Good morning, and welcome to IPG Photonics' Second Quarter 2022 Conference Call. Today's call is being recorded and webcast. At this time, I would like to turn the call over to Eugene Fedotoff, IPG's Director of Investor Relations, for introductions. Please go ahead sir..

Thank you, Rob, and good morning, everyone. With us today is IPG Photonics' CEO, 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 are detailed in IPG Photonics' Form 10-K for the period ended December 31, 2021 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 as of today, August 2, 2022, only. 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, earnings call presentation and the Excel-based financial data workbook posted on our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of this call.

With that, I'll now turn the call over to Eugene Scherbakov..

Good morning, everyone. We are pleased with our results this quarter as we continue to diversify our revenue across key regions and applications. Second quarter revenue increased 1% year-over-year, but was meaningfully impacted by the strength of the U.S. dollar which reduced revenue and revenue growth by $18 million and 5%, respectively.

I am proud that we continue to make progress on our key strategies. First, we made progress to achieve a better geographic balances in our business. Sales outside of China accounted for 64% of our total revenue and grew significantly this quarter led by a strong revenue growth in North America and Japan.

Second, we also made progress in diversifying across different applications with record revenue in welding and strong growth in medical applications. As a result, the high power cutting business in China contributed less than 10% of IPG's total revenue in the quarter.

This was another record quarter for welding revenue that benefited from growth in electric vehicle batteries, general manufacturing, medical device applications and the adoption of our handheld laser for manual welding applications.

Laser welding adoption continues as our fiber laser enables faster, more precise welding for a wide range of materials, including thin foils and highly reflective materials like copper and aluminum.

Our adjustable mode beam lasers provide spatterless, high-quality, high-speed and uniform welding for a broad range of different materials used in electric vehicle battery manufacturing and other applications. Our LightWELD handheld welder is a superior tool for small and mid-size fabricators that brings ease of use to the welding process.

Welding was the strongest driver behind our growth this quarter and the revenue from this application has become as important as our revenue from high power cutting applications. While our cutting business still accounted for a significant portion of IPG's revenue, welding revenue has surpassed high power cutting revenue in several key geographies.

IPG is benefiting from current investment in e-mobility, which may potentially accelerate in the near future as a result of higher energy costs across many regions. The EV market continues to drive our demand with new model launches and additional battery capacity announcements to support higher EV sales.

We had record sales to EV applications in the quarter with strong demand for our welding and foil cutting solutions. We are also working on a number of additional opportunities, including cleaning and hairpin welding solutions that increase our exposure to this growing market.

Emerging growth product sales were 40% of our total revenue in the second quarter. Many of these products are benefiting from global macro trends such as automation and e-mobility as well as focus on sustainability, renewable energy and energy efficiency.

More specifically, record sales in AMB lasers and high power pulsed lasers were driven by strong growth in electric vehicle applications. We saw continued sequential improvement in demand for our green lasers for solar cell manufacturing applications. This market is expected to grow as a result of increasing investments in renewable energy solutions.

We also saw strong performance in cleaning applications, which is driven in part by the sustainability benefits of lasers, which help to reduce use of toxic materials. Medical revenue more than doubled year-over-year as our thulium laser is considered the new gold standard for the laser urology market and has been rapidly gaining adoptions.

LightWELD sales increased significantly and we have received CE marking and we are now selling LightWELD in several markets in Europe. We are also seeing growth in laser-based systems sales, which are benefiting from complete solutions designed for EV applications and other emerging applications such as laser cleaning.

Before I turn the call to Tim, let me provide an update on our operations in Russia. As previously announced, IPG stopped all new investments in Russia and prepared plans to increase manufacturing of critical components in the United States and Western Europe in order to reduce our reliance on manufacturing capacity in Russia.

We continue to make progress with hiring additional employees, allocating workspace for increased production and running second and even third shifts in certain locations. Our inventories of critical components increased and further lowered our risks of supply chain disruptions.

We qualified some third-party suppliers and are now placing orders for some of these components. In the second quarter, we started setting up infrastructure for production increases in Germany, Italy and United States.

We expect that most of the manufacturing capacity will be brought online during the course of the rest of the year enabling us to reduce our reliance on Russian components by year-end. While our facilities are moving towards ramping up production, our ability to hire additional employees remains challenging.

However, we are introducing new production technologies and automation, which should eliminate some more labor-intensive steps and increase yields and productivity. I'll turn the call over to Tim to discuss financial highlights in the quarter..

Thank you Eugene, and good morning everyone. My comments generally will follow the earnings call presentation which is available on our investor relations website. I will start with the financial review on the Slide 4.

Revenue in the first quarter was $377 million, up 1% year-over-year driven by growth in most of our key geographies, and increased 2% sequentially mainly due to higher revenue in North America, China and Japan. Revenue from materials processing applications decreased 1% year-over-year and revenue from other applications increased 29%.

Second quarter GAAP gross margin was 45.7%, a decrease of 290 basis points year-over-year, due to increased inventory reserves as well as higher shipping costs and tariffs. We also had slightly lower absorption of manufacturing costs in the quarter which negatively impacted gross margins.

This was partially offset by lower costs of product sold, which benefited from stable selling prices, lower cost products introduced to the market such as the ultra-compact lasers and improved systems' margins. We faced strong currency headwinds this quarter with significant strength of the U.S. dollar. If exchange rates relative to the U.S.

dollar had been the same as one year ago, we would have expected revenue to be $18 million higher and gross profit to be $10 million higher.

Excluding foreign currency transaction losses related to revaluing foreign currency assets and liabilities to period-end exchange rates, operating expenses decreased slightly year-over-year, primarily in research and development. GAAP operating income was $72 million and operating margin was 19%. Net income was $57 million or $1.10 per diluted share.

The effective tax rate in the quarter was 22%. During the quarter, we recognized a foreign exchange transaction losses of $18 million or $0.28 per share, primarily related to the appreciation of U.S. dollar and Russian ruble. Moving to Slide 5. Sales of high power CW lasers decreased 14% and represented approximately 43% of total revenue.

Sales of ultra-high power lasers above 6 kW represented 50% of total high power CW laser sales. Pulsed lasers sales increased 13% year-over-year, with continued growth in high power pulsed lasers used in EV battery manufacturing, but offset by lower sales into solar cell manufacturing.

Systems sales increased 30% year-over-year driven by growth in laser systems and higher sales of LightWELD. Medium power laser sales increased 4% while QCW laser sales were down 9% year-over-year. Other product sales also increased driven by higher sales in medical applications.

Looking at our performance by region on Slide 6, revenue in North America increased 33% driven by growth in cutting, welding and medical applications. In Europe, sales increased 2% as a result of higher demand in marking, cleaning and medical applications.

In the first quarter, we reported pull forward of demand in Europe as customers were securing supply, which negatively impacted demand in the second quarter. Revenue in China decreased 14% year-over-year despite strong growth in welding and foil cutting applications in the region.

While revenue in high power cutting applications stabilized at a lower level in the last several quarters, it was still down significantly on a year-over-year basis. Moving to a summary of our balance sheet on Slide 7, we ended the quarter with cash, cash equivalents, and short-term investments of $1.2 billion and total debt of $32 million.

Cash provided by operations was $79 million during the quarter and capital expenditures were $35 million in the quarter. Cash generation was negatively impacted by an increase in inventory during the quarter as we continued to build safety stock in order to keep reasonable lead times and secure critical components.

In the second quarter, approximately $40 million of the $72 million increase in inventory value was due to the translation effect of exchange rates, with $32 million attributable to investment in inventories of critical components.

While continuing to maintain a strong balance sheet, we have returned a significant amount of capital to shareholders with our ongoing stock repurchases. In the last 18 months, IPG repurchased shares for approximately $450 million with $312 million spent on share repurchases since the beginning of this year.

During the quarter, we repurchased just under 2.4 million shares for a total of $233 million, a record quarterly share repurchase number for the company. We believe in a disciplined approach to share repurchases and have become more active as the share price declined in the recent quarter, providing a good buying opportunity.

Given that we completed both May 2020 and February 2022 share repurchase authorizations during the quarter, the Board approved a new $300 million share repurchase authorization in July. Moving to outlook on Slide 9, second quarter book-to-bill was slightly below 1.

We saw some moderation of order flow across Europe as compared to record bookings in the first quarter, but we were pleased to see continued strength in key applications and more stable demand in other key geographies.

Macroeconomic indicators have been moderating particularly in Europe, but remained in the expansionary territory for North America and Asia. Furthermore, PMI in China returned to growth in June due to easing COVID-19 restrictions and posted a modest increase in July.

While forecasting our business continues to be challenging in the medium term and our third quarter guidance remains subject to significant uncertainties, including the impact on the global business environment from geopolitical events, trade restrictions and sanctions, COVID-19, economic trends, tariffs, currency fluctuations, growth from emerging product revenue, competition and the lack of long-term binding order commitments, we continue to benefit from growth opportunities created by major macro trends that drive growth in electric vehicle battery manufacturing applications, LightWELD and medical sales.

For the third quarter of 2022, IPG expects revenue of $350 million to $380 million. The company expects the third quarter tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $1 to $1.30, with 51 million diluted common shares outstanding.

We continue to expect currency headwinds and estimate that third quarter revenue guidance range is reduced by about $15 million due to the strength of the U.S. dollar.

As discussed in the safe harbor passage of today's earnings press release, 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. And with that, we will be happy to take your questions..

Thank you. first question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question..

Hi good morning. Noticed that, fairly healthy step down in spending for R&D, and sales and marketing Q2 versus Q1.

Just looking at your guidance for OpEx, Tim for Q3, should we assume things begin to more begin to normalize in some of those expense levels? I don't know if you want to talk to some of those the variability we saw in OpEx on the quarter?.

Yeah. So in terms of the quarter, there's some benefit on OpEx due to the weaker Euro for example. But we've also on the R&D side stated that we intend to rationalize R&D expenditures to ensure we're focused on projects that are really going to add value. And we believe that we can commercialize in the medium-term.

So there's been some rationalization of expenses there. There's been better control over some of the material expenses that were being outlaid for R&D. So there's a bit more discipline around that. It's not that when defocusing investment on R&D, but really trying to ensure that the projects are targeting a meaningful return on them.

As you do get into Q3, we go through our merit, salary cycle in July. So part of the increase of OpEx in Q3 relates to those merit increases coming through during the quarter..

And the follow-up question I have is, and you provided a little bit on the book, just in light of the changing macro environment.

I'm wondering if you can give us some sense as to how the bookings have progressed through the quarter into Q3, and if there's been any significant variability in bookings by region, it sounds like you're seeing some softness in Europe?.

Yeah, there's no significant change in the overall tone of bookings. We did come off the sort of very spectacular level of bookings in Q1. So the book-to-bill in Q2 being below 1, for example, we took a very significant number of medical orders in Q1, but they're slated for delivery during the rest of this year and in next year.

Some of the other orders we took in Q1 give us visibility into the second half of the year. So tonally in Q2, certainly in the middle of the quarter with the lockdowns in China, it was a little bit weaker and then we saw some improvement in June. And then in general through July order flow has held up reasonably well.

Some of the impact in Europe is really currency related as well. PMI, if you're looking anywhere in Europe, the area we're watching closely though would be Europe given the weakening of PMI there.

It was good to see some improvement in PMIs in China, we had good order flow in Japan across multiple applications and good order flow in North America as well during the quarter. So it's sort of we're watching things closely, Jim, rather than seeing any real fundamental changes at this point in time..

Our next question comes from Nikolay Todorov with Longbow Research. Please proceed with your question..

Yes, thanks. And good morning, everyone. I think I heard that you talked about some difficulties about finding employees in Europe to grow capacity in Germany and Italy. And you also mentioned that you've qualified some third-party suppliers for some of those components coming out of Russia.

Should we expect any of those to have any impact on the gross margin range that Tim you gave in the last earnings call? It seems like no, based on your guidance. Maybe can you talk of some of the offsets and the puts and takes offsetting those? Thank you..

About manufacturing in different countries. Of course we had some problem in Germany, but in Italy, it's much easy situation with people. This is why we increase in our facility production in Italy, much easy. About the components which we are now buying from Russia not, but we're placing order from other suppliers. Yes, we've already tested.

We've already qualified practically all components, which we before received from Russia. And now we are placing orders for this suppliers. And I think we'll get the first big enough quantity of these components in one month. And then we'll start that production of our final devices in Europe based on this components..

Nikolay, it’s Eugene.

I would say in Q2, there's a lot of challenges around the business at the moment, right? So I was actually quite pleased with the gross margin performance even though our inventory provisions were high and inventory provisions are high as a result of carrying inventory to support the supply chain constraints and other issues that we faced.

I thought what was really pleasing was the gross margin of the product sold was good and we were able to offset some of the inventory provisions and then some of the higher costs related to shipping and tariffs, and import duties.

And so, yeah, the guidance for Q3 implies maintaining gross margin rather than seeing it get impacted any more than it has been. So overall, I actually, I thought the margin profile and the expense containment on the business Jim asked about on OpEx, I told was all pretty positive for us during the quarter..

Okay. And just a quick follow up on that, Tim, you touched on the inventory reserves, it seems like you've taken now reserves for three quarters in a row, at least.

Should we expect or should we model inventory reserves going forward, given the supply chain challenges, or how should we think about that?.

I think they're incorporated in our gross margin guidance that we've provided. So if you're modeling gross margin within that range, you'll be taking into account where we expect inventory provisions to be, that's where – that's how I'd answer the question..

Okay. Last one for me, just on the demand side, you talked about bookings in the prior question, but I didn't hear much said about China. You talked about stabilization in China cutting.

What are the prospects of seeing some potential rebound in China cutting? And also, can you kind of rank the visibility into the second half by regions that you have based on bookings?.

No, I mean, I just not – I can't rank the second half into visibility on bookings, but overall China bookings in Q2 were pretty reasonable. Obviously compared to peak revenue that continue to be down. We referenced the total cutting into China, both the low-end or less-than 6 kW or more than 6 kW was less than 10% of our total revenue.

So we've certainly managed to diversify away from that business and de-risk it. Now, I think there may be a moderate pickup in cutting applications in Q3, given some of the rebound from COVID, but certainly not expecting anything very meaningful there.

And we're continuing to focus on many of the other applications that are driving the stability on China's side. We referenced on where bookings were in Q2. I was really pleased to see some of the improvements in Japanese bookings, and it was also fairly diverse. We've got very good backlog for medical applications.

North American total bookings were good. The LightWELD performed very well. When we referenced that we're kind of like watching Europe, which is, it's got both a currency headwind and some slightly weakening PMI data at the moment..

But also for China, for example, cutting applications, we are now in transitions this quarter, the new compact 8 kW lasers. And we can see – I think we'll see a good adoption from the Chinese market for these new lasers, additional opportunity to increase our presence in cutting applications in China..

Thanks for the answer..

Our next question is from Paretosh Misra with Berenberg. Please proceed with your question..

Thanks. And good morning.

Can you guys talk about your medical business as to are you select to some sort of integrators or selling directly to customers, and then are you taking share from another laser producer or is that something you're developing a new market?.

As usually we are working with some OEM customers and I mean, we're talking about the medical business. We have some important OEM customers, we are working directly business customers and about the new applications.

Yes, we are thinking about this and also making the investigation in which kind of medical area we have to also provide our advanced lasers. But in total, already our medical business is going fast enough and we are seeing there is a good potential for our medical business this year and next year..

And just to add to some of the applications are displacing older laser technologies, but in each of the areas, even if there's a laser application that's there, our solution also is enabling displacement of for example surgical applications or ultrasonic sort of application as well.

So it is partially displacing lasers, but it also is broadening the total application set..

Got it. Thank you for that detailed response.

And then also on your electric vehicle battery business, what are you hearing from your customers with regard to the rollout this year? Any sense of how much incremental capacity you think will be built or added this year?.

Yeah, there's a significant increase in capacity this year. We estimated the laser demand for batteries is probably more than doubled this year. The view is that, that continues to be sustained for the next two to three years. If you go out to like 2030 now, I mean, these numbers are changing almost every month.

The latest, I think there was a report out a couple of days ago that showed that total battery capacity may get as high as between 5 terrawatts and 6 terrawatts and we're still I think we're still below at terrawatts at the moment. So there's still a huge capacity additions being planned, but it's almost a moving target..

It changes monthly it seems, but also very important that, we had discussion about the new capacity for battery productions, that exist also the ability to use laser for new applications, which we didn't discuss before. It's very important. And from the point of view of the laser applications, it's also very exceptional growth..

Great guys. Thank you..

Our next question is from Mark Miller with The Benchmark Company, please proceed with your question..

Thank you for the question. I was just was wondering your emerging products has continued to grow 40% or so of sales.

What is the margin profile of emerging products? Is it higher than your overall margins?.

Depends which product you look at? A lot of them have higher than corporate average margins. So particularly on the higher power pulse lasers, the AMB lasers, the medical device lasers have very good margin on them.

Some of the renewable energy sources and you get down to some of the systems, I said, we'd seen some improvement in margin, but they're below corporate average.

If you look at the handheld welder, which we classify within systems, when it was first introduced a year ago, the margin profile of that was quite low, but there's been significant improvements in that margin profile as we've reduced the bill of material costs, but also added feature sets to that.

And then some of the advanced applications, obviously would've extremely good margins. So if you take all of that together, the overall margin benefit of the emerging growth products is definitely positive. But there's a bit of a mix there..

It's much better as for the product..

Like also ask when you're shifting operations out of Russia, how much of impact is that on your margins once you get this set up in the other countries?.

So we've stated obviously that, you've got a higher salary costs outside side.

The moment we think that we've got those factored into the gross margin guidance in the nearer term, the other ways we're going to offset some of those costs are by introducing, we're not just replicating very manual processes, we're looking at more automation and improvement in yields, and then offsetting some of those higher costs you've got as Dr.

Scherbakov just mentioned the introduction for example, of the ultra compact lasers at higher power levels, there'll be a margin benefit from that. And I just talked about some of the margin benefits we've seen from things like LightWELD and another product line.

So we were hoping we can manage through that, but certainly Russia was a low cost manufacturing area for us and you've got to find ways to improve yields and lower costs in order to offset some of those headwinds..

It's very important that the cost we had in our strategy to introduce automation and also improve the technology for some process and so on. But under these conditions, we insist to increase our activity in this area. This is why we are already start this several project concerning the automation assembly of some components and some final devices.

And I think during the one year, will give the much more, better improvement in this area than it was before..

Thank you. Our next question comes from Michael Feniger with Bank of America. Please proceed with your question..

Yes, thanks. Hey everyone. Thanks for squeezing me in. Tim, if we look back the last 10 years, like outside of 2020, Q4 revenue is like typically down sequentially.

I'm curious if you think that normal seasonal trend plays out this year or are we just in like a different kind of weird cycle, given some of these lockdowns?.

Mike, I'm not going to give – I'm not giving guidance on Q4 at this point in time. So I mean, we're giving guidance quarterly..

Fair enough.

And then I guess Tim, just with the inventory build like how does this play out in the second half like, do you slow production to wind some of that inventory down or do you continue to build at this pace? Just curious since the inventory number does kind of stick out and I'm curious how you guys kind of manage that over the next really six months into 2023?.

First of all, we have some strategic plan, how we can manage our inventory and there exists some problems. First of all, we would like to continue to supply our product according to our standard delivery time. It means from six up to eight weeks, it's our standard delivery time for mainly our products.

And we continue to insist our customer to use our product resist short delivery time.

Of course, for this, we have to get some strategical inventories or some components, first of all, optical components, but much more important electronic components because in many cases delivery time for this electronics components from outside vendors increase dramatically up to two, three times.

And these are why we have to organize this strategic inventory. The second of course, why is this inventory grows because price for these components, first of all, electrical components also grows dramatically and several cases up to several times up to 10 times for some components.

Of course, it's also going to increase our inventory, but in any case, we have to manage this inventory and we have to also satisfy to our internal request for delivery time. It's very important and we have to insist our customer to use our product. These are our main goal..

Yes. And just adding to that, I think we clearly added a significant amount of inventory in the first half of the year, part of which has been driven by some of the translational currency.

There's certainly a lot of focus in the company on ensuring that I'd say a lot of the investments we've made have happened and we're targeting having a more stable level of inventory.

We don't expect to see a massive decrease in it, but at least getting to stability and not seeing a significant amount of additional cash used to invest in inventory, we've clearly built a lot of strategic supplies on that side, particularly on electronic component supply.

So I think part of the other question, Mike was, if you take inventory down as that impact gross margin, a lot of the inventory that we've got was purchased from third parties, it wasn't related.

Some of it obviously is related to internal production of optical components, but a lot of the increases on the electronic component side and even mechanical component side where we're sourcing those from third parties..

Got it. That's really helpful. And I'm just curious, like we're seeing these headlines in Europe. Obviously, you're seeing it as well. You guys have some production facilities in Europe and moving some capacity to some of your facilities in Europe.

How do we kind of – how do you guys plan around this potential energy crisis? I don't know if your customers have talked to you guys about that.

Obviously, we're all watching the headlines with nat gas but just curious in like high level, if those conversations are picking up and how do you even kind of think about that and what that might entail?.

Of course, potentially we are influence in our gross margin and also productivity is clear, but how much, how strong today is now difficult to say, but in any case, we are thinking about the optimization, our production from the point of also energy consumption, it's clear we're working in this direction..

Our next question comes from Hans Chung with D.A. Davidson. Please proceed with your question..

Hi, good morning. Thank you for taking my question. So first, what's the operating expense implications as we started to building the facility in the Europe and United States.

I guess, some of the potential impact should be embedded in the third quarter guidance, but what about the full Q? I think you mentioned pretty much the new capacity will be coming online throughout the course of the year.

So just kind of want to get idea, like what kind of the implications for the OpEx in the second half?.

But first of all, we are not – increase in our capacity, reusing our existing capacity in Germany, because we are using to increase our productivity by installations. Second and in some cases, for example, fiber products of the search shift, but using the same capacity.

In Italy, the same situation, we are not using the new capacity using our existing facility only to make some modifications and to expose some additional agreement..

Got it, got it. Okay. And then….

I think the other thing is that just and there's a – for example, in Oxford, there's a major new building that's been under construction for a while, so we're not seeing any – that building is close to completion and will help us to expand capacity.

We acquired a building in Germany at the beginning of this year that is being devoted now more fully to replicating. So we're actually not seeing any – when we're not guiding to a change in our CapEx for the year in terms of any increase. In fact, for the first half of the year, I think we're well within the budget and guidance we gave.

So we're kind of, we're trying to do this as efficiently as possible rather than driving it with sort of, we don't have to invest $200 million in additional facilities to get where we want to be.

On the – I didn't quite get the question on the OpEx side, there wouldn't really be any significant change related to the manufacturing capacity additions we're making..

I see.

And the second question, just can you give us some color around the demand trend or the order flow for the product used in 3D printing verticals?.

Yes, 3D printing, additive manufacturing. It's come back a little bit, but it's still some way below peak levels. We're starting to see maybe a little bit of a renewed interest and resurgence in the industry, but it's certainly not increased by 30% or 40% year-over-year. The benefit of as well has been some geographic diversity we've seen.

So we referenced before that we've seen some orders from customers in China and some other customers outside of Europe, but I would, it's kind of improved. It's not a drag on growth at the moment, but it's certainly not increased by 50% on a year-over-year basis.

So I think the industry's still trying to resolve their – some of the issues they've got, where they've got to improve the speed of growth of product. They've got to improve the repeatability of it.

You're starting to see systems with up to 10 lasers used in them which would ultimately be a benefit to us if the commercialization becomes more successful..

Okay. Thank you..

Our next question is from Jamie Wang with Citigroup Hong Kong. Please proceed with your question..

Thank you very much for taking my question. Just wanted to ask about China business and just some more colors on it, you’ve reported 14% year-on-year declined in revenue in China.

So I was wondering, is that more because of their market share due to the competition of Chinese competitors like Maxphotonics, or Raycus, or is mainly because of the lockdowns in China, just this quick question. Thank you..

It's primarily – I mean, we had a significant decline in the cutting market, part of which was lockdowns, but obviously a lot of which is also the competitive dynamics there.

What really we thought was fantastic was the degree to which we were able to offset that by growing the other applications in China, such as welding and the marking applications were stable, other micro processing and fine processing applications performed exceptionally well.

So we're certainly benefiting from, for example, the battery investment cycle there. So yes, the cutting market was both impacted by competition was certainly slower due to lockdowns.

There'd be some moderate pickup in cutting in Q3, but it's really pleasing to see the diversity of the rest of the business in China that has offset some of those dynamics..

But well, speaking about the cutting market in China that are taken in mind that it only 2D metal cutting applications, but also Tim mentioned about some metal production for cutting, also used by our lasers. And in this area, we don't have any big competitors..

Okay. Got it. Thank you very much..

Thank you..

Our next question is from Paretosh Misra with Berenberg. Please proceed with your question..

Hi guys, thanks for taking my follow up. So IPG was doing about $100 million of sales from Russia to China. So I was just curious if you could give us any sense as to how that number looked in Q2 and how it will evolve as you conclude your risk reduction program through the year-end. Thank you..

So Russian sales to China, which is….

Russian sales to China now decreased, not dramatically but essentially this quarter. And because we start to produce the same lasers, first of all, the mid power lasers in United States increased our production, also in Germany. We also start this production this lasers in Italy.

Our goal is to decrease the chance rate production of this laser in Russia, and substitute a production by Germany and Italy and United States..

Great. Thanks guys..

We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Eugene Fedotoff for closing comments..

Thank you for joining us this morning and for a continued interest in IPG. We will be participating in a number of investor events this quarter and are looking forward to speaking with you over the coming weeks. Have a great day, everyone..

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation..