IPG Photonics Corporation. Second-Quarter 2013 Conference Call Prepared Remarks

Transcription

1 IPG Photonics Corporation Second-Quarter 2013 Conference Call Prepared Remarks Operator: Good morning, and welcome to IPG Photonics second-quarter 2013 conference call. Today s call is being recorded and webcast. At this time, I would like to turn the call over to Angelo Lopresti, IPG s Senior Vice President, General Counsel and Secretary, for introductions. Please go ahead sir. Angelo Lopresti: Thank you and good morning everyone. With us today is IPG Photonics Chairman and Chief Executive Officer, Dr. Valentin Gapontsev, and Senior Vice President and Chief Financial Officer, Tim Mammen. Statements made during the course of this conference call that discuss management's or the Company s intentions, expectations or predictions of the future are forwardlooking statements. These forward-looking statements are subject to known and unknown 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 include those detailed in IPG Photonics Form 10-K for the year ended December 31, 2012 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG s website at investor.ipgphotonics.com/sec.cfm or by

2 IPGP/2 contacting the Company directly. You may also find copies on the SEC s website at Any forward-looking statements made on this call are the Company's expectations or predictions only as of today, July 30, The Company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call. Please go to and select Investors to review these remarks. I ll now turn the call over to Dr. Valentin Gapontsev. Valentin Gapontsev: Good morning everyone. IPG performed well during the second quarter, with 22% year-over-year revenue growth. Much of our growth came from sales for materials processing applications, with strong contributions from Asia and the U.S. Gross margins during the quarter were within our target range at 53.5% and we grew our bottom line by 11%. As Tim will explain later, our net income comparison was adversely impacted by a large FX gain in 2012 and in 2013 by increased costs from the investments we are making in R&D, selling and other areas to support and drive the future growth of IPG. We continue to see solid demand in most of our end markets and we maintain a strong technological advantage over our competition. Our fiber lasers continue to take market share from conventional laser technologies like CO 2 and Nd:YAG, particularly for cutting and welding applications. Materials processing applications account for 94% of our total

3 IPGP/3 sales. Many of our OEMs are increasing the percentage of fiber lasers they buy from us versus conventional lasers. Because of the success our cutting OEMs had with fiber lasers for thin steel cutting, demand for higher power lasers to cut thick metal is increasing as the quality and speed of thick metal cutting has improved. Another application which presents exciting opportunities for growth is additive manufacturing, which includes 3-D printing, cladding and sintering. In this application, the IPG lasers are used to manufacture a part from powders made of metals or other materials. We have been in this application for years and most of the key global manufacturers for metal additive manufacturing use IPG s fiber lasers. With the unique performance of our fiber lasers, customers are developing terrific new applications. For example, recently a customer in Asia manufactured a large and sophisticated aerospace part out of special alloys with our 10 KW laser. Additive manufacturing is an exciting application for IPG in the future. We sell into many different industries, and automotive is a large portion of that business. Another significant portion of sales for materials processing applications comes from general manufacturing. This can include anything from consumer products to elevators, as well as heavy industry sectors like shipbuilding or for example construction work. We have also seen an increase in sales to the aerospace industry where we are beginning to penetrate the market for very high speed drilling of holes in turbine blades. The holes assist with the cooling of turbine blades, improving fuel efficiency because it allows the engines to operate at a higher temperature. Welding of aluminum and other alloys in the aerospace industry is another application which we are working on and

4 IPGP/4 which we think could drive future sales. The same with processing of parts from composite materials. Order flow in the second quarter was strong and the book-to-bill was substantially above 1. To accommodate demand, we are making continuing investments to support the expected growth of our business and strengthen our competitive position. We are investing in sales and marketing support around the world. This year, we invested in our apps labs in China, the U.S., Japan and Russia, and expanded our overall sales headcount. IPG opened 140,000 square feet facility for new production, R&D and administrative buildings in Russia. A further 200,000 square feet will be added at our Russian facility before the end of the year for fiber and systems manufacturing. This year, we will expand our Oxford, MA facility with new two buildings of the highest standards: one with 80,000 square feet for tripling diode production and for manufacturing visible and UV lasers as well as one with 30,000 square feet for electronic and metal parts manufacturing. We are opening a branch in Taiwan to support customers and new opportunities there and we are expanding our Shanghai presence with a new and larger office. Looking further out, we expect to begin investing in new geographies, including Eastern Europe and South America, to leverage the materials processing markets there. We also are focused on increasing our strong competitive lead by continuously introducing innovative products and improving the existing products. For example, we substantially increased the wall plug efficiency of our high power cutting lasers from 28% to 35%, a 25% improvement, which not only reduces electrical consumption but

5 IPGP/5 also cuts cooling requirements and associated costs. Another great result a new, third generation of our unique, patented, first in the world, manual laser seam stepper. It has great potential to replace widely-used resistance spot welders in applications where customers need high quality welds and productivity. There is an enormous market for such devices. In June, we finished qualification and received an international certificate as a class one device, free to be distributed worldwide. We have a lot of requests from automotive and other industries. With the resources of the Mobius Photonics team, which we acquired in the first quarter of this year to help our own efforts to develop a fiber-based UV laser family, we expect to offer lower cost, more reliable and much better performing UV lasers than current lasers on the market. We also have developed new ultrafast fiber lasers and are exploring with our customers applications for them. In total, I am taking responsibility to claim that, in spite of the forecasts of some market analysts, IPG s share in fiber laser materials processing has not been impacted by competition. Our year-over-year growth of 38% in high power revenue does not leave any arguments for opponents. In reality, the growth was even larger. In units, we raised our shipments in the year by more than 50%. The difference in revenue is caused by further optimization of prices. With that, I am pleased to turn the call over to Tim Mammen, our Chief Financial Officer. Tim Mammen: Thank you Valentin and good morning everyone.

6 IPGP/6 I ll start with a review of our end markets, products and geographic regions. After that, I ll provide highlights from our income statement and balance sheet, and close with our guidance. As Valentin mentioned, second-quarter revenue grew 22% to $168.2 million from $137.9 million a year ago, primarily driven by growth in materials processing. Materials processing sales increased 26% year-over-year to $157.6 million, accounting for 94% of total sales during the quarter. We continue to make progress in penetrating OEMs for materials processing applications, particularly in China, Europe, Turkey and the U.S. We believe we are continuing to win significant market share vs. conventional CO 2 lasers used for cutting applications. Other applications, which include telecom, advanced and medical, accounted for the remaining 6% of sales. Revenue from these other applications decreased 22% yearover-year to $10.6 million. Much of the decline was due to weak telecom demand, primarily in Russia. Sales of high power lasers, which accounted for 51% of total revenue, increased 38% year-over-year to $85.4 million. IPG s high-power fiber lasers are being widely accepted for cutting and welding applications, particularly in the auto industry as well as with OEM s who serve various general manufacturing needs. We have begun to penetrate additional markets like aerospace, heavy industry and construction, as the benefits of using fiber laser technologies become more widely adopted. Recently, IPG also started to market its laser seam stepper with potential new customers around the globe. This is the first time that IPG marketed the newest version of this device on a

7 IPGP/7 more widespread basis, not only to the automotive industry but also to companies producing other products such as kitchen appliances. Pulsed laser sales were $40.0 million, which accounted for 24% of total revenues and increased 5% compared with last year. Demand for pulsed lasers continues to be driven by marking and engraving applications across a wide variety of different industries. We introduced new and more sophisticated shorter pulsed lasers which are starting to gain sales in more advanced marking applications. Sales of medium power lasers increased to $15.7 million, accounting for 9% of total revenues and increased 41% year-over-year. We had a record quarter for QCW laser sales, which increased by more than 100% to $5.6 million compared with last year, and accounted for 3% of sales. A noteworthy accomplishment is that our unit sales for QCW lasers more than tripled. We have brought the manufacturing cost and sales price of QCW lasers down to make them an even more attractive replacement for lamp pump YAG lasers in welding and drilling applications. Also, we sold more than 50 QCW lasers for glass cutting which is a new application developed by one of our customers. Sales of low power lasers were down 14% year-over-year to $3.6 million primarily due to lower sales of medical applications. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-ir lasers, integrated laser systems and certain components, were $6.2 million. Service, parts, lease and other revenue, including accessories, totaled $9.6 million.

8 IPGP/8 Now looking at our Q2 performance by geography Asian sales, which include Western Asia, increased to $91 million, or by 34% year-overyear. In China alone, sales increased to $58.5 million, or by 54% year-over-year. There has been some skepticism around the Chinese economy, but Q2 was a record quarter for IPG in that country. We ve been successful in penetrating the Chinese market for cutting, welding, marking and additive manufacturing applications. In Japan and Korea, we have invested heavily in our management and are beginning to see the results. Sales in Turkey, which is included in Western Asia, have been strong due to increased demand from cutting OEMs there. European sales were flat year-over-year at $47.0 million. Although we have seen an increase in demand in Europe for cutting, welding and metal sintering, the telecom industry in Russia has been weak and ultimately offset some of the growth we are experiencing in other areas. North American sales at $30.3 million for the quarter were up 34% year over year. The materials processing business in North America for automotive and other applications is continuing to perform well. Now, working our way down the income statement... Gross margins were 53.5% compared with 54.3% in Q This is within our target range of 50% to 55%. Margins were slightly impacted by geographic and customer mix, product mix, and $0.5 million in fair value inventory charges related to acquisitions.

9 IPGP/9 Sales & Marketing expenses were $6.8 million, or 4.1% as a percentage of sales, essentially flat with 4.2% as a percentage of sales in the year-ago quarter. General & Administrative expenses increased to $12.8 million, and as a percentage of sales were 7.6% compared to 6.3% a year-ago. The increase was primarily due to increased salaries, benefits and recruitment expenses driven in part by the addition of costs related to recent acquisitions and also our continued investment in resources and infrastructure to support and drive further growth. Research & Development expenses increased to $10.5 million. As a percentage of sales, R&D was 6.2% of total revenues, which is up from 5.2% in the second quarter of Again, this represents our increased investments in product development to capitalize on future growth opportunities and includes the costs of the Mobius Photonics team which we acquired in Q1 of Operating expenses for the second quarter of 2013 of $30 million include a foreign exchange transaction gain of $0.1 million as compared to a $3.4 million gain in Second-quarter operating income was $59.9 million, or 35.6% of sales, compared with $56.4 million, or 40.9% of sales, in the second quarter of last year. Excluding foreign exchange gains, operating margins were 35.5% and 38.5% in 2013 and 2012, respectively. The effect of goodwill written-off net of contingent consideration payable related to acquisitions resulted in a net charge of approximately $350,000 during the quarter.

10 IPGP/10 Our tax rate in the second quarter was 30%. We continue to expect that our rate going forward will be approximately 30%. Net income attributable to IPG for the second quarter increased 10.5% to $41.7 million. On a diluted per share basis, we reported $0.80 for the second quarter compared with $0.72 a year ago. We estimate that if exchange rates had been the same as one year ago, sales in Q would have been $0.1 million higher, gross profit would have been approximately the same and operating expenses would have been $0.2 million higher. Now, turning to the balance sheet We have a solid balance sheet and ended the quarter with cash and cash equivalents, including short-term investments, of $369.5 million. This is down approximately 3.8% from year end because of a large tax payment we made in Germany in Q1 plus our investments in other working capital, plant, equipment and acquisitions. At June 30, 2013, inventory was $154.0 million. Our current level of inventory on hand amounts to 179 days, compared with our target range of less than 180 days. If foreign exchange rates were at the same level at the end of the second quarter 2013 as they were on June 30, 2012 the translated value of inventory would have been $152.6 million. Accounts receivable were $114.5 million at the end of the second quarter, or 62 days sales outstanding, compared with $96.6 million at December 31, 2012, or 60 days sales outstanding.

11 IPGP/11 Cash provided by operations during the quarter was approximately $35.3 million. Capital expenditures and acquisitions for the quarter totaled $16.5 million and were $34.3 million year to date There is a possibility that capital expenditures for 2013 may increase to a range of $75 to $80 million from $65 to $70 million in the event we purchase additional real estate in Moscow to support engineering and sales efforts there. And now for our expectations for the upcoming quarter Looking ahead to Q3, demand is solid in most of our significant end markets. In the second quarter our book to bill was substantially greater than 1 meaning we have built some backlog. We remain committed to making investments where necessary to support our customers needs, now and well into the future. We have significant opportunities and are excited about our ability to capitalize on them. Our goal remains the same: drive profitable growth while extending our technological lead in the industry. IPG Photonics currently expects Q3 revenues in the range of $165 million to $175 million. The Company anticipates Q3 earnings per diluted share in the range of $0.77 to $0.87. The mid-point of this guidance represents revenue growth of 9% year-overyear. The EPS guidance is based upon 52,385,000 diluted common shares, which includes 51,462,000 basic common shares outstanding and 923,000 potentially dilutive options at June 30, This guidance is subject to the risks we outline in our reports with the

12 IPGP/12 SEC, and assumes that the exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates. And with that, we will open the call for your questions. After Q&A Valentin Gapontsev: Thank you for joining us. We look forward to speaking with you next quarter.