IPG Photonics Corporation (IPGP) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to IPG Photonics’ Second Quarter 2012 Financial Results Conference Call. Today’s call is being recorded and webcast. There will be an opportunity for questions at the end of the call. (Operator Instructions) At this time, I would like to turn the call over to Mr. Angelo Lopresti, IPG’s Vice President, General Counsel and Secretary for introduction. Please go ahead sir. Angelo Lopresti – Vice President, General Counsel and Secretary: Thank you and good morning everyone. With us today is IPG Photonics’ Chairman and Chief Executive Officer, Dr. Valentin Gapontsev, and Vice President and Chief Financial Officer, Tim Mammen. Statements made during the course of this conference 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 known and unknown 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 those detailed in IPG Photonics’ Form 10-K for the year ended December 31, 2011 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 at investor.ipgphotonics.com/sec.cfm or by contacting the company directly. You may also find copies on the SEC’s website, at www.sec.gov. Any forward-looking statements made on this call are the company’s expectations or predictions only as of today, July 31, 2012. The company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call. Please go to www.ipgphotonics.com and select Investors to review these remarks. I will now turn the call over to Dr. Valentin Gapontsev. Dr. Valentin Gapontsev – Chairman and Chief Executive Officer: Good morning everyone. IPG delivered another successful quarter with record revenues of $138 million, gross margins of 54.3% and net income of $37.7 million, which increased by 23% year-over-year. High-power fiber laser sales for materials processing applications continue to drive IPG’s top-line growth. We also reported a record quarter for pulsed laser sales and solid growth in medium power and QCW laser sales. Our sales growth continues to be driven by three factors. The first is the adoption of fiber laser over other laser technologies. I’ve discussed many times before the efficiency, superior performance and cost benefits of the fiber laser. The second factor is the overall use of lasers in an increasing number of applications. This is due to new types of materials used in manufacturing, the growing use of automation, and the need for precision and speed that only lasers can handle. The third factor is the strong demand we’re seeing in several of our key industries that is currently holding up despite prevailing economic concerns. For example, automotive OEMs are using new materials such as high-strength steel in advanced manufacturing techniques, and fiber lasers are the best solution to cut or weld these materials. We believe that meaningful transition to laser processing is just starting for some of these applications. As a consequence, the fiber laser is continuing to make significant market share gains across applications. These factors also explained why IPG is doing well in geographies like China and Europe, despite slower macro-economic growth. Looking to the future, we are conducting internal research and working with industrial institutes and other strategic partners to develop new applications and new products in applications where lasers have not been widely used before. We plan to further leverage our leadership position by pursuing large-scale, higher-margin applications, including welding and cladding with high power lasers, micro-processing and ceramic cutting with QCW lasers, as well as processing of non-metals, micro-processing, scribing and marking with high-power green lasers. In addition, we are expanding our geographic footprint to meet customer demand. In Q2, we opened an office in Turkey to service a numerous OEM materials processing customers we have there. Finally, we remain focused on developing specialized laser-based systems to meet the specific needs of manufacturers whose requirements are not currently met by standard systems or in certain geographic areas where fiber laser systems are not currently available. We also are improving the flexibility of our existing products. For example, we have developed a 2 kilowatt air-cooled laser for use in dry environments and an ultra-compact 1 kilowatt fiber laser for use in applications requiring a small footprint. We are continuing to make the necessary investments to support the increasing demand for our products and meet the needs of our customers as well as to identify opportunities to expand and grow our business. With that, I’ll turn the call over to Tim Mammen. Tim Mammen – Vice President and Chief Financial Officer: Thank you Valentin and good morning everyone. I’ll start with a review of our end markets, products and geographic regions. After that, I’ll provide highlights from our income statements and balance sheet, and close with our guidance. Second-quarter materials processing sales increased 16% year-over-year to $124.6 million. This market continues to drive our growth and accounted for 90% of total sales during the quarter. The most significant materials processing applications for fiber lasers are cutting, welding, and marking and engraving. We’re also seeing growth from applications such as cladding, drilling, brazing, annealing, and rapid prototyping. Other applications, which include telecom, advanced and medical, accounted for the remaining 10% of sales. Revenue from these other applications decreased 5% year-over-year to $13.3 million. Sales in these end markets can be uneven due to the timing of orders. The year-over-year decline in Q2 was due to a particularly strong second quarter of 2011. Sales of high-power lasers, which account for 45% of total revenue, increased 13% year-over-year to $62 million. We continue to see demand for high-power lasers used for cutting and welding, particularly in the automotive, and in heavy industries. Sales of medium-power lasers increased to $11.1 million or by 32% year-over-year. These lasers benefited from an increase in demand from developers of consumer electronics for thin-sheet metal cutting and welding. IPG is a proven, qualified vendor to multiple consumer electronics integrators, displacing other vendors, and we look forward to continuing to expand upon these relationships. Pulsed laser sales had a record quarter at $38.2 million, which accounted for 28% of total revenues and was an increase of 10% compared with last year. The increase demand for pulsed lasers can be attributed to growth in the consumer electronics market. Low-power sales were $4.2 million for the quarter, down 11% year-over-year. The medical end market accounts for the majority of our low-power laser sales and we are seeking to diversify our customer base in that area. Sales of QCW lasers, which are primarily used for micro-welding and cutting applications, increased 16% to $2.1 million, compared with last year. QCW unit sales increased by 79% as deployments increased following the selling price reductions we implemented earlier this year. Demand for QCW lasers is steadily increasing as we adjusted our pricing and customers now have a cost effective fiber-based alternative to flash lamp high peak power pulsed lasers. Sales and other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components, were $10.3 million and service, parts, lease and other revenue totaled $10 million. Now, looking at our performance by geography, European sales increased 11% year-over-year to $47.2 million. Growth was driven by a record revenue quarter in Russia, where both telecom and materials processing performed well. North American sales decreased to $22.7 million or by 10% on a year-over-year basis. The decline from the prior year is primarily due to the timing of shipments as order volume in North America was strong during the quarter and we are anticipating significant growth in Q3. Asian sales, which include Western Asia and the Middle East, increased to $67.6 million or by 26% year-over-year. China and Japan delivered solid quarters, particularly from the general manufacturing, automotive and consumer electronics end markets. In China, we are expanding our presence and taking market share from our competitors. As Valentin mentioned in his introduction, despite slower economic growth, China is performing well primarily due to market share gains in cutting applications, strength in microelectronics, and growth in welding applications. In Western Asia, we also saw strong growth from Turkey as a result of increased sales to cutting OEMs. Now, turning to the income statement. Total sales for Q2 increased 13% year-over-year to a quarterly record of $138 million. Gross margins were on target at 54.3% compared with 54.7% in Q2, 2011. Gross margin includes stock-based compensation charges of $568,000 and $363,000 in the second quarters of 2012 and 2011 respectively. Sales and marketing expenses were $5.9 million, or 4.2% as a percentage of sales in line with the year ago quarter. General and administrative expenses increased 5% to $8.7 million, but were relatively flat as a percentage of sales at 6% compared with the year ago quarter. R&D expenses increased year-over-year on a real dollar basis by 9% to $7.2 million. As a percentage of sales, R&D was 5.2% of total revenues, which was flat with the second quarter of 2011. Our R&D efforts are focused on designing and introducing new and improved standard and customized products and the mass production of components. Operating expenses for the second quarter of 2012 include foreign exchange transaction gains of $3.4 million, or $0.04 per share net of tax. Excluding the foreign exchange gain, total operating expenses increased by 5% to $21.8 million. Operating expenses include stock-based compensation charges of $1.633 million and $1.330 million in the second quarters of 2012 and 2011 respectively. Second quarter operating income was $56.4 million or 40.9% of sales, compared with $46.1 million or 37.8% of sales in the second quarter of last year. Operating margin, excluding the foreign exchange transaction gains, was 38.7%. Net income attributable to IPG for the second quarter increased 23% to $37.7 million. On a diluted per share basis, we reported $0.72 for the quarter, compared with $0.63 a year ago. Net income attributable to redeemable non-controlling interests during Q2 was $2.1 million, or $0.04 per diluted share. We regained complete control of our Russian subsidiary, just prior to the close of the second quarter purchasing the minority interest of $55.4 million in cash, and expect that the transaction will be accretive from the current third quarter as there will be no income attributable to the non-controlling interest in that and subsequent periods. There was no impact to EPS as the purchase price approximated the fair value of the non-controlling interest share in our Russian subsidiary. We estimate that, if exchange rates had been the same as one year ago, sales in Q2 2012 would have been $4.3 million higher, gross profit would have been $2.3 million higher, and operating expenses would have been $0.7 million higher. Now, turning to the balance sheet. At the end of the second quarter, cash and cash equivalents, including short-term investments had increased by $149.7 million to $355.3 million. This was primarily due to the closing in March 2012 of the public offering of 3.250 million shares, which contributed a $168.3 million after operating expenses. At June 30, 2012, inventory was $122 million, an increase of 4% from year end 2011. Our current level of inventory on hand amounts to 174 days and is now below our target range of less than 180 days. We strive to strike a balance between holding a low number of days outstanding while maintaining a sufficient balance of inventory to fulfill customer orders around the world with short lead times. If foreign currency exchange rates were at the same level at the f end of the second quarter as they were on December 31, 2011. The translated value of inventory would have been $124.5 million. Accounts receivable were $86.1 million at the end of the second quarter or 56 days sales outstanding compared with $75.8 million at December 31, 2012 or 56 days sales outstanding. Cash generated from operations during the quarter was $51.5 million, capital expenditures for the quarter totaled $22 million. We still expect capital expenditures to be $55 million to $60 million for the year. In addition to expanding diode capacity, we are adding to manufacturing capacity in Germany and Russia and investing in our international sales and service locations to response to our customers needs. Recently we opened new application development center for cutting and welding in Russia as well as a sales and service office in Turkey. We are considering increasing our presence in addition of countries with further infrastructure investment. Now for our expectations for the upcoming quarter, IPG continues to benefit from our market leading products superior fiber laser technology, global scope and first mover status. The increased number of fiber offerings from competitors has not adversely affected our business given our product performance, reliability and pricing advantages and may ironically help to drive acceptance of and expand the market for fiber lasers as our competitors educate more end uses about the benefits of fiber laser technology. We are confident in our prospects for growth and profitability in the coming quarter, despite potential macroeconomic headwinds driven by the three factors, which are driving demand that Valentin discussed at the outset of the call. The second quarter was a record quarter for order bookings and the book-to-bill was greater than one. That momentum continued into the first few weeks of July. We expect the top line to grow on a sequential and year-over-year basis in Q3. IPG Photonics currently expects Q3 revenues in the range of $145 million to $155 million. The company anticipates Q3 earnings per diluted share in the range of $0.74 to $0.84 that is based on 52,175,000 diluted common shares, which includes 51,066,000 basic common shares outstanding and 1,109,000 potentially dilutive options at June 30, 2012. The basic common shares outstanding include the 3,250,000 common shares issued as a result of the follow-on offering in Q1 2012. This guidance is subject to the risks we outlined in our reports with the SEC and assumes that the exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates. And with that, we’ll open the call up for your questions.

Thank you. We’ll now be conducting question-and-answer session. (Operator Instructions) Thank you. Our first question is from Zach Larkin with Stephens Incorporated. Please proceed with your question. Zach Larkin – Stephens Incorporated: Hey good morning gentlemen, congratulations on a great quarter.

Thanks Zach, good morning. Zach Larkin – Stephens Incorporated: Hey first half I wondered if you could talk about the guidance and maybe go through what’s some of your key assumption are that underpin the guidance and perhaps what some of your expectations are by product category?

First of all, the assumptions that we’d used to derive guidance of the same as and the methodology is the same that we’ve used over the last five years since we’ve been public. So, we look at the total backlog and orders in hand that at the beginning of the quarter factoring how bookings have run during the first weeks of the quarter and then also factoring elements of orders that were booked and billed. So, the ratio of orders in hand relative to guidance is equivalent to where we’ve been in past quarters its about 70% to 75% maybe it would be a little bit higher than that. In terms of specifics on product lines we haven’t really previously given any specific data on that and I’m going to do it now I’ll do a little bit on geographies where we expect a nice pick up in the U.S. going to the third quarter, a reasonable as you probably know very nice pick up in Japan. And then China, we’ll perform relatively well, we don’t expect to see this – the same pickup from Q1 to Q2 in Q3 in China, but we’ll still have a strong quarter. And then in Europe for example order flow has been good in July, we’ve actually had some advanced application orders in for the 10 kilowatt single mode lasers and 3 kilowatt single mode lasers so that will also help European sales in Q3. So, some of the advanced application orders that I talked about at the beginning of Q2 were booked in July. So, that was like to see and we’ve also had some solid orders from microelectronics in Europe and also the automotive industry.

We are also starting to get as a benefit from new products we introduced end of last year, beginning of this year. For example, let’s say very good return from the new nanosecond one nanosecond pulse laser we have introduced end of the year and this is only for three months – end of the last quarter and for this quarter we received a huge order from one Taiwan customer its more than 2000 units more than – of about 30 million order only this new laser we introduced recently. So, also now expecting very good benefit from our QCW laser in next quarters, we expect in green laser which we introduced also end of the last year now with the upgrade with much more power also going very well, so the implementation in the field these lasers will give us future return we expected in this year although already in this year. We now in quarter three, quarter four we plan to introduce market a lot of new products more than 10 new products which can revolutionize some new application which was we feel don’t have good position currently. Zach Larkin – Stephens Incorporated: Thank you very much for all of that color. And then you talked about the new entrance expanding the focus on fiber lasers. Are you seeing any of these new players in the fiber laser arena doing anything (cookie) with pricing trying to come in and buy market share to anything - anything draconian like that?

I think they’ve become more aggressive on pricing the view - our view is that they are still above our prices and not really able to compete. And then given I think first of all the quality of our products, reliability over it in the volumes that we can produce some with short lead times. We’re not really seeing a huge impact from that increased competition in terms of product offering. I’ve mentioned previously even at the lower power levels in the pulsed lasers we actually think we probably increased our market share over the last year to year and a half. And certainly not seen any meaningful degradation in high power I would expect our higher power market shared to be very higher still.

Yes, in pulsed laser, we are now with the last quarter very good increase of sales. In total its revenue increased 13% for one year, in both ways whether its quantity, its now what it’s for example last month 40% more than what a year ago we produced, shipped lasers – pounds of lasers 40% more. The same with kilowatt laser we shipped in units, we shipped 23% more than the last year in units and pound and we expect the increase up to 36% next quarter – this quarter. (Indiscernible) very big increase in quantity we feel making some optimization of pricing and because during this quarter we got very good improvement – decrease in cost of our major product for example in 4 kilowatt laser we decreased the cost by more than 20%, QCW laser more than 53% decrease the cost give us additional opportunity to win competition and to control the price we’re saving very good gross margin. Zach Larkin – Stephens Incorporated: Thank you.

Our next question is from Krish Sankar, Bank of America-Merrill Lynch. Please proceed with your question. Krish Sankar – Bank of America-Merrill Lynch: Yeah. Hi thanks for taking my question. I have two of them. Tim can you talk a little bit about the linearity of bookings you saw in the June quarter and the strength you’ve seen so far in July, do you expect it to continue through the rest of the September quarter?

Krish Sankar – Bank of America-Merrill Lynch: Got you, alright, that’s helpful. And then as a follow-up, then just trying to get a sense of when you guys go and displace an incumbent or if a customer who is trying to second source someone besides you, what is the timeline it takes to qualify a second source typically?

You mean a fiber competitor. Krish Sankar – Bank of America-Merrill Lynch: Yeah.

We don’t know what that timeline is. I will say that most people who have tried to qualify a second source in most of the instances, we know have actually reverted back to abandoning that second source and using IPG solely will have substantially ramped up their cool offs from IPG. So, the implication being that they are not being serviced successfully in qualifying other people. In the pulse laser side the qualification if they wanted to use someone else probably would not be that long because the light is operated the same wavelength. So, it’s dependent upon the ability to believe in more the reliability and ability of the customer to deliver.

Our next question is from the line of Tom Hayes, Thompson Research. Please proceed with your question. Tom Hayes – Thompson Research: Thank you. Good morning gentlemen. Congratulations on the quarter.

Thanks Tom. Tom Hayes – Thompson Research: Just wondering on the business in Russia, it sounds like it was a pretty solid quarter and you expect a good growth for the balance of the year. You mentioned the Teleco and the material processing segment I was just wondering if you could provide a little color of it was one that’s outperforming the other and your thoughts on those areas for the balance of the year?

Any one is outperforming the other we’ve previously talked about the fact that we hope Russia will grow both of those end markets, for telecom it is our biggest market. The industrial market in Russia sort of continues to grow fairly strongly. There is this move to re-invest in the manufacturing base and capability there. We have done a lot of work with major industrial companies ranging from automotive manufacturing to shipbuilding to the aerospace industry, locomotive and train building. We believe making very good progress of being at the forefront of helping them improve the way that they are manufacturing product. And we think that in the future, one of the areas where we are focused on developing complete systems and solutions and where that will take off fairly quickly is in Russia over this, probably the next 18 months or so. Tom Hayes – Thompson Research: Okay. On the last call, you indicated that you had a new diode and it works for the QCW lasers, I was just wondering it sounds like that came to fruition as you are able to lower your cost if I understood it right by about 30% on those lasers?

Yeah, the new diode – package for the higher power diode is qualified and being used in the QCW and actually some of that R&D innovation has been carried over to new package and higher – slightly higher power level diodes for some of the QCW. So, it’s actually a good example of leveraging the benefits that you drive for one product into another product as well.

We (indiscernible) qualification of these diodes, for example, is captive much production. So, this – in June, we produced in the large quantities and diodes start to deploy in our product, and QCW, familiar way, during this quarter, we upgrade very dramatically before we stop with basic model 1.5 kilowatt, now new model much more perfect, 3 kilowatt power and the combination of such module now has to deliver energy per pulse up to 200 joules or 20 kilowatt power system. It’s absolutely situation in this market.

Thank you. Our next question is from the line of Joe Maxa of Dougherty & Company. Please state your question. Joe Maxa – Dougherty & Company: Thank you. You mentioned three key verticals cutting OEMs, auto manufacturers, and consumer electronics applications I’m wondering if you can breakout how much those areas account for your total revenues?

We have mentioned that we only for few months order, very huge order few months, so you count up to $30 million only first quarter. So, really we are qualified as one of the major customer, is evolved for such application and full qualified type of massive supply them in the large quantity (indiscernible) up to 1400 per month shipments.

Okay. The other side, we don’t break that down. We’ve mentioned that our automotive sales that we can identify range in any given quarter from sort of 10% to 15% of sales. And then there is a significant part of sales that go to cutting OEMs and other people produce welding systems that probably end up in the automotive industry maybe as highest 25% to 30% of sales. The problem we are trying to break this out by end markets more specifically is that we do not have access for that information and could not provide very reliable information about it. Joe Maxa – Dougherty & Company: Okay.

And now from these top automotive companies in main production manufacturing facilities – five of the biggest automotive companies, our CFO will certify our user (indiscernible) use in their production way. It’s in Germany, U.S. and Japan, five top automotive companies, now, laser fully qualified, certified will have our (official) documents, certification documents from these (indiscernible). Joe Maxa – Dougherty & Company: Can I also want to follow-up on the advanced application orders you mentioned, so that – would that suggest we should be seeing uptick in the gross margin like we saw in Q1?

Still benefited a little bit, but not dramatically, as a percentage of sales, it will be relatively small. Some of those will ship in Q3 and some of them will ship in Q4. But yeah, I mean the point I think you are making is that the gross margin on those products because of the relatively high selling price given our unique advantage with those products is a bit higher. It won’t be a meaningful difference to maybe a little bit of a benefit.

Thank you. Our next question is from the line of Jim Ricchiuti of Needham & Company. Please state your question. Jim Ricchiuti – Needham & Company: Good morning. Thank you. Tim, can you say whether the business in Europe excluding Russia was up?

It was, I mean, Germany actually performed relatively well. Germany was up by 4% or 5% year-on-year. The rest of Europe was up by about 5%, so clearly the 10% overall was driven a bit more strongly by Russia. But, Europe was given almost the headwins and problems they’re actually performed relatively well. Jim Ricchiuti – Needham & Company: Okay with respect to QCW I think in as you talked about potentially doing as much as $12 million or so of revenue in 2012, given where you are through the first six months of the year and given the demand you are seeing in the market, do you feel that’s still reasonable or is there potentially upside for that?

I would think that’s a sort of reasonable number, it’s going to depend how much more attraction we get in Q3 and Q4. There is lot of tremendous number of enquiries and people talking about large contracts it just depends when they materialize whether they come through in the second half of this year or really drive into next year. But we are talking about the high volume orders with significant dollar value against this. So, our expectation is for that product line to become probably of the high power in polyester the third most important product line over time?

For duplication process customers for duplication, they have to make change upgrade their system and qualify test procedure and so on. It’s typically one or two years process is going because they start making volume. We introduced the (indiscernible) fit the units and to gauge certification process in menu where it got costs and going very well and they are very optimistic on this job. Jim Ricchiuti – Needham & Company: Thank you.

Our next question is from the line of Patrick Newton with Stifel Nicolaus. Please proceed with your question. Patrick Newton – Stifel Nicolaus: Good morning Valentin and Tim. Congratulations on the quarter.

Thank you, Patrick. Good morning. Patrick Newton – Stifel Nicolaus: So, Tim I guess on the gross margin front, how should we think about gross margin inventory as we move into the September quarter, I would think we should expect a sequential increase in both given that you burned inventory in the June quarter and they’re not below your long-term days target and like we need to re-stock I guess is that a fair assumption?

No I think we’ve got lot more focused on inventory and managing the days. So, I don’t think we are in a position where we’re going to restart. We’ve actually in terms of finished product build some finished products in China for Q3 supply. They have a little bit of finished product in Japan, so actually in a pretty good position there. I would say that gross margin will come towards the top of our range of 53% to 55% given where our revenue is pull cost to be and maybe a little bit above that with some benefits from the single-mode high brightness lasers that we expect to ship. But we are not fundamentally changing the expectation on gross margin I think it will be another very solid quarter there. Patrick Newton – Stifel Nicolaus: Alright. Thank you. That’s helpful. And I guess on the QCW laser two part question do you anticipate another leg down on pricing to drag more unit adoption or should we see relatively stable pricing at current levels as you’ve reached a competitive costs threshold. And I guess secondly on the unit side, do you anticipate that year-over-year growth rate will be sustainable or possibly you can accelerate relative to growth year-over-year that you put up in the June quarter?

I think on the unit sale, we’ll see an acceleration on the units and then on the pricing leave balance and so on for that questions whether you need to continue to reduce QCW prices are lower than now at a reasonable level.

Patrick there is and they will reach very competitive now that they would maturation from might they use such lasers. And we don’t see a need for a growth of sequential growth of price. It depends also from geography for example in the Europe or in U.S. and Japan our projects are extremely competitive now what will be to (indiscernible). In china steel needs some balancing, but it depends only from 24 already now the top user in china also now registered us and considers if change they won’t stop their own production of (indiscernible) lasers.

Thank you. Our next question is from Jagadish Iyer of Piper Jaffray. Please state your question. Jagadish Iyer – Piper Jaffray: Yeah. Thanks for taking the question. Two questions Tim, first can you talk about the trends that you're seeing in the automotive segment for the second half versus the first half in terms of the various geographies. North America particularly and Europe as well as China because we are hearing mixed bag on the automotive front, so any color on that will be great and I’ll have a follow-up?

We’ll start with North America the transition to lasers both for cutting and welding of high strengths steel is just beginning and is expected to continue. One of our main OEMs believe that this largest North America the worldwide they’re going be several thousand cutting systems deployed in the near – medium term I would say for cutting high strength steels. The adoption of high strength steel in North America and Europe is still really – to be early stage and that a very early stage in China for example. We are seeing transition to trends for welding a transmissions continuing and then a relatively new development in North America, which follows on from some of the development in Germany is increasing use of aluminum with a couple of manufactures announcing a greater content of aluminum in vehicles. The fiber laser is very well suited to welding that and we've been recently qualified with a couple of end users, so that should helps us not just over the next three or four months, but we're taking year over the next years as the adoption continues. In Europe we've had a couple of reasonable orders from the automotive sector coming into beginning of this quarter. I’d say that the Europe we've despite – very well qualified with many people Europe's a little bit slower in automotive. And we're making good progress in China again from this is really from the adoption of new technologies there. So, we’re not saying a tremendous change in the desire of the automotive manufactures to bolter the new manufacturing techniques that they want to adopt. Jagadish Iyer – Piper Jaffray: Okay.

That is well about the where we started to see purchasing from some of the larger manufactures there that we highlighted it would happen that started in Q2 is and is expected to continuing Q3. Jagadish Iyer – Piper Jaffray: Okay. Just on the Russia side, given the backdrop of your outstanding purchase of the minority interest. How should we think about sales to Russia, I know you kind of alluded earlier, how should we think about sales to Russia in the second half versus the first half and is there a secular growth in Russia over the say the next 12 to 24 months?

So Russia in Q3 will have another good quarter like Q2 I don’t expect to see spectacular sequential growth , but then I think we’ll drive into a strong Q4 which is always a good quarter in Russia. And I would expect to see some growth there. Over the next two years we do believe strongly in the sort of secular growth story from modernization of Russian industry and from fiber laser devices and fiber laser systems being much more leve we adapt to their manufacturing. So, the targets that we have for Russia over the next quite – over the next couple of years are pretty high. Valentin a bit close that do you want anything to Russia?

In Russia our target was to translate it more does in a way that supply complete production sales even production lines. We're working very constantly deduction we sales now agreement with mainly 12 production manufacturers. The strategic agreement some multi-year agreement for developing jointly supply them production lines. At bottom what you are of space for the Europe for the steel companies and so on. Fifth, prototype of some system we kept shift to customers and now they’re very excited to get local domestic supplier correct volume to domestic supplier for them its fifth time and the Russia we found that sub-product. Okay, very good Tim, unique Tim and roughly is without any constitution from domestic to have the manufacturer vertical only the company which we’ve been about to complete conclude with the outside surplus (indiscernible).

Thank you. (Operator Instructions) Our next question is from the line of Avinash Kant of D.A. Davidson. Please proceed with your question. Avinash Kant – D.A. Davidson: Good morning, Valentin and Tim.

Good morning, Avinash. Avinash Kant – D.A. Davidson: I had the question about your capacity expansion on the diode side. Could you update us a little bit in terms of where you are in terms of the capacity expansion and are you to the point when you are able to see your yields from the plant and see whether it’s in line with what you have had to thought and hopefully that will add to the – make the cost structure better going forward?

The sales – business went to threefold our capacity during the couple of years and with the working capital deterioration, now the facility we are finishing and also the agreement that we have (indiscernible) is during the 1.5 year, we believe our capacity would be paid, but even now we have enough capacity to meet any market demand.

And as I think some of these machines are still being qualified, so the multiple wave – the new multiple wave of system is on the verge of being completely qualified. The other way to look at your question is our yields are already very high and there is not a fundamental significant change in manufacturing techniques that we expect to be able to maintain as yields.

Our yield is extremely high. So, in all you get the opportunity to increase the cost nearly (indiscernible).

Thank you. Our next question is from Mark Douglass of Longbow Research. Please state your question. Mark Douglass – Longbow Research: Hi, good morning gentlemen.

Good morning, Mark. Mark Douglass – Longbow Research: Talking about Russia and China, what were Russia and China sales in the quarter?

Russian sales were $10.9 million, China was $37.9 million. Mark Douglass – Longbow Research: So, that was significant sequential uptick in China, was that – can you talk about how much is related to just end market demand versus new OEMs onboard or significant wins with certain customers, where there is lot of that driven by electronics customers, these new customers for you?

Some of it is microelectronics, but I think we had, first of all, been pretty clear in articulating that we expected Q2 to be strong and that’s on the results of all of the work and investment that we have done in China over the last year, strengthening the management to the sales teams, improving the distributions that we have qualified new customers. We’ve also qualified existing customers with new applications. So, the cutting business for 2D has grown significantly compared to a year ago. In terms of newer applications, a very good progress in the microelectronics and market, both for very high-quality marking as well as for wealthy applications using our 500-watt medium-power lasers that performed very well in the quarter, and then developments of macro-welding applications with the couple of the OEMs. It’s across the Board. I think what we will find is that coming into the end of the year fiber has got pretty significant market share gains in China, and particularly, IPG’s fiber.

Thank you. Our next question is from Olga Levinzon of Barclays Capital. Please proceed with your question. Olga Levinzon – Barclays Capital: Hi, thank you for taking my question.

Hi, Olga. Olga Levinzon – Barclays Capital: Hello. Just wanted to touch based on the pulsed laser strength that you saw in the quarter, you talked about that being primarily driven by consumer electronics. I was wondering if the consumable electronic seasonality, which would probably mean that equipment orders are strong as in 3Q and then declined into the fourth quarter. Has that changed the linearity or seasonality of your pulsed laser business or do you expect your typical seasonality because of other aspects that play into the pulse business?

I think, it’s too early to state that, but I mean, you could see as China is well-known that they invest, for example, very heavily coming into the Christmas season, we don’t know at the moment and we are not providing any information about Q4, because it’s too early to do so.

Thank you. Our next question is from Mark Miller with Noble Financial. Please proceed with your question. Mark Miller – Noble Financial: I was wondering if you can comment what you are seeing in terms of demand from scientific application customers?

Well, the scientific business is relatively small and stable, no massive growth there. I think the growth and the benefits we have seen in terms of order flow more on some of the R&D applications using higher power lasers, so not necessarily scientific as in R&D and university end-markets, but people utilizing the lasers they are trying to develop new applications that are commercially viable, so whether that’s in the oil and gas or materials destruction and testing, that’s where the R&D focuses on using our lasers.

Last year, we focused for OEM to develop OEM business that we (indiscernible) not very beneficial to support the business, but now in new phase, we are gaining (indiscernible) scientific business, and for that, we create special separate unit, which will focus on scientific business. We are now creating such unit in Santa Clara.

Thank you. Our next question is from the line of Jiwon Lee of Sidoti & Company. Please state your question. Jiwon Lee – Sidoti & Company: Thank you and good morning.

Good morning, Jiwon. Jiwon Lee – Sidoti & Company: Just wanted to kind of hear some updated thoughts about the cash used, first of all?

So, I think the first thing is that we used $55.4 million to repurchase the minority interest in Russia that is a accretive transaction for the company. We are continuing to evaluate acquisition opportunities and the strategy that we have around that is the same as before, it is to either leverage our existing products into new applications or significantly increase their sales in existing applications. So, that could be, for example, high power lasers used in welding or medium and QCW lasers used in micro-welding or micro-cutting. The other area where we’ve talked about trying to get some traction into is looking at fine processing applications, because we are, first of all, increasing the power of the green lasers, both at pulsed and CW. Our UV laser in Russia now, we’ve increased the power of that and started to improve the reliability. So, we are going to have a compact low-cost very easy-to-use device at some of the shorter wavelengths in the next couple of years. We think that we can increase the sales of those by investing in improved distribution and expertise into that market. So, the basic strategy is to continue to look for opportunities, where the synergy comes from leveraging the technology, not necessarily from or not from coming – not coming from buying a company and trying to look for cost savings. We really want to leverage product lines and fiber into end markets and that’s the intention is to use the cash, the smaller scale acquisitions in that area.

(indiscernible) future in the fine processing markets, short power – ultra short power (indiscernible) and so on. And we are the development qualification now many devices in positive reaction, which we believe will make practically this revolution in this application.

Thank you. At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Dr. Gapontsev for any closing or additional remarks. Dr. Valentin Gapontsev – Chairman and Chief Executive Officer: Thank you for calling in on our call. We look forward to reporting to you our new results through three months. Goodbye.

And that concludes our conference call. Thank you for joining us today.