IPG Photonics Corporation Third

IPG Photonics Corporation
Third-Quarter 2014 Conference Call Prepared Remarks
Operator:
Good morning, and welcome to IPG Photonics’ third-quarter 2014 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 forward-looking 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, 2013 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 or by contacting the Company directly. You may also find copies on the SEC’s website.
Any forward-looking statements made on this call are the Company's expectations or predictions
only as of today, October 28, 2014. 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. I’ll now turn the call over to Dr. Valentin Gapontsev.
Valentin Gapontsev:
Good morning everyone.
IPG delivered another quarter of record revenues and net income. We reported $199.7 million
with 16% growth from the prior year. Our gross margin of 54.6% and our record EPS of $1.05
per share reflect the leverage we have in our operating model. These results continue to
demonstrate IPG’s strong fiber laser leadership position and our ability to increase penetration in
existing end markets and capitalize on growing demand for several emerging applications.
As you know, IPG’s team has been most successful in penetrating in industrial metal processing
end-markets, particularly cutting, welding, brazing, cladding, cleaning, drilling, marking and
engraving. As more OEMs and end-users widely deploy fiber lasers in their systems to displace
existing laser and non-laser technologies, we expect demand for our products will grow.
This will be driven by further penetration of existing OEM and end-users as well as gaining new
customers in materials processing. Contributing to the trend is the growing acceptance of fiber
lasers.
For example, from worldwide sales of over 7,500 units of high power laser cutting machines
expected in 2014, the share of fiber cutters doesn’t exceed 30%. In 2020, the share should be
increased, according to industry experts, up to 60 to 80% with a total volume up to 12,000 units.
In addition, we are seeing a clear trend to use higher power lasers for cutting applications. For
example, last week at EuroBLECH, the international sheet metal working technology exhibition
in Germany, some OEM customers demonstrated cutting systems using IPG's 8 KW fiber lasers.
One of our customers has promised a demonstration of a 12kW fiber cutter at the next Fabtech
show in November. The higher power lasers allow a cutting of thicker metal and generally faster
processing speeds. This is a continuation of an ongoing trend that has seen cutting OEMs
transition from 2KW lasers to 4KW fiber lasers and now to 6KW and higher power levels.
These higher power lasers expand the value of IPG's available market because their ASPs are
higher and because these higher power fiber lasers are only available from IPG. Taking in
account these two trends, we can expect the growth of fiber cutting sales by a factor of 5 to 8
times during next six years.
Further, top auto manufacturers are now starting to increase their use of fiber lasers as they
deploy them more widely around the world. There is a significant potential for fiber lasers with
the move to use lightweight materials such as high strength steel and aluminum and potential for
substitution of resistance spot welding with our laser seam stepper technology. Additionally, our
new more efficient and perfect technology for brazing car roofs and air bags has recently passed
a production test by one of the top European car makers. An Asian car maker qualified our new
customized ECO laser for mass implementation in their body-in-white assembly lines. Taking in
account many other new applications developed by IPG, we expect laser welding to be a key
driver of sales growth in 2015 and 2016.
In addition, newer markets such as additive manufacturing, fine welding, cutting, and ablation
are starting to contribute meaningfully to our growth. Fiber lasers used for additive
manufacturing applications, or 3D printing, is another area that is steadily emerging as a
significant growth opportunity for IPG. For example, fiber lasers are now being used in industrial
applications such as depositing metal to precisely form increasingly complex metal parts that
might otherwise be machined. IPG has a solid position in this market and sales in the quarter
more than doubled compared to 2013. Although this growth was on a relatively small base, we
do anticipate it being a meaningful future growth driver.
New products introduced in the past few years are also contributing to sales growth. QCW
sales continue to grow strongly driven by fine welding and aerospace drilling applications,
among others. Also, high power pulsed lasers are growing for deep engraving applications.
Finally, the potential opportunity for growth in the micro-machining and fine processing market is
significant. We plan to address this emerging opportunity with our green and UV lasers as well
as ultrafast lasers. IPG now has numerous lasers in long term test and evaluation as we have
developed a new technology platform for this new generation of products. Unlike past product
introductions when we have had to reduce the ASP of the product to meet market requirements,
the green and UV products should have a starting sales price substantially below incumbent
technologies with lower operating costs, while providing a more reliable solution. Over the near
to long term, these products will open a substantial new available market for IPG. We expect to
introduce our new unique UV fiber lasers with 355nm and 266nm spectral ranges in 2015 and
2016. In addition, we are starting now the mass production of a new family of short picosecond
and femtosecond fiber lasers, with impressive improvement of efficiency and other principal
parameters.
We will continue to work with our customers while investing in R&D to broaden our product
suite and expand upon the growing list of applications for which our fiber lasers can be used.
With that, I will turn the call over to Tim.
Tim Mammen:
Thank you Valentin and good morning everyone.
With Valentin having provided the business highlights, I’ll get right into the sales drivers for the
quarter. Materials processing sales increased 17% year-over-year to $192.3 million, accounting
for more than 96% of total sales during the quarter. Within materials processing, high-power
lasers used for cutting applications continue to be our strongest growth driver.
Sales to other markets, including advanced applications, telecom and medical applications,
which account for less than 4% of IPG’s total revenue, decreased by approximately 9%, or by
$0.7 million to $7.4 million.
Looking at our results by product line, it is important to note that sales growth was meaningful
across most of our key products, demonstrating both the market acceptance and diversity of our
portfolio products.
High-power laser sales, which accounted for 53% of total revenue, increased 10% year-overyear to $105.8 million. This growth continues to be driven by sales for cutting applications.
Cutting is our largest single application and grew strongly year-over-year. Our OEM cutting
customers are tending to move up the power scale for their cutting systems allowing them to
improve processing speeds and cut thicker metals as Valentin mentioned. This trend bodes well
for the continued penetration of fiber lasers that displace conventional lasers in OEM systems.
Growth in high power cutting was tempered by a decrease in high power welding applications.
Sales of lasers for welding applications can be more uneven because they tend to be project
driven by end users. For example, they are often affected by the timing of purchases in the
automotive industry and introductions of new vehicle models. Last year in Q3, welding had a
strong quarter. As the use of high strength steel, aluminum and other materials to reduce
vehicle weight becomes more widely adopted in the automotive industry, and as manufacturing
techniques continue to grow more sophisticated across many different industries we expect that
welding sales will grow strongly in the coming year and beyond. Welding is an important growth
opportunity for IPG. We also see developing interest in our Laser Seam Stepper welding
subsystem at several major auto manufacturers. Several subsystems are in production and test
at different plants; however it could take some time to develop into significant sales volume. As
an aside, high-power laser sales also benefited from the shipment of units used in oil and gas
drilling.
Pulsed laser sales, which had been soft for several quarters due to heightened competition in
China, increased 11% year-over-year to $38.4 million. While this was partly due to project
driven demand it was, nonetheless, a positive sign that the new generation of low cost, low
power pulsed lasers that we recently launched are gaining traction and taking some market
share in China.
Sales of medium power lasers rose 45% to $20.6 million, or 10% of total revenues. Much of the
growth is coming from sales for fine-processing applications particularly cutting of thinner
materials and also from laser sintering applications.
Sales of QCW lasers, which are mostly used for welding and turbine blade drilling, increased by
122% year-over-year to $14.5 million and accounted for 7% of total revenues. Some of the
recent demand for QCW lasers has been driven by fined welding projects for consumer
electronics. IPG’s QCW lasers provide better performance at a lower cost than traditional YAG
technology, which has dominated the micro-processing market until now. So we expect to see
steady growth in demand for our QCW lasers for use in applications currently employing YAG
lasers.
Sales of low power lasers were up 14% year-over-year to $3.1 million, primarily due to the
timing of orders in the U.S. for medical applications.
Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers,
integrated laser systems and certain components, were $8.5 million, down 1% year-over-year.
Service, parts, lease and other revenue, including accessories, totaled $8.8 million, a decrease
of 10% from last year primarily due to an increase in deferred revenue.
Now looking at our Q3 performance by geography…
In Asia and Europe, we experienced strong sales growth in both regions during Q3 which we
think continues to demonstrate the secular growth trends toward fiber lasers. Sales in Asia
increased to $113.1 million, or by 25% year-over-year. Within that region, China sales increased
29% to $72.4 million. Growth in China was primarily related to strong demand for QCW lasers
used for fine welding, high-powered lasers used in cutting applications and pulsed lasers used
for consumer electronics applications. Of particular note was a 30% growth in pulsed lasers, a
product line in which we have seen increased competition in recent quarters. The growth in
pulsed lasers in China was due in part to timing of consumer electronics projects, but also in
part due to sales of our new lower priced pulsed laser introduced to directly compete with lower
cost Chinese manufacturers.
We also saw strong growth in South East Asia and Western Asia. Demand continued to be
strong for high-power lasers used in cutting applications from a major Korean OEM. We are
also seeing a growing opportunity in Korea for metal welding, brazing and scribing applications,
including an order for six 5 kW single mode lasers to be used in the steel industry that will be
shipped in early 2015. In Turkey, our main cutting OEM's continue to drive growth in that region.
In Japan, sales declined primarily due to weaker demand for high-power lasers used in welding
applications. This decline was somewhat offset by increased sales of high-power lasers used
for cutting applications, as well as pulsed laser sales. However, in broad terms, we continue to
make progress in the Japanese auto industry with high-power lasers and expect welding sales
to improve in the medium term. An Asian automotive customer has adopted IPG’s fiber lasers
for welding and is currently rolling them out in its factories worldwide. We’re also gaining
traction in penetrating the market for cutting applications. Japanese cutting OEM's have been
slower to adopt fiber lasers, but we are beginning to see that change. We did face some
currency headwinds in Japan this quarter due to the weak Japanese Yen and also the change in
consumption tax earlier in the year distorted the phasing of sales there driving a lot of demand
into the first quarter of 2014.
European sales grew 23% year-over-year to $60.4 million, driven by strong growth from our
cutting OEMs and from a major German automotive manufacturer for welding applications. We
also sold a few laser seam stepper systems that are being evaluated by customers in the auto
manufacturing industry in Europe. We expect meaningful growth from these systems over the
long term.
North American sales decreased 22% year-over-year to $25.1 million. This was primarily related
to a period of strong retrofitting sales in the automotive and welding markets last year.
Also,
$1.8 million in revenue related to an advanced applications order was deferred pending
installation. Sales for lasers used in drilling oil and gas wells as well as medical applications and
microsystems somewhat offset the decline in North America. While year-to-date performance in
North America has been rather anemic for materials processing Q3 order flow improved nicely
which should help Q4 North American revenue. In addition to steady materials processing
orders, we just were awarded a sole source contract to provide the NASA Ames Research
Center up to four 50 kW fiber lasers, consisting of a base purchase of two complete systems
and options to procure two additional systems. The contract value is approximately $3.4 million,
which we believe will be recorded in Q4 and will benefit other sales in the period.
Now, working our way down the income statement . . .
Gross margins of 54.6% demonstrate the leverage in our operating model as higher
manufacturing activity improved absorption of manufacturing overhead. Product mix and
continued component cost reductions also helped margins to improve year over year. Inventory
provisions were approximately 1.3% of revenue.
Research & Development expenses increased to $13.4 million from $11.5 million a year ago. As
a percentage of sales, R&D was 6.7%, which is even with the third quarter of 2013.
General & Administrative totaled $14.2 million, or 7.1% of total sales, compared with $13.2
million, or 7.7% of sales a year ago. Sales & Marketing expenses increased to $7.5 million, or
3.8% of sales, from $6.8 million, or 4.0% of sales, a year ago. In both areas we saw an increase
in real dollars, but a decline in the percentage of sales.
Operating expenses for the third quarter of 2014 were $31.5 million, including a foreign
exchange gain of $3.6 million, compared with $33.0 million a year ago, which included a foreign
exchange loss of $1.6 million.
Third-quarter operating income was $77.6 million, or 38.9% of sales, compared with $59.8
million, or 34.7% of sales, in the third quarter of last year. Excluding foreign exchange
transactions gains and losses, operating margins were 37.1% and 35.6% in 2014 and 2013,
respectively.
Our tax rate in the third quarter was 29.0%.
Net income attributable to IPG for the third quarter increased by 30.4% to $55.2 million. On a
diluted per share basis, we reported $1.05 for the third quarter compared with $0.81 a year ago.
Excluding the benefit related to foreign exchange transaction gains EPS was $1.00.
If exchange rates had been the same as one year ago we would have expected revenue to be
$0.8 million higher and operating expenses would also have been $0.5 million higher.
Now, turning to the balance sheet…
We continue to maintain a strong balance sheet, ending the quarter with cash and cash
equivalents of $487.5 million, and $13.9 million of debt including lines-of-credit.
At September 30, 2014, inventory was $179.5 million, up 4% from $172.7 million at year end significantly less than the rate of sales growth. Our current level of inventory on hand amounts
to approximately 182 days, compared with our target range of less than 180 days. We maintain
inventory at higher levels in order to provide short lead times to our customers. Accounts
receivable were $136.6 million at the end of the third quarter, or 63 days’ sales outstanding,
compared with $103.8 million at year end, or 57 days’ sales outstanding. The increase in days
sales outstanding is primarily driven in part by the timing of sales in the quarter which were more
heavily weighted to September.
Cash provided by operations during the quarter was $47.2 million.
Capital expenditures for the quarter totaled $28.9 million, which included the purchase of
facilities and equipment that will be used for manufacturing, sales, applications and research &
development.
In October, we purchased a corporate aircraft. Having access to a corporate jet will improve
management efficiency and effectiveness given the extensive amount of travel required by the
CEO and management due to the geographical diversity and growth plans for the Company. The
purchase price was $22 million, all of which is financed with long-term debt. As a result of this,
we expect G&A expenses to increase approximately $0.5 million and interest expense to
increase by approximately $90,000 per quarter starting with Q4.
We estimate capex for full year 2014 to be approximately $82.0 million excluding the aircraft
which was financed with a note as described above
And now for our expectations for the upcoming quarter…
Year to date, IPG’s revenues have increased by 17% and we delivered operating margins of
36%. With one quarter left in 2014, we continue to seek opportunities to expand our business
with existing OEMs and end-users, establish partnerships with new OEMs and end-users, and
qualify IPG’s fiber laser-based products for new applications. Strategic investments that
enhance our product pipeline and expand our worldwide infrastructure will continue to be a key
element of our strategy to generate profitable growth while maintaining gross margins within the
target range of 50% to 55%. Our book-to-bill ratio was just below one, coming off a record
revenue quarter. Order flow in Q3 was very good considering the normal seasonality we
encounter headed into the fourth quarter and increased substantially as compared to Q3 2013.
With that in mind, we currently expect revenues for the fourth quarter to be in the range of $190
million to $205 million. We anticipate Q4 earnings per diluted share in the range of $0.86 to
$1.01. The mid-point of this guidance represents quarterly revenue and EPS growth of
approximately 19% and 34%, respectively, year-over-year.
The EPS guidance is based upon 52,792,000 diluted common shares, which includes
52,088,000 basic common shares outstanding and 704,000 potentially dilutive options at
September 30, 2014. This guidance is subject to the risks we outline in our reports with the
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.
With that, Valentin and I will be happy to take your questions.
After Q&A
Valentin:
Thank you for joining us this morning. We look forward to speaking with you on next quarter’s
call.

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