Q3 2024 IPG Photonics Corp Earnings Call
Speaker Change: Good morning and welcome to IPG Photonics third quarter 2024 conference call. Today's call is being recorded and webcast.
Speaker Change: At this time, I'd like to turn the call over to Eugene Fedotoff, IPG Senior Director, Investor Relations, for introductions. Please go ahead with your conference.
Eugene Fedotoff: Thank you and good morning everyone. With me today is IPG Photonics CEO Dr. Mark Gitin and Senior Vice President and CFO Tim Mammen.
Eugene Fedotoff: 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.
Eugene Fedotoff: 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.
Eugene Fedotoff: These risks and uncertainties are detailed in IPG Photonics Form 10-K for the period ended December 31st, 2023 and are the reports on file with the Securities and Exchange Commission.
Eugene Fedotoff: Copies of this filings may be obtained by visiting the investor section of IPG's website or the SEC's website directly.
Eugene Fedotoff: Any forward-looking statements made on this call are the company's expectations or predictions as of today, October 29, 2024 only, and the company assumes no obligation to publicly release any updates or revisions to any such statements.
Eugene Fedotoff: For additional details on our reported results, please refer to the Earnings Specialist, Earnings Scope presentation, and the Financial Data Workbook posted on our Investor Relations website.
Speaker Change: We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark.
Mark: Thank you, Gene, and good morning, everyone. Our third quarter revenue came in at the high end of our guidance, adjusted for the sale of our Russian operations in August.
Mark: Adjusted earnings per share also came in at the top end of the guidance. We continue to focus on what we can control while navigating a demand environment that has remained muted.
Speaker Change: Since joining in June, I've focused on diving deep into key aspects of IPG's business and strategy. We're making good progress, executing on our key initiatives, and I'm even more excited about our future opportunities than when I joined. I'll share a few highlights.
Speaker Change: I will start with the sale of our Russian operations. As I mentioned on our last call, our team has done a tremendous job since the start of the war in Ukraine, executing flawlessly to serve the needs of our customers by quickly rebuilding our manufacturing infrastructure to ensure we did not miss a single shipment. This was not an easy task.
Speaker Change: This quarter, we were finally able to completely exit Russia with the sale of our operations in the country.
Speaker Change: With this transition, now in the rearview mirror, we are focusing on optimizing our global manufacturing footprint to drive better efficiency while ensuring enough capacity for an uptick in demand in future quarters.
Speaker Change: In addition, we are working to decrease the cost of our products with a new generation of laser diodes that will also enable a significant reduction in the form factor of our high-power fiber lasers.
Speaker Change: The second highlight is our announcement today that we signed an agreement to acquire CleanLaser, a leader in laser cleaning systems based in Germany.
Speaker Change: IPG has a strong track record of driving the usage of lasers in new applications and solutions, and this remains a key part of our growth and differentiation strategy. This tuck-in acquisition advances our capabilities in the large and attractive cleaning market where we see a lot of opportunities.
Speaker Change: It will enable us to expand the use of labor more quickly into this area. The acquisition highlights are focused on long-term growth. I'll talk more about how CleanLaser fits this IPG business shortly.
Speaker Change: My review of the business confirms the strength of our product pipeline, technical know-how, and future market opportunities.
Speaker Change: We have work to do to execute on these opportunities, and we're going to be investing in a number of key areas.
Speaker Change: We will make sure we're allocating resources to capitalize on high-value programs in areas such as medical, cleaning, and micromachining, and also strengthening the organization to ensure that we are optimized to execute on these opportunities.
Speaker Change: We have a robust product pipeline that presents attractive opportunities to drive differentiation around lasers and systems, and to deliver complete solutions, process know-how, and world-class support to our customers.
Speaker Change: All of this cannot be easily replicated by competitors.
Speaker Change: Our focus will remain on providing a high level of service and support, maximizing uptime, and lowering the total cost of ownership for our customers.
Speaker Change: Thank you for watching!
Speaker Change: On the organization front, we need to get stronger to ensure we are executing at a high level.
Speaker Change: This includes how we drive decisions, efficiency throughout the organization, and our go-to-market approach.
Speaker Change: We will be making some investments here and I'll provide more color on in future calls. But the main theme is that we are going to be stronger operators and more formidable competitors as we exit the current demand downturn.
Speaker Change: Because of the prolonged down cycle in the industrial market that we're facing, we need to make sure that we're managing with agility as we invest for the long term. Over the past few months we've achieved additional cost efficiencies in the implemented cost avoidance initiatives and more recently executed a targeted headcount reduction.
Speaker Change: We expect to reallocate these savings to opportunities that will drive long-term growth for IPG.
Speaker Change: I'll have more to share on all the initiatives underway in coming months, but for now let me make it clear that we are moving purposefully and operating with agility as we put IPG in a strong position both for demand recovery and for long-term growth opportunities in our industry.
Speaker Change: And we are starting this from a solid foundation with great products, customer relationships, strong cash flow generation, and one of the industry's best balance sheets, including a billion dollars in cash and no debt.
Speaker Change: Thank you for watching!
Speaker Change: Let's now turn to the current business environment. Overall demand continues to bounce along the bottom. Customer conversations indicate a cautious spending environment across many markets, driven by economic and political uncertainty and reduced end-market demand in the key areas of general manufacturing and e-mobility.
Speaker Change: Our fourth quarter guidance reflects a continuation of this trend and we currently don't have any visibility into an improved demand environment.
Speaker Change: Turning to our key applications, in welding, revenue decreased modestly year over year, primarily due to lower demand for e-mobility in China.
Speaker Change: Despite the year-over-year comparison remaining negative, it's important to note that welding sales have been relatively stable over the last three quarters and that there are several good signs of progress for IPG.
Speaker Change: We're winning business with some large global customers in EV and general automotive applications and driving further adoption of our welding solutions.
Speaker Change: A real-time well monitoring system is gaining acceptance with automotive and non-automotive customers where well quality is critical for safe performance of their products.
Speaker Change: Additionally, EV sales improved sequentially, which demonstrates we are gaining market share in EV applications despite a downturn in battery capacity installation.
Speaker Change: I'm also encouraged to see growth in our welding system sales with both automated systems and handheld posting better year-over-year results.
Speaker Change: Welding systems for medical device manufacturing are gaining traction around the world and we're seeing strong demand for our solutions in this market. We're having great conversations with important customers that indicate a favorable longer-term adoption curve and we're well positioned for further gains.
Speaker Change: Overall, across welding applications, we continue to focus on the total solution for customers by providing best-in-class lasers, in-line real-time weld monitoring, and full automation to solve customers' manufacturing challenges.
Speaker Change: Thank you very much.
Speaker Change: In cutting, sales decline significantly year-over-year, primarily in Europe and U.S., as flat sheet cutting remains weak. Amid an environment of weaker manufacturing PMI, our customers have not resumed normal purchasing activities, although some of them have made progress working down inventories.
Speaker Change: On a positive note, I continue to be enthusiastic about our opportunities in the growth areas where fiber lasers can replace incumbent technologies. That's the reason behind the clean laser acquisition as we look to increase our penetration into industrial cleaning applications.
Speaker Change: Cleaning is an important opportunity because traditional cleaning applications often rely on high levels of environmentally unfriendly consumables such as acids and abrasives that must be disposed of.
Speaker Change: The processes may also involve high water consumption.
Speaker Change: By contrast, laser cleaning systems are environmentally friendly, with limited or no process waste, and have a compelling total cost of ownership.
Speaker Change: Clean Laser has a strong foothold in Europe as a longtime leader in the cleaning space.
Speaker Change: They have a wide array of customers in industries such as automotive, aerospace, medical, food and other markets. This is a great example of a targeted and prudent approach. You will see us take an M&A activity.
Speaker Change: We've known the Clean Laser team and have supplied our laser sources to them for a number of years. Our businesses are complementary in many ways, bringing together our respective strong customer bases in North America and Europe, as well as product and technology synergies.
Speaker Change: Kimball provides more details on the structure of the deal and its financial impact.
Speaker Change: I want to emphasize that I'm extremely excited about a number of products and technologies in development. So we will be doubling down on some of them over the next couple of years.
Speaker Change: Well, it's too early to share the details, I believe these products can provide significant differentiation for IPG in medical, micromachining and advanced applications, all of which provide large and attractive market opportunities for us.
Speaker Change: Moving to our Outlook, our third quarter book to bill was won, excluding Russian sales.
Speaker Change: As I mentioned earlier, we continue to believe that we are bouncing along the bottom of this demand cycle. Across our geographies, we've seen some stability in demand in China, offset by continued macro uncertainty in Europe and the U.S.
Speaker Change: We have limited visibility beyond the current quarter, but are remaining hopeful for more stability in 2025. With that, I will now turn the call over to Tim.
Tim Mammen: Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation, which is available on our Investor Relations website.
Tim Mammen: I will start with the financial review on slide 5.
Tim Mammen: Revenue in the third quarter was $233 million, a decline of 23% year-over-year, and down 8% sequentially when adjusted for Russian revenue, which was $7 million in the quarter.
Tim Mammen: Revenue came in at the top of our guidance.
Tim Mammen: Foreign currency did not have a meaningful impact on revenue this quarter.
Tim Mammen: decreased 22% year-over-year primarily due to lower cutting sales, while revenue from other applications decreased 28% due to unevenness in medical and advanced application sales.
Tim Mammen: Gap gross margin was 23.2%, a decrease of over 20 percentage points year over year, primarily due to excess inventory provisions, which provided a 12.8 percentage point headwind to gap gross margin this quarter.
Tim Mammen: adjusted gross margin was 36 percent.
Tim Mammen: above the midpoint of our guidance.
Tim Mammen: Additionally, lower absorption of manufacturing costs as a result of lower revenue and our continued effort to right-size inventory
Tim Mammen: Reduce gross margin by 660 basis points.
Tim Mammen: These negative impacts to gross margin were partially offset by a decrease in import duty
Tim Mammen: and shipping costs, as well as a further decrease of $5 million in sequential manufacturing expenses.
Tim Mammen: Most of the increase in inventory provisions was related to excess quantities of strategic electronic and diode components.
Tim Mammen: The provision related to the electronic components was driven by the severe issues that affected the electronic supply chain over the past several years which resulted in significant purchases of these items as a strategic backup.
Tim Mammen: Given the slowdown in our business and unsuccessful attempts to sell the electronic inventory in the secondary market, the realizable value of these items is now uncertain.
Tim Mammen: The provision for excess diode components is a result of the transition from the current generation of diodes to the new more cost-effective high power platform.
Tim Mammen: Although this transition will happen over the next 12 to 15 months, our analysis shows that we will not consume all the existing inventory.
Speaker Change: Thank you for watching!
Speaker Change: Operating expenses came in at the low end of our expectations.
Speaker Change: due to the sale of our Russian business.
Speaker Change: and focus on operating efficiencies.
Speaker Change: Currency Translation
Speaker Change: had a minor impact on revenue and gross profit in the quarter of approximately $1 million.
Speaker Change: Currency transaction losses had a negative impact on operating income of $1 million or $0.02 per share.
Speaker Change: Gap operating loss was $253 million.
Speaker Change: and included $198 million loss on sale of assets related to the disposal of our Russian operations.
Speaker Change: and $27 million in asset impairment charges.
Speaker Change: due to recent EU trade controls which curtailed our ability to operate in Belarus.
Speaker Change: related to this business.
Speaker Change: Thank you for watching!
Speaker Change: As a result of these items,
Speaker Change: We reported a net loss of $234 million.
Speaker Change: or $5.33 per diluted share.
Speaker Change: Excluding loss on sale of assets. Asset impairment charges.
Speaker Change: and Excess Inventory Provisions.
Speaker Change: Our adjusted EPS was $0.29 in the third quarter.
Speaker Change: at the top of our guidance.
Speaker Change: We have provided a reconciliation to adjusted net income and adjusted earnings per share in the press release.
Speaker Change: and Earnings Corp. presentation.
Speaker Change: Moving to the revenue performance by region on slide 6.
Speaker Change: Sales in North America decreased 20% year-over-year due to lower sales in cutting applications.
Speaker Change: and a decline in medical revenue.
Speaker Change: Our medical orders from a large customer can fluctuate significantly quarter over quarter due to their inventory management practices.
Speaker Change: adding some unevenness to these revenues.
Speaker Change: Other applications perform better with growth in welding and marking.
Speaker Change: EB investment is being delayed in the region.
Speaker Change: but traditional automotive investments seem to be bouncing back slightly.
Speaker Change: Thank you for watching!
Speaker Change: In Europe, sales decreased 29%.
Speaker Change: compared to the prior year due to lower sales and cutting applications.
Speaker Change: Large Cutting OEM Customers
Speaker Change: continue to manage their inventories.
Speaker Change: with only low order rates as economic conditions.
Speaker Change: in Europe continue to be weak and industrial demand remains muted.
Speaker Change: Revenue in China decreased 27% year-over-year due to lower sales in cutting and welding applications.
Speaker Change: as a result of soft demand in general industrial and e-mobility markets.
Speaker Change: which was partially offset by growth in 3D printing applications.
Speaker Change: Cutting cells were also impacted by the challenging competitive environment.
Speaker Change: Moving to a summary of our balance sheet and cash flow on slide 7
Speaker Change: We ended the quarter with cash, cash equivalents, and short-term investments of $1 billion and no debt.
Speaker Change: Cash provided by operations was $66 million and capital expenditures were $23 million during the quarter.
Speaker Change: We continue to generate cash from inventory as we manage our investment in working capital.
Speaker Change: Thank you for watching. Have a great day.
Speaker Change: The proceeds received from the divestiture of our Russian operations...
Speaker Change: resulted in a net cash outflow of $25 million.
Speaker Change: We spent $74 million on share repurchases in the third quarter and $286 million year-to-date.
Speaker Change: While maintaining a strong balance sheet, we have returned a significant amount of capital to shareholders.
Speaker Change: through share repurchases.
Speaker Change: since the beginning of 2021.
Speaker Change: As mentioned earlier, we signed a definitive agreement to acquire Clean Laser for approximately $75 million.
Speaker Change: Moving to our outlook on slide 9 for the fourth quarter of 2024, we expect revenue of $210 million to $240 million.
Speaker Change: The Revenue Guidance Range is similar to the last quarter, but after for adjusting
Speaker Change: Adjusting for Russian sales reflects an increase in the revenue guidance range of ten million dollars sequentially.
Speaker Change: The fourth-quarter gross margin is estimated to be between 35% and 38%.
Speaker Change: We anticipate delivering earnings per diluted share in the range of 5 cents to 35 cents.
Speaker Change: with approximately 44 million diluted common shares outstanding.
Speaker Change: Let me provide additional guidance on the financial impact of the divestitures and acquisitions.
Speaker Change: The sale of Russia is expected to reduce our revenue by approximately $40 million on an annual basis.
Speaker Change: that should have a neutral impact on operating income as the business was running at approximately break-even after the restructuring.
Speaker Change: Our total operating expenses will come down as a result of the sale.
Speaker Change: But the decrease will be partially offset by our annual merit increase.
Speaker Change: Furthermore, we will continue to invest in research and development, and sales and marketing.
Speaker Change: to support technology development and closer collaboration with customers.
Speaker Change: the announced acquisition of CleanLaser
Speaker Change: is expected to close in the fourth quarter pending regulatory approvals.
Speaker Change: and is not a part of our guidance.
Speaker Change: We expect this acquisition to add approximately $30 million to revenue in the first year.
Speaker Change: It will be approximately neutral to GAAP operating income due to accruals for earn-outs based on future growth and profitability targets for the business.
Speaker Change: as discussed in the safe harbor passage of today's earnings press release.
Speaker Change: Our guidance 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 Harbor and the company's reports with the SEC.
Speaker Change: With that, we'll be happy to take your questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to be placed into question Q, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question Q.
Speaker Change: 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 star 1. One moment please while we pose for questions. Our first question is coming from Ruben Roy from Steeple. Your line is now live.
Speaker Change: Thank you for watching!
Ruben Roy: Thank you. Hi, Mark and Tim. Thanks for taking the questions.
Ruben Roy: I wanted to start, Mark, with maybe drilling into the comment on no visibility of an improved demand environment a bit in the context, within the context of the book-to-bill, getting back to one here. Maybe you could talk about linearity of bookings or...
Ruben Roy: geography of, you know, the improvement from last quarter on the bookings front to this quarter or, you know, sort of, you know, the bookings front to this quarter.
Ruben Roy: You know how you're how you're thinking about that maybe just in a little bit more of a you know specific Specificity on other geographies or on markets applications, etc
Speaker Change: Thank you for watching!
Speaker Change: Sure, Ruben. Hey, it's great to talk to you and it'll be nice to see you next week in Chicago.
Speaker Change: Thank you.
Speaker Change: So I'm being, yeah.
Speaker Change: So again, as we mentioned, things have been stabilizing. So if you look at the book-to-bill, as I mentioned, is now one. So we're seeing some stabilization there. If you look at the areas that we're
Speaker Change: If you look at the cutting area, that's been affected by the macro, so that's been a key piece there. Mostly in China, we're seeing, again, in the industrial markets,
Speaker Change: We have PMIs that are, you know, continuing to be down, so that's really driving the industrial market. And that's been mostly in—the effect there has been really mostly in—
Speaker Change: in Europe and in North America.
Speaker Change: areas that we've seen some you know some real you know comeback has been on the on the welding side that's been you know quite exciting for us we're seeing some really good progress as we as we win business
Speaker Change: in a number of areas, actually, you know, both in EV as well as general automotive.
Speaker Change: So we're seeing that really across the world, we're seeing some of that happening now. Again, gaining market share, while the overall EV is still pulling the market down, we're gaining share in those areas. So, you know, really excited about the progress.
Speaker Change: in welding so that you know gives you some some sense and again those those gains are really across the across the world.
Speaker Change: Very helpful, Mark. Thank you. I'm going to add a bit of color geographically, Ruben. I think we saw a little bit of a pickup in bookings in North America. That was good. Europe was flat, so stable.
Speaker Change: China was also pretty stable Japan was a little bit weaker than we were expecting but offset by strength in Korea
Speaker Change: And then, in total, medical buildings were a little bit weaker, but we're actually expecting a good quarter on medical revenue coming into Q4, we've got a positive forecast on that.
Speaker Change: So, not too much of a mixed bag. General stability...
Speaker Change: across the board, I'd say, but no real momentum.
Speaker Change: Thank you for your time.
Speaker Change: Summer slowdown in Europe and other places in August, but yeah You haven't got people pounding at the door at the beginning of the quarter to drop orders on you, so
Speaker Change: It's still a bit of a struggle, which is why we think we're bouncing along the bottom.
Speaker Change: very helpful thanks for the detail guys as a follow-up Mark made the comment that there's some investments coming and then you talked about you know some research development programs as you're collaborating with customers etc it seems like a good time to invest
Speaker Change: you know, as we are in this down cycle, but will there be any implications that we should think about in terms of OPEX? Maybe, you know, beyond Q4?
Speaker Change: Thank you very much.
Speaker Change: Thank you for watching!
Speaker Change: The Merit Increase. Next year as we go through our annual operating plan process, but I'd expect the overall level of expenses for next year to be
Speaker Change: Slightly higher than they are this year, given those investments that we want to carry on making on R&D and the selling side of the business and developing customer relationships.
Speaker Change: I will call out, I think, that we've done some analysis of where we are relative to some of the comps and we're really right in line with the median and average on our spending.
Speaker Change: We're looking at it in that context, the wines remain disappearing.
Speaker Change: can give us additional details.
Speaker Change: about some of these areas and doubling down in some of the R&D areas where we see
Speaker Change: I mentioned welding, that's an area that we're continuing to focus on of course.
Speaker Change: Good morning everyone and welcome back to the facts on povo
Speaker Change: with you today.
Speaker Change: Some work in the go to market, improvements and some adjustments in sales and service and those pieces that'll continue to make us stronger. But again, we're doing that, as Tim mentioned, in a very disciplined way. You saw that we took some costs out of the organization as I talked,
Speaker Change: in prepared remarks, and we'll be reallocating that to the
Speaker Change: to cover some of these areas and allow this additional investment.
Speaker Change: got it and just one last one guys just so I have this straight
Ruben Roy: Tim, the transition to the high-powered diodes that are more cost-effective over the next 12 to 15 months. Nice to see the progress there. Can you remind me what percentage of revenue we're talking about? I think last time we talked, you were saying somewhere around 35, 45 percent. Is that accurate? Yes.
Speaker Change: Less price sensitive and we'll initially roll out the newer devices on some of the cutting applications for example Which will enable us to go to market a bit more aggressively and
Speaker Change: and the cost of sales.
Speaker Change: Excellent. Thank you very much. See you guys next week.
Speaker Change: Yeah, so thanks everybody.
Speaker Change: Thank you. Next question today is coming from Jim Raschutte from Niederman Company. Your line is now live.
Jim Raschutte: Hi, thanks. I'm wondering if you could give
Jim Raschutte: Give us a sense how big your cleaning business will be with the acquisition of clean laser I know it's up until now. It's been a fairly small part of the business, but it might be helpful
Jim Raschutte: Thank you very much.
Jim Raschutte: Hi Jim, it's Mark. Great to talk to you again.
Jim Raschutte: Thank you for watching.
Speaker Change: We don't break out the cleaning business, but it's in the realm of tens of millions of dollars.
Speaker Change: And then, as we've mentioned, CleanLaser is adding about $30 million. Very excited about the area. You know, this is a great area because this is a place where we can really drive the adoption together with CleanLaser, drive the adoption of cleaning in the industrial world.
Speaker Change: Cleaning markets, which is a you know tremendously large market and again. It's it's just as we've done in in welding It's really moving us from Allowing us to penetrate non laser markets with with laser, and we see you know large opportunity for for growth in that area
Speaker Change: Mark, you know, you've had the opportunity now to evaluate strategies established
Speaker Change: some new objectives for the business. I'm wondering, you know, you talked a little bit about R&D and the pipeline, and we'll hear more about that, I'm assuming, as you said, but I'm wondering whether M&A is gonna play a greater role in the future plans of IPG.
Speaker Change: Thank you.
Speaker Change: Yeah, thanks very much, Jim. So.
Speaker Change: You know, we have a great strategy, R&D, great...
Speaker Change: and Bobby Weiss.
Speaker Change: is a great example of that.
Speaker Change: Okay, let me...
Speaker Change: Thank you. Last question for me, Tim, you've given us some parameters in the past about how to think about gross margins at higher revenue levels. There's clearly a lot of moving parts of the business over the past year, but I'm wondering if you might be able to give us just an update as to possibly how to think about gross margins as revenues recover.
Tim Mammen: Jim, I don't think that's really changed at all in terms of the way the model is performing at the moment. So I kind of tend to look at what the gross profit is of the products. That remains very strong and relatively stable quarter to quarter. It can change a little bit depending upon mix.
Speaker Change: Thank you. Thank you.
Speaker Change: And then you're looking at where really your underabsorption is relative to that. So if you can continue to maintain that strong gross margin off the product, which is driven by continuing to get the pricing down, your manufacturing efficiencies.
Speaker Change: pricing you're getting the market for the product and then you can start to recover some of the under absorption at the moment mention that under absorption was 660 basis points
Speaker Change: If we can get that down back to a more normal level, so when we were running last year, that was...
Speaker Change: those 660 basis points lower, it will put you at 42 or 43 percent gross margin. You know, in terms of the revenue to get there...
Speaker Change: You know the flow through on the model is very strong
Speaker Change: and I think you know as you turn back up above 250 you're going to see some a little bit of momentum in that as you get closer between 250, 260, 270, 280 and towards 300.
Speaker Change: I'd certainly expect to be above 40% gross margin, somewhere in that midpoint between
Speaker Change: between 250 and 300. So, nothing's really fundamentally changed on that. I think the other benefit is, as we continue...
Speaker Change: to get inventories more under control. Part of that's happened this quarter with the disposal of Russia and also these provisions we've made that we actually generate cash out of inventory. As inventory comes down and the day's on hand...
Speaker Change: Reduce as well. We should see a reduction obviously in the underlying inventory provisions
Speaker Change: that we're incurring, which should come down to a much more normalized level of one and a half or one percent as compared to say, you know, three, three and a half percent.
Speaker Change: The underlying interventory provisions have been running out.
Speaker Change: Got it. Thanks. Thanks very much.
Speaker Change: Thank you. As a reminder, if you'd like to be placed into question queue, please press star 1 on your telephone keypad.
Speaker Change: Our next question is coming from Keith Howsam from North Coast Research. Your line is now live.
Keith Howsam: Good morning gentlemen. Mark, maybe you can remind us how important Belarus is to the company now, and I think you mentioned that you guys are going through an analysis there about perhaps next steps based on what's happening with some of the regulations out there. But just give us some more color on what you're thinking there.
Speaker Change: Yeah, absolutely. Thanks for the question. So, you know, Belarus was just a supply into the organization.
Speaker Change: We, more than a year ago, you know, we saw the potential of this issue and all of the supply lines have been covered by, you know, by others.
Speaker Change: from then. So we've, you know, we've done other outsourcing that covers that. So really, you know, no risk at all to the business, no risk at all to the supply, and you know, we're working on, you know, strategic options for that, for that now going forward, but really no effect on the business.
Speaker Change: Gotcha, I appreciate it. And Mark, you've been there a few months now. Obviously, you've got a lot of things that you're looking at in terms of investments and some strategies. I guess, in your mind, what are the top two or three strategies that you are focused on now, I guess, until the end of the year?
Mark: Yes, sure. The first thing I would say, and I said this coming in, IPG is a great company.
Speaker Change: This is really not about change, it's really about building. IPG has a tremendous foundation.
Speaker Change: Great team, technical know-how across lasers, components, systems, applications, and as I stressed last quarter
Speaker Change: The process knowledge in the company is tremendous.
Speaker Change: And that allows us to do things like we're doing with CleanLaser, where you can actually replace incumbent technologies with laser technologies, same as we've done in welding as well. So that's the really big places to grow the business.
Speaker Change: We've got a great brand in the marketplace, great relationships, and as Tim mentioned, we have a strong balance sheet with a billion dollars of cash and no debt.
Speaker Change: And we see, you know, a number of really excellent growth opportunities, differentiated offerings in, you know, a number of applications. Some of these I, you know, discussed earlier, we're excited about medical, cleaning, welding, micromachining as some examples.
Speaker Change: And then to drive this long-term value creation, I just want to say we really need to get better at two things. The first is sharpening our focus on the highest value R&D programs, some of these I mentioned. And the second is really strengthening the organization to drive better execution.
Speaker Change: And this is, you know, this will have some targeted additions in some areas. And, you know, we're making really incremental investments, as Tim mentioned too, in these efforts that, you know, we'll talk about these more on future calls.
Speaker Change: But as we talked about, we're being smart about how we do this, how we execute.
Speaker Change: We're managing with agility and controlling what we can control, as I mentioned earlier.
Speaker Change: We've implemented these manufacturing efficiencies, targeted headcount reductions, and such already.
Speaker Change: And we've got we've got more opportunities there. So, you know, again, we've got really, really high confidence.
Speaker Change: to drive this long-term value creation, you know, again, on top of the strong foundation that create technologies, including that applications process technology that's so critical and, you know, therefore growing growth, really opportunities in these differentiated applications.
Speaker Change: And, you know, again, industry's best balance sheet. Tim talked about the cash generation and the leverage through the business model. So, you know, kind of putting all of those pieces together. Those are some of the key areas that, you know, I see us investing in and driving the company forward.
Speaker Change: Okay, if I can squeeze in one more here. The clean laser acquisition, one, it's more, it sounds like it's more of a systems acquisition as opposed to, you know, being laser driven specifically. Is this perhaps a little bit more openness for the organization to move further into systems and not just the laser component?
Speaker Change: Thank you for watching!
Speaker Change: So what I'd say there is we need to operate on each of these areas. So again, it's about driving adoption into these non-laser markets. So if you look at something like cleaning with clean laser, it's the lasers, but it's really understanding that process and being able to deliver a solution to the customer.
Speaker Change: components that can then, you know, scan fast enough, scan faster to be able to, again, clean at the proper speeds, and then pulling those together to provide a solution. And we'll be, you know, providing lasers in these various markets, just like we do in welding, just like we do in cutting. We'll be supplying components, we'll be supplying subsystems and systems as needed.
Speaker Change: Again, it's about the adoption and just playing at the right value point and doing that across the portfolio.
Speaker Change: All right, thank you
Speaker Change: Thank you. As a reminder, that's star one to be placed into question Q. Our next question is coming from Mark Miller from Benchmark. Your line is now live.
Mark Miller: China has recently announced more stimulus programs. I'm just wondering, do you think that will have a beneficial impact on IPG and if so, when?
Speaker Change: Thank you for watching!
Speaker Change: So, I think stimulus programs, there may be areas, for example, in EV, one of the things that we're seeing in China is that the adoption of EVs is becoming more and more common.
Speaker Change: is becoming faster. So now I think more than...
Speaker Change: and some of that stimulus may flow into the auto areas.
Speaker Change: maybe that will continue to drive adoption and flow into some of these factories where where some of the ev capacity EV battery capacity has been a bit stalled and some of that will flow in I don't know Tim if you have other other thoughts on that
Tim Mammen: I don't know what specifically, I think we have to watch the PMI data out there which has continued to be...
Tim Mammen: relatively weak it's not it's not really bad but I think some of the key indicators are the things to watch to see whether that
Tim Mammen: stimulus is creating a bit of momentum in the economy. I think for us
Tim Mammen: The benefit is that we've seen
Tim Mammen: a more stable business environment over the last couple of quarters.
Tim Mammen: And if we can then build on that with these with some of that stimulus coming as a bit of a tailwind it potentially is
Speaker Change: Thank you. Thank you.
Speaker Change: slightly improved performance. I think we're still, the Chinese economy is still
Speaker Change: We've got a lot of challenges behind it, so let's see how much benefit that stimulus can have. But we've got a stable business out there at the moment. Yeah, we've seen some uptick in areas like 3D printing, you know, 3D manufacturing.
Speaker Change: the centering of metals where our single mode lasers are such an important part. So it's an area, again, it's an industrial piece. It's one particular segment. But as Tim said, hard to understand that across the whole economy at this point.
Speaker Change: Thank you for watching!
Speaker Change: One more point on that is...
Speaker Change: We've heard that actually some of the utilization of some of the largest battery manufacturers has started to pick up meaningfully.
Speaker Change: So that could be a catalyst coming into some point in the future for a pickup in that demand, and I think our total EV sales in
Speaker Change: In China, we're slightly up, quarter over quarter, so that's another...
Speaker Change: slightly positive viewpoint here.
Speaker Change: Thank you very much.
Speaker Change: Israel said it's going to be deploying a laser-based defense system against missiles and drones. I'm just wondering if you have any, I know you've done some previous work, do you have any irons in the fire in terms of development contracts and what's going on in that area?
Speaker Change: have been an important part, you know, just across the world, there are.
Speaker Change: They are used in those applications.
Speaker Change: Thank you.
Speaker Change: So you still have ongoing programs there.
Speaker Change: We're still selling lasers into that market. It's not a huge business for us today, but we do have irons in those fires.
Speaker Change: Thank you.
Speaker Change: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.