Good morning and welcome to the IPG Photonics Second Quarter 2021 Conference Call and Webcast. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Director of Investor Relations for introductions. Please, go ahead, sir. .

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

Good morning, everyone. We are pleased to report another good quarter for IPG.

Our second quarter revenue was significantly above the same period of last year and increased from strong results in the prior quarter, driven by improved macroeconomic conditions in most major geographies, growth in emerging products as well as, excellent execution by the IPG team.

We saw higher end market demand for our core material processing product, where our fiber lasers are replacing traditional tools and handheld welders and continue to pursue the opportunities in emerging markets.

We remain focused on growing sales in applications that require innovative solutions, our expertise in fiber laser technology and superior quality of product, such as advanced applications, electric vehicle battery production, medical and microprocessing.

Our technologies are transforming the way products are created, enabling production of smaller and more complex devices, improving the product we use every day and bringing advanced manufacturing capabilities to electric vehicle and renewable energy industries, helping to address climate change and sustainability initiatives.

Our investment in new products and the applications are paying dividends..

Thank you, Valentin, and good morning, everyone. During the quarter we demonstrated excellent progress in our core material processing market, across all major geographies, with accelerated growth in high power and ultra-high power lasers for cutting applications in the U.S. and Europe and strong growth in welding in China and Europe.

We also delivered robust growth in emerging products and applications. Revenue from material processing applications increased 27% year-over-year and contributed 93% of total revenue in the quarter.

Sales in welding application grew significantly in the last several quarters due to increased sales of our AMB adjusted motor beam lasers for general manufacturing purposes and electric vehicle battery welding applications.

Battery manufacturers are facing challenges welding together different type of materials such kind of copper, sulfur and aluminum. These materials are extremely same reflective and need to be welded with high precision and reliability.

Each battery model requires hundreds of welds and our AMB lasers can address these challenges, offering superior speed and weld quality or competence solution this broad range of beam tunability and spotless welding. We also saw strong demand in emerging and micro material processing applications such as solar cell manufacturing and 3D printing.

Sales of our green pulsed lasers, which are used to improve solar efficiency more than tripled compared to the prior year and becoming a more meaningful part of IPG's revenue.

We are taking advantage of opportunity created by increased focus on sustainability globally and expect future solar cell manufacturing capacity to grow driving additional sales in our green lasers.

We are also increasing the pulse energy of the green lasers to enable next-generation applications in solar, drilling and copper welding for consumer electronics. Revenue from our other applications increased by 5% year-over-year.

Medical sales showed a good growth both year-over-year and sequentially, as a result of improved demand of our surgical lasers. Advanced application sales improved year-over-year, while telecom revenue declined compared to the same period in the prior year..

Thank you, Eugene and good morning everyone. Revenue in the second quarter was $372 million, which increased 25% year-over-year and 8% sequentially. Revenue from materials processing applications increased 27% year-over-year and revenue from other applications increased 5%.

Sales of high-power CW lasers increased 20% year-over-year and represented approximately 51% of total revenue. Sales of ultra-high power lasers at six kilowatts or greater represented 51% of total high-power CW laser sales and increased 15% compared to the prior year.

Medium power laser sales increased 70% on growth in cutting welding 3D printing and semiconductor applications. QCW laser sales increased 13% year-over-year on higher demand from welding applications.

Pulsed laser sales increased 45% year-over-year with strong growth in green pulsed laser used in solar cell manufacturing and higher sales of our infrared lasers for marking and cleaning applications as well as foil cutting applications in the electric vehicle batteries manufacturing process.

System sales increased 19% year-over-year with improved sales for Genesis and ILT. Other product sales decreased 4% year-over-year. We estimate that supply chain constraints impacted our revenue by $7 million to $10 million in the quarter..

Great. We will now be conducting a question-and-answer session. Our first question today is coming from Jim Ricchiuti from Needham & Company. Your line is now live..

Hi. Good morning. Tim, I think I heard you say, the impact that you saw from supply constraints in Q2, I think you said around $7 million to $10 million. So, is that -- just to be clear, is that a direct impact to you, or is that what you're seeing from some of your -- what you're seeing from some customers? It seems like a fairly modest number.

That's why I'm asking?.

Yes. It was a fairly modest number. I'd agree with that. It's a variety of things.

It's both the impact internally on the ability to supply some products and also an impact from slightly lighter demand from some customers because they can't get components for some of their systems, and therefore delaying shipments of their systems and then they don't want to take the lasers at the same timeframe they did it.

And the other thing is that it is across most geographies. So it's not just in one specific location. China was impacted a bit, but also North America and even Europe as well..

Do you anticipate that being a little worse this quarter?.

No. It's probably going to be at a similar level. So in Q3, it's a combination of that as well as some of the softness in the China cutting market that are really impacting guidance. It's not that that is specifically driving the guidance number down more significantly..

Got it. And just my follow-up question. Just with respect to North America, you showed strong year-over-year growth. And clearly that's an easier comparison relative to the pandemic last year.

But on a sequential basis, I'm just curious the decline there 10% or so sequentially is there -- are you seeing any signs of the US North American market either slowing down or potentially being impacted by some of these external factors that we're hearing about?.

No. Not specifically. I think with North America it was more the timing of revenue. We had a very strong start to the year in Q1. We still had some backlog. For example, I think one of those 100-kilowatt lasers was recognized as revenue in the first quarter. So that was a bit of a benefit, slightly slower quarter in Q2.

I will say that overall North American backlog continues to be very strong. And the guidance number we have with -- I can't remember -- sequentially I think it will be basically flat but again continuing to show growth on a year-over-year basis. So the backlog in North America remains pretty robust even though Q2 performance was a little bit later..

Thank you Eugene, and thank you Tim..

Thank you. Next question today is coming from Nik Todorov from Longbow Research. Your line is now live..

Yeah. Thank you. I want to double-click on the China demand particularly in cutting. If we go back a quarter ago, I think you were talking about macro indicators showing signs of weakness, but I think your data points were strong. We were talking about strong freight agreements that were tied usually to high demand for ultra-high power lasers.

If I look at the high-power sales and breaking down between ultra-high power and the low six-kilowatt we can see that ultra-high power lasers grew very incrementally on a sequential basis. Also on a year-over-year basis while below six-kilowatt lasers grew I think 24% or 25% year-over-year and about 10%, 15% sequentially.

So that implies that China sales should have been strong.

So I just want to double click and see the reasons if you can give us more around the softness in China cutting?.

So China sales in the second quarter were strong both on a sequential and even on a year-over-year basis okay. The growth on a year-over-year basis was a bit lower than some other geographies, but don't forget that China had recovered already a significant round of revenue in the second quarter of 2020. So the comparison there is a bit more difficult.

I wouldn't say I was not concerned about performance in China in Q2. In fact, bookings as well were strong. The issue is, is that I think a couple of companies even that have announced in the last couple of days have pointed out a weaker macro environment in China and even the government being concerned about a potential a bit more of a slowdown.

Yes, we highlighted that on some of the PMI data that had initially come out I think in April. So there is a bit of a concern that China is a bit weaker than expected. And that's clearly driving some of our expectations in addition to the supply chain constraints in the third quarter.

So I mean bookings are good, but we expect those orders to be delivered over a slightly longer time than necessarily would have been if the demand environment had remained resilient or stronger. It's still resilient and stronger..

Okay. If I can click on the supply chain dynamics, I think we heard that there were some challenges with delivering chillers that were causing some lead times extension.

Maybe can you give us what components are impacting your lead times and when do you expect those to get resolved? And what are you doing to address that?.

Yes. Earlier there was some -- there were some components, but it's not critical components. It's -- first of all, what also mentioned that a price for some materials also increased dramatically. For example, for copper welding and also for our components based on these materials.

But for our production is not dramatical, and I think we will deliver in time not only chillers, but also other product during this quarter. .

Okay. Last quick one. Germany sales were down sequentially. I think European sales overall are very strong.

What is the reason why Germany sales are kind of diverging from the rest of Europe?.

So, actually let's go and look at the data on that on, which customer it was specifically there. We tend to focus on total European sales rather than just the individual countries there. And as you point out total European sales continue to perform pretty strongly. I'd have to look at which customer was the change between Q1 and Q2..

And from other side Germany, again, demonstrated very high amount of orders for ultra-high power lasers and it was keeping 22-kilowatt and more as a first time..

Got it. Okay. Sounds good there. Thank you and good luck. .

Thanks..

Thank you..

Thank you. Next question today is coming from Tom Diffely from D.A. Davidson. Your line is now live..

Yes. Good morning. Maybe one more question on China. You talked in your prepared remarks and said that pricing pressure remained.

I'm curious if that has moved up into the high power region you had most of the pricing pressures at still at the low power?.

No. Pricing -- some of the competitors are introducing product at higher power levels and trying to get into that ultra-high power market. So 12-kilowatt lasers even. And certainly the only way they can compete is on pricing.

So what we call the low end of the market not just on power, but really on pricing is moving up into higher power levels and impacting or reducing pricing there.

Our strategy though is really as we articulated to continue to deliver behind the value proposition of IPG's product and not get drawn into what -- it would be a terrific victory on pricing in terms of trying to compete at that low end of the market, which is just -- it's not focused on any kind of reliability or quality of devices using.

I think so far our strategy has borne out pretty well with fairly robust China sales, but good profitability on those And we're pleased with the way that gross margin and even total operating margin has continued to track in the second quarter Tom..

Okay. Yes. A year or so ago you talked about using your strong cost structure to maybe get more aggressive in the marketplace. And it sounds like you've been a little bit more disciplined than over the last year than I thought you may have been after some of those comments.

But have you used pricing at all from your side, or is it just in response to what you're seeing from the competitors?.

No. We've introduced some of the lower cost rack-mounted lasers that's enabled us to reduce the selling price of those and make them a bit more competitive, whilst maintaining margins on that, but we're not using pricing as our strategy within the China market.

It really would be a bit of a terrific victory in terms of gaining significant amount of share, but at a significantly lower average price per watt. And then having to draw even more resources to building product that would have a lower profitability on it, so, we're focused on the high end of the market.

And also outside of cutting very strong growth in some of the welding applications for EV, the foil cutting applications for EV. Even some mid-power laser growth for some of the additive applications in China.

And then surprisingly some of the pulse lasers even at lower power levels for marking applications, where the quality of our product is recognized have actually held up quite well. So, there's a number of different areas we're focused on trying to drive that value at the highest level possible..

Okay. That sounds great. Just one final housekeeping question.

What's in your category of emerging products right now?.

Anything really introduced in the last three-plus years. So it includes things like high-power pulse lasers, the AMB, green, ultrafast, UV, some of the systems applications, accessories, so beam switches and cutting and welding heads scanners, some of the telecom product advanced applications as well. .

And also integrated systems and subsystems based on our laser strong components..

Okay, great. Thank you..

The next question today is coming from Michael Feniger from Bank of America. Your line is now live..

Michael can't hear you. .

Our next question is coming from Paretosh Misra from Berenberg. Your line is now live..

Thanks guys. Good morning.

Maybe first of all on the electric vehicle, if you could just talk about how is that market evolving in North America and perhaps maybe your most current estimate as to what percentage of your sales are now going to EV?.

EV Market of course it's growing very fast. And you see first of all for battery welding and cutting applications different materials and production of components and some components for e-vehicles. But also you see a new tendency especially in Europe they start to produce and start to develop as a new body in white for future e-vehicles.

Because after now they're using the standard. And now based on the new technologies and new projects are based also on laser welding and cutting up using for such kind of transaction. They start to produce new models based on such kind of approach.

And this market grows dramatically and we see also our opportunity to participate in this by using the not only on our lasers or components of a subsystem, but also we have some proposal to produce a full production system from better for example production or some other as components in e-vehicles. .

Not just production system, production wise full production-wise. .

It's correct. .

Got it.

And currently it's what? Like it's -- on all these different sales combined to about 5% of your total revenue is give or take?.

No. Previously we sort of -- we cut another -- weak quarter to be 5% and a strong quarter to be 10%. In Q2 it's actually well above 10% of total sales in the second quarter. So continuing to grow strongly. And if you looked at like capacity rollouts on battery investments that would potentially go meaningfully higher.

I think if you look at like total capacity investments it could get to like 20% of quarterly revenue over time. .

Got it. Interesting.

And maybe just one is there a way to think of your year-over-year sales growth in terms of how much was volumes versus pricing?.

Most of it would have been volume because average selling price per kilowatt across the -- if you look at it on a global basis was pretty stable. It was down very moderately on a year-over-year basis. .

Great. Thanks guys. That’s all I have..

Our next question is coming from Joe Wittine from Edgewater Research. Your line is now live..

Hey good morning. I want to ask on the China cutting competition. I know somebody already asked on this, but really just wanted a clarification on whether the prepared remarks from Dr.

Scherbakov had intended to signal there was more competition than your expectations 90 days ago, or am I reading too far in?.

You see in principle, we don't have any competitors because our product is the best in the world and we are producing the best not only lasers also other components.

From this point of view again, we already mentioned in our presentation that up to now more than 20 years nobody could produce a product with parameters or performance better than IPG laser did. From this point of view there's no competition. Of course, there exists some competition from first of all in China and with Chinese production.

But for this some people using combination work like acceptable quality made the acceptable quality for China, but not acceptable quality for us. Our goal to produce best in the quality product. For this product, we can guarantee a year in guarantee not only three years like now. We have impressive guarantee up to five and seven years. This is our goal.

And from this point of view, again, nobody can compete with us after now..

I can add also not only in China, China is damaged product, China is absolutely a lower-quality product up to now. But nobody from the best American and European company not able many of them tried, including we wanted bigger guys that try to make compete with that. Nobody was able to compete with us not in quality not in pricing.

So up to now 20 years typically any new product need one to two years now to provide some similar product. And I would think unique situation. 20 years nobody not in the East not in the West able to compete IPG product in quality also in price cost and so on. We're only one leader here..

Yeah. I mean, I don't think any of that's debatable.

Your quality has proven out over decades in the channel, but is the market shifting more towards price focus – a price versus focus right now, because this is the point the cycle where you wouldn't necessarily expect that, or again, am I reading too far into just the second quarter trend second and third perhaps?.

And also we feel that in first wave in China, a very special situation today. Now the Chinese government – now all the policies – make in-house not by where you push the company. They will have customers not to buy outside of China. It's the government policy. They will use all major financial unions saying, they have – to stop them to buy outside.

Only made in China is quite much more worse quality shown, but made in China. You could not compete with this. Sorry for the regular customer – mass customer it's Chinese policy. Now, it's not only China, many other country now especially after the trade kind of regulation were destroyed towards last year.

The many companies now start to make such policy also not only the – even America claim now made in US now looking for any advantage to make – to buy only US-made product what in 20 years, 30 years ago situation.

Now, they return to this situation, which was 20 years, 30 years ago, when even Laser from Germany was very difficult to sell in the US, due to many regulations which create to counter Europe to sell high quality product from US. Now, the situations return to this – this 20 years ago in the union centric.

With the new quality government this throw a regulation – to relation between worldwide regulation which were creating during the last 20 years. Now they just wait..

Great. Maybe just one follow-up just on ever topic, I'm curious on your take on Raycus being put on the US black list. I don't think there's a bunch of Raycus units ending up in the US so probably not much of an immediate direct impact on your business, but wondering if you may have any nuanced views there? Thank you..

We're not entirely sure how that's going to impact them on the global stage. And in terms of US sales it clearly does. And then we know that they are and believe know for certain that they're buying some components from US suppliers.

And I mean, I think, we'll watch what they say in terms of what their impact on any critical components that they have and then how that may impact them going forward. It's obviously not a positive development for them at all..

Great. Thanks, Tim..

And your next question is coming from Michael Feniger from Bank of America. Your line is now live..

Hey, guys. Yeah. Thanks for taking my questions. Apologies, I had some issues. So if was asked, I apologize.

But Tim, what's baked into Q3 on the gross margin range? Can you kind of help us there?.

Yeah. I mean, sort of very similar to Q2 in the range of 47% to 49%. And OpEx, I think last quarter guided like $83 million to $85 million. We're more in that sort of $85 million $86 million range for Q3 as well..

Okay. Great Tim and look there's much investor worry on China right now. You guys based on tough comps, you mentioned a slowing, cutting. Tim, can you just help us understand, the degree, like in 2019, obviously your China revenue was down 25% sequentially. In other years China is down a more moderate 5% sequentially.

So can you just help us to understand which -- where the market right now is getting very worried, we're thinking of 2018, 2019 where are we in that the 2018, 2019 type drop-off? Is this a similar type episode that we saw previously, where a more modest sequential decline.

Just help us as the stock up right now is showing a lot of worry on this in Q3, Q4?.

No. It's not a -- it's a very -- at this point in time it's not a similar comparison to 2018 or 2019 where you saw that very steep contraction and drop-off.

So, we're seeing some weakness in the cutting market, but there's still a lot of strength and demand coming from a lot of the other applications, where we have inherent advantages and which markets continue to grow both in China and outside. So I'm not going to give a specific number on what is baked into guidance. But it's nowhere near that 25%.

It's much lower than that impact on Q3 sequentially, compared to Q2. It is down quarter expected in China, but nowhere near like that level..

Okay. Thank you..

And you could not -- you expect -- you could not expect the cutting market will grow in the next 50 years. Each share application have saturation has peaked and ones I think are going down. Cutting market exists, 15 years huge typically much more than many are.

Now trend cutting market have saturation and will grow even units down right because trend to high-power cutting lasers for one, 20 kilowatt cutting system with 20-kilowatt laser it weighs five, even 10 mid-power cutting system, five or 10 one -- only one system, new system. Much high efficiency much higher speed and so on.

As a result is I can say go into high power, but once you will see work units will saturate and will go down. This is trend you -- nobody can destroy and to change this trend.

So cutting to talk about, we develop new applications even cutting we develop -- for example, before for EV -- before it's now we can drive maybe 80% very, very high -- 80% started growing temporary growing they say its cutting. We're developed now with this new process for cutting. That's a very sick metal.

Recorded number only seven years, five to seven years ago there was expert technical which was set all fiber lasers volume for few millimeters, which should -- may we replace it with even five millimeters. Now we develop growth system.

We develop machinery which cutting to 20 millimeters is still much faster and much higher quality than plasma cutting, never before plasma cutting as they use laser for our 20 millimeters and 25 millimeters to 30 millimeters.

Now we heard such process we heard them unit in exhibition and one the new distribution we will demonstrate, new machine with fantastic speed and quality or we expect obsolete machine prototype which they never -- did not even -- we're making the samples they did not give away -- without any correction now.

This -- but such that now -- but one such machine we replace in this new application of cutting instead of plasma cutting, also very serious market. And we developed this process, introduced market, new application.

We develop application for with the green -- curable green lasers for example, also for cutting the thin metals, so very high very production metals and for micro cutting from medical and others, it's also very interestingly new markets. So all time, we develop new yield process, not commodity like China.

China maybe invest – single time dream this end. So it's not a high-tech product. It's not high-tech product. It's commodity product. We're not allowed to go to commodity with variable margin where for the – with high-tech company unique high-tech companies..

Thanks. Thank you for that. And with all that you just said about cutting, you said about saturation cutting, growth in new applications and your view on China.

Just helping to level set for everybody when we think of 2022, if global GDP is at 5% next year and what you're talking about with new applications versus cutting like how do we normally should be thinking about the puts and takes for next year, if your backdrop is what you're playing out right now and you're thinking of GDP might be in the 5%.

Can you just help us frame some of the moving pieces there to think about? Thank you..

Yes. I'm not going to core drawn on like guidance for 2022, at this point in time.

But if global GDP remains strong, the underlying materials processing markets, particularly with some of the growth coming from other areas and welding has been a standout performer not just on EV but in other areas, recovery and additive, ablative processes for cleaning, the foil cutting applications and even the other cutting applications.

Generally, that market will grow at a significant premium to global GDP, sometimes as much as twice that amount. And then you have expected growth from some of our new and emerging products to be additive to that like medical for example, ultrafast, microprocessing applications, the systems business and accessories and other areas.

So though that still gets us towards our double-digit growth rate that we are targeting and continuing to target for the medium term for the company..

Thank you..

Thank you. Next question today is coming from Mark Miller from The Benchmark Company. Your line is now live..

Thank you for the question.

The strong growth in green lasers, besides solar, what else was the driver there in terms of the growth – in green laser sales?.

Primarily, at the moment, the green is being driven by solar applications that actually improve the efficiency of the solar cells by a couple of hundred basis points, which is extremely – it's actually quite an extremely high increase in total efficiency.

There are other green applications we're working on things like, microprocessing and semiconductor valve and just referenced now, development of much higher power green lasers for cutting and even welding as reflective materials. So – but those needed to get to kilowatt-scale green power..

Do you have any estimates in terms of the supply constraints, when they might ease? Would it be later this year do you feel?.

No. I mean our insights into this is the same as everybody else's insight relatively uncertain. A lot of it is around the electronic component, supply chain and processes and CPUs and things like that. So it's probably going to take a few months for us to really fully remediate or potentially a bit longer. We don't have any specific....

Don't forget, now inflation growing and growing very fast. A way more and more company with not even western company, which now you in the way of delivery shipment product because waiting when the price will grow to provide higher price, all the planning to increase price for their product.

Because it's a inflation and very fast, nobody can predict what would be priced through three, four months, maybe even 50% more even sometimes even 200%, 300% more. Now the many electronic components which help now happen..

Such kind of components the price was more than three times, up to 10 times. Of course, it's not a big component but it's demonstrated also tendency in this market....

Trend..

Trend..

Thank you..

Thanks. Our next question today is a follow-up from Jim Ricchiuti from Needham & Company. Your line is now live..

To also go back to the growth you're seeing in emerging, and I wonder if you could just comment a little bit more specifically, about the biggest components to the growth in that area?.

The biggest component to the growth in Q2 were the very high-power pulse lasers for foil cutting A and B green, some of the accessories I think. .

Medical..

Medical was there. Yes, medical as well..

Okay..

Four or five areas. .

Tim, just with respect to OpEx, you gave some color for Q3. It was -- your overall OpEx is a decent amount sequentially.

And how much of that is just the layering back of some of the temporary expense savings you saw coming back into the business in Q2, or are there some renewed investments that are coming in?.

Some of this is -- just the layering back expense. The other thing is that relative to the budget that was put together, our performance is above that. So total variable comp is a bit higher than a bit higher. It's significantly higher than it was a year ago. So that will probably moderate over time.

And then, we're continuing to invest for example on R&D to ensure that we're getting more emerging products and applications to the market than in the future growth of the company. So we're not pulling back on things like R&D at this point in time.

The other area on G&A, which -- it requires some investment is the sort of whole cybersecurity thing, where you need to continue to invest on the IT infrastructure there. The cost of having a more significant cyber event on us. It's a challenge faced by every organization.

You've got to invest in that to make sure that you harden your security and protect yourself as much as possible..

Thank you. We reached the end of our question-and-answer session. I would turn the floor back over to Eugene for any further closing comments..

Thank you for joining us this morning and your continued interest in IPG. We look forward to speaking with you over the coming weeks and we'll participate in number of virtual investor events this quarter. Great day everyone..

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today..