Q4 2024 IPG Photonics Corp Earnings Call
Music
Speaker Change: Good morning and welcome to IPG Photonics fourth quarter 2024 conference call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to your host, Eugene Fedotoff, IPG Senior Director of 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.
Speaker Change: Let me remind you that statements made during the course of this call that discuss management or the company's intentions, expectations, or predictions are the forward-looking statements.
These forward-looking statements are subject to risks and alternatives, and
Speaker Change: 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 IPG Photonics Form 10-K for the period end of December 31st, 2023, and all the reports are on file with the Securities and Exchange Commission.
Speaker Change: Copies of these filings may be obtained by visiting the investor section of IPG's website or the SEC's website directly.
Speaker Change: Any forward-looking statements made on this call are the company's expectations or predictions as of today, February 11, 2025 only, and the company assumes no obligation to publicly release any updates or revisions to any such statements.
Speaker Change: For additional details on our reported results, please refer to the earnings press release, earnings call presentation, and the financial data workbook posted on our Industry Relations website.
Mark Gitin: 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 Gitin: Thanks Eugene and good morning everyone. For today's call I'll provide a high level overview of the quarter and share progress we've made on our strategy to drive long-term sustainable and profitable growth. After that I will turn it over to Tim to provide more of the financial details and then we will open the call for questions.
Thank you. Thank you. Thank you.
Mark Gitin: Starting with our fourth quarter, revenue came in at the high end of our guidance, up slightly from our third quarter, and consistent with the business environment that continues to bounce along the bottom. Gross margin improved in the quarter helped by our efforts to reduce inventories. Our operating expenses were also better than expected, and down both year-over-year and sequentially.
Mark Gitin: Our progress on expenses reflects the hard work the team has already undertaken to reduce our cost structure, and we will be deploying the savings towards strategic investments in the business.
Mark Gitin: Our free cash flow remained strong, reflecting higher profits and the positive working capital impact, and we maintained a very strong balance sheet.
Mark Gitin: Although our results do not yet reflect our full potential, I'm proud of the progress we've made in navigating a challenging business environment that is impacting us on two levels. One, the tough macro conditions in general industrial and automotive markets, including EV, and two, a more competitive environment in cutting.
Mark Gitin: Over the last few months we've undertook a comprehensive review of our strategy, markets, technologies, and competition.
Mark Gitin: We then developed a plan to strengthen our current products, penetrate new applications and markets, introduce novel solutions, and set the foundation for return to growth and better profitability in 2026 and 2027. Our leadership team and board are aligned around our strategic plan, and we are hitting the ground running.
Mark Gitin: We are addressing the challenging year-term demand environment and increased competition by reducing product costs, accelerating product development, and strengthening relationships and support for our OEM customers.
Mark Gitin: A prime example of our efforts to reduce product cost is our recent introduction of a new high-power fiber laser platform.
Mark Gitin: This platform features next-generation, high-power pump diodes that enable a more compact design at a lower manufacturing cost to help our cutting OEM customers defend against low-cost Chinese-made systems.
Mark Gitin: We also remain well positioned for opportunities in applications such as welding and cleaning as industrial and e-mobility demand recovers.
Mark Gitin: In order to win in the long term, we are making investments in our business to drive differentiation in attractive markets where we can earn the greatest returns on our capital.
Mark Gitin: Since I joined, we've taken a deep dive into every R&D program.
Mark Gitin: Entering 2025, we are accelerating investment in several dedicated programs with strong market potential. Examples include urology applications, key micromachining opportunities, and other areas where we have strong expertise and important relationships with market-leading customers.
Mark Gitin: In aggregate, these programs target markets exceeding $5 billion in TAM and offer IPG multiple hundreds of millions of dollars in revenue opportunities over the next several years.
Mark Gitin: It's important to note that these roadmaps will develop over time and have multiple milestones to hit on the path to market, but we are engaged with key customers today and have booked initial orders for a number of products in development.
Mark Gitin: For competitive reasons, we prefer to keep many of these initiatives out of the spotlight, but one area that I can highlight is urology.
Mark Gitin: Urology is a multi-billion dollar TAM where we already have a solid position and where our applications and laser expertise can be utilized to create novel treatment solutions and outperform us on the market today.
Mark Gitin: We expect to introduce the next product on our urology roadmap later this year, our new generation of thulium laser systems for the treatment of kidney stones, and we are making good progress in our other targeted RMD program.
Mark Gitin: We expect to generate initial revenue from some of these programs in 2025 with more meaningful returns on our investments beginning in 2026 and beyond as new products gain traction.
Mark Gitin: We're also actively seeking opportunities to expand product offerings and market reach in key application areas throughout targeted acquisitions.
Mark Gitin: We are integrating our December acquisition of CleanLaser, a maker of laser-based cleaning systems.
Mark Gitin: Clean Laser is an example of our plan to complement focused R&D with strategic tuck-in acquisitions that accelerate our penetration of important markets.
Mark Gitin: By leveraging CleanLaser's unique technological expertise and European presence and combining it with our strength in other markets, we aim to accelerate growth of our laser-based cleaning systems.
Mark Gitin: Cleaning is a promising market particularly for laser systems for the long term and it's a market where we bring differentiated solutions.
Mark Gitin: Furthermore, to support our strategy, we are strengthening discipline and execution across the organization.
Mark Gitin: We are increasing intimacy with our customers so that we can focus product development on their foremost needs.
Mark Gitin: We are enhancing our go-to-market by optimizing our sales team structure to drive targeted business development opportunities and improve account and product management.
Mark Gitin: And finally, we're enhancing our service strategy and our offerings to better support our customers, build trust, and create recurring revenue opportunities.
Mark Gitin: In summary, from innovation and cost savings to strategic acquisitions and tailored solutions, our initiatives showcase the depth of work underway to strengthen IPG for the long term.
Mark Gitin: While some of our initiatives, including our product development programs, will take time to be reflected in our results, our work today to strengthen our organization and execution will put us in a position to mitigate the near-term environment while positioning IPG for a stronger 2026 and beyond.
Moving to our near-term outlook.
Mark Gitin: We continue to believe we are bouncing along the bottom, with fourth quarter booked to bill close to one.
Mark Gitin: As I've discussed, we are investing in the growth of our business, which will have an impact on our profitability in the near term, but we are committed to these investments as they will drive shareholder value in the long term.
Mark Gitin: When revenue growth returns, we expect to show strong operating leverage that highlights the value of our platform.
Mark Gitin: Before turning the call over to Tim, I wanted to touch on a few other items. The first is how we are thinking about capital allocation as we invest for the future.
Mark Gitin: IPG has exciting opportunities ahead. We also have one of the strongest balance sheets in the industry, with over $900 million of cash and no debt.
This financial strength provides flexibility and a significant competitive advantage.
Mark Gitin: We've talked today about our strategic investments in differentiation and growth, both organic and via Tuck & Acquisitions.
Mark Gitin: As we prioritize investing in our business, you should expect us to be less aggressive on share repurchases in the near term. We are excited about the initiatives we're driving as we position the company for long-term value creation.
Mark Gitin: The second item relates to the founders' trusts that are significant long-term shareholders of IPG.
Mark Gitin: The Komponsiv Trusts have always operated with IPG's long-term interest in mind and have historically sold modest amounts in the open market under Rule 144a to cover their expenses.
Speaker Change: Since Trust 1 and 3's remaining shares are not currently eligible to be sold under Rule 144, we plan to file a resale registration statement following our 10-K to facilitate an orderly distribution of shares over the next three years to cover expenses and diversify trust assets.
Speaker Change: The total amount of shares to be registered represents approximately 5% of IPG's total outstanding shares today.
Speaker Change: The trusts have indicated that they intend to remain significant long-term shareholders and support our strategy.
Speaker Change: In closing, IPG is a great company with enormous potential. I am confident that with our continued focus on innovation and execution, we are well positioned to leverage our strengths to drive sustained growth. 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. I will start with the financial review on slide 4.
Tim Mammen: Revenue came in at the top of our guidance in the fourth quarter at $234 million, up slightly on a sequential basis despite the full quarter impact from the disposal of Russian operations and only a modest revenue contribution from Clean Laser.
Tim Mammen: Revenue was down 22% year-over-year and down 18% excluding divested operations.
Foreign currency reduced revenue by approximately 1% this quarter.
Revenue from materials processing applications decreased 24% year-over-year.
Tim Mammen: primarily due to lower sales in welding, cutting, and marking applications, while sales increased in additive manufacturing and micro machining applications.
Tim Mammen: Revenue from other applications decreased 6% due to lower sales in medical, partially offset by increased sales in advanced applications.
Tim Mammen: Gross margin was 38.6%, an increase of 40 basis points year over year and above our guidance, driven by lower product costs and a decrease in import duty and shipping costs.
Tim Mammen: partially offset by lower absorption of manufacturing expenses as a result of lower revenue.
Tim Mammen: Continued effort to right-size inventory resulted in a more moderate impact from inventory provisions.
Tim Mammen: and we were down both year over year and sequentially due to the disposition of our Russian operations and controlled spending.
Tim Mammen: Currency translation had a minor impact on revenue and gross profit in the quarter of approximately $2 million and $1 million respectively.
Tim Mammen: Foreign currency transaction gains had a positive impact on operating income of $1 million.
Tim Mammen: Gap operating income was $14 million and reported net income was $8 million, or $0.18 per diluted share.
Tim Mammen: The effective tax rate was 64% in the quarter due to certain unusual tax items primarily related to repatriation of cash.
Tim Mammen: which impacted the quarter by $3.4 million and earnings by $0.08 per share.
Tim Mammen: In addition to this item, the effective tax rate was impacted by no tax benefits from losses in certain regions, other discrete items, and the geographic spread of income in the quarter.
Tim Mammen: Now let's look at our Revenue by Application, which we provide an update on annually.
Tim Mammen: Welding was 37% of total sales in 2024 and was down year-over-year due to weakness in general industrial manufacturing and automotive.
including EV battery manufacturing compared to a strong 2023.
Tim Mammen: Cutting revenue continued to decline and represented 21% of total revenue in 2024.
Tim Mammen: We saw soft demand in general manufacturing and e-mobility markets across all regions.
Tim Mammen: and our OEM customers went through inventory de-stocking due to a lack of market recovery in the second half of the year.
Competition continued to impact cutting cells in China.
although these represent less than 5% of our consolidated revenue.
Tim Mammen: Our OEM customers are seeing some increased competition from low-cost Chinese laser cutting system suppliers selling outside of China and we are working closely with customers to help them maintain their market share.
Tim Mammen: Medical bounced back significantly in the fourth quarter, but was down slightly for the year, adjusting for the divestiture of Russia.
Tim Mammen: We expect medical to grow in 2025, with more significant revenue increases in 2026 and beyond.
Speaker Change: Medical is one of the attractive areas with strong growth opportunities that Mark detailed.
Moving to the revenue performance by region on slide six.
Speaker Change: Sales in North America increased 6% sequentially, but we're down 31% year over year due to lower sales in welding applications.
Speaker Change: as a result of a large e-mobility purchase in the prior year that did not repeat this year.
Speaker Change: Our medical orders from a large customer improved significantly from the prior quarter, but we're still down year over year.
excluding divested revenue
Speaker Change: Sales in Europe increased 5% sequentially driven by growth in additive manufacturing and advanced applications.
Speaker Change: European sales declined 22% year-over-year due to lower sales and cutting applications as the industrial demand environment remained weak.
Speaker Change: Revenue in China decreased 10% sequentially and 22% year over year due to lower sales in cutting and welding applications to general industrial and e-mobility customers, which was partially offset by growth in additive manufacturing.
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 $930 million and no debt.
Speaker Change: Cash provided by operations was $74 million and capital expenditures were $23 million during the fourth quarter.
Despite revenue being down this year,
We continue to generate strong cash flow from operations.
Speaker Change: and positive cash flow from inventory as we manage our investment in working capital.
Speaker Change: We sold two buildings earlier this year, realizing $25 million in proceeds.
Speaker Change: and our capital expenditures for the full year came in at approximately $99 million, which was well below our earlier expectations.
Speaker Change: However, some projects were delayed and will drive higher capital spending in 2025.
Speaker Change: We spent $57 million on share repurchases in the fourth quarter and $344 million for the full year.
Speaker Change: Moving to our outlook on slide 9, for the first quarter of 2025 we expect revenue of 210 million dollars to 240 million dollars.
Speaker Change: We expect the first quarter gross margin to be between 36% and 39%.
Speaker Change: As Mark alluded to, we are increasing investments in the growth of our business.
Speaker Change: As a result, our operating expenses are expected to be between $82 million and $84 million in the first quarter.
Speaker Change: And we expect these expenses to increase further in the second quarter and remain elevated over the course of the year.
Speaker Change: We anticipate delivering adjusted earnings per diluted share in the range of 5 cents to 35 cents.
with approximately 43 million diluted common shares outstanding.
The adjusted EPS.
excludes amortization, acquisition-related charges, and any other non-recurring items.
Speaker Change: First quarter adjusted EBITDA, which excludes stock-based compensation, is expected to be between $19 million and $35 million.
Speaker Change: We are planning on providing these non-GAAP financial metrics starting in the first quarter of 2025 to help you keep track of our underlying financial performance.
Speaker Change: We expect our 2025 CapEx to be between $105 million and $115 million.
Speaker Change: The increase is primarily related to investment in manufacturing capacity in Germany.
Speaker Change: in order to replace fiber and other critical production that we lost access to in Russia.
Speaker Change: As mentioned earlier, a significant part of the 2025 expenditure relates to this project that was deferred from 2024.
Speaker Change: We continue to expect our normal maintenance CAPEX to return to less than 5% of revenue once these critical investments are completed in the next 12 to 15 months.
Speaker Change: In closing, I would like to highlight that our team remains focused and continues to execute well through the current environment.
as we prioritize near-term investment in our future opportunities.
Speaker Change: We believe that these initiatives strengthen our foundation and position us well to deliver healthy operating leverage as the company returns to growth.
Speaker Change: We will also be able to improve free cash flow even further as we complete our near-term CapEx commitments.
With that, we will be happy to take your questions.
Speaker Change: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please while we poll for questions.
Speaker Change: Our first question comes from Reuben Roy with Stiefel. Please proceed with your question.
Thank you.
Reuben Roy: Hi, Mark and Tim. I wanted to start, Mark, if I could, on maybe drilling into some of the details around your review of the business a bit and specifically, you know, as you look at some of these new opportunities and then balance that against what's going on in cutting, I'd love to maybe get some thoughts on how you're thinking about cutting, investments in cutting,
Reuben Roy: and you know how you see cutting kind of play out over the next several years as you invest in some of these other growth areas.
Thank you.
Thank you. Thank you. Thank you.
Great. Well, thanks a lot for the question.
Ruben, it's good to talk to you.
Reuben Roy: So, yes, I've now spent, you know, six months doing a deep dive into all of our technology capabilities, execution, and, you know, really all of the R&D programs, and, you know, entering the new year, then we've really aligned on a three-year strategic plan now to drive differentiation and profitable growth.
Reuben Roy: We'll talk about that with respect to cutting as well. So, you know, we're launching new high-power fiberulators that I talked about on lower cost platforms with smaller form factors.
Reuben Roy: And these are really competitive in today's market and these provide a competitive edge now for
Reuben Roy: our OEMs to compete in the market because, just to speak about cutting for a minute, remember that cutting in China has really been the biggest issue from a competitive aspect.
Tim Mammen: and that's less than 5% of the business now. As we go to other markets, we're starting to see, as Tim mentioned, some of our...
some of our cutting OEMs.
Tim Mammen: seeing Chinese systems play into some of their markets, and we're providing now these new higher power, smaller form factor lasers, at lower cost that allow them to compete. So that's where we're playing on the cutting side, and then we're driving now to
to really move towards
towards differentiation in the marketplace.
Tim Mammen: These are programs that target markets exceeding $5 billion in TAM and offer IPG hundreds of millions of dollars in revenue opportunities over the next several years.
Tim Mammen: And, you know, it's important to also mention that we're, you know, in these areas we're working collaboratively with key customers, and we already have, you know, purchase orders in place for some of these, for some of these programs.
We expect to see benefits from these.
Tim Mammen: later this year and really kicking in in 2026 and 2027.
Thank you very much.
So.
Tim Mammen: Now, just to bring back to that, so these are differentiated areas that we're driving. That's what's really going to drive the growth of the company.
Tim Mammen: Cutting will continue to, you know, provide differentiation where we can, but the, you know, again, the real growth from the company is going to be from these key areas that I mentioned.
and 27.
coming.
Mark Gitin: Okay, thanks for all that detail, Mark. I guess just to make sure I'm understanding correctly on Tim's comments about competition, you know, starting to, you know, boil up here and there outside of China.
Speaker Change: Are you saying that the, you know, Tim mentioned that you're working with customers to maintain their market share?
Speaker Change: I assume what you're what you're talking about there is more on competitive differentiation rather than price is that the way to think about that or?
Speaker Change: or is it, you know, something else that you're working on? Yeah, so the way that I would talk about it here is, again, we're launching and we already launched at the Photonics West show, so people saw this, a, you know, very high power, so, you know, 40 kilowatts.
Speaker Change: based upon our newest higher power diode platform. So that gives the...
Speaker Change: The OEM, a smaller form factor with higher power at lower cost. So now think about that from...
Speaker Change: from them competing in the marketplace that allows them to put, you know, a higher power laser into their system, you know, in that same kind of form factor. So the form factor, to give you an idea, a 40-kilowatt laser is now in a form factor that years ago was a 4-kilowatt laser.
Speaker Change: and, again, at a better dollars-per-watt level. So they can then put those in their systems and compete with the Chinese players that may be encroaching in some of their markets with their systems.
Speaker Change: Okay, okay, and then just one last question. You mentioned, Mark, you know, sort of, you know, a lot of, you know, these areas of...
Speaker Change: focus on investment and expectations for return to growth in 2026. With this mindset of bouncing along the bottom, book to bill a little bit under one, can you give us a little bit of detail about how you're thinking about visibility or the second half of the year? Do you think revenues are sort of...
Speaker Change: Steady state here can get things get worse, maybe a little bit better. What are the sort of puts and takes as you think about the rest of 25? Thank you. Yeah, I mean, we're not you know, we're not guiding to the to the full year, what I can say, you know, again.
Speaker Change: We're seeing book-to-bill, you know, is around one or a little bit below one. It's the the industrial markets have still been still been under pressure.
Speaker Change: And, you know, you can see, you know, varied forecasts of what's going to happen to the industrial markets. There's a little bit of uptick in some of the PMIs that gives a little bit of good indication. You know, we're seeing some of our customers are coming to more normalized inventories. But, again, it's really going to depend on what happens later in the year in those industrial markets.
You're welcome.
and how that how that plays out.
Speaker Change: We are expecting some contribution from some of the investments we're making towards the end of the year, I think.
Speaker Change: You know positively cutting picked up a little bit in Q4 that reflects
Speaker Change: Some of the sentiment that we're hearing from ROEMs that their inventory levels are back down to much more normal basis and
Speaker Change: The Demand Environment is definitely stable. On the book to build, one thing I will point out, the reason why it was just a little bit below one was because of all the geopolitical uncertainty in Korea and our Korean bookings.
Speaker Change: came in very weak versus expectations. Those orders are not cancelled and they have a they're expecting to book a lot of those orders in in Q1 but just given the uncertainty there that that impacted total bookings. Had it not been for that Korean impact, book-to-bill would have been at or slightly above one.
Thank you, Tim. Thanks, Mark.
Thank you.
Speaker Change: Our next question comes from Jim Rischuti with Needham & Company. Please proceed with your question.
Jim Rischuti: Hi, thanks. Good morning. I just wanted to talk a little bit about the step-up you're anticipating in OPEX in Q1.
Jim Rischuti: plays out between sales and marketing and R&D. It sounds like you've got a fair amount of investment going on on the new product front, but I assume there's also market development. And maybe just to clarify, you're anticipating, Tim, I think you said further increase in Q2, and then are you expecting?
Jim Rischuti: that OpEx leveled to somewhat level off in the back half, I may have misinterpreted what you said.
Thank you for watching!
Jim Rischuti: So let's deal with those in stages, Tim. First of all, yeah, Q1 OPEX increases. First of all, Q4 benefited from about $3 million of stock-based compensation that related to PSUs that we're not going to vest.
Jim Rischuti: So you layer that back in to get to a more normalized level for a stock-based comp.
Jim Rischuti: The second thing that really impacts it is that bonus levels do end up being accrued at more of a target level where they've been below target because we've been underperforming relative to our budgets. And you then start to see some of the investments.
in the business.
Jim Rischuti: start to ramp up. So yeah, in Q2, we expect OPEX will increase further and then stabilize.
Jim Rischuti: for the remainder of the of the year. I'm going to split on SG&A and R&D for the first quarter, but a lot of the PSU and Stockholm stuff would be mainly in G&A and selling. So SG&A
Jim Rischuti: And then the increase in some of the bonuses is really spread across all SG&A and R&D as well.
Thank you very much.
Jim Rischuti: and Jim you're right some of that is is focused on the go-to-market right so the business development aspects of this
some more focused OEM.
sales, as well as our service infrastructure.
Jim Rischuti: and these programs, as I mentioned, that we're doubling down on, you know, these are programs that will really drive us into the future.
Speaker Change: And then two quick ones, if I may. It sounds like you're anticipating growth in the medical business in 2025.
Speaker Change: Is that, are you seeing, Mark, some broadening out of the customer base? I know you've had concentration in this area of the business. And then the other follow-up question just relates, I was struck by the increase you saw in Japan, and Tim, maybe you can give a little color on that, whether that's sustainable. Thanks.
Speaker Change: Yeah, yeah, thanks Jim, it was great to see you at the show. So, following up on that, the...
Speaker Change: Yes, we are expecting some uptick towards the end of the year because on the medical we're launching a new product in our line of thulium lasers for lipotripsy, that's kidney stone. So that's where we're going to see the first part of the uptick, but we have a very significant roadmap that we're continuing to invest in that will drive.
Speaker Change: in Urology, and Matt will also start to turn on this year and give us give us some updates.
Matt: Yeah, Japan they had a good quarter so overall they actually had quite a reasonable year. Japan revenue can be a bit volatile from
Matt: quarter-to-quarter and uneven just in the way that they run their businesses
Matt: So Q1 actually has got reasonable guidance, not particularly strong, but they've got a reasonable budget out there for the year. It's actually a good business because it's...
Matt: Fairly diverse. Some of the feedback we've heard on an improvement in the cutting this has
Matt: comes from Japanese OEM customers and I think there's a bit more of a positive tone around the Japanese economy as a whole.
Got it. Thank you.
Thank you. Thank you.
Speaker Change: Our next question comes from Keith Housam with North Coast Research. Please proceed with your question.
Keith Housam: Good morning guys, I appreciate it. Hey Kim, I just want to make sure I understand, in terms of the manufacturing process for the high-powered lasers, are you guys already implementing your cost-cutting measures there in terms of reducing cost of sold for those, or is that still ongoing here?
Keith Housam: You're talking about the low-cost, the new low-cost high-power lasers? Correct.
Thank you.
Keith Housam: We're rolling them because when you cost high power lasers, when are they being rolled out or are they fully reflected in the business model already? Yeah, thanks for the question. So we're just launching those. We announced this, actually, at Photonics West.
Keith Housam: this last couple weeks ago, where we showed our high power 40 kW laser in a very small form factor. Again, this is all based upon our new, high power diodes that then...
Keith Housam: can give us higher power fiber lasers in a smaller form factor, and yes, at a lower cost. We're rolling those out in Q1 and Q2 of this year.
Speaker Change: Gotcha, appreciate it. Ian, in part of the question that's tough to answer but I've got to ask that question obviously. A lot of moving parts with tariffs going on these days. You know, you guys go to OEMs around the world. How are you guys thinking about tariffs as we stand today?
Speaker Change: So, first of all, I mean, in the worst case, tariffs would probably have a 150 to 200 basis point impact if we did nothing, right, continue to source and supply lasers, but we actually have quite a lot of flexibility.
Speaker Change: in what we can do. So we can move manufacturing from one location to another and supply customers in different regions from different areas. So that does provide us with a lot of flexibility in relation to potential tariffs.
Speaker Change: It's not possible to say they'll have no impact, but we think the impact, at least from a cost side, can be managed and will be relatively small. I think it's more difficult to identify
Speaker Change: How much uncertainty this drives into the near-term environment from a demand perspective in the longer term? I mean in the US, for example, tariffs are designed to drive reshoring of manufacturing and that would largely come from automation and using
Speaker Change: flexible efficient tools like lasers so there'd be a longer term potential medium to longer term benefit from from that but for the cost side we've got a relatively manageable situation and some flexibility in what we can do
Speaker Change: Okay, I appreciate that. And this last question for you here, you know, we continue to hear the question on volume versus price and obviously I understand the different parts of the business have a different impact, but maybe you can perhaps provide a little color in terms of, you know, where you see the business pressure on volume versus price these days.
Speaker Change: I think the place to talk about that is really in cutting, as I mentioned earlier. So again, just to review, the biggest issue in competition in volume and price has really been in China with cutting.
That's now less than 5% of the business.
Speaker Change: If you go outside of China, you know, our OEMs, you know, we have very good position with those OEMs.
Speaker Change: because they know the, you know, the performance and the, you know, reliability and the support and service that we provide.
Speaker Change: Now they're starting to see some pressures from cutting systems coming from China into their marketplace and that's where that's you know driving some of that.
Speaker Change: and from, you know, now bringing out the higher power, lower costs, lower dollars per watt, you can say, in a smaller form factor, now
Speaker Change: Those customers will be in positions to win against the the Chinese players using You know higher power systems higher power lasers within their systems at similar cost and or in some cases you know
Speaker Change: driving some lower cost within their system from the lasers, and we would expect
Speaker Change: that from a volume standpoint, today, you know, it's been, the cutting market's been depressed for some time. We're starting to see some.
Speaker Change: some of that destocking subside and so as industrial markets come back and the volumes and volumes come back we should see those things start to normalize.
All right, thank you, Jadak.
Speaker Change: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions.
Speaker Change: Our next question comes from Michael Fenninger with Bank of America. Please proceed with your question.
Michael Fenninger: Great, thanks guys for for squeezing me in. Just can you remind us just on the auto side and e-mobility just how how big of that is as a percent of
Michael Fenninger: the business right now, and what you're kind of seeing currently with that. Is there any expectation that we can see some of that come back in the second half? Just curious kind of how you guys are looking at that side of the business.
Speaker Change: Yeah, I mean we haven't given an EV number on that this year. EVs basically, it's gone down over the years so it's less than...
Speaker Change: 20% of total revenue was above 20% and then you have other automotive business. I haven't actually got that number at hand, Michael, but you add that to the EEV with probably still in the range of
Speaker Change: 25 plus percent for total automotive sales. The EV environment I think remains
Speaker Change: Uncertain and unclear. I mean, capacity utilization is picking up. There are a number of projects that we know that are out there that we're very closely working with the end customers on. So, it's uncertain.
It's the businesses.
Speaker Change: We're expecting it to stabilize and potentially improve a little bit this year, but no significant.
Massive momentum behind it, yeah.
Speaker Change: The only thing I would add to that, just to remind you, we've got a very strong position in EV batteries, even with it being down, because again, we have the combination of
are adjustable mode laser plus the
what's called the LDD or laser diode, laser depth.
dynamics that that actually will measure the weld.
Speaker Change: in situ and provide quality control plus some of the scanning and systems so we have a very big moat around that area so as the EV comes back
We will get our fair share of that business.
Speaker Change: And the other thing, just to point out on, you know, because EV is often equated to batteries.
Speaker Change: There are other areas of batteries that are continuing to grow. For example, stationary storage is becoming a big area that's...
Speaker Change: that's grown 100% year over year and continues to grow. And there are other areas of electrification where we play in the batteries because of these unique capabilities that we bring in the laser and the process.
And Mark, just to double-click on that.
Speaker Change: The competition intensifying, it sounds like that's still a cutting side. Is that correct? It's not showing up on welding or on the EV side.
Speaker Change: That's right. The biggest issues in competition are in that cutting.
Speaker Change: The other areas like welding, like EV welding, and some of the areas that I talked about where we're investing in, these are areas where we have
Speaker Change: you know, key differentiation. Remember, as a company, we have tremendous technologies.
Speaker Change: in Fibers and Diodes and Optics and Scanning and, you know, the whole host. Plus, there's tremendous process.
Speaker Change: and applications knowledge within the company. So you put those pieces together, and then that really creates a moat. And so if we talk about that and even shift to where we're investing.
Speaker Change: We're investing for growth in areas where we have these key differentiation in medical, in micromachining, in some of these advanced areas where we can bring those pieces and really drive the growth and have real moats around the business.
Speaker Change: Fair enough, Mark. And I think Tim addressed this, you know, in an earlier question, but I'm just curious with
Speaker Change: some of the tariffs. I mean, how much of the U.S. revenue do you guys kind of import?
Speaker Change: from Europe. I know you guys have the CapEx that you're set, you know, to invest in the capacity increase in Germany.
I'm just curious with with Terrace.
Speaker Change: out of Russia, and you guys have expanded in certain areas. I'm just curious, if we are in a more tariff-driven world, do you have to kind of think a little bit more about maybe your footprint? Is that more smaller or bigger changes to think about? Thank you.
Tim Mammen: Yeah, again, there's a lot of uncertainty in the tariff side. What I would tell you, and Tim mentioned this, we have a lot of flexibility in our manufacturing platform. We have a lot of capability in the U.S. and in Europe.
Tim Mammen: So there's, you know, there's the ability to, you know, to decide where we should, where we should build and we have, we have some of that flexibility as we, as we look at, you know, potential future tariffs and how that works. So, you know, I think we have a lot of capability to mitigate depending on what's happening.
Alrighty then.
Speaker Change: Yeah, Mike, maybe a question. We do not expect tariffs to suddenly turn around. We don't expect to turn around and say, oh, we're going to have to increase CapEx by another $50 million, right? We actually have a significant facility in the U.S. that's just about to be completed, so that would enable us to ramp production in the U.S.
Speaker Change: If we don't want to import stuff from our German facility, that would in turn free up capacity in Germany to supply other countries around the world. And then when the German investment in fiber and...
Speaker Change: The optical component manufacturing is completed this year that replaces Russia. That actually provides a lot of capacity within Germany as well.
Speaker Change: The one thing I'm pretty, I'll say it with a very good degree of certainty, we're not going to turn around and say we have to build another $50 million building somewhere because of tariffs. We expect free cash flow to improve significantly in 2026 once we're over this investment cycle.
Perfect, thank you.
Speaker Change: Our next question comes from Scott Graham with Seaport Research. Please proceed with your question.
Scott Graham: Hi, good morning. Thanks for taking my question. I wanted to explore cutting a little bit more I know you ended the year with about 21% of sales from cutting and if we let's just say take out the China piece call that four or five percent You know, we're looking at you know in the upper teens percent of sales basis
Speaker Change: I know you're launching new products to help defend your market positions, but maybe help us understand what percentage of that sort of mid-teens
Speaker Change: cutting away from China is kind of under this competitive pressure you're talking about and how much of that are you going to go out and try to really defend with new products?
So, again, from the, from this side it's, it's
Speaker Change: The cutting percentage is a bit less than that, again, outside of China.
and we will be...
Speaker Change: defending that business with these new lasers. Again, the new lasers provide a significant benefit in size, performance, and cost.
Speaker Change: So we believe that these will provide our OEMs a very good position to...
to compete.
Speaker Change: So just to clarify, Mark, just on that, the 15% that remains includes foil cutting, which is another specialized cutting, so we haven't given a specific number on the flat sheet metal cutting, but it's less than the 15%.
Speaker Change: That's where our customers are on a global basis and we intend to defend that business.
vigorously over the over the coming
Speaker Change: and beyond. And again just realize too that you know we have very close relationships with these OEMs. We've been supporting them for years.
Speaker Change: And it's the lasers, it's the performance, it's the reliability, and it's also the support and infrastructure that we provide to service our customers and their customers. So that's a key piece of this.
Speaker Change: When it comes to these OEMs that are outside of China, it's a bigger piece than just power and dollars per watt.
Speaker Change: Got it. Thank you for that. I appreciate it. Um, the other question I wanted to ask actually, I have one more after this if you don't mind, but
Speaker Change: amortization that you're you know you're changing your adjusted to an adjusted EPS. So what is that going to be in cents per share and in full dollars so we can see the tax rate too?
Yeah, the amortization is about 2.3 million dollars per quarter.
and then
Speaker Change: On an EPS basis it would be just over three cents on an EPS basis after tax.
That's the only ad back that we're...
incorporating in Guidance on Adjusted EPS.
Speaker Change: and then adjusted EBITDA, which includes the outback of Stockholm as well as all of the depreciation and amortization.
Speaker Change: Yes, thank you for that. Last question, I don't know if you can answer it or if you will, but it kind of sounded a little bit, Mark, like, you know, setting the stage for 26-27 sales growth was your comment.
Speaker Change: I mean for 25, is it really just sort of hoping to get back to flat in the second half of the year at this point?
Speaker Change: You know, we've mentioned the fact that some of our new products will be launching in, you know, towards the end of the year, so we, you know, I mentioned that we have a new medical product that will be coming out late in the year, also mentioned that we have, you know, a new customer coming online there, and some of the other programs that I talked about where we're making these significant, where we're making these investments,
Speaker Change: We're engaged with customers, and we even have some purchase orders for some of the initial products that will start to come out.
you know combine that and and then
Thank you very much.
pretty vigorously, so.
Understood. Hey, thank you
Speaker Change: Our next question comes from Mark Miller with the Benchmark Company.
Mark Miller: Please proceed with your question. Besides your aforementioned lower cost, high power lasers, what other measures are you taking to try to improve margins?
Thank you.
Mark Miller: So what are the measures we're taking to improve margins? I think first of all I'll talk about a little bit on the gross margin side, Mark can talk about things like LDD, where we're taking some cost out and other areas, but
Mark Miller: On the gross margin side, having got inventory much more under control, the impact of inventory provisions this year will decrease.
We expect to see...
Mark Miller: lower revenue levels to try and reduce further some of the under absorption. We had a little bit of a benefit from that in
Mark Miller: in Q4 that was still under-absorbed relative to an optimal level by about 600 basis points.
Mark Miller: So we need to sometimes preserve the investment in the manufacturing capacity. We've had a rebound in demand, for example, for a product that was running at very, very low levels last year and that week.
Mark Miller: dismantled that manufacturing and would have been able to respond to the customer demand. But we certainly want to try and take out a few hundred basis points on underabsorption this year. That would be the thing. And then if the investments,
Thank you very much.
Mark Miller: Mark and I mean yeah I mean exactly as you know as I talked about the investments that we're making are in in areas for you know quite differentiated products where we can maintain and gain and gain margin so in each of these areas in in medical and advanced and
Mark Miller: Also, in areas like micromachining where we're bringing out new products, the gross margins, the differentiation is very high, the moats are high, and we'll be able to find a higher margin with mix.
Tim Mammen: and you know as Tim said we're also continuing to work on gross margin benefits you know across the portfolio. We are working on also reducing costs on some other products.
Tim Mammen: and, as Tim said, we're working on operational efficiencies that will continue to help margins. So, overall, we're working on a number of areas that, over time, will drive the margins up.
Speaker Change: Your laser and non-laser system sales were down sequentially year over year. I'm just wondering what's going on there.
Thank you very much.
Thank you very much.
Thank you very much.
Speaker Change: They've got a very strong pipeline of orders they're working on, but I think customers have been sitting on their hands even
Speaker Change: Even post the election, we didn't see a big pickup in orders, but there's still a strong pipeline that they're working through on that. We should see a pickup in that, Joe, over the course of this year.
Thank you.
Speaker Change: We've reached the end of the question and answer session. I'd now like to turn the call back over to Eugene Fedotoff for closing comments.
Speaker Change: Thank you for joining us this morning and for your continued interest in IPG. We will be participating in a number of investor events this quarter. Looking forward to speaking with you again soon. Have a great day everyone.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.