.
Mark Miller: <unk>.
Mark Miller: I think it is more of the capacity that they have built out and that they are actually growing into that capacity. So EV demand in the first half of last year was pretty weak you're absolutely right in the second half of the year David.
Mark Miller: Picks up quite meaningfully I think.
Timothy P. V. Mammen: I think, I haven't got the data at hand, but a significant and quite high proportion of total EV sales. In China, total vehicle sales in China are EV. I haven't got the number right here at hand.
Mark Miller: And Shouldnt go to tanks at hand, but.
Mark Miller: Significant and quite high proportion of total EV sales.
Mark Miller: In total.
Mark Miller: Total vehicle sales in China, EV I haven't quite haven't got the number right here.
Timothy P. V. Mammen: So I'd say the EV market, the end market in China has started to improve, particularly in the second half of last year, and I think total EV sales were about 40% of light vehicle sales. Thanks. Thank you. Next question. Today's a follow-up from Jim Ricchiuti from Neiman Company. Your line is now live.
Mark Miller: So I would say the EV market the end market.
Mark Miller: In China has started.
Mark Miller: Improve particularly in the second half of last year, and I think total EV sales for about 40% of light vehicle sales.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question today is a follow up from Jim Ricchiuti from Needham <unk> Company. Your line is now live.
Jim Ricchiuti: Thanks, I wanted to ask about the systems business, which showed some nice sequential growth. And I wonder if you could talk a little bit about what's driving that, whether you're seeing some impact on the systems business on the cleaning side, or, you know, is that some of the newer drying applications? Or is it just strength and welding, and first of all, of course, we will see the very big potential for systems and for cleaning applications. We have already started to...
Jim Ricchiuti: Thanks, I wanted to ask you about the systems business, which.
Jim Ricchiuti: Showed some nice sequential growth.
Jim Ricchiuti: And I Wonder if you could talk a little bit about that.
Jim Ricchiuti: What's driving that whether you are seeing some.
Jim Ricchiuti: The impact on the systems business on the cleaning side.
Jim Ricchiuti: You said some of the new withdrawing applications or is it just thinking welding in general.
Jim Ricchiuti: Yeah.
Jim Ricchiuti: Okay.
First of all of course, you'll see is a very big potential for systems for cleaning.
Jim Ricchiuti: Applications, we already to start.
Jim Ricchiuti: Sure.
Eugene Fedotoff: I demonstrated to our customer to sell some systems, and the first reaction from the customer was very positive, because there are a lot of different applications and for such kinds of applications, also, we have to provide flexible enough systems, but again, combination of our high power pulse lasers, I mean high power up to medium power, up to 2-3 kilowatts, again together with our scanners together with our monitor. And finally, with the integrated box, we can provide this kind of subsystem to our customer, not the final system, because the final system is much more complicated. It must, of course, be coordinated with the final customer. But this subsystem, the flexible subsystem, for different applications, for us, it will be, and we will also demonstrate this, a valuable product. The second, another very important application, also connected to welding.
Jim Ricchiuti: Demonstrate our customized for sales of systems.
Jim Ricchiuti: First reaction from customers is very positive because a.
Jim Ricchiuti: A lot of different applications.
Jim Ricchiuti: For such kind of locations also we have to provide flexible enough systems, but again combination of our high power pulse lasers.
Speaker Change: Hi, Paula.
Speaker Change: Medium power up to three kilowatt again together with our scanners together is our monitor.
Speaker Change: And finally with integrated markets weaken provides us such kind of sub system through our customer not final system because final system. That's much more complicated it must be of course coordinate this final customer, but this sub system predictable sub system footprint.
Speaker Change: Applications for assets that will be and we also demonstrated available product. The second the second very important application also connected to the world.
Eugene Fedotoff: I already mentioned that we would like not to present a set of components to our customers, but we would like to produce final solutions for our customers. IT NEWS, Kappa, because it's for EV applications. Kappa welding is very important for different applications in the situation. Aluminium welding is also very important, different kinds of aluminum, different kinds of configurations, and so on.
Speaker Change: <unk> already mentioned that.
Speaker Change: <unk> not the presents a set of components store customer when we look at.
Speaker Change: <unk> produced dollar customer final solutions program.
Speaker Change: It means.
Speaker Change: Copper because it's for EV applications copper overall, I think it's very important for dividend.
Speaker Change: Applications solicitation Illumina <unk> also is very important different kind of really many different configurations that zone, and we propose but of course in dollar customer the final solutions.
Eugene Fedotoff: And we propose to our customers the final solution. For us, it's an absolutely new business model, and we would like to promote this business model for our future. www. IpgPhotonics.com is a laser system for a different kind of application.
Speaker Change: Core assets under the new business model and we would like to promote this business model.
Speaker Change: The future.
Speaker Change: Expansion.
Speaker Change: For our laser system for a different kind of applications.
Jim Ricchiuti: Concerning drying, for drying applications today, we are shipping only lasers. But, of course, we are in close contact with our potential and existing customers and also... I'll start to think about how we can develop, again, not the final system, because the final system must be more complicated, but again, some solution for our customers. They're all working in different directions. Okay, thank you for clarifying, by the way, on the drying side. The last question for me is just about the medical portion of the business. How would you characterize the outcome?
Speaker Change: If confirmed to Brian So Brian.
Speaker Change: Applications are shipping.
Speaker Change: Lasers, but of course, we are.
Speaker Change: And as a close contact result of potential and existing customers.
Speaker Change: Sure.
Speaker Change: I'll start this and how we can develop there again not the final system that gross final sees the market be more complicated, but again some solution for our customers.
Speaker Change: And we are working with <unk>.
Isn't it.
Speaker Change: Okay. Thank you for clarifying by the way on the dry side.
Speaker Change: Last question for me is.
Speaker Change: On the medical portion of the business.
Speaker Change: How would you characterize the outlook as you look at Q1, and perhaps further into 2024 on the medical side of the business.
Timothy P. V. Mammen: as you look out Q1 and perhaps further into 2024 on the medical side of the business. So in Q1, actually, Jeremie, our medical is going to be after us from Q4, a little bit weaker with one of our main OEMs on the surgical side as well adjusting some of their inventories down. For the full year, we expect medical to basically be flattish this year, and then we're introducing two or three new applications and devices at the end of this year, working with an additional partner as well on one of our main applications, so we then expect medical to start to pick up much more meaningfully into 2025. Thanks very much, www.ipg.com. Your next question is coming from Scott Graham from Seaport Researcher Line is now live.
Speaker Change: In Q1 actually Jimmy <unk> medical is going to be off to a strong Q4, a little bit weaker with.
Speaker Change: One of our main OEM on the surgical side as well adjusting some of their inventories down for the full year, we expect medical to basically be flattish.
Speaker Change: And then we're introducing it.
Speaker Change: A lot of two or three new applications and devices at the end of this year working with an additional partner as well.
Speaker Change: One of our main applications. We then expect the medical to start to pick up much more meaningfully into 2025.
Speaker Change: Okay. Thanks very much.
Speaker Change: Thank you. Your next question is coming from Scott Graham from Seaport Research. Your line is now live.
Scott Graham: Hi, thank you for taking my follow-up questions. You know, the first quarter operating expenses guidance, I guess I was a little bit surprised that it was at that level. And maybe you can't get to it in the first quarter, but what are you doing around operating expenses in 2024 to bring those down as a percent of sales? I'd say the first thing is targeting getting revenue back up. That'll bring them down a bit, but we are focused on looking at the total level of expenses. One of the things that happens at the beginning of the year, though, is that we have an annual operating plan that's out there. And last year, we were below that annual operating plan, not surprisingly, given the results. So some of your variable compensation accruals do change when you have a recess on the annual operating plan.
Scott Graham: Hi, Thank you for taking my follow up questions.
Scott Graham: First quarter operating expenses guidance, I guess I was a little bit surprised that it was at that level.
Scott Graham: And maybe you can't get to it in the first quarter, but what are you doing around operating expenses in 2020 for to bring those down as a percent of sales.
Scott Graham: Sure.
Speaker Change: I'd say the first thing is doing targeting getting revenue back up that will bring them down a bit but we are focused on looking at the.
Speaker Change: The total level of expenses one of the things that happens at the beginning of the year.
Speaker Change: Is that we have an annual operating plan that's out there and last year, we were below that annual operating plan not surprisingly given the results. So some of your variable compensation accruals do change when you have a reset on the annual operating plan.
Timothy P. V. Mammen: We don't believe we want to take a lot of investment. We mentioned some of the investment in selling expenses is very important because we're not just focused on this year, but we're trying to drive growth out of a wide range of new applications. We're also trying to accelerate bringing some of the newer products to market. So, for example, continuing to invest in and develop our ultrafast and UV lasers, which will substantially open up some more of the microprocessing market, which again is a fast growing area. You know, on the G&A side, there's a limited amount of expenses that we can take out there. It's really a question of... Trying to optimize them as best as possible, But certainly not cutting back on areas where we think we should be investing in for the long-term growth and benefit of the company. As I said, my personal view and the view we've held at IPG for a long time is that cutting R&D and some of these investments just because you're in what you think is a relatively temporary downturn is the wrong thing to do. The longer-term returns are had by continuing to make those investments.
Speaker Change: There is there is no. We don't believe we want to take a lot of Investor. We mentioned some of the investment on selling expenses is very important because we're not just focused on this year, but we're trying to drive growth out of it.
Speaker Change: A wide range of new applications. We're also trying to accelerate bringing some of the newer product to market. So for example on continuing to invest and develop.
Speaker Change: Ultrafast and UV lasers, which will.
Substantially open up some more of the micro processing market, which again is a fast growing area.
Speaker Change: On the G&A side, there is a limited amount of expense that we can take out there so it.
Speaker Change: It's really a question of.
Trying to optimize them optimize them as best as possible but.
Speaker Change: Certainly not cutting back on areas, where we think we should be investing for the long term growth and benefit of the company.
Speaker Change: My personal view and the view we've held at IPG for long time is that.
Speaker Change: Cutting R&D and some of these investments just because you are and what you think is a.
Speaker Change: A relatively temporary downturn.
Speaker Change: Is the wrong thing to do the longer term returns had on continuing.
Speaker Change: To make those investments.
Speaker Change: Okay.
Scott Graham: I understand. Thank you. Just my last question would be around your commentary that, you know, some of this destocking might ease in the second quarter, and I feel that second half revenues can be up year over year. Is that customer feedback? Is that trade press? Where is that?
Speaker Change: Understood. Thank you just my last question would be around your commentary that you know some of this a destock.
Speaker Change: <unk> stocking might ease in the second quarter and you feel that second half revenues can be up year over year is that.
Speaker Change: Is that customer feedback is that you know trade press.
Where is that.
Speaker Change: Coming from.
Timothy P. V. Mammen: These. We have direct discussions with all of our main OEM customers on the cutting side, and It's not like just trade news or PMI data. It's more specific feedback than that. Okay, thank you. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to anyone who would like to make further closing comments. Thank you for joining us this morning and for your continued interest in IPG. As always, we will be participating in a number of investor events this quarter and looking forward to speaking with you soon. Have a great day, everyone. Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.
Speaker Change: That those views.
Speaker Change: Yes.
Speaker Change: Direct discussions with all of our main OEM customers on the cutting side.
Speaker Change: It's not like just trading usual PMI data centers.
Speaker Change: It's more specific feedback on that.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you we reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.
Speaker Change: Thank you for joining us this morning, and your continued interest in IPG as.
Speaker Change: We will be participating in a number of investor events. This quarter and are looking forward to speaking with you soon have a great day.
Speaker Change: Hey, everyone.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Speaker Change: Yeah.