Yahoo Finance IPG Photonics Corporation (NASDAQ:IPGP) Q1 2024 Earnings Call Transcript
IPG Photonics Corporation (NASDAQ:IPGP) Q1 2024 Earnings Call Transcript April 30, 2024
IPG Photonics Corporation beats earnings expectations. Reported EPS is $0.522, expectations were $0.48. IPG Photonics Corporation 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’ First Quarter 2024 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to your host, Eugene Fedotoff, IPG's Senior Director, Investor Relations for introductions. Please go ahead with your conference.
Eugene Fedotoff: Thank you, Rob, 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 that we make during the course of this call that discuss management or the company's intentions, expectations, or predictions of the future are forward-looking statements. These forward-looking statements are subject to the 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 IPG Photonics' 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 IPG's website or the SEC's website directly. Any forward-looking statements made on this call are the company's expectations or predictions as of today, April 30, 2024 only, and 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, earnings call presentation, and the 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. In addition to our earnings release, we announced a leadership transition this morning. Let me start by commenting on the quarterly results first and then I will speak about the CEO change later in the call. In the first quarter, we continued to generate strong operating cash flow, reduce inventories, manage product cost, and return capital to shareholders. We achieved this while facing soft demand in general industrial manufacturing and e-mobility end markets, which together represent over 60% of total sales and negatively impacted revenue across many applications. Our book-to-bill was about 1 and we believe that we are seeing a bottom in demand with a potential modest improvement toward the end of this year.
At the same time, we remain focused on execution of our long-term strategy to displace other laser or non-laser tools with our fiber lasers and grow revenue in a number of focus applications such as welding, cleaning, heating, and medical, diversifying away from more competitive applications such as cutting and marking. Revenue in our emerging growth products accounting for 45% of total sales in the first quarter. These laser products and solutions can prove significant improvements in speed and quality of manufacturing processes while reducing energy consumption and other environment impacts. I will cover highlights and comment on the revenue by applications first, and Tim will cover our financial results in more detail. Starting with our largest applications, welding revenue declined year-over-year primarily due to lower demand from e-mobility customers, significant reduction in new battery investment in China compared to the prior year, and delayed EV battery projects.
North America reduced demand for our welding products and solutions. At the same time, we believe that we are able to gain some market share in EV welding, closing new business opportunity both with significant new customers and in new applications. Additionally, we are working with a number of leading automotive manufacturers of new fiber laser applications and batteries and general automotive assembly. We remain optimistic that EV battery investments may increase again towards the end of 2024 into 2025, resuming a multi-year trend of building our required battery capacity to support the transition from internal combustion vehicles to battery electric cars or plug-in hybrids. Additionally, we are very pleased to see a pickup in demand from consumer electronics battery applications, as well as growth in welding revenue, in general automotive, and general industrial applications.
Adoption of our real-time welding monitoring system and complete automated welding solutions are also showing good results. Our handheld welder sales slowed in North America in the quarter, with some smaller customers being impacted by uncertainty in demand and higher financial costs. But order pipeline and customer interest remain strong. In addition, we are starting to ship these devices to Miller Electric, which will help welder sales in the second quarter and will have more measurable impact in the second half of the year. Sales in cutting applications declined in the first quarter due to continued soft industrial demand across all major geographies. Large OEM customers were managing their inventories, which negatively impacted our cutting sales in Europe, North America, and Japan.
Market conditions remain difficult, but appear to be more stable compared to the last several quarters, and we expect that improvement in general economic conditions and reduced customer inventories should result in more stable demand in the second half of the year. Foil cutting sales also remained soft due to weak demand in e-mobility, but our system sales showed some improvement year over year. In other material processing applications, cleaning sales were negatively impacted by softer demand in e-mobility, but we are making progress introducing our cleaning solution across many general manufacturing applications. Cleaning revenue has been increasing and the applications is becoming meaningful contributor to total sales. While still relatively small, heating and drying lasers is another area of future growth for IPG.
The application delivered strong increase in sales this quarter as we shipped a large order for foil drying to an e-mobility customer. Additionally, we are working with a number of large manufacturers from across a number of application areas to build innovative heating and drying solutions to suit their needs. Finally, revenue increased in 3D printing applications as the industry is using the large number of high quality lasers to melt metal powder to create parts. IPG has a strong position in this market, providing lasers with high-stability beam characteristics. Outside of material processing, other applications revenue declined due to the lower sales in medical and advanced applications. Our medical business was negatively impacted by a large customer management inventories in the first quarter.
We expect medical revenue to normalize in the second quarter and we are working on several new opportunities that we'll launch in 2025 and 2026, and should help this business to grow and become more meaningful contributor to IPG total sales. Before I turn the call to Tim, I will provide a few comments on leadership transition we announced this morning. I would like to welcome Mark Gitin as IPG's next CEO. The board performed an extensive search and selection process and closed Mark Gitin because he passed a unique combination of relevant scientific expertise and proven ability as a successful operator in our industry. I look forward to helping him to make the transition seamless for our customers, employers, and other stakeholders. I also would like to thank the IPG team for its contribution over the last 30 years.
I was fortunate enough to be a part of the team that transformed the laser industry and helped IPG to become a global industrial leader. I believe that the best opportunity are still ahead for IPG and fiber lasers will continue to displace other technologies, driving the future growth for the company. I will miss my day-to-day interaction with my IPG colleagues, but I make this transition knowing that we have accomplished great things. This will be my last earning call, but I will remain on the board supporting the next leg of the journey for IPG, and I will also be involved as an advisor to Mark and to the board. With that, I will now turn the call over to Tim to discuss financial results.
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 5. Despite the headwinds to our revenue, I'm pleased with the resilience of our financial model and the company's ability to generate strong cash flow from operations to support current and future investments, as well as, continued opportunistic share repurchases. Revenue in the first quarter was $252 million, a decline of 27% year-over-year. Foreign currency headwinds reduced revenue growth by approximately 2%. Revenue from materials processing applications decreased 28% year-over-year, while revenue from other applications decreased 25%.
GAAP gross margin was 38.7%, a decrease of 360 basis points year over year due to lower absorption of manufacturing costs as a result of lower revenue and higher inventory provisions. These negative impacts were partially offset by improved product cost, mostly as a result of product mix and lower shipping and tariff costs. On a sequential basis, gross margin improved due to lower product cost, a decrease in expenses related to scrap and duty, which were partially offset by an increase in inventory provisions and unabsorbed manufacturing expenses expressed as a percent of revenue. Operating expenses came in at the high end of our expectations and increased both year over year and sequentially, primarily in research and development and sales and marketing, as we invested in resources to drive future growth while still controlling general and administrative expenses.
FX headwinds also had a negative impact on revenue and gross profit in the quarter. If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $8 million higher and gross profit to be $5 million higher. GAAP operating income was $19 million and operating margin was 7.6%. Net income was $24 million, or $0.52 per diluted share. The effective tax rate in the quarter was 28%. Foreign currency transaction losses related to remeasuring foreign currency assets and liabilities to period-end exchange rates had a negative impact on operating income of $2 million or $0.03 per share. We continued to optimize our footprint and as a result, we sold two buildings during the quarter. The gain on sale of these assets increased operating income by $7 million and increased diluted EPS by $0.11.
Moving to revenue performance by region on Slide 6. Sales in North America decreased 16%. We saw a decline in revenue in medical, welding, cleaning, and advanced applications, partially offset by growth in cutting systems and increased revenue in parts and services. Uncertainty in the general demand environment and lower e-mobility sales as well as cutting OEMs and medical customers managing inventories were the main reasons behind the decline in North America. In Europe, sales decreased 21% as growth in welding was more than offset by reduced sales in cutting applications due to large cutting OEM customers reducing purchases to manage inventories. Demand in 3D printing applications was also soft in the region. Economic conditions in Europe remain challenging, but we saw some improvements in e-mobility sales and benefited from a continued rollout of LightWELD in the region.
Revenue in China decreased 38% year over year as demand declined in general industrial and e-mobility markets, negatively impacting sales across cutting and welding applications. On the other hand, sales to 3D printing applications increased in China as the industry is seeing growing investments in the region. Moving to a summary of our balance sheet and cash flow on Slide 7. We ended the quarter with cash, cash equivalents, and short-term investments of $1.1 billion and no debt. Our inventories continued to decrease sequentially and we are targeting further reductions over the course of 2024. Cash provided by operations was $55 million and capital expenditures were $28 million during the first quarter. As I mentioned earlier, we sold two buildings in the quarter realizing $25 million in proceeds, which means net capital expenditures were just under $3 million, well below the same period last year.
While maintaining a strong balance sheet, we have been returning a significant amount of capital to shareholders through opportunistic share repurchases. We spent $90 million on share repurchases in the first quarter and continue to view current share prices attractive at current levels. Moving to our outlook on Slide 9. First quarter book-to-bill was slightly above 1. However, macroeconomic uncertainty is still negatively impacting demand across all of our major markets and resulting in project delays and reduced orders. Additionally, project delays related to battery capacity expansion are providing headwinds to our sales in China and North America. On a bright side, leading manufacturing indicators have been improving in US and China and bottoming in Europe and Japan, which should lead to more stable demand for our customers.
We also expect that medical and LightWELD will return to more normalized revenue levels in the second quarter. For the second quarter of 2024, we expect revenue of $240 million to $270 million. The second quarter gross margin estimate is between 37% and 40%. We anticipate delivering earnings per diluted share in the range of $0.30 to $0.60, with approximately 46 million diluted common shares outstanding. 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. Before we move on to questions, I would like to express our gratitude to Dr. Scherbakov on behalf of the board, management team, and employees of IPG.
He has made vast contributions over the past 30 years, too many to describe today. But we should recognize his contributions, particularly during his time as CEO, including by strengthening IPG's competitive position and laying the foundation for our next phase by establishing a clear strategic plan focused on key growth markets and applications, reorganizing R&D, and disposing of non-core assets. We all look forward to continuing to work with Dr. Scherbakov in his capacity as a Director. With that, we'll be happy to take your questions.
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