IPG Photonics Corporation (NASDAQ:IPGP) Q4 2023 Earnings Call Transcript

IPG Photonics Corporation (NASDAQ:IPGP) Q4 2023 Earnings Call Transcript February 13, 2024

IPG Photonics Corporation misses on earnings expectations. Reported EPS is $0.89 EPS, expectations were $0.95. IPGP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to IPG Photonics Fourth Quarter 2023 Conference Call. Today’s call is being recorded and webcast. At this time, I’d like to turn the call over to, Eugene Fedotoff, Senior Director of Investor Relations, for introductions. Please go ahead.

Eugene Fedotoff: Thank you, Kevin, and good morning, everyone. With me today is IPG Photonics’ CEO, Dr. Eugene Scherbakov; and Senior Vice President and CFO, Tim Mammen. Let me remind you that statements made during the course of this call that discuss management’s or the company’s intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company’s actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties are detailed in our Form 10-K for the period ended December 31, 2023, and our reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of the IPG’s website or the SEC’s website.

Any forward-looking statements made on this call are the company’s expectations or predictions as of today, February 13, 2024 only. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to earnings press release, earnings call presentation and the Excel-based financial data workbook posted on the Investor Relations website. We will also post these prepared remarks on the website following the completion of this call. With that, I’ll now turn the call over to Eugene Scherbakov.

Eugene Scherbakov: Good morning, everyone, and thank you for joining us today. We are pleased to report that fourth quarter revenue came at the top of our guidance. We saw growth in multiple areas, including welding, cleaning, 3D printing and medical applications, that showed success in our strategy to diversify revenue away from cutting and reduce the amount of sales from China. We remain focused on our strategy to displace legacy technology and processes with highly efficient and environmentally beneficial fiber lasers and laser-based technologies. Revenue in our emerging growth product improved sequentially and accounting for 46% of our total sales, driven by growth in hand-held welding, beam delivery and medical products.

However, uncertainty in macroeconomic conditions continued to weigh on sales and many general industrial applications, and some of our large OEM customers around the world were managing inventories and in-use purchases in the quarter. Also, we saw a soft demand for our lasers and e-mobility in China and solar cell manufacturing applications. Welding sales rebounded strongly in the quarter with growth in North America, more than offsetting our low revenue in China. Laser adoption is growing in general industrial and automotive applications, and not just in e-mobility. The increase in welding this quarter was driven by high sales in our hand-held laser welder and growing adoption of our real-time weld measuring tool, which has become the industrial standard for automating processes, monitoring and quality control.

Customers understand a significant value proposition of real-time welding processes monitoring, which can significantly reduce scrap and improve yields. We are also seeing the high sales of integrated laser welding systems and complete solutions for high-speed automating laser welding, which includes laser, scanner, vision and controllers that are easy to integrate in the manufacturing process. I am happy to report another quarter of strong growth in hand-held laser welder. Light weld sales are beneficial from rollout of the tool in Europe and increased 50% in 2023. We expect that adoption will continue this year and are excited about the new partnership with Miller Electric to promote laser welding among the large network of MIG and TIG welders.

Miller Electric is a leading worldwide manufacturer of arc welding products. We believe that most welding applications can be addressed by laser, including the hand-held market and there is tremendous productivity improvement that lasers enable. Welding is a large addressable market for our lasers and we are in the initial stage of developing it. Indicative of success, we are generating in welding IPG to our largest customer. Laser application increased 13% year-over-year and accounting for 36% of our total revenue in 2023. IPG remains a well-positioned in immobility market providing welding, cleaning, cutting and now drying solution for most major EV battery manufacturers around the globe. While our immobility sales were negatively impacted by a showdown in new capacity additions in China.

We saw an increase in sale in North America, Japan and Korea during the quarter. Our capacity in battery production in China after a strong investment cycle in 2021 and 2022 continue to provide a short term drag on our growth, but we remain optimistic in the future revenue for this important applications as a new electric vehicle sales continue to grow worldwide. We are also looking to increase our exposure by editing more adjacent laser technology around our current offering to the further penetrator mobility applications. We successfully shipped the first order of laser drying solution for battery oil manufacturing. The solution replaced the less efficient infrared bulbs and environmentally unfriendly gas fired furnaces and can significantly increase drying speed and reduce energy costs for our customers.

For the full year, our EV sales increased modestly to the new record value level and accounting over 20% of total revenue. Additionally, we are looking at new growth opportunity in laser cleaning market. Laser cleaning solution while still small contributor in our overall sales have been grown at high rate and there is an increased interest in the market to replace traditional cleaning process, which uses abrasive materials and chemicals. Whether it is paint or rust removal, our laser can do the work quicker, more safely for the operator and with less harm to the environment. Finally, our medical business delivered strong results in the fourth quarter. Our revenue grew slightly to a new record level, despite some destocking by large customers in the second quarter.

We have benefited from growth in single use fibers and some additional demand in aesthetic applications. We believe that there is a large installed base of old laser technology that can be replaced with fiber lasers over time. As you can see from our guidance, which will be covered by team later in this call, we are looking at slow start to the year as the industrial demand remains weak. However, we are focusing on what we can control to offset these headwinds. We are targeting a number of addressable markets where fiber lasers can replace existing laser or non-laser technology by taking advantage of several novel trends including automation, increasing efficiency and reducing the environment impact. We expect that these trends to continue and help diversify our revenue.

We also are focused on operational improvement, such as lower cost and reducing the inventories in 2024. We are investing in the future growth and continue to maintain strong balance sheet. Our cash flow generation remains strong and benefited from inventory management and I would like to thank, our employers for their contributions to 2024. And we will turn the call over to Tim to discuss financial highlights in the quarter.

Timothy Mammen: Thank you, Eugene, and good morning, everyone. My comments generally will follow the earnings call presentation, which is available on our Investor Relations website. I’ll start with the financial review on Slide 4. Revenue in the fourth quarter was $299 million, down 10% year-over-year that came in at the top of our guidance. Revenue from materials processing applications decreased 12% year-over-year due to lower general industrial demand, which impacted revenue in cutting applications, partially offset by growth in welding, cleaning and 3D printing. Revenue in other applications increased 4%, driven by the strength in medical. GAAP gross margin was 38.2%, an increase from last year due to a significant decrease in inventory provision and other charges related to our Russian operations that impacted results in the fourth quarter of 2022.

You can find details of these items in the financial tables of the press release. Additionally, gross margin benefited from lower shipping costs and tariffs, but these benefits were mostly offset by lower absorption of manufacturing costs and slightly higher cost of products sold. As we focused on reduction of inventory, we estimate that the impact of production shutdowns to work down our inventories, reduced manufacturing cost absorption and reduced gross margin by approximately four%age points in the fourth quarter as compared to the third quarter of 2023. Additionally, both revenue and gross margin were negatively impacted by foreign currency translation. If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $5 million higher and gross profit to be $4 million higher.

Operating expenses came in above our guidance range, driven by continued investments in R&D and sales organization to support our strategic initiatives and new applications. In 2023, we created numerous new and important sales roles globally that we expect will drive our sales, deepen custom relationships for the future. We also had higher stock-based compensation and some one-time expenses that increased operating costs in the quarter. Foreign currency transaction loss related to remeasuring foreign currency assets and liabilities to period end exchange rates had a minor negative impact on operating expenses of $0.4 million or $0.01 per diluted share in the quarter. GAAP operating income was $29 million and operating margin was 9.6%. Net income in the quarter was $41 million or $0.89 per diluted share.

The effective tax rate in the quarter was 2% and benefited from certain discrete items including closing tax audits. Moving to Slide 5, sales of high-power CW lasers decreased 19% due to lower sales and cutting applications in China and Europe as a result of lower industrial demand and OEM customers working down inventories as well as increased competition from Chinese players in cutting applications sales of ultra-high-power lasers above six kilowatts, represented 48% of total high-power CW laser sales. Pulse laser sales decreased 40% year-over-year due to lower demand in solar cell manufacturing and battery foil cutting applications, driven by reduced industry demand. System sales decreased 1% year-over-year with strong growth in light weld, offset by lower sales in other laser systems.

Medium power laser sales increased 5%, while QCW laser sales were up 6% year-over-year, driven by higher sales to consumer electronics 3D printing and e-mobility applications. Other product sales were up meaningfully on strong growth in medical applications and beam delivery. Looking at our performance by region on Slide 6, revenue in North America decreased 3% due to lower demand in cutting applications, which was partially offset by higher sales in welding, mostly driven by strong revenue in e-mobility applications. In the face of a widespread economic slowdown in Europe, sales increased 1% as the region continued to perform better than expected with higher sales across most applications except for cutting. Revenue in China decreased 25% year-over-year, due to lower demand in general industrial markets, continued competitive pressure in cutting applications and reduced investments in electric vehicle battery production.

China represented 24% of total sales in the quarter, its lowest level in the last 10 years. Moving to a summary of our balance sheet on Slide seven, we entered the quarter with cash, cash equivalents and short-term investments of $1.2 billion and no debt. Cash flow generation remained strong with cash provided by operations of $106 million in the fourth quarter. Our CapEx was $25 million in the quarter and $110 million for the full year. Net of asset divestitures CapEx was $79 million. Our inventories declined in the quarter and decreased by more than 10% during 2023 as we continued to focus on managing inventory and reducing our investment in working capital. We will remain focused on lowering our inventories during 2024, which may have a short-term impact on margins, but will benefit our cash generation.

While maintaining a strong balance sheet, we continued to return capital to shareholders with our ongoing stock repurchases. We repurchased shares for a total of $64 million in the fourth quarter and $223 million in 2023. The board has approved an additional $300 million in share repurchases. We have returned over $850 million to shareholders via share repurchases in the last three years and continue to buy back shares opportunistically. Moving to the outlook on Slide nine, fourth quarter book to bill was below one. Continued economic uncertainty with low PMI numbers in Europe, North America and Japan is impacting industrial demand and capital investments. We are also seeing our cutting OEM customers managing inventory and reducing purchasing, which may not restart until the second quarter.

In China, demand has remained soft in some of the mature markets such as cutting and marking are facing severe competition. We expect e-mobility investments to pick up in China in 2024, but only in the second half of the year. While it will be a challenging start to the year, we believe demand will improve as the year unfolds. We continue to focus on emerging growth applications and our strategy to continue to drive laser adoption in new markets and applications in 2024. For the first quarter of 2024, IPG expects revenue of $235 million to $265 million. IPG anticipates delivering earnings per diluted share in the range of $0.30 to $0.60 with approximately 46 million diluted common shares outstanding. The coming expect the first quarter tax rate to be approximately 25%.

We expect 2024 CapEx to be in the range of $120 million to $130 million net of disposal of assets as we continue to invest in additional manufacturing capacity in Germany, US and other locations. Significant amounts of the spending in 2024 relates to replacement of fiber and other critical components capacity that we no longer have access to in Russia. We expect capital expenditures at a significantly lower level in 2025 and beyond. As discussed in the safe harbor passage of today’s earnings press release, our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the safe harbor and the company’s reports with the SEC. With that, we’ll be happy to take your questions.

Operator: [Operator instructions] Our first question is coming from James Ricchiuti from Needham & Company. Your line is now live.

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Q&A Session

James Ricchiuti: Hi, thank you. Good morning. So it sounds like the non-China EV related business held up better in the quarter. Is that your expectation still as you think about the early quarter of ’24 just given some of the signs of slowing in the Western markets as it relates to EV and the impact that might have on capital investments may be moving — shifting to the right?

Eugene Scherbakov: So, Jim, you’re right. EV outside of China in the fourth quarter was quite strong with good sales in North America, career in Japan. Clearly, given the guidance we’ve got for the first quarter at least, there is a sort of lower level of EV sales in North America in the first quarter in particular expected. I don’t think there’s any big pick up in the first half of the year. We’ve mentioned that we think we’ll start to see some capacity investment in China in the second half of the year. There are a lot of R&D projects that we’re working on both in North America and in Europe with a number of the larger automotive manufacturers. There’s a significant I’d say not rebound, but increase in interest given the success of some companies utilizing the sort of subsystem incorporating the laser weld measurement technology is a renewed or increased interest rather from a broader base of some of the large automotive manufacturing companies.

So we remain optimistic about it, but I think it’s going to be a slow start to the year. We’ve got a fairly robust number for example the new drying application we expect that to grow strongly. We had a good win for some EV motor applications, some hairpin welding applications as well. So that was a positive, but Yes it’s a difficult start to the year and I think EV is part of that as well.

James Ricchiuti: Got it. And then, Tim you size some of the impact from — on Q4 gross margins from the production shutdowns. Has that as we think about the early part of Q1, has that also been a headwind that has factored into the presumably the Q1 gross margin guidance?

Timothy Mammen: Yes part of the Q1 is continuing to try and work down inventories. I was actually really pleased with the progress and the pretty definitive progress we made in that in the end of the year and the way that translated into really strong cash flow generation. I’d say in Q1 it’s a combination of continuing to want to manage inventories closely with also a level of revenue guidance that starts to more fundamentally impact our fixed cost absorption relative to say a $300 million revenue run rate. There’s a combination of the two things Jim.

James Ricchiuti: Got it. I’ll jump back in the queue. Thank you.

Operator: Thank you. Next question is coming from Ruben Roy from Stifel. Your line is now live.

Ruben Roy: Thank you. Hi Tim. Would like to stay on the inventory topic if we could and move over to the customer side of the equation, I think you mentioned that you were managing inventory at customer. So I’m wondering if you can give us a little bit of detail around that dynamic versus demand and I know you like — that you don’t like to guide for more than a quarter, but you did say probably expect some pick up second half. So when you think about the first half, do you think that there’s further downside as inventories are digested at customers in Q2 or do you think that we’re sort of at a level where we could think about sort of a flat revenue outcome and perhaps a little bit of growth in second half as the inventory is come up and you come down at your customers. Thank you.

Timothy Mammen: Yes so I think it’s mainly our cutting OEM customers who are managing their inventory levels and not only are they trying to get those down in the first half of the year, but on the other side the equation they’re also expecting to see some improvement in their business as we get into the second quarter and beyond. So we don’t expect cutting market outside of China to remain persistently weak for the entire year. So we’re looking for some recovery in that. I’d say, my senses we’re seeing somewhat of a bottom in the demand cycle here. We don’t have a great bookings forecast for the first quarter, that’s been put together, but it’s actually relatively stable. Now January bookings off of compared to the very, very weak October saw some improvement in January is the first month of the year.

So that was quite good. It was still down on a year-over-year basis. So if I’m sort of going to pull together a trajectory here, I think the first half of the year will continue to be, or will be, will be very challenged. But I’d like to target and we are targeting maybe some moderate growth on a year-over-year basis in the second half of the year. clearly, given the weakness we had in the second half of last year, that shouldn’t be too difficult to do if we see even a basic recovery and things. But I think it would be good to get back into a some growth on a year-over-year basis. And that’s certainly what we’re trying to target.

Ruben Roy: Very helpful, Tim. I guess just to follow up on that, outside of some of your own inventory work-downs, et cetera, and obviously, on the lower level of revenue, there are these absorption costs that we have to worry about. But in terms of some of the other areas that you folks are working on last year, sort of bringing up the expanded factory, manufacturing levels, et cetera, as revenue does recover, are some of the factories set to go. Germany, Poland, in terms of seeing a little more of a, I guess, inflection in gross margins as those revenues come back, second half of the year. We’re even looking, sort of exiting this year into next year, should we expect, sort of a meaningful recovery in gross margins as revenues recover, I guess, to the question?