Welcome to IPG Photonics Third Quarter 2014 Financial Results Conference 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 introductions. Please go ahead, sir.

Thank you. Good morning, everyone. With us today is IPG Photonics Chairman and Chief Executive Officer, Dr. Valentin Gapontsev and Senior 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 and IPG Photonics' Form 10-K for the year ended December 31, 2013 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the investor section of IPG's website or by contacting the company directly. You may also find copies on the SEC's website. Any forward-looking statements made on this call are the company's expectations or predictions only as of today, October 28, 2014. The company assumes no obligation to publicly release any updates or revisions to such statements. We will post these prepared remarks on our website following the completion of the call. I will now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. IPG delivered another quarter of record revenue and net income. We reported $199.7 million with 16% growth from the prior year. Our gross margin of 54.6% and our record EPS of $1.05 per share reflected leverage we have in our operating model. This result continued to demonstrate IPG's strong fiber with a leadership position and our ability to increase penetration in existing end markets and capitalize on growing demand for several emerging applications. As you know, the most successful IPG team penetration in industrial metal processing end- markets particularly catching, welding, brazing, coating [ph], cleaning, draining, marking and engraving. As more OEMs and end-users widely deploy fiber lasers in their systems to displace existing laser and non-laser technologies, we expect demand for our products will grow. It will be driven by further penetration of existing OEMs and end-users as well as gaining new customers in material processing. Continued toward the current is a growing acceptance for fiber lasers. For example, from the 7500 units toward sales of high powered laser-cutting machines expected in year of '14 -- fiber cutters doesn't exceed 30% a year. In 2020, the share should be increased according to best experts up to 60% to 80% with a total volume up to 12,000 units. In addition, we are seeing a clear trend to use higher power lasers, fiber lasers for cutting applications. For example, last week at EuroBLECH, the international sheet middle metal working technology exhibition in Germany, some OEM customers demonstrated cutting system using IPG's 8 kilowatt fiber laser. One of manufacturers has promised to demonstrate 12 kilowatt fiber cutter on next (indiscernible) show in November. The higher power lasers and the cutting of sheet metals and genuine refractor (indiscernible) speed. This is a continuation of an ongoing trend that has seen…

Thank you, Valentin. Good morning, everyone, with Valentin having provided the business highlights, I will get right into the sales drivers for the quarter. Materials processing sales increased 17% year-over-year to $192.3 million accounting for more than 96% of total sales during the quarter. Within materials processing, high power lasers used for cutting applications continue to be our strongest growth driver. Sales to other markets including advanced applications, telecom and medical applications which account for less than 4% of IPG's total revenue decreased by approximately 9% or by $0.7 million to $7.4 million. Looking at our results by product line, it is important to note that sales growth was meaningful across most of our key products, demonstrating both the market acceptance and diversity of our portfolio products. High power laser sales which accounted for 53% of total revenue, increased 10% year-over-year to $105.8 million. This growth continues to be driven by sales for cutting applications. Cutting is our largest single application and grew strongly year-over-year. Our OEM cutting customers intending to move up the power scale for their cutting systems, allowing them to improve processing speeds and cut thicker metals as Valentin mentioned. This trend bodes well for the continued penetration of fiber lasers that displace conventional lasers in OEM systems. Growth in high power cutting was tempered by a decrease in high power welding applications. Sales of lasers for welding applications can be more uneven because they tend to be project-driven by end users. For example, they are often affected by the timing of purchases in the automotive industry and introduction of new vehicle models. Last year, in Q3, welding had a strong quarter. As the use of high strength steel, aluminum and other materials to reduce vehicle weight becomes more widely adopted in the automotive industry, and as…

(Operator Instructions). Our first question comes from the line of Krish Sankar. Please proceed with your question. Krish Sankar – Bank of America Merrill Lynch: I had a couple of them. First one Tim, in terms of the competition, can you give us some color on how the competition on the diode front is going on? Not the laser, the actual diode. Looks like it might be one competitor out there who might have a similar diode to you guys. Just kind of curious your thoughts on what the cost basis is.

The general view is -- I think that the cost basis of diode manufacturers in the market is still substantially higher than IPG. IPG benefits not only from the scale that we have on the manufacturing, but also from technological advantages around yields, automation, simplicity of package design, so each of those things contributes significantly advantages. I don't know exactly where the manufacturing cost of the competitors is, but it is probably at least -- their manufacturing cost may be 300% higher than ours and the price that we see in the market -- or hear about in the market is still five times higher than our diode manufacturing costs. Do you have anything else specifically Valentin, on diode competition?

We don't see serious diode competition. It is only the (indiscernible) who produce diode chips and package outside. But it also increases the cost of final product -- packaged diodes and total volume suggests you produce for [Technical Difficulty] of lasers is many times what we produce today and we increase each year the volume by 40% the last two years, per year. So it is -- nobody warrants with such volumes and so on to reach such volumes should be enormous contributor to time and investment. Krish Sankar – Bank of America Merrill Lynch: And then in terms of the Q4 guidance, what is the FX and tax rate assumption you have embedded in it?

So we’re using the current exchange rates around the world and the tax rate is still at around 29%. So we’re not assuming any benefit from, for example R&D tax credits because that legislation has yet to be reenacted for the year. Krish Sankar – Bank of America Merrill Lynch: And then a final question if I could squeeze one, the laser market is about $4.5 billion give or take, I'm just trying to find out what do you think realistically is the fiber laser opportunity within that? Is it like 50% of that, 80% of the overall laser market? Or do you think fiber laser has a good shot at replacing traditional lasers? Thank you very much.

I think you have to break the market down into its different parts at the moment. If you look at right now where metal processing is, excluding micro-processing and some of the marking engraving that is about a $1.8 billion plus market expected to grow for certain applications as high as 10% in other applications and 3% or 4%. Fiber's opportunity in metal processing is as high as some market analysts say 80% or 90%. The other large part of the market we’re focused on is the micro-processing area that is another, in total, about $1 billion. If you strip out the lithographic applications, it is probably about 40% of that total. At the moment, fiber's penetration into those areas is relatively small, but as we introduce enhancements to the green lasers and new UV laser and the ultrafast technology. We believe that we can get a significant share of that part of the market. Ultimately, if you go out again 6, 7, 8 years, we would like to probably see that we have fiber approaching 40% or 50% of that market. The other areas of the market that include things like medical, the defense applications, and research and development, taking more time to develop, we believe that, for example, medical does represent significant opportunities. The ultrafast technology may have applications in ophthalmology, the thulium lasers in surgical, but it is less well quantified and understood. We believe that medical, for example, should start to be a more meaningful driver of growth in the coming years, but very difficult to pinpoint exactly.

Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question. Jim Ricchiuti – Needham & Company: I wonder Tim, you gave a little bit of color on the book-to-bill. It sounds like you had just given the revenues in North America, probably had a good book-to-bill there. There. Can you talk about the book-to-bill in some of the other geographic regions? Was there much of a difference?

No. I think bookings -- we don't get quite that granular on this stuff, Jim. Bookings overall were very good around the world for Q3, particularly as compared to a year ago. So there was nothing of particular weakness that really comes to mind. It performed -- Europe held up pretty well despite some of the negative news out of there. China is always a little bit weaker on bookings in Q3. Q2 is the strongest month, but it was still up compared to last year. The Japan order flow was very good and we expect to see some pickup in Japanese revenue into the end of the quarter. So it was really across the board and across different applications. Jim Ricchiuti – Needham & Company: And just given the--

Last year we have had a quarter what was not so good was in the U.S., but Q3 and now Q4 is growing with a very serious increase for booking from U.S. Jim Ricchiuti – Needham & Company: And just with high power, the deceleration in the growth rate, how would you characterize the bookings for high power? Sounds like just based on some of the color, that you had a nice rebound in bookings there?

I think high power has got good growth prospects for it. Valentin even talked about over the sort of medium term -- longer term, how much the cutting market is expected to increase as lasers and fiber start to displace some of the non-flexible cutting technologies, for example in transfer and not transfer stamping lines. The welding opportunity we think is still very early stage and will grow. We believe the penetration into the Japanese cutting OEMs is going to have significant legs to it in 2015 and potentially even accelerate a bit at the end of the year into 2016. So the high power it went through a little bit of a weaker quarter, but don't forget it has grown so strongly over the last couple of years. My real take-away from that was it was great to see some of the other product lines perform so well, offsetting some of that. A little bit of weakness this quarter, but the high power laser's penetration into that total high power market. As Valentin mentioned, in cutting is less than 30% and welding it is 30% or 40% and you have all the new applications on high power as well, which are just starting out. So I wouldn't read too much into the Q3 high power number. Jim Ricchiuti – Needham & Company: What was metals additive manufacturing for you in the quarter?

That was just under $5 million. So the run-rate on that exceeds already anybody's estimate of what the market would be this year. And year to date, we mentioned, that is up about 100%.

Our next question comes from Patrick Newton with Stifel. Please proceed with your question. Patrick Newton – Stifel Nicolaus: Could you talk a little bit on the pricing environment, especially in cutting? I think in your prepared remarks you talked about a shift to four and now even six high power kilowatt fiber lasers. And given you have virtually no competition as the powers continue to move higher, should we anticipate that you are going to be able to hold pricing relatively steady? And then could we see gross margin benefit as a result?

Price fuels much in the competition and that is why despite they try to penetrate market with very low margin. So what we have very good reserve if need, where we will -- can cut, but now it is not dramatically little, how the price takes time to hold the competition out of the serious share in the market. And we have future reserve in high power within and will control the price.

So with regards to gross margin question, we still are targeting this range of 50% to 55%. Cutting is one example where maybe you move to higher power levels. You have a lot of room on ASPs, but we are also targeting growing, for example, the systems business. The margins on that business may be slightly lower. So there are as usual, going to be puts and takes in any given quarter around product mix. We think that this gross margin range that we have targeted of 50% to 55% is stellar, it's way the best in the industry and getting at the moment to the top end of that range, I think is a very significant achievement for the company. I think we have executed really well around that, and have achieved just about everything we set out to do in the beginning of the year and everything we said -- we had communicated we would try to do as well. So I think that is how we look at it internally as well.

50%, 55% frame is sort of consolidated margin, for high power margin -- the sale way essential higher. Patrick Newton – Stifel Nicolaus: As a segue on the systems comment Tim, is that still a low single digit percentage of revenue contribution? Are you seeing any disruptions in that business due to some of the macro impacts from Russia? And what was Russian revenue in the quarter?

Russian revenue in the quarter was still relatively small. It is less than 5% of revenue. There is a significant pipeline of systems business that people have been working on in Russia. I would say that so far it has proved more difficult to close some of those opportunities. So, there is work being done on the sales and marketing side as well as the development side. So we have many different types of systems being ready to introduce to the market. On the top end of our guidance range, we do assume that we will get some significant improvements in systems sales into Russia. We have factored in some of the highest probability system sales into that guidance range. So we’re hoping to see the typical pickup in Q4 in Russian revenue. It is very difficult to quantify how much that geopolitical unrest or disturbances have had to that revenue because it is always very difficult to close this business during this sort of first two or three quarters in the year. So I think it is probably better to ask that question answer at the end of the year and see how the systems business has tracked there through the end of December when a lot of the budgets do get spent.

In total we expect this year revenue in Russia will increase minimum 25% compared to last year in total. But regarding the assumption, of course it impacts our business because our developmental system, this year we expect this impact would be like -- we stopped on shipment we have already contract for some customer who is on this list of assumptions. In total it's a loss of about $8 million to $10 million we estimate this year, maybe twice more or two or three times more next year -- minus. But from other side, other customers, which out of the list in our applications which potential also should not be on the list with support, it gives us a much better situation because if you are poor, the most wealthy customer prefer to buy even more equipment outside from Europe, from Japanese, and so on. Now, the situation in full changed. Now they all trying to buy the portable equipment from (indiscernible) located in Russia. And from that point, IPG has enormous advantage to any other people because our Russian company, really sales efficient Russian entity, which produced of auto product without any impact of the devices from outside of Russia. It's all made in Russia from Russian components. Is only a few metal parts (indiscernible) we still import outside, but it is not -- this is a part we can replace if need by the -- or practical edit value very high in these products made directly in Russia and so we now only see the serious suppliers in Russian systems. We both have strong competition from the same and from others, now we are practical with all this talk. For now we consider our target and working for application when there was no sanction, for example outcome with automakers, railway, industry construction and gas and oil small companies, not only one large company with oil traction but more companies now we are working with them, for telecom, for private sector medical application and in science university. It's very large for us. It would be very serious with respect to very strong growth during the next 2 -3 years.

(Operator Instructions). Our next question comes from Avinash Kant with DA Davidson. Please proceed with your question. Avinash Kant – DA Davidson: Quick question on the pulse laser side, you said that the pulse laser sales in China were up 30% on a year-over-year; looks pretty strong. Could you talk a little bit about your margin profile there compared to last year on the pulse laser alone in China?

Margin remains the same. It is not so -- high power lasers, but where it is within the same margin up to 60%. But as Tim mentioned, only one way how we increase the sales, is by introduction on low cost device, but also lower as much with production cost. So it remains with the same margin as the other lasers. But we introduced also now in stock mass sales of our new generation of lasers primarily with less short pulse laser of nanosecond, very highly efficient. For touch laser we still don't have any competition in China. Its sales and requests for such lasers is growing very fast in China and also in other countries -- application airport products for such lasers. Avinash Kant – DA Davidson: Okay. And on the QCW, you saw a big jump, especially on sequentially and on a year-over-year basis in the current quarter. Should we consider that as a baseline or there was something one-time that may not be next quarter?

There is some project -- we mentioned on the script that there are some project-driven applications there. I think there was -- Avinash Kant – DA Davidson: Like how much was it?

I am not able -- I can't qualify it exactly, but yes, it is a little bit of an exceptional quarter on QCW. I don't have the numbers exactly to hand on that.

More and more people -- customer who produce before owning, yes yeah laser now -- a store or a share, be useful in ways that we are starting to buy QCW lasers because they provide so much enormous advantage to the flash pump (indiscernible). So it is not possible to neglect these. And prices now are reasonable, so competitor price with your own production or fewer (indiscernible) lasers in house.

Our next question comes from Mark Douglas with Longbow Research. Please proceed with your question. Mark Douglas – Longbow Research: Tim on the Q4 guidance, what is the estimated impact of currency? I am assume it's negative, since it's going to be more of a headwind and fourth quarter, sales versus what you had in 3Q. Do you have an estimate of what the headwind is there on a percentage year-over-year basis? And does that affect EPS as well?

I didn't have an exact impact. I said we use the current euro, Japanese yen, for example, exchange rates in generating the guidance number. I didn't actually go back and recalculate guidance as though the euro had been at $1.35. So, predominantly, all of the sales in Europe are denominated in euros. With the euro having gone down by 5%, you take 5% impact on the total value of European sales. It may be $1.5 million, $2 million headwind, something like that. Mark Douglas – Longbow Research: Okay. So it is pretty straightforward that your European sales are directly related to the euro there. I mean, it is not like you have--

Predominantly, all of them are in European denominated. Yes. It is not particularly complex. The interesting, on EPS is, clearly on the European-denominated sales, you have a bit of a lower profitability. But, our European manufacturing also makes products, for example, in China where the euro is depreciated against the RMB. We sell in RMB, but we have a lower European manufacturing cost because those are in euros. So what you lose on the European sales in dollar denominated or translated profit, you may recover a little bit on some of the non-euro denominated sales that are shipped out of Germany, for example. Mark Douglas – Longbow Research: And then with the other income expense, that is not in guidance, correct?

The gains and losses related to future changes in the exchange rate are not included in guidance. Mark Douglas – Longbow Research: Right. Now, on the U.S., the relatively weak U.S., is that all related to tough comps in automotive? And then, if you could, just describe how big automotive is for IPG across the board.

Automotive continues to track in terms of what we can identify in that sort of 15% to 20% range. Some of the U.S. is auto-related, but we also mentioned that the advanced business has been weaker. We had to defer a $1.8 million very high power laser that went into some of the advanced applications. It was actually related in the script. We said installation is just an FOB destination laser. So that will be picked up in the fourth quarter. Some of the advanced will improve in the fourth quarter with some of the NASA orders as well. There are also a lot of automotive orders that came in at the end of Q3 for some of the welding applications that will benefit the fourth quarter. So yes, it was a tough comp a year ago in Q3, but these trends should be looked at more on a longer-term basis in order to establish what is really happening in the end markets. And the automotive order flow has been pretty good through the end of Q3 and into Q4 as well.

Our next question comes from Tom Hayes with Northcoast Research. Please proceed with your question. Tom Hayes – Northcoast Research: You have talked on this call and previous calls about the work you have made in increasing the efficiency of your machines. I was just wondering if you are seeing any of your customers who maybe have purchased a laser it a couple of years ago, deciding that the efficiency gains are significant enough to buy new lasers. In other words, are you seeing an equipment upgrade cycle from these increased efficiencies?

No. You relatively rarely see that kind of thing happen. I think first shortest equipment lifecycle you see is sometimes on the very high-volume consumer electronics applications at lower power levels, where maybe the lifecycle of the laser is four to five years. On a cutting equipment laser, the value of the cutting system in total is such that the lifecycle of that cutting system is still running on average are probably eight years. You have seen some retrofits for welding applications, obviously, over the last several years related to the improved efficiency. But I can't say we are suddenly seeing people say we are going to throw out a two year old laser that has 35% electrical efficiency to replace it with a laser that has 45% electrical efficiency. I think you will go through the normal cycle of -- lifecycle of the devices rather than see that as be a significant driver. I think it is more of a driver in displacing legacy laser technologies and potentially non-laser technologies. Tom Hayes – Northcoast Research: Okay. And just lastly, you had talked previously about potentially returning some of the cash over the next 18 months, absent a deal. I was just wondering if that is still something that is being talked about.

I don't think we have ever mentioned that specifically. I think we continue to look at acquisitions and the most efficient deployment of the cash that we have. Clearly we have discussions internally about our capital structure, but we have nothing to disclose or report related to that, Tom.

We are looking for traditional cost. We realize many opportunities, but still each time (indiscernible) find a place so many problem and flexibility, and still expensive so still did not make positive decision anyway, whether capital or small -- organic growth and so on. Organic is much cheaper, much more flexible, is much less problem and so our capital expenses you see higher now, they provide enormous return. For example, for the last four years, I estimate we made the capital investment to within $250 million, but we have a return increase obviously our net income increased for these four years, for $450 million -- extremely efficient capital investment with very high return. So this is the best way. With the acquisition you never will get the same return.

Our next question comes from the line of Mark Miller of Noble Financial Capital Markets. Please proceed with your question. Mark Miller – Noble Financial Capital Markets: Just was wondering, you noted in your comments three areas that portend relatively new. And I am just wondering, what do you feel of these three areas? And they are auto, seam, welding. You are talking about introducing the UV fiber laser and also oil drilling. I'm just wondering what should these areas which of these areas could be the largest in terms of growth next year in terms of your sales.

The two major areas we are focused on growing are automotive and other welding applications. Valentin mentioned some of the work we have done on developing some of the, not just welding, but unique brazing technologies, particularly for zinc coated materials. I think, as well, when the UV and ultrafast technology, the product gets introduced, we are hoping to get that introduced, as we said, towards the end of this year. That will be a significant driver. I think the oil and gas is still -- if they get it commercialized and accepted, you are talking about an opportunity that is a couple of years out and maybe even longer. So it is more of cash that is more of a potential long term driver, two to three years out. The other two are much more near-term.

We expect also very serious increase on sales next year in such (indiscernible) not material processing application, for example, in telecom, when we have supported many years telecom now with the build new highly integrated products. And we now (indiscernible) growth our telecom business we expect, especially in Russia. It would be up to $100 million-plus we expect during capital year to develop the business. We expect also some other applications, for example (indiscernible) system for new format large theaters, 3D theaters. So we develop where we see this project and the direction. We -- in a meeting of some of these new display materials also very large projects we develop now, many other new applications. Also systems business really developed 11 projects; different technologies and hardware for a new application, many of them are still not available in the market. So this system business during two years we have very good result in where we implement in the market late starting next year serious implementation market this system, new kind of systems.

Our next question comes from the line of Jeremie Capron with CLSA. Please proceed with your question. Jeremie Capron – CLSA: I wanted to follow up on the high power sales, which decelerated to 10% this quarter. I understand this was largely driven by the decline in welding applications. Could you give us a little more color in terms of whether that is really concentrated in North America and Japan? Are you seeing a broader weakness in welding, including Europe? And how should we think about that segment over the next couple of quarters? Should we expect a catch-up effect?

There is no weakness in the welding. It would be very good to compare growth, to compare to last year. So it is only one (indiscernible) it was seasonable and so on. The welding business is growing very fast and we develop now -- add some new opportunities. Our expectation during five years' welding business would be similar in volume as we have for cutting; our expectation, maybe you consider too optimistic, but it is what we expect with the high-growth in the welding business for high power welders. Jeremie Capron – CLSA: Okay. And looking at China, obviously quite a few projects on the consumer electronics side of things in this quarter, what do you think the market looks like over the next couple of quarters? We have seen a macro slowdown, obviously. A success in investments seems to be coming down; machine tool market, not fantastic. Do you expect the company to keep growing at that kind of pace in China?

No, I think the overall China has become a huge market for us. It is 35% of our sales. We have always said that the overall growth rate in China, we are likely to slow because of the scale we are at. So more specifically, in Q4 we will see the usual seasonality with some slowdown sequentially from Q3 to Q4 that we factored into the guidance numbers. The prospects, though, for 2015 look good. The pipeline of business that we have got from the main applications we deal with cutting, welding, marking, engraving, looks pretty robust. You are seeing big pickups in the fine processing, so both fine welding and cutting. So the overall trend for next year should still be to grow that business. To grow it, though, at 20%-plus off the levels it has reached is going to be a bit more difficult unless you get some of the newer applications there. I wouldn't say the order trends in Q3 showed any significant deterioration related to some of the macro trends. I think we are still gaining a significant amount of share against other technologies. China is generally an early and a quick adopter of fiber technology. They are not so beholden to some of the CO2 or other legacy laser applications as some other geographic regions are. So we haven't seen particular delays in customers paying us or any change in the credit environment. That sometimes, more than anything else, can affect China sales. Now, I am not saying that can change also very, very quickly from month to month, but we are not seeing any deterioration in that. That is one thing that I watch in relation to China.

Of the major customers in China, forecast for next year is very serious fiber growth, major customers, which, it is only with current broad applications. But we, next year, we will introduce in Chinese market many new applications where would we start the business with new directions and we are hoping to extend our opportunities in China.

Our next question comes from Joe Maxa with Dougherty & Company. Please proceed with your question. Joe Maxa – Dougherty & Company: I just wanted to follow-up on what your comments on the telecom business. If I heard it correctly, did you suggest you could be doing $100 million in revenue within a couple of years? And is that based just in Russia, for the most part?

The most part in Russia, yes. Now we have firm confirmation that we finish stepped qualification, our new product there where we have firm confirmation for the next five years, very serious, two projects. Only this project will provide us such numbers. But we also developed now more business in the Asia and we increased sales here and in Japan. So we said that our recovery of our telecom business on absolutely new (indiscernible). So now we provide 400G systems for very good quality and for some -- have qualified by very serious customers. And proof is -- sole supplier such system for some serious customers. Joe Maxa – Dougherty & Company: And one other question, I apologize if it was asked earlier, but did you give the book-to-bill ratio?

It was just a very, very slightly below one. So, order flow in Q3 was significantly up compared to a year ago. It was actually a great quarter on order flows. It was very good to see it, and that is reflected in the Q4 guidance number and 19% growth in the midpoint of the range for Q4.

At this time, we have reached the end of the Q&A session. I will now turn the call back over to Dr. Gapontsev for any closing or additional remarks.

Thank you for joining us this morning. We look forward to speaking with you on the next quarter's call. Good bye.

Thank you everyone.