Rofin-Sinar Technologies' CEO Discusses F3Q13 Results - Earnings Call Transcript

Rofin-Sinar Technologies, Inc. (NASDAQ:RSTI)

F3Q13 Earnings Call

August 1, 2013 11:00 AM ET

Executives

Günther Braun – Chief Executive Officer

Ingrid Mittelstädt – Chief Financial Officer

Analysts

Mark Douglas – Longbow Research

Patrick Newton – Stifel

Mark Miller – Noble Financial

Jagadish Iyer – Piper Jaffray

Jiwan Lee – Sidoti & Company

Operator

Welcome to Rofin-Sinar’s Third Quarter 2013 Results Conference Call. Today’s call is hosted by Mr. Günther Braun, Chief Executive Officer, and Ms. Ingrid Mittelstädt, Chief Financial Officer. Following management’s comments, you will have the opportunity to ask questions. Please go ahead.

Günther Braun

Thank you. Good morning or good afternoon to everyone. I am here in Plymouth, Michigan, together with Ingrid, Ingrid Mittelstädt our CFO. I hope you all got the press release containing our third quarter 2013 results. We will give you some comments about our business and performance and then we will open it up for questions. Now, before we start, I would like to make the usual statements about the information you are getting in this conference call.

Safe Harbor statements. Our discussions may include predictions, estimates or other information that maybe considered forward-looking. While these forward-looking statements represent our best current judgments on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. Throughout our discussion, we will attempt to discuss important factors relating to our business that may affect our predictions. You may also want to review our last 10-Q and 10-K filings for a more complete disclosure of financial risks. The company disclaims any obligation to update any forward-looking statements.

Okay then, let’s start. We are pleased to report, solid financial results which are above our guidance. We experienced a strong quarter in sales to the machine tools and electronics industry, mainly triggered by China also sales to the semiconductor industry improved significantly on a sequential base.

Order entry in Europe was slower than expected whereas North American and Asian orders marked our best quarter during this fiscal year. So this is the somewhat condensed summary of the quarter, but let me continue now with our standard review of third quarter ended June 30, 2013.

As you have seen from our press release, we reached sales in third quarter of $139.1 million, which is $7.4 million or approximately 6% higher than in the comparable quarter in Q3 2012. It was again an interesting quarter, because the larger portion of the turnover was recognized towards the end of the quarter which helped to over achieve of analyst forecast.

Sales in our Micro Marking business mainly reflect the reasonable semi business, semiconductor business and slow solar and medical device business and improved smartcard business and a remarkable electronics business in comparison to last year’s third quarter.

Net sales increased by 1% to $62.6 million or 45% of total sales. Sales in our Macro business increased 8% compared to the third quarter 2012 and reached $37.1 million. Macro business contributed 41% to quarterly sales. The major change came from the increase in business to the machine tool industry, more than $6 million more and military business in the range of $1.7 million more, whereas automotive business declined by roughly $2 million.

And just a side note here, high power CO2 laser increased unit-wise 16% CO2 laser below 1 kilowatt 44%, and finally high power fiber laser 139% compared to last year’s third quarter talking about units. Our components business increased 15% and reached $19.4 million, representing 14% of quarterly sales. Again a good quarter for laser diodes from dealers and fiber related components from – but also beam delivery products from Optic contributed nicely.

Now coming to the breakdown of our quarterly sales by industry. Automotive last year was 11%, this year, third quarter 7%. Machine tool last year 37%, this year 41%. Semiconductor electronics, last year 24%, this year 28% and others last year 28% and this year 24% or I have to say that medical device was slower than in previous years.

During the third quarter, we shipped a total of 1364 lasers versus 1068 lasers, that’s approximately 28% or 296 lasers more compared to last year’s first quarter. And we shipped 627 versus 437 units for Macro applications and Marking and Micro applications was 737 versus 631 lasers.

Now let me hand it over to Ingrid who will further comment on the financials.

Ingrid Mittelstädt

Thanks Günther. Good morning and good afternoon to everyone. As Günther already mentioned, during the third quarter we achieved revenues of $139.1 million that represents an increase of 7.4% or 5.7% compared to the third quarter of fiscal year 2012 and were at the end higher than our expectations.

Exchange rate fluctuations positively impacted our quarterly sales by approximately $0.7 million Compared to the third quarter of last fiscal year our gross profit decreased from 37.5% of total sales to 35.5% in the reporting quarter mainly due to an unfavorable product mix $2.4 million lower service and spare parts business and higher fixed cost related to our fiber laser activities.

SG&A including intangibles, amortization represented 19.5% of net sales in the third quarter 2013 compared to 19.6% in the corresponding last fiscal year. In absolute figures, SG&A decreased by $1.2 million to $26.5 million and the increase in SG&A expenses is mainly a result of higher exhibition expenses related to the Laser Show we had in Munich, as well as an increase in the allowance for doubtful accounts and commissions. These points resulting from the higher level of revenue in the quarter.

R&D expenses for the third quarter amounted to $10.5 million or 7.5% of total revenues compared to $11.5 million or 8.7% of total sales in the Q3 fiscal 2012. Quarter gross spending was $11 million versus $11.8 million in the prior year. The decrease in R&D expenses is mainly a result of lower material consumption and higher R&D grants.

Other income expense, the quarterly net other income amounted to $0.3 million compared to $1.1 million in the comparable period fiscal year 2012 and a decline in other net income mainly relates to lower net exchange gains realized during the reported quarter.

Our effective tax rate on income before income taxes and minority interest for the third quarter was 27.1% compared to 34.7% for the same period last fiscal year and this lower effective tax rate is a result of the generation of taxable income mainly in countries with lower tax rate and the utilization of R&D credits in the US.

Even with the low gross profit and the negative impact of exchange rate fluctuation we were able to manage our operating expenses and generate net income this quarter of approximately $8.7 million and this resulted in diluted earnings per share of $0.31 based on $28.5 million weighted average shares outstanding.

Now, coming to the balance sheet. The weakening of the U.S. dollar mainly against the euro comparing the exchange rates from June 30, 2013 versus September 30, 2012 resulted in a change of approximately 1.2% but other currencies, especially in Asia, like the Japanese Yen had a fluctuation of 27.1% in the same period. Therefore the impact on the balance sheet, positions could be different depending on the geographical distribution of the corresponding balances.

Trade accounts receivables net amounted to $110.5 million and increased $2.4 million compared to last fiscal year, mainly due to the higher level of business. The impact of currency exchange rate fluctuations reduced accounts receivable by $0.1 million. The days sales outstanding is unchanged at 73 days compared to last fiscal year.

During the first nine months of the fiscal year, we increased our net inventory by $1.3 million; this was mainly due to the impact of the exchange rate fluctuations of $0.8 million and the increase in demonstration inventory. Based on the cost of the goods sold figures, inventory turned approximately 1.7 times.

Total debt decreased by $4.7 million during the nine months period and amounted to $17.9 million compared to $22.5 million as of September 30, 2012 mainly due to repayment of bank loans. Additionally, the receipt of the investment loan of $4 million from the State of Connecticut for Nufern’s expansion of its manufacturing facility took place during the reporting quarter and it’s reported under long-term debt in our balance sheet.

Now, I would like to give you some information related to our cash flow. Cash and short-term investments increased by $18.7 million to $119.8 million during the nine months period ended June 30, 2013and the impact of exchange rates fluctuations decreased cash by $0.4 million.

During the nine months period, the company generated $35.5 million from its operating activities. We used $15.3 million in investing activities mainly due to capital expenditures of $12.3 million and the net purchase of short-term investments amounting to $3.1 million. $5.7 million were used by the company in financing activities, mainly for the purchase of non-controlling interest at two Chinese subsidiaries amounting to $4.3 million and net repayments of debt of $4.3 million, partially offset by the issuance of common stock amounting to $2.9 million.

Now coming to our earnings guidance. As a result of our current market judgment, the backlog situation and the global economic environment, we want to give you the following guidance of the financial performance of the fourth quarter and the fiscal year 2013.

We currently forecast revenues for the fourth quarter in the range of $135 million to $140 million. We estimate gross profit for the fourth quarter at approximately 36% of net sales. The period expenses including intangible amortization in the range of 27% to 28% of net sales.

Income before income taxes and minority interest between 8% and 9% of net sales and the effective tax rate that depends mainly on the overall mix of results in the different countries and the not deductible expenses for tax purposes should be in the range of 31% to 32%. Intangible amortization and fixed assets depreciation are estimated at approximately 3% of net sales.

And now coming to fiscal year 2013 based on the backlog and the project situation, we estimate our revenues in the range of $547 million to $552 million. Gross profit is expected to be around 36% of net sales. The period expenses at approximately 27% of net sales.

Income before income taxes to be around 9% of net sales and the effective tax rate is estimated at approximately 30%. Depreciation and amortization are estimated in the range of 2.5% to 3% of net sales. This guidance is only an estimate and again subject to all the risks of our Safe Harbor statement.

Thanks for listening and let me hand it back to Günther.

Günther Braun

Thanks Ingrid. Let me update you on some other important developments as you have heard from Ingrid. We adjusted our top-line sales guidance to $552 million because of the order entry in Q3; we expected a little bit higher order entry. So that’s the reason.

Our backlog end of June resulted in $142.1 million, which is still a solid based for this fourth quarter and some statistics that current backlog includes 53.2 million from Macro, $71.2 million from Micro and Marking and $17.7 million for components.

In terms, as I mentioned already order entry in Europe was slower than expected whereas North American and Asian orders marked our best quarter during this fiscal year. So the quarterly order entry this $132 million represents the solid environment what we experienced in April and May, we had very good order entry. In June, it was a bit slower than expected, that’s the reason why we came out with $132 million and July so far was good.

Order entry by region, if you compare to the second quarter this fiscal year, North America order entry increased 14%, the Asian order entry 11% and the European order entry decreased 21%. And in North America, we have seen a nice marking business. It has improved; otherwise there is no specific industry to name. Of course, also on the military and defense side, we had slower orders.

Asian order numbers increased mainly due to stronger bookings in consumer electronics and semiconductor industry, that’s partially offset by slower bookings from the machine tool industry last quarter. European orders were at the level of last year first quarter but as I mentioned decreased sequentially.

Second quarter, we had excellent bookings in several countries from industries like the watch, electronics, automotive, medical device was just machine tool industries and somehow all the industries we have seen a little bit slower order entries.

Let’s get to the outlook by our main industries and again machine tool there we expect slower demand from the machine tool industry because or especially from Chinese OEMs for high power CO2 laser because there was one large project oil pipe cutting and it’s our fiber laser demand should be stable, but of course, what we face in general is market pricing for FL which is challenging.

On the low power CO2 laser side, we expect to continue as in the past, and this laser dominates the organic material processing application and the demand for those products is good. Our OEMs use these lasers for example for application in mobile devices, for the textile industries.

As a reminder and maybe you have seen the article in uptick about our UK operations regional and the local support, the grant, the regional funding for R&D on laser and the support for our project is building which we should get.

So you see still positive outlook on these products. On automotive and sub-suppliers, in general, the number of projects is healthy when you look to this, but as you have already heard from others too Europe is a little bit slower, so let’s see what happens there.

But there are opportunities for different applications with different laser technologies to first and second tier suppliers where we somehow count on as move through the application for engine parts, which promised in worldwide mid-tier potential.

Now, semi-conductor, of course affected by lower demand from the PC industry, but we believe we crossed the valley Q3, delivered already a significant to better results compared to our first and second quarter. And our fourth quarter should be I would say minimum on the Q3 level. It’s more back-end application is marking but also some front-end applications like milling where we should take some revenue.

Then coming to electronics, after a great Q3, we expect some fluctuations; project base is good, demanding customers. You know that with short lead time requirements, new device production as usual triggered this business and our applications when we sell lasers for usually marking or cutting of different materials like glass or plastic or metal and of course spot welding for such devices.

Then, another major industry of course is the solar industry and there maybe know further about, that there are or will be new rules in China for higher cell efficiencies which slowed down the planning process of new wax. So let’s have the treatment, but we have potential projects for efficiency increase of crystalline solar cells in the pipeline, that’s for the fourth quarter, we expect notebook shipments, but let’s see from 2014, it should be of course better.

On the medical device side, we call it somewhat durable business in North America and Europe. We have seen the special effects here in the US. We see US medical device tax and when you see the order entry and what’s going on, we believe there is an impact, but on the other side, there is an opportunity in the coming quarters. What’s positive, the Asian activities show good potential and also order entry, so somewhat a shift towards the different region at the moment.

On the military and defense side, there is no change of course, we spend also a lot on US programs and sales for the current quarter should be okay, but the outlook in terms of order entry, I would say is somewhat shaky, given the budget strength.

So this was an outlook of our, what’s the outlook of our main industries. Now let me shift now on an update on our high power fiber laser activities. We are on track with development of our fiber laser modules through increased output power for fiber laser modules to two kilowatts.

So that’s great. The same counts for our MBE AP activities at where we had no changes to our outlook so far. Tested for the first, meanwhile close to 1000 hours and the first results are good. Of course, as we always stated, there are more iteration looks needed that we are on track. In addition, we have third-party reactors in test which had a life time result so far as before which we are also going to qualify.

The realized sales, the fiber laser related products in the third quarter of $21.3 million. The order entry was $23.4 million for our low power fiber lasers, we are still working on new customer wins, for the allocation of production volumes, our mid-power range has gained momentum and mainly in consumer electronic applications, but also in medical device, and the usual statement in general there is still pricing pressure in the market.

So our backlog for this fiber laser related products as of June 30 was $31.8 million. And as I mentioned before in my side notes, high power fiber laser increased 139% compared to last year’s third quarter and 17% on a sequential base when we talk about July.

So overall, there is no clear trend on the economic situation in Europe. Asia or US, that’s a feeling that global markets continue to be challenging and the slow pace of GDP growth in China might influence the business in the coming months, but it looks like, every week there are news out of China.

At the moment, I think this week we got some more positive news. So let’s see how this turns out. But however, we believe that our – the solid backlog, our ongoing sales activities and that we focus on the Asian markets will help us to deliver a reasonable fourth quarter for sure.

As always, thanks to the Rofin team for their contribution and now thanks for listening and now we are prepared to answer your questions.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Mark Douglas with Longbow Research. Please proceed with your question.

Mark Douglas – Longbow Research

Good morning, Günther and Ingrid.

Ingrid Mittelstädt

Good morning, Mark

Günther Braun

Good morning, Mark.

Mark Douglas – Longbow Research

Okay, so you hit on this a little bit. Your initial guidance is 550 to 560, now I think it’s at the low end of that range. I know you think a higher order entry, but what kind of orders are you expecting or what markets are you hoping that 3Q orders would have been an improvement and anything materialized?

Günther Braun

I would have expected that in the fourth quarter, we will have more solar business than what we have – get that moment.

Mark Douglas – Longbow Research

Okay.

Günther Braun

And as I said, I think, April and May, we had really nice order entry, June somehow was a little bit slow and this caused only the $132 million in order entry.

Mark Douglas – Longbow Research

Okay, so orders were strong in June but not sales?

Günther Braun

No, sales were great. We are – the top month in the quarter, as usual, usually the first month is the best month, you know that.

Mark Douglas – Longbow Research

Okay, and then July orders you said were picked…

Günther Braun

So far good. No, no, July, orders were good so far.

Mark Douglas – Longbow Research

Okay, on the MBE roadmap, so when say it’s on track, you are still thinking you can – update what you are thinking can ship products with your own devices?

Günther Braun

What we said, we will qualify or we are going to qualify and have material towards end of this year. So and this is still is valid. End of this year means calendar year not …

Mark Douglas – Longbow Research

Right, right. And in the meantime, I guess that third-party you got into their reactor finally?

Günther Braun

That’s a first step, the third-party, I mean the third-party vendor and he delivered improved – material, so I could not talk about the AP which we used at the institute. Sorry, it’s really third-party vendor which has delivered improved materials so far in testing and that’s the second change.

Mark Douglas – Longbow Research

Of course. Okay, but right now, on the intermediate material from the MBE from the institute?

Günther Braun

There we had AP campaigns which started I think week 28.

Mark Douglas – Longbow Research

Okay, but nothing assembled into – so far.

Günther Braun

Nothing assembled into the product, no, into the product.

Mark Douglas – Longbow Research

Okay, so it sounds like, that might not get off the ground in time before you have to use – so before you can even use your own MBE, is that a fair statement?

Günther Braun

For sure not involved, for sure not involved.

Mark Douglas – Longbow Research

Okay. Okay, I’ll hop off. Thank you.

Günther Braun

Thank you.

Operator

Our next question comes from the line of Patrick Newton with Stifel. Please proceed with your question.

Patrick Newton – Stifel

Hi, good morning Günther and Ingrid.

Günther Braun

Good morning Patrick.

Patrick Newton – Stifel

I wanted to think about here a methodology for guidance. I think you provided intentionally prudent guidance in the June quarter after some mis-expectations in prior quarter. I am curious with the kind of the cut on the top-line relative to your full year guidance, does your September quarter methodology match the prudent June quarter methodology, have you reverted back your prior approach?

Ingrid Mittelstädt

I could talk about, but I think that we have seen really in June, a slowdown in the order entry and then of course we have to be realistic and this is now summer time. So, of course, we will try to do what we can, but you know that orders in Europe is a month where the companies are closed. So, based on the backlog we have today, this is the guidance we can give.

Günther Braun

It’s prudent based I would say what we did for the June quarter.

Patrick Newton – Stifel

Perfect. Thank you. All right. And then Günther , I guess on the fiber laser, a couple of questions there. One is the price environment, you said it was so pressured. Can you quantify that for us? I think you said, 6% to 7% year-to-date declined last quarter and then last quarter you also gave us fiber laser units or units in backlog and the percentage of units that were high powered and I was wondering if you could provide us with those details again?

Günther Braun

Okay, where should I start?

Patrick Newton – Stifel

With the pricing, let’s start with the pricing.

Günther Braun

Okay, the pricing of course in average we have seen is 6% to 7%, sometimes 10%. So it depends really in what situation we are and which customer we have at the other side basically. So, I would say it’s flexible. And it can be even going to 10 plus percent in some quarters. We of course, expect.

Patrick Newton – Stifel

And then on fiber laser units sold, in backlog and then percentage of backlog?

Günther Braun

And the backlog is in the range of 36%. We have – give you units in the backlog, let me see.

Patrick Newton – Stifel

Last quarter you said 248 units sold and 271 units in backlog.

Günther Braun

Okay, 331 units shipped last quarter, order entry 371 and backlog 363 units.

Patrick Newton – Stifel

Perfect.

Günther Braun

And 36% is high power of these backlog units.

Patrick Newton – Stifel

All right. Thank you for the details. And then I guess, to dovetail on the Mark’s question on your MBE production you said, you are going to qualify materials towards the end of the calendar year, can you help us understand timing, volume ramp. And then I guess, Ingrid, can you help us understand the gross margin implications and maybe help us gauge an expectation of how gross margin improvement should flow through into the fiscal year 2014 period?

Günther Braun

Okay, volume range, I think we have – or the MBE just gives a certain capacity and in the certain timeframe we can do a certain number of APs and wafers. So, on the volume side, if everything is clear, it’s a normal phasing of this product and would satisfy, I would say what we plan for next year in our turnover. The numbers of high power lasers. So on this side, we should not have really limitations in my opinion.

Ingrid Mittelstädt

Yeah, the impact in the gross profit, I see that it would improve over the quarter because of course at the beginning, we expect to improve also the yields over the fiscal year and I see that we will use, my expectation is that we will use the material for the corresponding products with higher power and so, over the quarters, we should improve the gross margins. So, we will not see there complete impact in one quarter at the beginning of the year.

Patrick Newton – Stifel

For a full year on a gross margin basis you would think about 200, 300 basis point type of year-over-year improvement?

Ingrid Mittelstädt

Yes.

Günther Braun

You should take what I mentioned in the call here, the increase in units compared to last year’s second or third quarter is close to 140% and you see this range in gross profit margin from 37.5% to 35.5%. Somehow it helps you maybe a little bit to understand the impact.

Patrick Newton – Stifel

All right, then one last housekeeping question is, could you please provide us with the spare parts as a percentage of revenue and then also your Macro and Micro Marking and component orders?

Ingrid Mittelstädt

Yes, so we have this quarter, 25.2% of revenues related to service and spare parts. And the other question was?

Patrick Newton – Stifel

Orders by Macro, Micro Marking and components?

Ingrid Mittelstädt

Yes, so order entry, Macro was $49.1 million, Marking Micro $67.8 million and components $15. million.

Patrick Newton – Stifel

Great. Thank you. Good luck.

Ingrid Mittelstädt

Thank you.

Günther Braun

Thank you. Bye.

Operator

Our next question comes from the line of Mark Miller with Noble Financial. Please proceed with your question.

Mark Miller – Noble Financial

Good morning, Günther and Ingrid. I was just wondering that your Chinese business picked up, was that choppy during the June quarter, does it slow down? I am just wondering particular? You said it recently there was some good news from China and you love this one major program was ending?

Günther Braun

Good morning, Mark.

Mark Miller – Noble Financial

Good morning.

Günther Braun

China is or was very successful in the third quarter because of good machine tools business and electronics business. So we shipped a lot ending up in China for electronics. Order entry, what I said at the moment, we would expect a little bit slower order entry because of business since year two program the oil pipe cutting project ended.

There are not lasers now shipped and so we believe it will be a bit slower. But the question is always, what comes from the electronic industry and how will our fiber laser business perform and continuing in China.

Well, in general, I think when you read the newspaper and listen to every week, we get a different opinion about China is economy going down, is still fear or will the government do something to maintain the 7% or 7.5% growth rate.

But there is nothing clearly specific what I could tell you. But in general, what we have seen somehow in the first quarter that semiconductor business compared to our first quarter and second quarter has increased nicely. I don’t know it gets rebound or what you have heard from others, but, it’s not bad what happened.

Mark Miller – Noble Financial

I imagined orders were nice mainly in Germany and European all in, well that’s the question on the general margin?

Günther Braun

Yeah, that’s European stats.

Mark Miller – Noble Financial

And I don’t know if I missed this, but could you give, cash from operations and CapEx?

Günther Braun

I think Ingrid did it, but she should get it.

Ingrid Mittelstädt

Yeah, so our investments in CapEx was $12.3 million in the nine months.

Mark Miller – Noble Financial

Okay, that’s nine months, what about for the quarter?

Ingrid Mittelstädt

For the quarter, it was $4 million.

Mark Miller – Noble Financial

And the same for cash from operations?

Ingrid Mittelstädt

No, cash from operations in the quarter was $7 million.

Mark Miller – Noble Financial

Thank you.

Günther Braun

Thank you, Mark.

Operator

Our next question comes from the line of Jagadish Iyer with Piper Jaffray. Please proceed with your question.

Iyer – Piper Jaffray

Hi, Günther and hi Ingrid. Thanks for taking the question. Actually I have three questions. First, I just wanted to drill down little bit more on your update on the factory in terms of – have you really started making chips? What kind of yields are you seeing? The reason I am asking is, one of your competitors always makes an important point about yield challenges. So I just wanted to get a sense, do you have acceptable yields on your early run and give us more color on that?

Günther Braun

We are not in the phase yet that we are talking about yields. We do still some iteration loops and changing. So, it’s not a question, but what the targets is minimum on the conservative sides to have a 50% yield. That’s how we did our calculations on the cost in the future.

Jagadish Iyer – Piper Jaffray

And this 50% yield would be by when, Günther ?

Günther Braun

When we start, it should be I would say achievable immediately. At least I haven’t heard anybody yet that we cannot achieve that.

Jagadish Iyer – Piper Jaffray

So, the realistic by year-end, you might be at 50%, is that a very safe assessment?

Günther Braun

That should be the idea that goes.

Jagadish Iyer – Piper Jaffray

Okay, fair enough. And then, I wanted to ask a follow-up on this, so Ingrid, how should we think about CapEx, if you have to compare fiscal 2013 versus fiscal 2014 for this particular facility in terms of your CapEx allocation.

Ingrid Mittelstädt

I would see CapEx mix at the similar level than this year.

Jagadish Iyer – Piper Jaffray

Okay all right. And then…

Günther Braun

Jagadish, if you look last year, we had CapEx in the range of $28 million, 29 million. This year it comes up to – in the range of $18 million roughly.

Ingrid Mittelstädt

Yeah, $18 million $20 million.

Günther Braun

And so, you should see a reasonable number.

Jagadish Iyer – Piper Jaffray

Okay and on the … go ahead, sorry.

Ingrid Mittelstädt

The last two years were really the main investment years for us, for now we are – even if we have an investment in the new facility, or expansion of manufacturing capacity, we should be at the level of 13.

Jagadish Iyer – Piper Jaffray

Okay and I have just one more point on the fiber laser. I just wanted to find out your backlog improved, I was just wondering whether did you add any new customers to your fiber laser?

Günther Braun

Yes, there are new customers, but more similar, because we don’t go really that is a lot of pressure after the OEM customers, because the OEM type customers, they usually have the lowest pricing because of the volumes and we try to get distinguish off at the moment. But we have existing OEM customers.

Jagadish Iyer – Piper Jaffray

Okay, finally one last question from me, Günther . I think you made a statement that you are cautious on the automotive segment, I just wanted to understand the commentary in the backdrop of, is that a secular shift of fiber laser that is happening in the automotive segment or is there anything more than that we should be hearing about? Thank you.

Günther Braun

No, no, it’s – on the fiber laser side, we have also shipped fiber lasers into automotives for first tier suppliers. So we are in this game, of course there is one leading company no doubt about, but there are still also see two lasers bought, it’s just, I would say that, the general climate in Europe, which indicates that everything should be a bit lower.

For example, here in the US if you go through the projects, it’s not too bad, what we see. But on the European side somehow, we see really just because of their success in the markets that which is slower demand. And less CapEx spending for such products.

Jagadish Iyer – Piper Jaffray

Thank you.

Operator

Our next question comes from the line of with Jiwan Lee with Sidoti & Company. Please proceed with your question.

Jiwan Lee – Sidoti & Company

Thank you. Günther , if you said this before I do apologize in advance, but, will you get the orders for those down in terms of the end-markets and when you look out the second half of this year, just knowing what you know now, in terms of your orders and backlog, where do you expect some of these trends to reverse back?

Günther Braun

No, we have experienced the slowdown in orders especially in Europe, if you take the number, it was on the level of the third quarter of last year of 2012, but we had a very successful second quarter this year, the March quarter order entry was very good and we had great orders that quarter out of Switzerland for example for the watch industry what I mentioned.

So we had also electronic orders. We had normal orders from the automotive industry and this somehow slowed down in the June quarter. So, the hope is what we expect that those countries somehow get back to a more normal ordering pattern what we have seen in the second quarter which means then that the fourth quarter should be also on a good level in terms of order entry.

As always, you know, Europe in August, there are many people on vacation, so especially beginning of August you don’t expect big orders. It’s always more pushed towards the September, December quarter.

Jiwan Lee – Sidoti & Company

Okay, did I hear you correctly, Günther is that fair to assume that machine tools and orders therefore the high power or the biggest MBEs temporary slowdown back or…

Günther Braun

In order entry, yes, especially in June. But for July, we have seen already some good order entry out of this especially automotives or machine tools it’s delivers to automotives. So, let’s see, it’s not as fast, maybe as you got it.

Jiwan Lee – Sidoti & Company

Just lot of pull and pushes, and sort of kind of checking along, are there different market dynamics going on in terms of the power level, high power versus mid to low power, it feels CO2 lasers and fiber lasers, because so far what I am hearing is, the CO2 lasers, the strength is mainly on the mid to low power side and it seems to be sort of the opposite on the fiber.

Günther Braun

That’s what I tried to say, because, everybody thinks high power CO2 laser a decrease in volumes in the market when you take our numbers and that’s the reason why I said it, we had an increase if you compare last year’s quarter even in units on higher power CO2 laser, but the growth is slower than compared to high power fiber laser of course. So the adoption of high power fiber laser is faster than – and of course taking some share from high power CO2.

But there is still growth rate possible in high power CO2 laser. Of course the big growth range is on the low power CO2 laser side because of the application you can do and the organic material treatment. So this has also increased volume-wise and one example is pixel structuring which has increased a lot, but also still some cutting is a CO2, low power CO2 application. So, there are enough applications and this part of the business should further over time increase in terms of units and value.

Jiwan Lee – Sidoti & Company

Okay and on the China front, how did the orders track in June and July and what you build on – conservative or what expectations do you have for the rest of the year?

Günther Braun

Yeah, in the third quarter China is the original country somehow went down compared to the second quarter and first quarter, somehow below, but on the other side, there was a shift where they placed an order, so it went more through Hong Kong. So if I combine both the order entry from China versus in comparison to the second quarter.

But as we said, what we think because we know exactly just oil pipe cutting project. This has ended. So forgive me we will not get additional Co2 lasers as orders and that’s basically caused our statement that we will see somehow slower order entry out of China from the machines for the industry well, to this specific application. But the level should be maintained, I would say compared to the last quarter.

Jiwan Lee – Sidoti & Company

And lastly for me, is there any reason to sort of put for some type of rebound on the medical font, they don’t have in this year or what do you think?

Günther Braun

I think, yes. I talked to our – to the sales colleagues here in North America and you get clearly, medical device tax cost, the manufacturer to rethink, how they manufacture – you have multiple choices, one choice is to manufacture outside America to avoid that.

The other choice is of course to put more pressure on the suppliers to get better pricing and lower the manufacturing cost and therefore somehow compensate this, what it is 2.3% on sales. So, I think, the manufacturer of medical device is still in the deciding process what they do.

But, I don’t believe that this causes a lower demand, somewhere the production tools are needed and this should come back and what we have seen is that Asia and especially in Japan, we have good response, nice orders for medical device. So there is business out and North America should get back.

Jiwan Lee – Sidoti & Company

Very good. Thank you very much.

Operator

Our next question comes from the line of Mark Douglas with Longbow Research. Please proceed with your question.

Mark Douglas – Longbow Research

Hello again.

Günther Braun

Mark, hello.

Mark Douglas – Longbow Research

So you talked about CO2, high power units up 16%, low power up 44%, is that correct?

Günther Braun

Yes.

Mark Douglas – Longbow Research

And high power fiber up 139%, so the unit sales are very, very strong, but unit shipments are very strong, but the sales were up 6%. So, can you help adjust this pricing…

Günther Braun

On the quarter?

Mark Douglas – Longbow Research

On the quarter, right. The pricing gone much further down that you are not getting as much benefit on the sales line, but large volume growth, or are there pieces, other hardware, you saw volume declines to offset from the other?

Günther Braun

No, there is of course compared to last year, but compared last year first quarter, average decrease in selling price fall, but as you got it’s I would say on the CO2 side in our typical range of 3%. But of course on the fiber laser side, the average selling price went down compared to last year a bigger number. And I would say it’s minimum last year from last year to this year 10% decrease on the fiber laser side we were able to achieve. But that’s now, it’s not calculated, sorry, but that’s a statement on my side. It is higher, yes.

Mark Douglas – Longbow Research

Okay, thank you.

Günther Braun

Thank you, Mark.

Operator

Our next question comes from the line of John Lopez with (inaudible) Group. Please proceed with your question.

Unidentified Analyst

Hi, thank you so much. I just had a couple of quick ones if I could. The decline in the backlog, I just wanted to make sure I understood, is that principally related to the large oil pipe project moving to the completion?

Günther Braun

It’s a portion of it of course, of course, but overall, no we had looking below one in the third quarter and so it’s not just this part of other industries will flow, and especially out of Europe we had this slowdown in order entry, when you look and that’s across the industries somehow, within Europe, it’s not just one industry in Europe or we have to say okay, now. It’s slower or bad.

Unidentified Analyst

Okay, understood. The second one, just you reconciled your fiber laser business in China, could you give us a sense, say perhaps by units that the 331 fiber laser units shipped sort of what rough percentage of that is, China relative to elsewhere.

Günther Braun

We could do, but we don’t do it. Yes, it’s generous information, what we disclosed so far and some things we keep on our…

Unidentified Analyst

Understood and agreed. The last question, sorry I apologize, this might be a little sprawling, but I guess I just want to get a better sense of the fiber laser strategy, so after better terms.

So, at the moment, you obviously are experiencing pricing pressure in excess of what the course here to market, there is obviously a reason for that, you have a relatively large competitor within that segment that’s applying price pressure.

At the same time, that competitor enjoys the gross margin that like 1000 basis points higher than you’ve sort of ever done and it between those two it’s quite obviously scale or at least that represents a reasonable portion of it it’s perhaps better way to say.

So, I just – the thrust of my question is, why not be more aggressive with the roadmap in fiber laser and on the other side of which why would you not be able to at least directionally begin to approach their level of gross margin, relative to your gross margin which now period-to-period 2000 basis points lower. Did that question sort of makes sense? Could you talk directionally about those issues?

Günther Braun

I think, it’s easy to answer. The first thing, this competitor has one technology and is vertically integrated comes from the wafer production up to – in the meantime, I think, there is even the heat exchanger. So it means, everything is based on one technology and they can scale that.

Compared Rofin, we have all the technologies, which are somehow needed in the industrial material processing and we are for sure, the latecomer, that was only one – the one company who was really concentrating on fiber laser technology and they did it pretty well. And we are working on being also vertically integrated and that was the part our, MBE reactor and we took chips and wafers and what we are going to do.

And so we go in this direction and we work on, but there is technology behind, it’s not just, doing coffee machines and doing instead of ten coffee machines and million coffee machines and get the cost down. So, it’s a mix of, I would say, doing the right structured organization in manufacturing but also at the end, technology must work and you have to get the right output power. And of course this is the right lifetime for the customers.

Unidentified Analyst

Understood.

Günther Braun

I hope, helped you?

Unidentified Analyst

Yes it certainly does, maybe if I could ask it modify differently, that’s all but, say for example, by the end of the year, you were able to attain your yields target on the components side. And the MBE reactor process is smooth. At that point, would your gross margin selling at fiber laser exceed your current corporate gross margin?

Ingrid Mittelstädt

I think what we said in the past and this is still our target is to come back to gross margins of 40% – 40 plus percent and the basis for that is because we – as Günther already mentioned, we have several technologies and several products. And so the mix we expect to have and that is also our target is to come back to our good level of gross margins of 40% – 40 plus percent.

Unidentified Analyst

Understood. Thanks, sorry, just one last one, again on the fiber space, I apologize for so much focus there. But I am curious there is a lot focus obviously on your large competitor, but you had a range of other competitors, more so in the last 12 months or so, begin to launch anywhere from 1 kilowatt to 6, and in some cases little bit higher products. I guess, I am curious, are you seeing the competitive environment broadening a bit in fiber laser over the course of – say the last 12, 15 months, or do you still see it’s principally coming from a single source?

Günther Braun

No, what we see is basically at the customers we see two companies and that’s it and the new companies in this space for also such products, somehow they has different industries or channels or customers. It looks like. So, we haven’t seen them. And, on the high power side, usually though, two in the game, it’s IPT and Rofin at the end of the day.

Unidentified Analyst

Understood. Thank you so much for the help. I appreciate it.

Günther Braun

Thank you, John.

Operator

Thank you. It seems there are no further questions at this time. I’d like to turn the floor back over for any closing comments.

Günther Braun

Thanks for listening again. Of course just one statement, I think you all know that typically our fourth quarter is our best quarter within the 50 years. So we are working in this direction.

Let’s see what we can do. I hope we get some orders which we can ship in this quarter that we can maybe somehow deliver better results than expected. And we will continue to work on the fiber laser. It’s key, no doubt about, the trend is clear and let’s see what we can tell you in our November conference call. This concludes my statement. I wish you all the best and nice summer time and talk to you hopefully soon. Thank you, bye.

Ingrid Mittelstädt

Bye.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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