Good morning, and welcome to IPG Photonics' Third Quarter 2020 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 and General Counsel, for introductions. Please go ahead sir..

Thank you, operator, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev, Chief Operating Officer, Dr. Eugene Scherbakov and Senior Vice President and CFO, Tim Mammen.

Statements made during the course of this 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 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 the impact of the COVID-19 pandemic on our business and those detailed in IPG Photonics' Form 10-K for the period ended December 31, 2019 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 30, 2020.

The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the Excel-based financial data workbook posted to our investor relations website.

We will post these prepared remarks on our investor relations website following the completion of the call. With that, I'll now turn the call over to Valentin..

YAG lasers. This is due to the significant cost savings they can bring due to an increase in welding productivity and decrease in electrical consumption. Our kilowatt-scale pulsed lasers for ablation and cleaning applications are also continuing to gain acceptance.

Beyond materials processing, we continue to develop new soft tissue medical treatments, mid-infrared lasers for molecular-level resolution online spectroscopy, inspection, sensing and biomedical research applications and new high-speed transceivers for the telecom and datacom markets.

I want to conclude by thanking our employees for their strong execution during one of the most challenging periods in our company's history. The diligence of our employees to keep each other safe has enabled us to return our operations back to normal within safety guidelines.

Of course the well-being of our employees, their families, our customers, our partners and our community remains our highest priority. With that, I'll turn the call over to Eugene..

Thank you, Valentin and good morning. I will begin by discussing the effects of COVID-19 on our production. All three of our major production facilities in Germany, the US and Russia remain open and are operating normally, and we have not seen any disruption to our manufacturing or service capabilities in the regions where we operate.

Our global facilities are operating on a largely normalized basis, albeit with social distancing and enhanced cleaning and filtration measures in place. In addition, we were back to normal operations promptly after we reported the ransomware attack in September.

The incident did not have a material impact on our business, operations, financial condition or our ability to report financial results. As we disclosed earlier, we carry cyber insurance to cover this type of risk. Nonetheless, IPG is conducting an analysis to improve the security and resiliency of our systems.

We continue to benefit from our vertically integrated production model which enables key technological and cost advantages over the competition while minimizing supply chain disruptions.

The current constraints on our business primarily relate to restrictions on travel that affect our sales team and customer visits related to applications development. Logistics were less impacted in the third quarter, and we did not encounter any meaningful disruption in our ability to ship components and finished product around the world.

As a percent of sales, shipping costs were slightly lower than they were in the second quarter. We continue to benefit from reducing the cost of devices and from the expense reduction initiatives we undertook in the second half of 2019. Gross margin improved to 48% this quarter.

Total SG&A and R&D expenses increased by $2.8 million to $78 million in the third quarter compared to $75.3 million in the second quarter while sales revenue increased by $22 million. Operating expenses continue to track well below the peak level of $84 million incurred in the second quarter of 2019.

Examining our performance by region, revenue in China increased 22% year-over-year, representing approximately 47% of total sales. New orders booked in China were slow at the beginning of the quarter but picked up in September.

However, China continues to have a significant backlog given the exceptional level of orders booked in the first half of the year. While we face aggressive competition in the region for lasers at 6kW and below, we continue to maintain share at key accounts while anticipating a strong mix of lasers at 10 kW or greater in the future.

In Europe, revenue decreased 10% year-over-year due to the effects of COVID-19 on many countries in the region. Similarly, revenue in North America decreased 26% year-over-year with strong growth in medical lasers and advanced applications not being sufficient to offset declines in laser and systems sales for materials processing.

While North American revenue was weak in the third quarter it was notable that order bookings were exceptional and benefited from several large orders for advanced applications and for our unique green lasers used in renewable energy. Sales in Japan decreased 41% year-over-year.

While COVID-19 infections in the region are below other countries, the recurring stop and restart of economic activity has delayed many significant projects within our welding and cutting businesses in Japan.

Sales to the rest of Asia increased 6% year-over-year as they recovered from the second quarter trough and also benefited from the shipment of high-power lasers for advanced applications. Sales in Turkey increased 15% year-over-year and by more than 100% as compared to the second quarter.

Global demand trends remain uncertain and we have seen continued delays of projects globally, which makes the execution in the third quarter all the more notable.

We continue to believe that our large and diverse advanced materials and components technology platform, our efficient R&D model and our strong balance sheet and free cash flow provide us ample flexibility to respond to business disruptions and emerge from the pandemic in a stronger competitive position.

With that, I'll turn the call over to Tim to discuss financial highlights in the quarter..

Thank you, Eugene, and good morning, everyone. Revenue in the third quarter was $318 million, which declined 3% year-over-year but increased 7% quarter-over-quarter. Revenue from materials processing applications decreased 5% year-over-year and revenue from other applications increased 24%.

Sales of high-power CW lasers were flat year-over-year and represented approximately 58% of total revenue. Sales of ultra high-power lasers at 6 kW or greater represented 58% of total high-power CW laser sales.

Pulsed lasers sales increased 3% year-over-year, with strong growth in green pulsed lasers used in solar cell manufacturing as well as higher sales of our new UV and ultrafast pulsed lasers which were partially offset by lower sales of lower-power pulsed lasers for marking applications.

Systems sales decreased 37% year-over-year as growth in systems for medical device manufacturing was offset by lower sales of other IPG laser systems and Genesis non-laser systems. Medium power laser sales decreased 1% on continued softness in additive manufacturing and the transition to kilowatt-scale lasers in cutting.

QCW laser sales increased 21% year-over-year from sequential improvement in consumer electronics applications. Other product sales increased 8% year-over-year driven by growth in medical laser sales. Q3 gross margin was 48%, which increased 160 basis points year-over-year.

Compared with the year-ago period, the increase in gross margin was driven primarily by lower cost of products, which was offset by an increase in inventory provisions as compared to the year-ago period. Third quarter GAAP operating income was $41 million and operating margin was 13%.

Goodwill impairment charges related to Genesis Systems Group reduced operating income by $45 million and reduced operating margin by 14 percentage points.

The results of this business were impacted by lower capital investments from industries impacted greatly by the COVID-19 pandemic, such as aerospace and transportation, as projects have been delayed.

We continue to be focused on numerous opportunities for Genesis including transitioning to a higher percentage of laser-based systems as well as expanding the international systems opportunities. We are hopeful that it will ultimately enable progress to be made on broader-based laser welding applications across many different industries.

During the quarter we recognized a foreign exchange gain of $11 million primarily related to revaluation of US dollar cash and other assets held in Russia given the depreciation of the Ruble versus the US dollar and to the appreciation of Chinese Yuan. The foreign exchange gain increased Q3 operating margin by 350 basis points.

Q3 net income was $36 million, or $0.66 per diluted share. The goodwill impairment charge reduced EPS by $0.63, while foreign exchange gains benefited EPS by $0.15. The effective tax rate in the quarter was 16%.

If exchange rates relative to the US Dollar had been the same as one year ago, we would have expected revenue to be $4 million lower and gross profit to be $3 million lower. We ended the quarter with cash, cash equivalents, and short-term investments of $1.3 billion and total debt of $39 million.

Strong operational execution resulted in cash provided by operations of $70 million during the quarter. As a result of COVID-19 we have reduced our planned capital expenditures for the year.

Capital expenditures were $25 million in the third quarter and we now expect capital expenditures will be in the range of $80 million to $100 million for the full year. During the quarter we repurchased 61,000 shares for $10 million.

Bookings growth in North America and Europe was strong compared to the second quarter while total orders in China were lower. In North America, we had record bookings aided by several orders for advanced applications and emerging applications.

While total orders in China for the third quarter were lower, China continues to have a significant backlog given the exceptional level of orders booked in the first half of the year. In total, third quarter book-to-bill was slightly below 1. Overall, it was also notable that order bookings improved markedly during September.

It is difficult to predict whether the improvement in some macro-economic indicators will be sustained given the resurgence of COVID-19 in Europe and North America and its potential impact on economic activity. These uncertainties continue to make forecasting our business challenging in the near to medium-term.

That said we continue to benefit from near-term growth opportunities in ultra high-power cutting, electric vehicle battery processing, medical procedures and advanced applications.

We believe the strides we are making in higher-power products within our core materials processing business and new solutions will enable us to emerge from the current downturn in a stronger competitive position. For the fourth quarter of 2020, IPG expects revenue of $290 million to $320 million.

The Company expects the fourth quarter tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $0.75 to $1.05, with 53.1 million basic common shares outstanding and 53.7 million diluted common shares outstanding.

Financial guidance provided this quarter is subject to greater risk and uncertainty given the COVID-19 pandemic and its associated impacts to the global business environment, public health requirements and government mandates.

As discussed in the Safe Harbor passage of today's earnings press release, actual results may differ from our guidance due to factors including, but not limited to, goodwill and other impairment charges, product demand, order cancellations and delays, competition, tariffs, trade policies, health epidemics and general economic conditions.

Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release, and is subject to risks outlined in the company's reports with the SEC. With that, Valentin, Eugene and I will be happy to take your questions..

Our first question is coming from the line of Jim Ricchiuti with Needham and Company.

Hi, thank you. Good morning. I wanted to follow up on the comments you made about the bookings picking up in September. Can you elaborate on where you're seeing the activity? And to what extent that may be may have been sustained thus far in October..

So, Jim, good morning. Yes, so the phasing of orders and the tone of orders in the quarter was a bit weaker in July and August and was really exceptionally strong in September. That strength was driven in particular by improvements in North America and China.

Overall, the order flow in Europe was a bit more even it was actually stronger than it had been in the second quarter.

The North American bookings, as we referenced, benefited from significant orders for advanced applications, some of which are scheduled to ship in Q4 and some of which probably going to be Q1, we may be able to get some of them into the fourth quarter as well.

Very strong orders for some of the emerging products, particularly green lasers; and even better orders during the quarter for slightly better orders for UV and ultra-fast. In October, the first week in October, China was actually on holiday. So there was no activity in China.

But since then, particularly in the last week and a half the overall tone of order flow has actually picked up in China. It's been quite strong in Europe since the beginning of October, which is interesting. And in North America in the last four or five days, it's also improved meaningfully.

We've had another order for green lasers from Southeast Asia as well. So we're actually quite pleased with the general tone of order flow in the business given the disruptions that you're seeing in the market..

Got it and just on curious, we're hearing more and more about a pickup in the automotive market.

Are you seeing any signs of that in the business including potentially in the Genesis business?.

Not so much in Genesis. I think automotive there is certainly a little bit more strength to it, it's difficult to bifurcate between traditional EV, there's a lot of investment going on in EV. And that's not just happening in China. The significant orders we're waiting for in North America as well for this. There's an order we just took this week for EV.

I'd say that the order flow in Europe around automotive is still a little bit weaker. So it's a different - there's a lot of - there's certainly a significant pipeline of automotive activity. It's a little difficult to bifurcate between traditional applications and the emerging EV applications..

Our next question comes from the line of John Marchetti with Stifel..

Thanks very much. I'd like to go back just a little bit to the order commentary again. The North American and European, I think is understood to be a little bit more tied to those regions recovering a bit, but I'm curious from the China perspective, you're having those orders get off to a little bit of a slower start.

And now coming back a little bit if you can discuss maybe some of the dynamics that are going on there in that market.

And then as we look out into 2021, and I know you're not specifically giving guidance there, but should we expect that the China business may be back more towards the 2019 time type of levels? Or do you think something has changed there as we're looking out into 2021?.

So there are a lot of different aspects that question. The order flow in China has been a bit and I call an anomalous this year, right? We've had this very, very strong order flow in the first half of the year. And we reiterate we have very strong backlog in China.

What's been good to see is that even with that order flow in China, and the general tone of the business has been quite positive in September and October. So you can't really call it normal just because the backlog is strong.

But also the tone generally tends to be a bit more positive at the moment; the feedback we've got from our China business is that Q4 the tone for business remains relatively good. Recent presentations from them for opportunities in 2021 are significant and meaningful.

They're driven by things like EV, the transition to higher power ultra, ultra high-power cutting applications. With NEV, it's battery welding, it's cleaning applications, it's oil cutting. So that helps us because of the higher power pulsed lasers.

There's actually some interesting demand that may come out, even though some additive applications in China. So there seems to be a broader base potential for the application sets in China.

And there are a very significant number of opportunities that they're working on, they're even working on looking at displacements of co2 lasers within traditional automotive industry, where they've identified 1,000, DOT co2 lasers that still potentially could be reduced.

So if the economic underlying economic stay relatively strong in China, I think you see that investment cycle continue to, I will reiterate on the order flow, North America was an extraordinarily strong quarter for us. And the good thing about that was just the diversity of applications. It wasn't materials processing on its own.

It was also some of the advanced applications; it was some of the micro materials applications. We actually got another order for medical in October, so that wasn't quite Q3. We called out the strength during the quarter from revenue and bookings on some of the semiconductors applications as well.

So North America was really, it was an exceptional quarter for us. And I think it was even record booking level if you execute some of the systems businesses..

Our next question is from the line of Nik Todorov with Longbow Research..

Yes, good morning, everyone. I just want to understand, again, going through bookings; you mentioned the China backlog remains very strong several times. Can you help us understand how should we think about seasonality? Yes, obviously, this is not a typical period of time.

But as we go into the December and March quarters, typically the business in China goes down a little bit, but how should we think about that relative to the backlog comments and the comments of order pick up in September and October..

And we're not going to give any commentary around Q1; it's too early to do that. I think the seasonality in China that's backed into our guidance is fairly in line even though it is a different - difficult time to pick that revenue in China would be slightly lower offset by strength in some other regions.

China has been giving us good forecasts but they've been intending to get towards the top end of their range. And I think it just depends out the tone of the business holds up there. I think given, beyond that I think there's an awful lot of commentary I've already given around orders and the tone of the business in these different regions..

Now introduces this quarter, new or some new, very exciting product in a way. Also I think they also have very good new chance in China also, not only worldwide. It is a product, very exciting and in China in a best serious order volume orders start to grow only in is this quarter.

Hope it will begin next year for us --to regular products in sales revenue in China and not only China, worldwide..

Okay. Thanks. As a follow up, I think, Tim, can you comment a little bit about that implied four quarter gross margin? If my math is correct, it implies about mid 45 percentages as where if I look at the revenue, that is - the revenue is about $15 million to $20 million higher than the June quarter where you guys had a 46% margin.

And obviously, September was very strong guided by FX, can you help us understand the implied gross margin in the puts and takes it for December?.

The implied gross margin is very similar actually to Q3, it's 45% to sort of 48% of the top end of the range. So as you tend towards the top end of the range of getting into the upper half of our 45% to 50%. I'm assuming for operating expenses, something pretty similar, the top end of the range and slightly lower.

And so I'm not sure whether you're saying 45%, we can come back to that in a bit more detail later.

But so I'm assuming 45% to 48% operating expenses at the top end of the range, similar to Q3 at the bottom end of the range, slightly lower, and then a tax rate of 25%, which would exclude any discrete items that we can't really predict what they would be during the quarter..

The next question is coming from the line of Michael Feniger with Bank of America..

Hi, guys, thanks for taking my question. My first question just on the high-power lasers, it was flat year-over-year, and this was the first quarter that it wasn't down on a year-over-year basis in nine quarters. So I'm just hoping Tim, you can kind of help me understand its impact.

If we assume based on your guide for Q4, the high-power lasers are going to potentially accelerate on a year-over-year basis, but how do we think about what that does for your mix. So it's been really down for the last nine quarters. And now it seems like it's flat and moving in the right direction..

Mike, I think it's a great comment. High power was basically flat year over year and given the circumstances. I think that's a pretty interesting observation and a great performance.

We've benefited from clearly the shift towards ultra high power that we've caught out where we have significant advantages in terms of just the quality, reliability, electrical efficiency capability of producing that product. Interestingly, the YLR lasers also performed quite well, we called out that they actually grew year-over-year as well.

So I think that continued to demonstrate again, the overall quality and reliability of the product that we have versus the competition and shows we're not losing shares there. We reference that we also sold some single mode lasers for advanced applications that helped a bit with total high-power laser sales in the mix there.

We've got this very strong backlog for single mode lasers; we actually took two of the orders taken in the US for 400 kW lasers. So that's for applications outside of materials processing. Yes, I think that the performance of that high-power lasers was driven by those factors.

I also call out that actually, we've got the new ultra compact U Series in the hands of customers, and they're evaluating it to performance, the less than 4 kW range was before significant orders being received for that product. So there are potential improvements in 2021 as that product ramps up at the low end of the market..

Makes sense. And Tim, I want to ask about your inventories. If you're going to year-over-year basis, your inventories were down year-over-year, much more than your revenues. We haven't seen this since 2017. You talked a lot about last year into some of these inventory charges that were taken, and you live now.

I mean, your inventory is kind of flattish while your sales were accelerating quarter-over-quarter.

So can you just give me a frame of reference? How do you feel about your inventory right now? Do you need to increase production to maybe match just demand where your inventories are now and where you think demand might be heading into 2021? Thank you..

I think that's a good operational question. Eugene, what's your view on inventory and the investments and the overall control and execution around that..

We already mentioned that sales of 90 plus delta control much more precisely our inventory in different facility. I mean in Germany, United States and also especially in Russia. And even if this is control, we can improve our position in this area, I mean much more control.

And from this point of view, I think we will continue to check to control and to keep our inventory to the acceptable level..

As this inventory our policy new inventory help us to pass this year, was a critical year when this all the sources press kick away all components and outside sources where they see this problem and the way and the average delivery time of new components so increase in some time.

So without inventory create enormous problem in manufacturing a product. But we have now inventory to pass without any problem, this worry - a tough time..

Our next question is from the line of Mark Miller with Benchmark Company..

Thank you for your question; considering a possible change in administration in United States and possible impact on tariffs, any thoughts about that in terms of how it might impact IPG if such a thing would occur?.

Mark, I don't get into discussing the impact the outcome of the election and to see what happens on that. We're a global and international company that operates in multiple end markets. I think for us at the moment, it's more the underlying economic growth that's expected next year globally.

So GDP is forecast to rebound quite strongly on a global basis. The most interesting important thing for us would be whether that is actually sustained, or whether the pandemic has an impact on that. I think the outcome of the US election is more muted relative to those expectations.

I think the other area that we're absolutely focused on is this diversification of the business and new products, at different wavelengths, different post durations, addressing different applications, and how we execute around those. And that, again, is on a global basis. So I don't want to get too hung up on the election results.

And I think there's other more in the near term, at least pertinent things that could impact whether global GDP growth is robust or not next year..

And just as a follow up, could you estimate what percent of sales are coming from products introduced in the last two years?.

The number we gave on emerging products, which is not quite the last two years, those include some higher power pulse lasers, but getting to higher powers on it was 21%. We gave that number in the script..

Our next question is all coming from the line of Tom Diffely with D.A. Davidson..

Yes. Good morning. So, Tim, you mentioned the gross margins of 160 basis point improvement year-over-year driven mainly by cost.

Does that infer that pricing has been relatively stable for you over that period of time?.

On a year-over-year basis pricing, I see still came down, it was more in the 10% to 15% range. It's more of, but some of that is also a change in - sorry, 10% to 15% on an average kilowatt basis. In fact, we looked at the high-power average selling prices were down significantly less because of the transition to higher power levels.

So you still got competitive dynamics and pricing issues there.

If you look at oil, interestingly, if you look at order flow, and ASP some of the ASP analysis around orders taken in Q3, they were actually slight improvements on that because of some of these ultra high power lasers and single mode lasers that we booked, but also the exchange rates have moved a little bit in our favor at the moment.

So the renminbi a bit stronger, the euros a bit stronger, and that helps with the ASP trends a bit. So the other side of the equation is just to continue to reinforce the ability of the company to reduce costs on product. And this is as I said even before the new compact YLR user introduced. There's certainly some benefit coming from the wireless use.

But there's also the product mix benefits as you go to ultra high-power lasers. Stronger sales of things like green lasers, stronger sales of ultra high power, high power nanosecond pulse lasers, these are all areas where we have a competitive advantage and where the value proposition delivered to the customer is exceptionally strong..

Okay, sounds good. And then on the bookings strength, especially in North America, how much of that do you think reflects just some pent-up demand from a couple of quarters of COVID versus matching the true underlying demand level today..

Booking, sorry - the North America was, we referenced it, really came from newer products and newer applications in advance. So it wasn't necessarily driven by a rebound on the core materials processing applications.

We started to see some more recovery of that, I think, probably in September and more recently, in October, where we started to see some of the cutting OEMs placed some orders. There's a significant order on automotive we're waiting on at the moment, there was an order taken automotive.

So the real trend on Q3 was from these advanced applications and strength on some of the emerging products in green and UV and ultra, ultra-fast..

The next question is a follow up from the line of Michael Feniger with Bank of America..

Hey, guys, Yes, thanks for squeezing me back in.

I'm just curious, Tim, I mean, what's your cash position where it is? I'm curious you took this impairment in Genesis, what have you really learned from Genesis? And with this cost position do you think IPG could be moving more aggressively in terms of acquisition to help drive that penetration on welding? How are you guys thinking about that cash position as you head into 2021?.

Sure, I mean, the cash position and the strength of our balance sheet has been a very significant advantage to the company during the last year, particularly given the volatility and the macroeconomic environment. It leaves us with a tremendous amount of firepower to look at potential acquisitions and investments in new technologies.

And the learning points on Genesis; Genesis unfortunately been very impacted by COVID-19, right? So there were a lot of growth opportunities and things like aerospace that we were looking at, particularly on the laser based in the aerospace industry, as I mean everybody knows it's just a complete mess at the moment.

So it's not that we don't think Genesis is going to be successful, I think that it has just been impacted, and it's going to take a bit of time to get that business to recover. On the overall acquisition strategy, we continue the successful acquisitions we've done, have been around looking at technologies that really fit with our lasers.

So the acquisition of LDD in Canada is driving significant revenue opportunities, given the real time world monitoring capability, the acquisition of OptiGrate in Florida really enhances the capability around ultra-fast lasers and also even in helping with some of the diode specifications.

So we're well positioned to look at strong technology acquisitions that benefit the business. At this time, we've reached the end of a question-and-answer session. And I'll turn the floor back to management for closing remarks..

Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you over the coming weeks. And we'll be participating in a number of virtual investor conferences this quarter. Have a great day, everyone..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..