Rofin-Sinar Technologies' CEO Discusses F4Q12 Results - Earnings Call Transcript

|
 |  About: Rofin-Sinar Technologies, Inc. (RSTI)
by: SA Transcripts

Operator

Greetings and welcome to the Rofin-Sinar’s Fourth Quarter and Full Year 2012 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’ll have the opportunity to ask questions. Please go ahead.

Günther Braun

Thank you. Good morning or good afternoon to everyone from Michigan as you have heard, I’m together with Ingrid, our CFO. I hope you all got the press release containing our fourth quarter 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, we would like to make usual statement about the information you are getting in this conference call. Safe Harbor statement; our discussion may include predictions, estimates or other information that may be 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 discussions, 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.

So let’s start. Of course, we are pleased with our financial performance in the fourth quarter, given the overall global economic environment. Net sales, net income and earnings per share turned out better than we expected, also gross profit was challenged and Ingrid will address this topic later.

Revenues this quarter were primarily driven by the machine tool, automotive, consumer electronics and medical device industries. And the trend towards high power fiber laser and sheet metal cutting was underlined at the exhibition in Germany, the Europe Hannover were out of 36 laser cutting systems, 26 systems were equipped with fiber lasers, and that’s based on the press release from the industrial laser solution and we’ll see, it’s a big amount than expected in our portion is already pretty reasonable I would say. but you can reach this and get the industrial laser solution.

Now let me start with our standard review of our performance in the period, September 30, 2012. As you have seen from our press release, we delivered sales in the fourth quarter of $147.5 million that’s well above our guidance, but $22.1 million or 13% lower than in the comparable quarter in fiscal 2011. Sales in our micro marking business mainly reflect excellent demand from the consumer electronics and medical device industry when comparing to last year fourth quarter.

Net sales decreased 13% over the comparable quarter to $75.4 million or 51% of total sales. The sales in our macro business decreased 18% to $55.2 million compared to the fourth quarter fiscal year 2011. This is mainly caused by the lower, but stable demand from the machine tool industry in China and the macro business contributed for the 7% to quarterly sales.

component business increased by 12% to $16.9 million representing 12% of quarterly sales against on quarter for the laser power products and fiber related components. The statistic for our geographical split, sales to Asian countries decreased by 22% to $53 million and resulted in 36% of quarterly sales, strongest countries this time were China, and then Taiwan and Japan. And the Chinese business contributed 19% to quarter sales, and by the way, the book-to-bill in Asia was $0.97.

North America increased 1% and contributed $30.9 million or 21% of quarterly sales supported again this time, mainly by the medical device industry as well as marking application and also nice component business, our book-to-bill rate was $0.91 for North America.

Europe was responsible for the remaining 43% of the quarterly sales, has decreased 10% to $63.6 million comparing to last year first quarter. Solar industry, of course, is one of the industries responsible for the original sales figure compared to last year, automotive and smart cards were stable and highlight again medical device industry and our book-to-bill was $0.91 in this quarter.

Our spare parts service business compared to Q4 last fiscal year decreased by 10% or $4.3 million, accounted for approximately 27% of net sales for the quarter, very stable business it still demonstrates a stable utilization of the equipment in the factories.

Some other statistics now coming to the breakdown of our quarterly laser sales by industry automotive this year, this quarter 8% compared to 7% last fiscal year. Machine tool 33% compared to 37% in 2011, so you’ll see already a decrease, semi-electronic 28% versus 29% last fiscal year and others 31% versus 27%.

During the fourth quarter, we shipped a total of 1,293 lasers versus 1,225 lasers last year’s fourth quarter. This is approximately 9% less compared to last year. For macro applications, it was 438 this year versus 600 units last year, and for marking and micro this year, 855 units versus 825 units last year. And as I commented to the 12-month figures, we realized sales of $540.1 million in the last 12 months versus the $597.8 million in the last year.

I think you know we have two challenging quarters that at the beginning where Asia was below our expectations, the result of course is a decrease of 10% or $57.6 million from the comparable period of fiscal year 2011. The difference in the U.S. dollar exchange rate decreased sales by $18.3 million compared to 2011 which means in the real numbers we were only approximately $30 million below of last fiscal year.

The net income in the 12-month period was of course, impacted by the change in technology and product mix to our fiber lasers, but not only it amounted to $34.5 million or 6.4% of sales.

The 12-month sales allocation between macro, micro marking and components was for this fiscal year, 38% macro, micro and marking 50% and components 12%. And then the geographical split, Europe this fiscal year 44% versus 45% last fiscal year, North America 22% versus 18% and has increased, and Asia 34% versus 37%.

And now the breakdown of the 12 months laser sales by industry year-over-year and automotive stayed at 7% both fiscal years, machine tool 35% for the 12 months versus 38% last year, semi-electronics, solar 27% this year versus 28% last year and others 31% versus 27% in fiscal 2011.

now let me hand it over to Ingrid, who’ll go through the comment on the financials.

Ingrid Mittelstädt

Thanks, Günther. Good morning and good afternoon to everyone. Our quarterly revenues of $147.5 million were above our expectations even under the impact of the strong U.S. dollar that reduce our quarterly sales by approximately $8 million. compared to the fourth quarter of last fiscal year, gross profit decreased to 34.7% versus 35.6% in the fourth quarter of last fiscal year and mainly due to the lower absorption of fixed costs due to the lower level of business, and unfavorable product mix especially in the high-power CO2 lasers towards a higher volume of lasers with lower output power. Additionally during the reporting quarter, we had multiple units order from one specific industry with corresponding lower prices in our micro, marking business.

SG&A, including intangible, amortization for the quarter represented 17.2% of net sales in the fourth quarter of this fiscal year, compared to 16.3% in the corresponding prior year quarter. In absolute figures, SG&A decreased by $2.4 million to $24.7 million for the quarter, the decrease in SG&A expenses is mainly a result of lower labor costs and commissions, but partially offset by an increase in allowance for bad debt.

R&D expenses for the quarter amounted to $10.5 million or 7.1% of total revenues compared to $10.7 million or 6.3% of total sales in the comparable period of fiscal year 2011. Quarter gross spending was $11.1 million versus $11.3 million in the prior year. The main R&D activities are still related to the expansion of our fiber laser product portfolio in the manufacturing cost reduction program for the high power fiber laser.

Coming to other income expense, the quarterly net other expense amounted to $0.7 million compared to net other income of $2.8 million in the comparable period of fiscal year 2011 and a decrease in other income is mainly related to higher net exchange losses generated during the reporting quarter.

Our effective tax rates and income before income taxes and minority interests for the fourth quarter was 31% compared to 28.4% for the same period last fiscal year that included a tax benefit resulted from some tax audits in Europe. Even with a low gross profit margin and a negative impact of exchange rates, fluctuations we were able to manage our operating expenses and generate net income that was higher than expected. The net income for the fourth quarter amounted to $10.1 million, and resulted in diluted earnings per share of $0.35 based on $28.5 million weighted-average shares outstanding.

Now coming to the balance sheet; the strength of the U.S. dollar mainly against the euro comparing the exchange rates from September 30, 2012 versus September 30, 2011 resulted in a change of approximately 4.5%. Trade accounts receivables net amounted to $107.9 million and decreased $11.5 million compared to last fiscal year, mainly due to the lower level of revenue in Q4 ‘12 compared to Q4 ‘11, higher allowance for bad debts mainly due to chapter 11 of the main German customer in the solar industry, and the impact of exchange rate fluctuations that decreased accounts receivable by $2.5 million.

The day sales outstanding is unchanged of 73 days compared to last fiscal year. Net inventory increased by approximately $13.3 million to $202.2 million in fiscal year 2012, mainly due to higher demonstration inventories, spare parts and raw materials related to our new fiber laser product.

Additionally, the Company’s holding products for some projects in China that are expected to be delivered, that are expected to be recognized in revenues in fiscal year 2013. This is partially offset by the impact of exchange rates fluctuations of $4.9 million. Based on cost of goods sold figures, inventory turned approximately 1.7 times. Total debt decreased by $0.3 million and amounted to $22.6 million compared to $22.9 million at September 30, 2011, mainly due to the impact of exchange rate fluctuations.

Now I would like to give you some information related to the cash flow, cash and short-term investments decreased by $29.2 million to $101.2 million during fiscal year 2012, the impact of exchange rate fluctuations decreased cash by $0.8 million.

During fiscal year 2012, the Company generated $22 million from its operating activities and new $39.4 million in investing activities mainly due to the final earn-out payments for our finished subsidiaries that resulted in an increase of goodwill of $13.4 million and capital expenditures of $27.3 million. $9.5 million were used by the Company in financing activities mainly for the purchase of treasury stock under the share buyback program announced in our last conference call. during the fourth quarter, we brought back approximately 505,000 shares for a total amount of approximately $10.7 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 first quarter and fiscal year 2013.

The Company currently forecast revenue for the first quarter in the range of $130 million to $135 million, we come back to our normal pattern where Q4 sales are typically the highest within the fiscal year, and Q1 is usually below Q4, also due to Christmas holiday.

We estimate gross profit for the first quarter in the range of 35% to 36% of net sales, period expenses including intangible amortization at approximately 27% of net sales, income before income taxes and minority interest between 8% and 9% of net sales.

The effective tax rate that depends mainly on the overall mix of results in the different countries, and the non-deductible expenses for tax purposes should be in the range of 32% to 33%. Intangible amortization and fixed assets depreciation are estimated at approximately 3% of net sales.

And now coming to fiscal year 2013, due to the uncertainty in the global economy and a more cautious sentiment of our industrial customers, we estimate our revenues in fiscal year 2013, currently at the similar level as in fiscal year 2012, $535 million to $545 million.

As usual our second quarter could be impacted by the Chinese New Year. And therefore, we expect the business improving over the second half of fiscal year 2013. Of course, we will update this estimation quarterly according to the market situation.

Gross profit for the whole fiscal year 2013 is expected to be in the range of 37% to 38% of net sales, period expenses in the range of 26% to 27% of net sales, income before income taxes in the range of 10% to 11% of net sales, and then effective tax rate is estimated at approximately 33%.

Depreciation and amortization are estimated at approximately 2.5% to 3% of net sales. This guidance is only an estimate, and again subject to all the risk of our Safe Harbor statement.

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

Günther Braun

Thanks, Ingrid. Let me continue with some other important developments, I think this situation has not changed, it’s even more uncertain just as it grew up specifically close in North America, let’s see how about this just means to us. The economic development in Europe and Asia currently does not support, also in principle and improved business comment.

Geographically in China, we saw goods for end customer interest in our CO2 and high power fiber lasers. Specifically, the CO2 laser interest was triggered by an all pipe cutting infrastructure project and the high power fiber laser project dynamics of the markets towards more fiber laser units seemed be cutting systems.

Consumer electronic business is still dependent mainly on the market leader demand for the smartphones or smart products. In Q4, we delivered the significant number of products on several head markets and low power fiber lasers for specific applications. Our solar projects continue on the lower level and that triggered of course by timing demand.

The semiconductor industry slowed down for our laser markets and the automotive industry maintained a solid level that we believe it’s under declining side. The European debt crisis should affect consumer spending, especially in the automotive industry where demand for smaller cars weakened, and that’s also a result of closing up trends, which are on the agenda.

Comparing to this industry of course, the medical device industry is very solid demand also in Europe. North American business continues to be challenging for high power laser products, highlights continue to be again medical device industry, but also laser markets will continue to support our business.

First quarter machine tool business developed as expected in order entry and sales, as projected solar and semiconductor business were weaker during the quarter while our consumer electronics sales peaked within our quarter. Quarterly automotive sales were slightly below Q3, which was the best in terms of shipments, and if you go to service and parts business, which was stable in the quarter at $39.3 million, and our component business maintained a high level, I would say supported by strong diode and fiber component service.

Now some comments on our fiber lasers. In gross, 752 fiber lasers were $56.5 million in fiscal year 2012, and we started with a backlog of 548 fiber lasers and $34.4 million in the fiscal year 2013. And comments due of course to the competitive situation, we won’t split the power ranges. So that’s the information you get. The new version of the 200-watt modules with new chip material and the 1.5 kW fiber laser engines are underway, and the projects are progressing well.

In total, we booked by the way 1,135 fiber lasers in fiscal 2012 amounting to $69.2 million, and one of the comments some of you would know that, at new firm, we expanded our production flow by approximately 3,000 square meters or 30,000 square feet. in Q4, so we are also prepared there for higher progress.

Now let me get to our backlogs, end of September, which decreased 4% by $6.2 million to $147 million, compared to September 2011, but it’s still a solid base for our first quarter 2013. The current backlog includes approximately $54.5 million for our macro products, approximately $76.1 million for marking and micro products and $16.3 million for our component business.

As the quarterly order entry, this $137.4 million was in the expected range with lower order entry in North America, roughly $5 million as well as Europe minus $4.8 million while in Asia, orders improved by $2 million compared to last year, first quarter.

Now some comments on the outlook. again, we believe that the business in Asia especially China continues to be stable over the next quarter for CO2 laser. And we should experience the increased demand for high power fiber laser. Micro is more challenging due to recalibration in the solar industry. But slowly, we see upcoming interest for upgrading systems to increase efficiency of solar cells.

To the consumer electronic industry, we delivered the remaining units for smartphones and working on new applications. In North America and Europe, we count on a stable medical device business and the semiconductor demand will continue to be below the previous quarters and on the automotive sub-supplier sales, we see a more challenging environment given the consolidation expense in Europe.

So these are comments on the outlook of our main industries. of course, still the side note of potential stronger U.S dollar will put pressure on our top line results from foreign currency translations into U.S dollar, and pleased to take this into account when you evaluate our guidance.

during fiscal year 2013, of course, we will continue our investments and cost structure improvements in the fiber laser area all of which should terminate in an increasing competitiveness and further cost reduction through the high power fiber lasers over the next quarter.

Just site information for those who are going to visit the FABTECH show, we do not attend this show in Las Vegas. So that it’s as always thanks to the ROFIN team for their contribution in fiscal year 2012. and special regards to our team in New Jersey, which was affected by the Mother Nature Sandy.

and thanks for listening, and now, we are prepared to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Patrick Newton form Stifel Nicolaus.

Patrick Newton – Stifel Nicolaus & Company

Yeah. Good morning, Günther and Ingrid.

Günther Braun

Good morning.

Ingrid Mittelstädt

Good morning.

Patrick Newton – Stifel Nicolaus & Company

Hey, a couple of housekeeping question, I guess I can ask my fiber laser high-power question. Did I hear correctly that fiber laser revenue was $56.5 million in fiscal 2012?

Günther Braun

That’s right.

Patrick Newton – Stifel Nicolaus & Company

Okay. And then gross margin guidance for Q1 Ingrid. I missed that one.

Ingrid Mittelstädt

35% to 36% in Q1.

Patrick Newton – Stifel Nicolaus & Company

All right, very helpful. And then just the last housekeeping question, before I jump into some of the media guidance, I guess Günther, can you provide us with orders by macro to micro, marking and components?

Günther Braun

I can’t do it, I can’t do it. so orders on macro in the quarter of $53.6 million, marking/micro $65.3 million and components $18.5 million.

Patrick Newton – Stifel Nicolaus & Company

Perfect. Okay, thank you.

Günther Braun

Okay.

Patrick Newton – Stifel Nicolaus & Company

And I guess Ingrid, I wanted to dive into the gross margin you discussed pressure from CO2 mix, and then multiunit orders, I’m assuming from the consumer electronics side. Could you dive in a little bit more into the details? Can you discuss whether or not fiber lasers pressured the gross margin results in the quarter? And then also can you discuss the pricing environment, which I assume played a little bit of role on the gross margin results and also guidance?

Ingrid Mittelstädt

Yeah. Let us begin with CO2 business, high-power CO2 business. there, we normally have, I would say more healthy mix in the laser delivered during one quarter, this quarter. we missed project with higher power CO2 lasers and we had a higher volume quantity of delivered and recognized revenue with lower power systems where the margin is lower than in the higher power CO2 lasers. So it’s a timing issue and nothing really material for the future. This was really the product mix this quarter.

Patrick Newton – Stifel Nicolaus & Company

And no pricing impact at all?

Ingrid Mittelstädt

No.

Günther Braun

Not really, just the usual what you’re doing at the end of the fiscal year and customer reached or replaced then of course in bonuses, but just one additional sentence to that, this quarter, we had, I would say more lasers, CO2 lasers of our proportion not more lasers up to 4 kilowatt and as a proportion less than five and higher optic power.

Ingrid Mittelstädt

Yeah.

Günther Braun

And this triggered a little bit less favorable mix margin.

Ingrid Mittelstädt

In the CO2 laser, and on the other side, of course, we said we had several multiple orders for one industry in the micro, marking area, and when you get these higher volume orders or multiple orders, the price is of course lower than for single projects with customized solution or system.

Patrick Newton – Stifel Nicolaus & Company

Okay, thank you. And then…

Günther Braun

Some more light on this one, of course, competition would be Chinese competition. And then you had for different price pressure on, and you take orders, volume orders. this is of course, the different price structure.

Patrick Newton – Stifel Nicolaus & Company

Okay, thank you. And then Günther, I guess on your cost control initiatives for fiber lasers, you talked about one kilowatt and 200 watt packages be, I believe the quote was on the way.

Günther Braun

Yeah.

Patrick Newton – Stifel Nicolaus & Company

I was wondering if you could give us an update on whether cabinet control introductions still on pace for this quarter. And also I think with the 200 watt packages, they are a couple of months behind the original target, can you discuss any of the issues that kind of pushed to release those packages back?

Günther Braun

I think that there is no change what we said last conference call, basically that we decided, because of power degradation on the first test to start a new test we slightly change chip material, and that’s underway. What I said, we are testing it, and we are in the process and the plan is to have this implemented into production in the next quarter. So that’s underway, there is no change basically to the last August conference call what we said, I agree the first initial intention was to have this already implemented in Q4. That’s true, and on the 1.5 kilowatt laser engine, we have this, the value tested this already, but this works only if you have the 200 watt module. So in combination when we have those ready and this should be next quarter, then we have this implemented in our production.

Patrick Newton – Stifel Nicolaus & Company

Perfect, thank you, good luck guys.

Günther Braun

Sure.

Operator

(Operator Instructions) Our next question comes from Mark Miller from Noble Financial Capital Markets.

Mark S. Miller – Noble Financial Capital Markets

Good morning, Günther and Ingrid.

Günther Braun

Hi Mark.

Ingrid Mittelstädt

Hi.

Mark S. Miller – Noble Financial Capital Markets

I just was wondering when you presented last quarter, you were certainly very cautious and there was some concern about the machine tool business, and I’m just wondering what led to the subside or what improved from that original cautious outlook for this quarter?

Günther Braun

As I said, it’s the demand out of China, the demand on outgoing, which reported last quarter, and still should help us in this quarter for this oil pipe cutting project in China where we still need to deliver some CO2 lasers. so although our infrastructure projects I would say supported this and, Ingrid, can you?

Ingrid Mittelstädt

And the orders we got during the quarter and we realized the revenue related to these marking, micro application in China.

Günther Braun

You asked machine tool, Mark?

Mark Miller – Noble Financial Capital Markets

Right.

Günther Braun

And as I said, it’s mainly Chinese; it’s a reasonable demand also in Europe but the improvement comes out of China.

Ingrid Mittelstädt

Yeah.

Günther Braun

And it looks at least the signals we have it should move on the stable basis, and that’s nice, because last year we saw this downturn.

Mark S. Miller – Noble Financial Capital Markets

Wondering last quarter, you gave us the book-to-bill for China, you gave us for Asia, could you provide that?

Günther Braun

For China, it was above one. we can provide this, I think orders were in the $30 million, and sales to China were $27 million something in that range, Ingrid can you?

Ingrid Mittelstädt

Yeah. Okay and we come back.

Mark S. Miller – Noble Financial Capital Markets

And then just one last question, what was your cash flow from operations that you gave for the year right now just for the quarter?

Ingrid Mittelstädt

Yes. For 2012, quarter it was $14.3 million.

Mark S. Miller – Noble Financial Capital Markets

Thank you.

Günther Braun

Thank you, Mark.

Mark Miller – Noble Financial Capital Markets

All right.

Günther Braun

Bye.

Operator

Thank you. Our next question comes from Jagadish Iyer from Piper Jaffray.

Vasanth N. Mohan – Piper Jaffray Companies

Hi, good morning. Hello, Günther. Hello Ingrid.

Günther Braun

Good morning, Jagadish.

Vasanth N. Mohan – Piper Jaffray Companies

This is Vasanth calling for Jagadish, he’s traveling and I have a couple of quick questions.

Günther Braun

Okay.

Vasanth N. Mohan – Piper Jaffray Companies

So the first one is on the fiber lasers, do you have the course have a side of target on $80 million.

Günther Braun

Yeah.

Vasanth N. Mohan – Piper Jaffray Companies

For the year, can you tell us about that and where you came in, I believe you have a little bit short of that. Have you set aside another target for the upcoming year?

Günther Braun

Okay. We came in with $66.5 million. I think some of it that we did not reached $80 million of course is somehow the price pressure and our cost savings initiative, which is somehow delayed. So therefore, we did not push further in getting more fiber lasers, I think that’s one of the reasons why we did not came out with $80 million, what was target which we mentioned last one year ago. For next fiscal year, the target is to get on the high power side towards 300 lasers including military and defense lasers by the way. So and I think that’s what you are like to hear in my opinion. And of course, the increase also there is low power pulsed fiber laser business for marking application, which was this year also I would say the last six months nice business for us.

Vasanth N. Mohan – Piper Jaffray Companies

And a quick follow-up, in terms of gross margin from fiber lasers, has it reached or how does it compared to the corporate margins?

Ingrid Mittelstädt

For high-power fiber laser, it’s still below corporate order rate, I mean that’s the reason why we are working on this cost reduction program and we have already explained the steps. So we should be able to see improvements over the next fiscal year.

Vasanth N. Mohan – Piper Jaffray Companies

Okay. Thank you.

Günther Braun

Thanks.

Operator

Thank you. Our next question comes from Lee, Jiwon from Sidoti & Company.

Jiwon Lee – Sidoti & Co. LLC

Thank you and good morning.

Günther Braun

Good morning, Jiwon.

Ingrid Mittelstädt

Good morning lee.

Jiwon Lee – Sidoti & Co. LLC

Günther, I just wanted to ask about the next quarter guidance. You did see an upside from the last quarter's revenue guidance, consequently will you expect to see this sequential hold back implied in the revenue guidance?

Günther Braun

Help me what do you mean?

Jiwon Lee – Sidoti & Co. LLC

In terms of the end market, I'm sorry, the sequential revenue decline.

Günther Braun

Yeah, I think we have faced this of course on our order entry, which we had in the fourth quarter, and based on the backlog. So of course there is upside potential if you get orders in which you ship in this quarter. But I think we learned last year the lesson that we should not be too optimistic and be more on the conservative side. So I will say that’s our message.

Jiwon Lee – Sidoti & Co. LLC

And in terms of your full-year outlook, did I hear you correctly that the second quarter and you may see a little more softness because of the China, so consequently you are expecting a little more robust rebound in the second half, as well as on the margin front?

Günther Braun

So as of today, we expect the second quarter somehow in line with the first quarter, hopefully a little bit better, that’s basically what Ingrid said. And typically, the last quarter is one of the best quarters in ROFIN and the items, see and we have not seen that this item has changed over the years. And I also would believe that is our new products and our cost reduction on the fiber side, we are more flexible. and therefore, we can generate higher revenues there.

Jiwon Lee – Sidoti & Co. LLC

And switching gears a little bit 400-watt module that you’re going to start producing in next quarter. when does the volume production start on that side?

Günther Braun

The target is of course, Ingrid if you?

Ingrid Mittelstädt

Yeah.

Günther Braun

Go ahead.

Ingrid Mittelstädt

For the next quarter, we expect to half these. And then we will see that the impact in the following quarters in their revenue.

Jiwon Lee – Sidoti & Co. LLC

Okay, excellent. And two more questions more for Ingrid, I’m trying to reconcile the foreign currency impact on the ETSI?

Ingrid Mittelstädt

This is normally not material, because we of course, have this natural hedging in our P&L. so the costs are normally also in other currencies. So it could be $1 million in a quarter or below.

Jiwon Lee – Sidoti & Co. LLC

Okay, excellent. And lastly from me Ingrid, the gross margin impact on a sequential basis from the high-power CO2 lasers. was that the majority of it?

Günther Braun

No.

Jiwon Lee – Sidoti & Co. LLC

Or was there something else?

Ingrid Mittelstädt

No, no, no. It was really the complete product mix this quarter and including of course, this high volume…

Günther Braun

Multiple unit order…

Ingrid Mittelstädt

More specifically the unit orders in…

Jiwon Lee – Sidoti & Co. LLC

I see, okay no problem, I actually got it.

Ingrid Mittelstädt

Okay.

Günther Braun

Okay.

Jiwon Lee – Sidoti & Co. LLC

That’s all from me. thank you.

Günther Braun

Sure, Jiwon.

Operator

Thank you (Operator Instructions) Our next question is a follow-up from Patrick Newton from Stifel Nicolaus.

Patrick Newton – Stifel Nicolaus & Company

Yeah. A couple more for you guys, I guess one Günther, when I’m thinking back you’ve said that, Asia especially China is stable. and I think you alluded to China expectedly stable again in this upcoming quarter.

Günther Braun

Yeah.

Patrick Newton – Stifel Nicolaus & Company

We’ve heard charter just over the last few weeks that there has been some credit and winding tightening across China. and I’m wondering it in your comments into signal. but have you seen any kind of this, but you have any concerns pertaining to winding practices in China and then Europe intermediate term?

Günther Braun

I don’t have any signals yet from our Chinese guys, from our colleagues. so and also the order pattern what we have seen so far in October was okay and probably Patrick, now we can also save that October was, I would say a very good order entry quarter for us.

Patrick Newton – Stifel Nicolaus & Company

Yes.

Günther Braun

also from China, so up to now it’s pretty stable.

Patrick Newton – Stifel Nicolaus & Company

Okay, good to hear, okay. And then I guess a couple for you Ingrid, one is that you did begin to reduce inventory in the quarter as you previously forecast, I guess given the macro environments, your revenue and guidance or the levels were you want them or we should be expecting another breakdown in inventories for the quarter?

Ingrid Mittelstädt

They are of course, not at the level. I would like to have it and we are working on that and as I already mentioned, we have also some inventory our customers waiting for revenue recognitions. So the target is of course to reduce inventory levels over the next quarter.

Patrick Newton – Stifel Nicolaus & Company

Okay. And my last one is, I guess, I’m kind of hoping for a gross margin walk, what drives the 200 basis point uptick from the mid point of your 1Q guidance of 35.5 to your full year guidance for 37.5, is that a function of better fiber laser business with cost reductions that as a function of mix just anything to help with this point and place quite an uptake throughout the remainder of the year?

Ingrid Mittelstädt

Of course it’s the cost reduction in the manufacturing of the high-power fiber laser.

Patrick Newton – Stifel Nicolaus & Company

Is that the biggest driver?

Ingrid Mittelstädt

Yeah.

Günther Braun

Should be the biggest driver of course the other products too, across the product line we have to look into manufacturing cost of course.

Patrick Newton – Stifel Nicolaus & Company

Perfect. Thank you.

Günther Braun

Thank you. Okay.

Operator

Thank you. As there are no more questions at this time, I will turn the call back over to management.

Günther Braun

So thank you, thanks for listening. I hope you had a good time in favor of when we report I hope we can surprise you again a little bit, so at least we are working towards this direction to improve again our business. So have a good time looking forward to talk to you next time, later in February. Thank you.

Ingrid Mittelstädt

Good bye.

Günther Braun

Bye.

Operator

Thank you. This does conclude today’s teleconference you may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!