Q2 2019 Earnings Call
Good morning, and welcome to I.P.G. Photonics second quarter 2019 conference call.
Today's call is being recorded and.
Webcasted at this time I would like to turn the call over to James Hillier I P. Jeez, Vice President of Investor Relations for introductions. Please go ahead Sir.
Thank you Omar and good morning, everyone.
With us today and I think people are I'd be just platonic this chairman and CEO Dr. Bell Downtick, a concept senior Vice President and CFO Tim Mammen.
Statements made during the course of this call that discuss management's what the company's intentions expectations or predictions of the future are forward looking statements.
These forward looking statements are subject to risks and uncertainties.
The company I could results to differ materially from those projected in such forward looking statements.
These risks and uncertainties include those detailed and I bid you Protonix. Its Form 10-K for the year ended December 31, 2018, and other reports on file with the Securities Exchange Commission copies of these filings may be obtained by visiting the investors section of <unk> website or by contacting the company directly melafind drops on the Fccs website.
Any forward looking statements made on this call are the company's expectations or predictions only as of today July 32019. 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, and Axaltas financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website. Following the completion of the call with that I'll turn the call over to bounce.
Good morning.
Oh, its second quarter results with that alone.
The right way improving trends in our China business, you know pretty closely we saw that aircraft number okay borrowing basis during the quarter Oh, So the current economic climate and the pricing.
And why didn't want to bore or they might in Chile engine, we believe that it is out and fill it up.
Well our guidance range, while demonstrating solid traction in New York.
We continue to me, it's compared to two children disease by substantially reduced income on that and when your production cost.
Why are you introducing new products that improve the CVG and increased flexibility for our customers.
It was widely and importantly, the market economy.
Yeah, I guess so.
And this is the geopolitical climate has become more stable I would add to that about your months is.
As he is out way again apply and I would say in the more on Sept unpleasant you can always limited near term visibility to you.
So you put all we've got a improving business conditions.
Despite the what would stop <unk>, JV political and business and why did.
We will continue to in within your product.
The implication built substantial wins comes out getting paid to do but the Houston.
Hi, BG remains the clear market leader in fiber lasers with comedy So my Gabor open stope completed.
<unk> unions in second quarter, I will make a lot of talk to walk to cope our sheep.
And each aircraft away well.
We were able to successfully meet the strong sequential growth in demand for our laser products.
Coming from China was a difficult month it though.
We continue to see a good issue pricing and one China will become confused.
We intend to play Doh wouldn't see I'm told that second quarter.
And that was that was what you said on sequential growth you know I always say too.
Okay.
Many other ways up but all the synergies that are unique in the industry.
Chief among these we continue to produce high powered should double your ways. This procaccino, where we didnt.
I'm not that much either <unk> or <unk>.
Nick pace.
In the city, they didn't buy them very well.
Beam that'd be really cheap and won't walk if you shouldn't.
Sales of quotes that are probably follow up quite a ways that that six kilowatt them great.
Accounting when you were 50% of all.
High power laser sales.
So oh somebody is is it 10 kilowatts and good well great grew 16% Youre our year deriving by a rate cut the adoption in cutting applications.
Okay started shipping our new high speed.
Well only the deceiving.
Encouraging kids were put on our customers.
This new products to offer do you put into h. it solution to catch in Oems, but I'm glad you asked that we just didn't fit to MTGE in income bridge to Mark.
This unique capability in could you just give since beep improves got quarterly cheap the deal was clear and then more controlled the deal in and she can mosquitoes and reduce could up by enabling combos. The next gen box.
Well she then.
Ken Berlin customer interest in our new generation on ways that we deductible mold to beam compatibility that.
Pardon me I didn't weibo adjustment or the output volume growth is.
M. be shown to reduce in spot tariff increase speed.
And to improve quality enough, where we didn't application and our if you put all that I'd been evaluated.
By Allegion age went through the quarter and you'll see us.
Is it caught in my kit.
Well you M concocted wide to reinsure much you do see weaknesses to use in our SMB in ways that or I would extend the case filing ways that weve. Our unique went below quite fall Oh Chico kits.
We delivered excellent progress in new products easier outside tomato growth.
Sales so good in some ways that you still improved so the solar cell efficiency increased candide, 50%, you Oh, yeah. It nearly doubled on a sequential basis.
We increased it was so far our older fossil borrow some ways does more than 200% year over year in New Jersey, It 50% sequentially.
Well I have to live working on a more than 15, you put all that well see some ways the across a wide range corporate allocation.
Processing Las ceramics second the boards.
Oddly GP on where that is in so overall sales.
So so far we knew was bound to laser which includes all this isn't it the visible and Oprah wire with the with your wins.
And well take our product the pulse durations now exceed 10 million per quarter and a good ROI in more than 60%.
We expect revenue for this product will grow rapidly over the coming years.
System sales increased more than 50% year, our year, excluding dependencies, driven by strong growth in multiple system for welding and other material processing application.
In addition, our seam stepper.
Had a record quarter with sales into several large automotive customers.
Sales.
Okay beam delivery accessories increased 10% year over year.
So at the end of the quarter, we receive will mature model for our medical laser solution addressing is surgical application in kunshan, our visibility into strong growth in where you can laser solutions this year.
Collectively sales so we knew it on laser products and system into emerging application grew 12% year over year in the second quarter and were 18% in total revenue.
I'm pleased to report that we continue to demonstrate meaningful production.
In ultra high power fiber lasers by investing in new products and applications.
That expand our addressable market opportunity.
While marker of factors.
Creating near term headwinds in our business.
Our continues continued focus on developing in enhancing our differentiated away distribution will drive the car companies growth for many years.
As a reminder, our mission is to make Lpgs fiber laser technology that tool of choice in the mass production.
And I remain confident in our ability to deliver on this mission.
With that I'll turn the call over to Jim.
Thank you Vincent and good morning, everyone.
Revenue in the second quarter declined 12% year over year to $364 million.
Revenue from materials processing applications decreased 12% year over year.
Revenue from other applications.
Decreased 16%.
Examining performance by region.
Second quarter revenue in China decreased 19% year over year versus a record quarter, a year ago and represented approximately 45% of the total.
On a sequential basis sales in China increased more than 40% driven by cutting welding and marking applications.
Following the escalation of the U.S, China trade conflict, we have seen a slowdown in order volume growth during the month of June .
That has continued through the first three weeks of July .
Unfortunately, we believe this is now likely to delay the recovery that have been underway in China.
The pricing environment in China remains intense.
Affecting the dollar value of units sold.
Our team is focused on further cost reductions throughout the manufacturing process.
These cost reductions will only partially offset more aggressive pricing actions taken by the competition.
And we can unit volumes arising from the challenging macroeconomic backdrop will be a headwind to growth during the third quarter.
In Europe revenue decreased 22% year over year, primarily due to softness in cutting and additive manufacturing, partially offset by growth in welding.
While pricing pressure in Europe has not been as intense in China.
The decrease in average selling prices in Europe .
He has been above our historic average of late.
Affecting revenue during the quarter.
Within the region, we have seen a slowdown in Italy market, which had held up better during the course of 2018.
Looking ahead, we believe the persistent macroeconomic weakness throughout Europe .
Is likely to pressure results in the region.
In North America revenue increased 34% year over year.
Driven by the acquisition of Genesis, Excluding Genesis sales in North America decreased 5% year over year with strong growth in welding and cutting offset by declines in marking telecom and government applications.
Due to project timing and more challenging comparisons.
Sales in Japan decreased 10% year over year on softness in marking welding and cutting.
Sales in Korea decreased 14% year over year, so strong bookings suggest improved Q3 performance.
And revenue in Turkey decreased 31% year over year, given macroeconomic pressures in the region.
Turning to performance by product sales of high power CW lasers decreased 20% year over year and represented approximately 59% of total revenue.
Reduced revenue from high power CW lasers in cutting welding and additive manufacturing applications was partially offset by strength in other materials processing applications.
Pulsed laser sales decreased 2% year over year.
With rapid growth in solar cell processing, and fine cutting offset by reduced sales for marking applications.
Medium and low power sales decreased 50% on softness in additive manufacturing and the transition to kilowatt scale lasers in contract.
While Q CW sales declined 21% year over year due to softness in fine welding for consumer electronics versus the year ago period.
System sales increased 193% year over year, including Genesis and 50% year over year, excluding Genesis driven by growth in macro systems for welding and other materials processing applications.
Other product sales decreased 9% year over year with growth in beam delivery accessories and service revenue more than offset by declines in communications and other laser products.
Gross margin of 49.5% declined 726 basis points from the second quarter 2018.
Compared with the year ago period.
Less favorable absorption of manufacturing expenses and foreign exchange reduced gross margin by 150 basis points.
The acquisition of Genesis reduce gross margin by 200 basis points.
And higher inventory provisions reduced gross margin by 150 basis points.
Lower product pricing and other factors reduce gross margin by approximately 240 basis points.
Given the renewed uncertainty and increasing price competition.
We have limited visibility and less confidence in getting gross margin back above 50% in the near term.
Holding all other factors constant we believe that recovery in our core laser business.
To more than $318 million in quarterly sales would enable us to get gross margin to 50%.
Even at their current levels, though our gross margins are industry leading.
Second quarter operating income was $91 million or 25% of sales.
Down 1430 basis points year over year.
Excluding a foreign exchange loss of $5 million operating margin was 26.4%.
Excluding foreign exchange operating expenses as a percentage of sales increased 600 basis points year over year.
Due to lower revenue investments in engineers salespeople and it systems.
And the acquisition of Genesis and our Brazilian submarine networks Division.
Net income was $72 million.
Earnings per diluted share were $1.34.
Foreign exchange losses reduced EPS by eight cents.
If exchange rates relative to the US dollar had been the same as one year ago.
We would have expected revenue to be $18 million higher.
And gross profit to be $10 million higher.
The effective tax rate in the quarter was 24%, which included certain discrete tax items.
We ended the quarter with cash cash equivalents and short term investments of $1.04 billion and total debt of $44 million.
Cash provided by operations was $58 million during the quarter.
Operating cash flow.
Was reduced by $44 million outflow in accounts receivable related to the increase in revenue during the quarter.
Capital expenditures were $54 million as we continue to invest in new plants and equipment to meet demand for our products over the next several years.
During the quarter, we repurchased 15000 shares for $2 million.
We expect to achieve share repurchases to increase in the back half of 2019 and remain committed to offset dilution from equity issuance.
Turning to guidance.
Data points relating to the health of manufacturing economies in our largest regions have weakened over the last three months.
Our second quarter book to Bill ratio was above one below normal seasonality as order volumes weakened in June .
Furthermore, the competitive environment remains challenging.
Due in part to the recent slowdown in industry demand levels.
As a result, we expect pricing headwinds related to the competitive environment continue.
We do expect growth in our innovative new products accessories and complete systems.
To partially offset softness in our core business has these solutions gain further acceptance in the market.
Based on these factors for the third quarter 2019, we expect revenue of 325 million to $355 million.
We expect our third quarter tax rate to be approximately 25%.
We anticipate delivering earnings per diluted share in the range of one dollar five to $1.35 cents.
Escalation of Us China trade conflict and further macro softness have reversed the market recovery.
We had expected to strengthen in the second half of 2019.
Our largest machine tool OEM customers have not provided us with expectations beyond the next few months.
Given the weaker macroeconomic and geopolitical climate.
As a result, we do not have the necessary conviction to provide an outlook beyond the current quarter.
However, we believe strength in new products and ongoing enhancements.
To our core laser portfolio will enable us to better capitalize on the eventual rebound in end market demand.
As discussed in the Safe Harbor passage of todays earnings press release actual results may differ from our guidance due to factors, including but not limited to product demand.
Order cancellations and delays competition terrorists trade policies and general economic conditions.
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 company's reports with the SEC.
With that Valentine and I will be happy to take your questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one your telephone keypad, a confirmation tone one carrier lines in the question queue. You May Press Star two if you would like to review question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key is one moment. Please while we poll for questions.
Our first question comes from Michael Feniger.
Bank of America Merrill Lynch. Please proceed with your question.
Yes, Thanks, guys for taking my question, just just to help us understand the pricing comments I believe.
At a conference Tammy I think two months ago, you mentioned, how pricing stabilizing somewhat sequentially sounds like things changed in June . So can you just remind us how much is pricing typically fall every year I think it's like 5% to 10% how much did we see that fall in 2018 and now what what are your inspection expectations now for us as we think of the rest of 2019 there.
And typically you will see pricing go down 5% to 15%.
Historically.
More recently on average pricing if you look on a year over year year over year basis since being.
At 30% or even slightly higher than that on certain product lines.
The issue that is really become apparent within the market is as soon as the macro environment weekends.
The competitors try and hold onto or increased share by decreasing pricing aggressively. So its very closely tied we're seeing to changes in the demand environment.
With the way that the competitors respond to that.
Having said that you know and the pricing is it continues to be a challenge we've had a lot of discussions internally at IP GE about.
Being certainly more selective and very strategic about how we are going to respond to.
To to these sort of reaction removed by the competition.
There are even some Oems, where we're looking at not not responding to pricing in the way that they're they're demanding because we believe we do have a significantly better quality product.
Both in terms of just for example, electrical efficiency reliability service and support specifications warranty.
And those are the advantages that we believe people should be paying for and.
If everyone is going to be reactionary in this market, particularly in a volatile demand environment, It's really just to chase to the Boston.
Our view is that that that's not a way to leverage the value of this technology, which drives tremendous improvements in productivity and you've really seen this sort of really rapid growth in demand for different applications coming from those improvements in productivity. So it's certainly a challenging environment, but we're also looking at how we can add value around the lasers. The accessories. The for example in the welding applications. Some of the real time, well monitoring capability within systems very advanced welding applications like titanium.
Copper welding and these are in areas, where the competition doesn't really have a lot of expertise will capability and there are areas, where IP GE is building a tremendous amount of of debt then in capability and thats. Excluding some of the newer product applications, where we're starting to see some some nice traction as well where there is an incremental margin profile that we have of that.
And and Tim just can you help us I understand the visibility is limited right now, but could we be seeing some type of replacement demand.
Come through I think systems are seven to 10 years old you would have seen strong growth over the last.
A few years now Im just curious if you are seeing maybe some baseline level replacement demand that has to has to occur and then just secondly on that I'm, just hoping you could give us any more color on the auto market I know, there's a lot of movement there with.
New ERP investments, but also some of the traditional size, we're seeing capex, maybe start to plateau any type of color. You can you can share on that as well. Thank you.
So the first part of the question.
Certainly for fiber lasers, you've got some quantity of kilowatt scale and other lasers that are now you know 10 or more years old the issue that we face is the real volume of kilowatt scale fiber laser starts to increase probably in 14 or 15, so you're relatively early in that replacement cycle. What I will say, though is there still a very large installed base of C. O two lasers that needs replacing.
One of our competitors and other suppliers in the industry of components will will quote the days more than 70000 C. O. Two lasers that are out there that would require replacement over time, we believe with fiber.
Not in this part of the investment cycle towards replacing those is one of the issues that everyone's based EBITDA challenge on the that has slowed down.
When you get to some improvements in sort of.
The macro climate OE, perhaps get some better visibility into whats happening with the geopolitical tensions around the world that replacement cycle, certainly has an opportunity to rebound.
Pretty quickly and it is as I said tens of thousands of Cotwo lasers that do require replacement.
The automotive market is I think obviously, there's a lot of.
Different.
And now this is our data shows that the automotive investment cycles are are relatively.
Low at the moment, and perhaps peak, but notwithstanding that just going back to Q2.
We just mentioned that we had the largest.
Supply and 10 purchase order that we supply for our seam stepper applications into major automotive Oems in.
In Europe , so that was actually as it demonstrates a change in technology is being invested in even when the market is relatively low.
There is a strong pipeline of automotive business, we're working along in the US again, driven by technology changing some of the benefits we have from.
The real time, well monitoring capability that we're hoping will generate order flow and then the overall outlook for the E V investment cycle.
Remains very strong and Thats, a multi year investment cycle. It is project driven and it can be uneven from quarter to quarter, but there are certainly.
Different areas of investment within the automotive that we believe that we will be drivers for our business over the medium term and certainly for the longer term.
Our next question comes from Andrew.
De Gasperi.
Baron Berg.
Please proceed with your question.
Thanks, Good morning.
Thanks for taking my questions I guess, one and maybe a follow up on.
This is first of all I guess, the 380 million core.
Laser business, you mentioned to get to 50% just for clarification was just the midpoint of the 50% to 55% gross margin or was this just over 50%.
So getting back above 50% would be to targeted on level that we've talked about.
Previously and on this call so you'd start to see your.
Absorption rates pick up.
Yes, I think the thing to do is look at where we were a 363 million would just below 50%.
Did have some relatively large inventory provisions in the quarter. So 380, it does give us some comfort of being able to get back there.
But it is a different scale business than the one we're guiding up the Q3, obviously, which is the challenge.
Right.
And then just on pricing and competition.
Hi is.
Six to 10 kilowatt seeing some pricing pressure because of competition at the lower end.
Or are you not seeing competition and that's in that traunch of lasers.
Numerous of the competitors have announced product at that level, then that tried to sell them you face is that to a certain degree.
Any customer looks at the average selling price per kilowatt fiber laser and even if there is less competition at the higher levels you can price at a premium and you got a very good gross margin on that product, but there is a certain flows through on an ASP per kilowatt across the entire product line is how we'd like to think about that.
Got it thank you.
Is the MAU quote can PTC them to more and more difficult to compete because the yeah.
You wouldn't move with move power, it's I wouldn't know, which you put in motion.
We are they where do you see the problem with lifetime, what we said Okay. You have to repay where do you opened with high power the great Kiszko know them way than what they booked a walk in serious so Jeff Moore from images claims they fail, but no to deals to say if we do then.
Our next question comes from John that we're in.
Edgewater Research. Please proceed with your question.
Yeah, Hey, guys.
It's Joe for I'll first talk for Highpower, TCW, you'd actually deposits that you now shipping.
Wondering if you're offering in all geographies and then if you have any rough estimates on let's say what portion of the cutting base may realistically adopt HVP TCW over the next year or so.
So we're offering this throughout the world at the moment, Joe It's still too early to say what proportion of for example, the lower end of the market will will transition to using that.
High peak power laser.
But there's a lot of evaluation work ongoing it's probably.
Quarter, if not two quarters.
Early to be able to give more definitive information about.
The traction that we expect to see from that all for example, what percentage of the low end of the market.
Which start using an age two kilowatt HBP or four kilowatt HBP.
Okay got it a little bit early.
Jim I know you can't quantify the fourth quarter, and then that makes perfect sense, but in any event lets say headlines kind of stay.
With the status quo, you know kind of similar to as they are today when would you expect all else equal.
Somewhat typical seasonality off the third quarter base wherever that ends up being.
So you know that I can't quantify but you're asking me to quantify it.
I guess I am.
[laughter].
We just don't I mean, it's one of those extraordinary times when we just think we need to get through the quarter to work out.
No see where our order flow ultimately ends up see where demand in China ends up see whether there's going to be a bit of budget spend come through there was certainly some projects around.
The advanced that we're expecting order flow from that would be driven by some budget spending there's a pickup in some of the medical business shipments that will take place in Q3 and Q4, there's still not.
Very material that you kind of need to see where the trade wall.
Ultimately ends up and whether that stabilizes the situation in China, you want to see what happens with the European economic zone over the next eight to 10 weeks I mean, you've got this big issue now around Brexit.
With with.
Yes, the new Prime Minister in the UK being pretty aggressive there it.
It's an uncertain time so.
I'm now that's the kind of like.
Color I can give you around it.
Getting drawn into quantifying it at this point in time, if we've been able to quantify we would've done.
All right understood and then last for me could you remind us on what's driving the outsized inventory provisions on a year over year basis, and what do you assume there within the third quarter guide. Thanks.
Let me just go you are lower revenue level on relatively high build up of inventory last year. So you got inventory that just becomes a bit older.
It's not it's still not a massive in terms of total impact it's not it's not massively significant so I expect them to remain relatively speaking a little bit elevated for two or three quarters as we go through.
Lapping the annual buildup in some of the inventory that happened a year ago, but I don't expect to have a.
I am much more material impact related to them.
Thank you we try to manage that Joe as you know you want to.
On a constant basis rather than.
You know certainly looking at inventory provisions every two years and having to take a.
You know a much larger provision were trying to look at the realizable value on a.
A regular basis and manage it that way.
Our next question comes from David Ryzhik.
Seth Cola Hana. Please proceed with your question.
Hi, Thanks, so much for taking my question.
Tim can you maybe elaborate on the they speak declines in Europe .
Is that is that a function of competitive pressures increasing in Europe as well then I had a follow up.
Some of the Chinese are claiming they're selling product in Europe has certainly been some of the pulse lasers in Europe , they've been trying to get traction on.
They are trying to introduce product there.
It's debatable how much success, they've got in that regard given the quality their ability to support it.
Some of the pricing just transitions through to the Oems in.
In Europe , because they're aware of whats happened in.
Other geographies around the world often some of them have Jvs for example in China. So there are very aware of what happens to pricing so the ability to totally differentiate pricing.
On a standard products across regions is more difficult.
The ability to differentiate pricing on capability and technical specification, which is a key strategy that we have is very important strides. So we believe that the HPP lasers. The MB lasers are going through a nave, we're going to be able to premium price some of that product selling product with with some of the wells monitoring capability and accessories adds a tremendous amount of value around it but if you're just selling at a straight three four or five kilowatt laser people understand what's happened to pricing in different regions around the world and.
Unless you got some other differentiating factor to some degree that pricing migrates.
Understood Thanks and.
And just regarding the Threeq guide would love to get your assumptions for the new product category.
Embedded in your in your third quarter guidance, it increased nicely from 15% to 18% in Twoq just wondering what you expect for the third quarter.
We don't give specific guidance around different elements of the revenue streams in the third quarter. We continue to expect good traction around the green lasers, the ultra fast lasers, a pickup in some of the shipments for cinemark our applications continued strength in some of the laser systems business.
So we're looking for growth from those areas, we don't give specific guidance around those numbers and we're looking for growth to drive the business forward not just in Q3, but.
Q4, and the medium term from those newer applications there'll be a pickup in some of the medical shipments as well based upon the order.
That we call. It so we're actually pleased with some of the diversification in this business when you look at.
And these are all areas. We've worked on for a long time and they are now starting to generate not the level of revenue, we want but they've got they've got some nice.
Traction in in revenue coming from.
These leading edge new products and if we can continue executing with them. We've got to have a much more diverse business within a.
18 to 24 month period.
Okay. Thanks, Tim.
Our next question is from Jim Ricchiuti.
Needham and company. Please proceed with your question.
Hi, Thank you. Good morning wondering if there any regions geographic regions, where perhaps the bookings have held up somewhat that sounds like it's been a.
You are clearly seeing some slowing in bookings.
In in July .
In China, where were out where are you seeing other areas of weakness and where are you seeing some signs where it's holding up better.
So in China, Jim actually bookings were relatively strong for the quarter is just theres. Some uncertainty about whether people are going to take that demand now so that revenue guidance was weaker.
Order flow in Korea was actually very strong even though the macro data out of Korea is not good but thats again being that a lot of our development to some of the new product introductions.
Some.
And for all his yet from a and b that specifically, but they've been doing a lot of work for example, the MB on welding applications, but a lot of the ultra fast some of the UBI some of those newer applications in.
And the welding business in Korea was strong.
Japan order flow was was not great, but there's there's expecting we're expecting a pickup in revenue from Japan in.
In Q3. The you asked is continuing to hold up reasonably well so that that continues to be a more resilient.
The macro and also the US business is a bit more diverse ride you caught the emerging medical business Youve got the advanced business, which was revenue wise was a bit weak, but there's a lot of different projects being worked on that we got an order for a 60 kilowatt laser in the last couple of weeks out of the U.S. So.
Awards.
Two orders was 60 kilowatt.
So that would be for an advanced research application.
Other areas in Europe , as a whole is pretty weak and.
China's volatile right. There is some underlying demand that exist in China, but.
It's getting switched on and off as business uncertainty either.
It gets switched off when business uncertainty declines and it comes back when there is some confidence in the business environment. So I wouldn't say there is no demand for lasers in China is volatile at the moment and that's the challenge that we're dealing with.
Okay. Thanks for clarifying I know, we've got two wells two months, where do file the good old so business in China went after the new year increase will tell you for immediate we Cook who will go into two orders from China drove made minimum city times now will there our customers remain with us, but they do because they will order by five to 10.
You wouldn't believe key sandy units, but were unaware that now, but I won't go into towards the low is the same as would be appropriate to go we couldn't jeep, Andy but instead of 10 15 or Scandinavia with each other now will only one the two pieces. So they put a $1.11 wells waiting lists or you wins what could happen later now with the oil for example, rugged influence whether you would the tools and the poor chips, but put our loan to purchase.
That's helpful on the system side of the business ex Genesis.
Surprise that the business is holding up and you're showing the kind of growth that you have you you're showing in this kind of macro environment are you.
Is it just because it's a relatively small business and you have new applications you're going after.
So as you think.
Some of the systems are the.
The multi axis in the small form cutting machine, which is primarily sold in the US right does benefit from the us.
Economy being relatively stronger those also.
You know relatively old capital equipment in terms of age in the U.S, so that investment cycle potentially if the macro job is stronger the ill tee business, which is shipping into the medical device manufacturing industries had had a good quarter. In Q2 is going to have another it's going to have a better quarter in terms of shipments in Q3 that total order flow is also held up and then we did deliver quite a lot of higher power.
Specialized somebody is a fairly specialized systems. There was one system for welding batteries that was delivered to the UK Jim.
As another system for welding batteries in a consumer product that will will be delivered.
Well revenue will be cool come through on Q3, so some of those more specialized systems, we did get some revenue off.
And then for example, the system that was sold for the battery welding as actually going to result in.
Good order flow for some lasers for that battery welding application in the future.
So yeah the systems business ex Genesis for lasers was perform pretty well.
Okay. Thank you.
Our next question is from Patrick Ho.
Stifel.
Please proceed with your question.
Thank you very much Tim maybe first off you talked about some additional cost cutting efforts on year end given.
How you are already the lowest cost supplier in the industry are these additional cost cuts coming on the manufacturing side. The supply chain can you just give a little more color and details of where you can extract the additional cost savings.
It continues to come from the core optical components that we use the diodes is obviously one that we talk about a lot that increasing the power that you can get out of an individual fiber blog.
There are even some.
Mechanical components, where we're going to some of these are design changes right. So for example, some of the heat sink designs were looking after the used in the modules, we are going to improve the quality of the cost aluminium in that too.
Enable those key things to more rapidly remove heat that will enable us to produce modules of higher power level of increase reliability, that's something in the in the medium to near term that we're looking at that isn't going to roll into the bill of material for a few months, but that would be an example of something that we think about a little bit more of a lateral way of thinking about it and then you got to look at where we are adding value around the accessories, which grew at 10%.
Year over year, there's a lot of value added around the accessories that we produce.
Relative to the cost of that an accessory in the selling price.
The newer products, where we're taking cost out of the bills of material for.
For example, the cinema products.
Continuing to ramp the demand for ultrafast pulse trying to get the cost of the green lasers down a bit more so some of the newer products, you'll see improving margin there as well.
So it's a pretty broad based as I always said part of the strongest part of IP DNA is not just the technology.
It's really this ability to take cost out of products.
And we'll report before do we the infrared you throughout the year beginning of this year, a new value, which you much more powerful entities.
And also keep award whether its central with the only producer in the market only a couple months ago. Great. You go. It. So the idea. We didn't were currently died we expect until this year next year would be modestly down from the market with these days.
Great that's helpful and maybe as my follow up question.
Yeah, I think as Jim mentioned, Jim Genesis has held up very well.
In this overall environment, how do you see expanding genesys from kind of its core North American base, how do you I guess expand its opportunities into other regions.
And how you look at that on a going forward basis.
The journey to report walk through on the American market, they don't fit in our produce Debra.
The World worldwide, now, where we have stemmed the acuity of all the way through Europe , where you want for Asian markets for example.
'cause here in the Japan, when Yodlee is always to deal with it become a worldwide and we are and we expect in second also then put it now we redesigned the product to the U.S into them ways that before the quoted your system. They are projected to be equipped with the way the orderly weighted more toward digi novel modes, new programs or when.
Now based on ways that technology. It takes some time to get the design and improve on what we say were worthy series, where do much project now the thumb you Ed from another country. When we prepare now is worthy of watch per order to fix it so with me.
The.
The the wheel with the major players and I would say new integrator would be in our corporate useful cold chain for on the parts and components and ways that will support both by an old system isn't it it would be a major our internet, we integrate the old customer with whom we are working.
Could you guys see this program. They prefer to go were nowhere to Adrian is it that you have to wait excited now switch that to them or because the trend is that the major integrated when when you worry about.
Ways in that market.
Great. Thank you very much I doubt it takes time and it is starting from the more than one of these new coal production and new people with Supervalu will impact right away is that an hour on funds from our deposits away completely unique accent thirtyth optical active right now now we put our whites note that you wouldn't production. So we're still with some of them were able to make goes there will be a for now with the Genesis. We now will go into production on guidance.
Production rise or fall with you and change to Norwich in menu, a large company quote acknowledging that it will be important for our white new profit for our weighted to new solution a fully integrated solution that unit production by an effective with the new approach quite PDG takes some time, but where does the success. We will go into this new business.
Thank you.
Our next question comes from Tom Diffely.
D.A. Davidson. Please proceed with your question.
Yes. Good morning, just a follow up on Jims question on the system side.
Let me add that pricing is holding up better on systems versus the kind of the core fiber laser market.
Hi, this is different.
It's a different dynamic Tom it depends how much where are you, adding a lot of technology, and you're adding a lot of value and you're delivering complete processes.
The relative price versus cost is strong.
In some parts of the market, where there is more competition and the relative price to cost is lower so it really depends upon.
What the application and solution Youre delivering is in some of these core areas, where where we're seeing some growth for example, we are doing.
Some of the medical device manufacturing applications, the average selling price of those systems, because you're delivering software as well as technology.
Trace ability for example in the manufacturing process, certainly pricing is not being impacted in the way that it has in the other the other parts of the market.
But it really comes down to the the completeness of the technology and the solution that you're offering.
Okay. That's helpful.
And then Tim.
When you look at the FX impact in the quarter what region is driving most of that impact and what do you have in place since forwards naturally synthetic hedges right now.
So what was the last part of the question Tom.
So what kind of natural hedges through operations or synthetic hedges might you have in place for FX.
So the transaction FX losses in Q2 were primarily.
NIMBY versus dollar driven.
A little bit to a lesser extent on the.
On the euro.
We try and imminent in the natural hedge is a pretty much the same sometimes those natural hedges don't work as effectively.
If exchange rates go in the same direction, so a weakening renamed beyond a weakening euro your natural hedges just don't work if you have a weakening euro and a strengthening renminbi. So it's natural hedges work better.
I continue to be particularly with the cost of hedging some of the renminbi exposures.
Skeptical about whether you just end up smoothing the losses. So we tend not to go into using the FX.
Forward contracts for that on the other side of it if you look at the impact on revenue on a translation basis. The two biggest exchange rates that have moved over the last year again are the RIN MB is depreciated from us.
I have 630, almost if you go back to Q2, a year ago, it's touched lows approaching seven.
So thats, a 10% depreciation and the euro probably a year ago is 118 119 is anywhere in the range of 111 112.
To the ruble, which is also an exposure we have is probably traded between 57 and 63 ish over the last year.
And those would be the three main currencies that we that we were affected by.
Okay. Thank you.
Our next question comes from Nick.
Two Dora.
Longbow Research. Please proceed with your question.
Thank you good morning, guys.
So just to go back on the pricing headwind comment. So obviously most of the headwinds are centered in China, but can you guys talk about if you're seeing anything.
And in Europe or in North America were just picked up some commentaries from the supply chain that some.
OEM cutting tools manufacturers have become aggressive as well and from what we know they're not your customer. So just wondering if you're seeing any in any more aggressive discounts in in Europe and North America.
Yeah, I mean, I'd said that inevitably there is.
Our knowledge about what goes on in China from the cutting equipment manufacturers in different regions around the world So that.
You can't isolate price changes in one region for another one.
The second thing is that people tend to think about pricing in terms of the cost per kilowatt. So.
If you see decreases in one region they tend to migrate to the other regions to a greater or lesser extent.
It depends also on.
If you go to the higher power levels it tends to be less so because there's less competition as an advantage.
The cutting equipment manufacturers gaps in terms of productivity some of the electrical efficiency benefits and become more and more important as you go to higher and higher power levels right.
A laser that operates at 20% electrical efficiency at one kilowatt.
It's it's perhaps it was certainly not as important when you have.
20% electrical efficiency competing against an IP G laser that has 50% electrical efficiency in 10 or 15 or 20 kilowatt. So as you go up to empower their certain performance advantages that.
PT deliveries that are not matched by the competition, but you see pricing.
Migrates around the world just because people understand what's happened in China.
Several of the Oems I mentioned have joint ventures in China. They fall intelligence on the ground about what the cost of a 12468 or 10 kilowatt laser is.
Okay don't forget the Europe , followed them posted right, 70% to 80%, it's the only impact but not the yields are not entitled to Europe , mainly in Asia in China. So as the one we can put China, mainly so are you acquire the China to toys from pricing change immediately impactful situation Europe really carefully so we wait to see if they buy the different genetic failed or.
Correct correct prices for the year.
Okay. Hello, Nicole this is well is probably 25, you just looked at average selling prices.
Across the board about 25% of the total changes related to the FX.
As I addressed in the in the previous question just on a translation basis with.
The renamed be having depreciated, 10% in the euro having depreciated five or 6%.
Yes, if you saw the dollar start to weaken and some of those currencies strengthened there'd be some recovery against that so.
As a view that the dollar may weaken if interest rates are moved down by the fed tomorrow.
Yes got it and then you talked about demand being very volatile in China kind of related to changes in the headlines is it strictly demand being volatile or you're seeing also the same on the pricing front or prices have been kind of.
Getting progressively weaker as as we get into the into get into May and June .
I said at the beginning of the call. It the demand volatility then tends to drive price volatility right, particularly from the competition.
I think the industry has to learn to become less reactionary to this because it's just going to be or a rush to the bottom and we're certainly.
Being more selective and strategic about looking at pricing and the value that the lasers deliver.
So the demand volatility unfortunately, the moment drives a reactionary.
Response on pricing.
From particularly two or three of the competitors because.
That just trying to fight for any revenue they can get that's a very short term.
View to have in our opinion around the markets and one of the reasons why we're looking to be more strategic and selective.
Got it and last question from me.
Last couple of quarters, you talked about some strength in aerospace and defense can you give us an update then there I didn't hear anything in this quarter and I think you mentioned, some some volatility and probably in advanced products is that related to maybe some.
Some just temporary drop in demand that end market doors or something else.
Oh on the defense side is still very much there's some commercialize applications with the early developing right. So a lot of it tend to be very project, driven and you'll have very strong quarters and then the revenue can be uneven because order flow.
Will be lower in people will be working on on utilizing the latest report Theres. One application that's been developed for commercially at lower power single mode lasers, where we're expecting to see some increasing demand.
In the second half the year, we referenced that we got two orders for 60 kilowatt lasers that are going into research. So that business is just uneven and expected to be stronger in the.
In the second half of the year a couple of years. The first part of the question I can't remember.
No I think you answered that.
I think you're saying correctly.
Well, so we tend to be a pool or maybe about fulfill for diesel application job laser, but now were going for the to the sale of the production. So you wouldn't see it.
Well this market is so different approach and much more order book it. So on a go and waited for this was for the same for example to air of ways and high energy market. It's on core oil and gas market. So on are we going to woo Hoo complete solution. A unique growth is though we failed. The will of this growth is now we materialized in season pool system with Dom system platform feel to you Wouldnt tempting, so on but it's not easy proceeds to introduce in this market qualification they've done a year filled so and but we're going to be ready to accept with all the samples are well aware the difficult application going extremely well in future. So potential would be a very large toward a business.
Got it that's helpful. Thank you guys. Good luck.
Our next question is from Tom Hayes Northcoast Research. Please proceed with your question.
Hi, Good morning, Thanks for taking my question I will try to be brief Jim I was just wondering if you maybe provide any other color.
As it relates to mix within your China sales or is it kind of relates to movement up and down the power skill.
Maybe provide a little bit in the ultra high power and the greater than 10 kilowatts performed very well in the quarter that added rebounded.
Strongly in April or May say that was a bit of a.
And benefit the lower end of the market.
In units was was relatively strong.
I think that's really that's a high level stuff in terms of the.
The high power, there's some some of the welding applications in China at Highpower as well were.
Performed reasonably well.
Great. Thanks for the door.
Our next question is from Mark Miller at the Benchmark Company. Please proceed with your question.
Thank you for the question I'm, just wondering about Programmability is that becoming a bigger part of the laser laser sales you're seeing growth in demand for programmable applications.
Our programmable do you mean, the adjustable mode. The Mark Thats an area that we're working on with.
For example customers both in cutting and.
Welding applications in welding, there's a substantial reduction in splatter.
With the program ability of it you can also then caught varying.
Thicknesses of material.
It's important but it's.
Ed talked about a lot in terms of marketing.
Materials by different companies around the world our view on it is actually the Programmability is probably going to be more of an enhancement for welding applications that is.
Necessarily for enhancing thick cutting applications.
Some of the crop quality people are getting too with our higher power cutting heads for example is achieving adequate quality when youre cutting materials.
One and two in sickness is you know you don't require Jack so quality cuts there sometimes it's just the perception of the quality of the car.
It's absolutely mean about Programmability is going to have some niche applications, particularly in welding, it's not going to be an overall dominant type of laser that sold.
For materials processing.
Yes, I think I'd say in the <unk> for example, where blue case many of people talk coil pipe always also where do you see in the met those feeds to like one to really meet that suits. So and then Joe Torre will can provide much secret criticism not seek to much you now people forget about was it because quite bellwether graduate broadly one centimeter, so and now with the way we'll pick nodes you took out that book value.
Since you meet that way Chi quality got Nobody's steel fabrication technology, nobody can be sold if we can't wait to not only in Canada were wary square so and so also brought to the table.
Norwich and sold to alter the rewarded now with the value of this technology is that those are market nobody can compete with that to be is so on his thinking you're still quite low at three to six.
You wouldn't more centimeters cotton waiting size to be fairly quality and so nobody can make the equipped for example, the with with quite a 10 has been a.
You wouldn't 10 kilowatt worked 12 kilowatt would they tried to they will own a cartoon camps in profit to award we put away now with 2020 why your Wellbore.
In profits at Solta in ways to push out your mood that nobody can put to do this by the adult because it's not only power gig also witnessed where folks have moved and how they deliver this flywheel. So on and optical accepted so evidenced in spreads will nobody can go right to date to the market in the third well Ross says it all both an old how did the what these two business wouldn't be where do you see the illiquid, Guatemala, and nodded gotten or six steel or stainless steel with loan with care was this brought the way open site.
Thank you.
And also a copper catching for example, and so on also and so on and where would you need so and also the people for them where they agree with you there were required to generate a further example for very helpful.
Addicted to go station they cope serious problem with this yield and copper where we didnt. So we'll grow quite excellent technology. The way exists now with the we just got to put away for them with me upon I don't wait wait maybe two entities that were made in the world.
Thank you.
Thank you at this time I will turn the call back to James Hillier for closing remarks.
Thank you for joining us this morning and for your continued interest in AG. We look forward to speaking with you over the coming weeks and on next quarter's call have a great day everyone.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.