Good morning. And welcome to IPG Photonics Fourth Quarter and Year end 2014 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 introductions. Please go ahead, sir.

Thank you, and 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. The 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, February 20, 2015. 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. I will now turn the call over to Dr. Valentin Gapontsev.

Good morning, everyone. IPG delivered another year of record revenues in 2014, growing our topline 19% from 2013. The bottomline growth of 29% showed the ability of our vertically integrated business model to drive leverage of -- in our operating profits even after substantial investments we made in 2014 and prior years. We continued to grow our breadth of applications, we saw fiber laser penetration in the major application of cutting continue to grow rapidly and we improved our competitive position in the automotive market. In addition, the growth we anticipated in laser sintering and 3D printing at the beginning of the year was achieved with sales growing by more than 100% for those applications. The breadth of our applications is growing and our products continue to be evaluated for new applications. In the automotive industry, we have made significant progress in developing a unique multi-laser beam process for welding and brazing zinc -- hot zinc coated steel. The application is generating excitement and interest from leading automotive manufacturers. In addition, we recently shipped two 50-kilowatt lasers to NASA for materials testing application. Sales of our cutting and welding heads are starting to increase as these accessories become more widely accepted in the market and we added to the features and capabilities of the optical heads. Every high power laser used in metal processing uses a processing head so that we should be able to increase sales of these accessories from a couple 100 units per year to many thousands over the next few years. The laser market continues to grow at a significantly faster rate than GDP as lasers are being adopted across both existing and new applications. The total industrial laser market is expected to grow at about 5% in 2015, with industrial fiber laser growth expected to…

Thank you Valentin and good morning everyone. Fourth quarter revenue grew 25% to $207.4 million from $165.9 million a year ago. Materials processing sales increased 23% year-over-year to $191 million, accounting for approximately 92% of total sales during the quarter. The continued strong performance of materials processing was driven primarily by cutting, laser sintering and 3D printing applications. Sales to other markets, including advanced applications, telecom and medical applications, which accounted for approximately 8% of IPG's total revenue, increased by approximately 57%, or by $6 million, to $16.4 million. This growth was primarily driven by two 50 kilowatt fiber lasers that were shipped to the NASA Ames Research Center that Valentin mentioned and another 50 kilowatt laser that was shipped for another advanced application. Orders for advanced applications are typically large in dollar value, but are not even from quarter-to-quarter. High-power laser sales, which accounted for 56% of total revenue, increased 32% year-over-year to $116.2 million. This growth, which demonstrates our continued leadership in this area of the market, was driven primarily by strong sales for cutting applications, improved sales from automotive welding, as well as revenue from advanced applications. Increased demand for our new low cost, low-power and high-power pulsed lasers for marking and engraving applications resulted in pulsed laser sales increasing by 16% year-over-year to $32 million. Sales of medium-power lasers rose 58% to $21.3 million, or 10% of total revenues. This growth continues to be driven by sales for fine-processing applications, particularly cutting of thinner materials and also from laser sintering and 3D printing applications. Sales of QCW lasers, which are mostly used for fine welding, percussion drilling of fine holes and some glass cutting, increased by 23% year-over-year to $6.8 million and accounted for 3% of total revenues. Sequentially, sales were lower due to the cyclicality…

[Operator Instructions] Our first question is coming from the line of Patrick Newton with Stifel. Please proceed with your question.

Thank you. Good morning. Can you hear me?

Yes, Patrick. Good morning.

All right. Good morning, Valentin and Tim. So I guess first question is just on free cash flow and usage of cash, really solid free cash flow generation. So two-part question I guess is. One is, when does this free cash flow begin to convert with net income? And two is, given nearly $10 in net cash per share, how should we think about priorities of using that cash and how should we think about willingness to perhaps toward doing shareholders friendly actions with the cash?

So the first question is an interesting one. With CapEx coming down as a percentage of revenue, I won’t give you what our estimate as it will be of revenue because I will give you an annual guidance number for revenue. But obviously with our estimates of where CapEx will be for the full year, as a percentage of revenue that will come down. We clearly expect some strong growth in operating cash flow this year. So I think we will start to see a significant diminishing of the gap between free cash flow and net income this year and probably that position strengthen into 2016. I certainly don’t think free cash flow will be quite equal to net income this year, but we are getting closer and closer to that, given the sort of diminishing investment cycle. The second part of the question, there are multiple parts to that as well. We continue to believe that we are still relatively early in the penetration of fiber lasers not only into the industrial market despite all the progress that we’ve made, but also into potentially a wide range of many, many other applications. We continue to look at potential acquisitions within the industry that would strengthen our position. Some of them are relatively small. Some of them may be larger. We’ve looked to things before and walked away from them, because they may have good aspects to them, but there is a lot of baggage. We are very patient about this stuff, but I think the process we are taking is very good. So at this point time, we are preserving our cash really for acquisition strategy. Now if we haven’t, as I said before, made significant acquisitions or identified things within reasonable timeframe, and I am not going to say exactly what that is, clearly we may have additional cash available for share buybacks. We might look at may be offsetting some of the dilution in relation to options, but we are still away from that. We’re really looking at cementing the competitive position and the position of the company at this point in time. And strategically, we think that’s the most important thing.

Great. And then just a follow-up. Just wanted to focus on the margin side, on gross margin, near term, should we expect an uptick in the March quarter as you get the full benefit of the ruble in the quarter, and then perhaps may be gross margin starts to trend down afterwards, just given kind of a mean reversion? And then on the op margin side, you did say that we should expect controlled cost and tempered CapEx, should we interpret that to mean that there is still a leverage opportunity in 2015-2016 timeframe, or should we think more like 2012-2013 where your earnings growth was below your revenue growth rate?

No, I think we are still targeting an earnings growth rate at least equal to revenue growth rate. I do think that there’s probably a limited amount of leverage. In Q1, I think you just take the top end of the gross margin range still as being, if you get to the top end of the revenue range is a good proxy. Your point about getting some benefit out of the exchange rate devaluation and then potentially that diminishing less is actually a very perceptive one, but I don’t think it’s going to have a dramatic reduction in gross margin in the second half of the year. I think we are still targeting -- not I think we are still targeting to get into the upper half of that range and consistently remain there, if we can grow the business at a reasonable level. I do think that 37% operating margins, if you take out the FX, is a pretty -- we are very pleased with that. It’s a stellar number. We don’t know problems with it. And of course, you may see the odd quarter where you are above that, but sort of medium to long-term basis, that’s an operating basis that we would like to maintain. As is anywhere on the income statement, we are going to and we start to think about doing more work on this. It’s actually looking at our effective tax rate, but I’ve got no specific direction I can provide you on that time. It’s an extremely complex area. But if anything, tax is some area we could work on in the next 18 months or so. We may be able to drive a little bit of benefit out of that. This year continued investment in R&D is obviously as strategic direction we want to go in. There will be a little bit of leverage of G&A. I think it’s important to continue investing in sales and marketing given all of the different opportunities are out there, not just on the industrial side but outside of the industrial market as well.

Great. Thank you for the detailed answer. Good luck.

Thanks, Patrick.

Thank you. Our next question is coming from the line of Joe Maxa with Dougherty & Company. Please proceed with your questions.

Thank you. And good morning.

Good morning, Joe.

Good morning.

I was interested in a commentary about the U.S. auto market and the retrofit opportunities. It sounds like a big quarter in Q4. Do you expect to see more of that? Is that just the start of a trend? Or what should we be thinking about along those lines?

It’s an ongoing part of the business in the U.S. You remember that the U.S. business is not nearly as OEM driven as it is in the rest of the world, because they just don’t have number of systems integrated here. So it tends to be much more project-driven, particularly on the industrial side. And we add -- I think everyone was a bit worried in Q3, when U.S. revenue was weak compared to the previous year and I said that that was really just driven by the timing of projects. So we continue to work on many different retrofit opportunities. This was a good win. We expect new opportunities to arise not just over the next year, but the next three years or more. It’s difficult to predict when the volume of them will be -- the volume of them or when exactly they will arise. But this was a great win against one of our major competitors with the fiber laser against one of the stronger. Although we still think it’s a weak competing technology but one of the better technologies that tries to compete against us and that was -- it was a great result. But it’s not necessary they are going to drive a trend where you certainly going to see at this point in time hundreds of lasers on a consistent basis for retrofit in automotive in North America is still very project based.

In the U.K. they can mind it but laser penetration in North America in automotive market is still much less than in the Europe and Japan. So it’s lot of fluctuations here to grow the business fast in the U.S. and automotive than in other region.

And one more question I’ll ask is in the -- I would say, looking at the strong backlog and if you look at the geographic mix, obviously, strong China quarter again. Is the -- kind of that whole Asia-Pacific market growing in 2015? I mean, China probably slows down but do you have really that offsets in Japan and other areas?

Yeah. I think and we’re still targeting for a good year in China. Clearly, we’re monitoring what’s going on there very closely but there’s a significant pipeline of opportunities that exist there. There is upside in Japan. We’ve talked about this before both on the automotive welding side where we qualified with one of the largest manufacturers there. But also in particular on cutting applications where penetration of fiber into Japanese cutting is maybe at 10% to 15% over the next couple of years. The major cutting OEMs in Japan expect to go to a penetration rates equivalent to that, that’s been achieved in Europe and China. So it implies 50% to 60% of their systems will be fiber. So that’s one of the big upside opportunities in Japan. And in Korea, we’ve talked about that unique application there. The cutting business in Korea is starting to grow. So I think in Korea, there’s good opportunities on high-power. Many lower power systems in Korea now continue to be supplied out of China, so maybe a little bit more limited growth there. And then if we can get the newer product into the market, Korea is a big demand to some of the more advanced laser technologies and that will be a benefit in Korea over the next couple of years.

All right. Thank you very much.

Thank you. Our next question is coming from the line of Mark Douglass with Longbow Research. Please proceed with your question.

Hi. Good morning, everyone.

Good morning, Mark.

Tim, can you discuss the price and volume trends in fourth quarter? Typically, your volumes outpace your sales, price comes down a little. I’m wondering if ASPs are relatively stable, given there seems to be a real moving cutting applications towards even higher powers, 2, 3 kilowatts, now 4, 6 even 8 kilowatt systems. Can you talk about what fourth quarter is like as far as pricing volumes?

Pricing as we’ve said at beginning of the year has been much more stable. The need to reduce pricing about 15% or 20% to displace other technologies has gone. So what we saw on average like 3% to 5% reductions. Some of the benefit on cutting from higher power is starting to -- it's not meaningful yet, it’s really starting to come through on the ASP level if you look at the high power lasers but it hasn’t sort of driven ASPs up yet by 10% or so. I think that transition as you move to high volumes 6 and 8 kilowatt is a potential benefit to this year. In addition to sort of foreign exchange has started to offset some of that high power benefit a little bit.

Okay. And then looking at the 3D printing growth that materialized in 2014 greater than 100%, what’s the size of the business as we’re exiting ‘14? And does the pace -- continued pace in ‘15 or do you think it gets even better?

The size, I would say the 3D printing with the sort of the systems integrates primarily in Europe, so this is really medium power applications.

Right.

About $19 million, if you add on to that some of the most specialized high-power applications, the total additive manufacturing was closer to $22 million for the year. I think, in terms of total system sales, the market estimates are around 600 units this year. I think, it ramped to more than 1,000 units in the near-term as it’s still very much a possibility. And then if you go beyond that, if every single job shop or a vast majority of the job shops decided they need to have some 3D printing capability or additive manufacturing capabilities in metals then the market I think grows significantly beyond that 1,000 units per year. So I can't say that it going to accelerate. We don’t have too much data around that right now. I think we have to wait and see Q2, Q3, how things are trending and don’t forget a lot of those sales for the lasers are in Europe as well. So have a little bit of an FX headwind. I think unit volumes are going to be maintained with very strong growth. The dollar value sales may not quite accelerate, but we’re still targeting very strong growth for that area.

Right. Okay. Thank you.

Thank you. Our next question is coming from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Thank you. Good morning. I wonder if you could talk about the bookings in a quarter by region, I mean, it sounds like you had a -- you obviously had a bookings -- book-to-bill? Was it consistent around the various geographic regions?

Yeah. We had a book-to-bill was nicely about one -- wasn’t really any weakness out there. We had good order flow in the U.S. through the end of the year. Europe was despite some concerned about the European economic environment, Europe performed pretty well, Asia was good. I think, obviously, the area which is struggling a bit is Russia. But they set out quite a good revenue quarter in Russia, given all of the headwinds that they’re facing there. That was still just under 5% of revenue. But, yeah, if you look at the beginning of the years and said, where would you like to perform better before everything sort of got a bit more difficult, you would have said, maybe the Russian growth would have been higher, but then you also got the exchange rate which depreciated by 80% in the fourth quarter. So it wasn’t really any weakness on a specific geography, like you haven’t seen Europe fall out a bit, China hasn’t falling out a bit, you really know that.

Okay.

Now this year and last year, end of last year the fastest growth was in the United States bookings.

Got it. And as we look at, say, with your two months, almost two months into the quarter, any change in the trends in terms of what you are seeing in the markets, in terms of bookings activity?

No. The bookings rate through the first six weeks has been good. It’s up year-over-year and just about every geography. There is a good amount of order flow and backlog already for Q2. We’ve got, obviously, the next week or so China is on a holiday with China New Year, but China bookings have been really good for the first six weeks. No real change there. And Europe’s been strong even with the FX headwind. So we have no, no change really on that at this point in time.

Okay. Thank you.

Thank you. The next question is coming from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question.

Yeah. Hi. Thanks for taking my question. I have two of them, one, Tim, in the past you guys have spoken about use of fiber lasers and oil drilling applications, I understand that the environmental rules make it pretty slow to adopt. But given the oil prices, have you seen an acceleration in that using -- incorporating fiber lasers?

No. That’s still very much an R&D type application. So the Board -- for that application several lasers last year, Q3 I think we delivered some very high power devices, there’s probably ongoing R&D with that, very specific news to report on that question. And I don’t have any feedback as to whether how that, obviously, the significant decline in the oil price affects that.

Got you. Nice. And then a quick follow up, could you guys give gross margin guidance in the March quarter?

No. We don’t generally give the range. So we don’t give a specific gross margin amount.

Okay. Thank you.

Thank you. Our question is coming from the line of Jeremie Capron with CLSA. Please proceed with your question.

Thanks, and good morning, and congratulations on very strong results in last year. I wanted to ask first about your customer mix in terms of vertical industries that you serve? Are you seeing any shift beyond the emergence of additive manufacturing as a new end market? Obviously, automotive, historically, has been largest vertical industry that you’ve served and it sound like you have a significant customer wins there? I’m wondering if you are seeing any other shifts here?

Not yet. I think automotive is one of the largest and with the significant growth in cutting, you get and so much more diverse applications that some of the cutting laser is obviously going to be automotive. We called out some of the project wins as one customer that supplies multi-dimensional cutting systems there. But the cutting growth going into all kinds of industrial fabrication is probably a significant shift over the last couple of years. Additive manufacturing is now the fourth largest application. But the major shifts if you see anything happen will be more newer product introductions over the next couple of years. Lots of new applications coming to the floor with the industrial -- but they are all relatively small at the movement, so no fundamental shifts in that. Consumer electronics -- and that area was also a big part of the business, particularly at sort of lower and medium-power levels, where we are a very well recognized supplier into the major consumer electronics manufacturers. Again, a variety of applications, cutting of thinner materials, a lot of battery welding, a lot of other spot welding applications and I mentioned, we’ve talked about like the glass cutting, is a smaller application but it's a nice differentiator.

Okay. And looking at the cash flow statement for the year, I mean, it looks like you’ve got quite a big drag coming from the increase in receivables and you mentioned it in your prepared remarks. But I wonder if you could give us any more color on what's going on there. You mentioned the timing of revenues there but it's a significant increase and on the other hand, inventory days have comedown. I wonder if much of that is due to ForEx or there is a real reduction in your overall inventory management.

So on the receivables, I did point out that the timing of revenue in the quarter was fairly strongly weighted to December, a bit more than it had been a year ago. I will know -- on due concerns about receivables, we certainly didn't change any policy to make a revenue number here and I’ve seen how much cash is being collected in January. So you’ve seen some of that receivables turn already in January. In China, where there is some receivables outstanding, a very high percentage of that is covered with banknotes that do have a longer days collection. But we've been running those banknotes in China for the better part of at least two years now with zero touchwood losses on them. So, I don’t know -- it really is just the time on the quarter. And I think Jeremie, as you’ve got used to covering the company, you can see those days move around a little bit. On inventory, I clearly called out that we -- the inventory levels, if you translated inventory at the same exchange rates or the average rates that have been in place over the previous three months, the translated value of inventory would’ve been about $8 million higher. So, I am not trying to hide behind. The decline in inventory is being attributable solely to improved processes although there has been a lot of work done on inventory managements in the company. Some of that benefit is FX and I said in the script that it was about 8 to 9 -- $8.8 million I think. That would obviously be -- if you factor that $8.8 million, take your days up a bit, but it still puts you below the 180 days that we target.

Okay. Good. Thanks very much.

Thank you. Our next question is coming from the line of Mark Miller with Noble Financial Capital Markets. Please proceed with your question.

First of all, congratulations on another great quarter. Just was wondering -- the terms that you said, you had your green and UV laser under test. If all goals well, can you give us an approximate timeline or something, when we start to see these things shipping or being sold?

Really, it’s mainly product development. Many new products will enter this year. Some of them will enter in second quarter, some of them in second half of year. But certainly we expect this year it would be a serious contribution revenue growth by new product from point of new product.

Okay. Just want a little more color about this retrofit big win. Are you retrofitting from your previous lasers, your competitor’s lasers, what has been retrofit?

Competing lasers and then we also were competing against somebody else to get the business. So no, we’re not retrofitting our own lasers older technologies.

[Indiscernible] this is a solid state laser, which was implemented. It’s somewhat more large company. It’s installed five, seven years ago when that was replaced by our fiber lasers.

Most competitive one. Finally, can you give us an update on one major opportunities for seam steppers and the fabs, how is that going long in the auto assembly fabs?

Seam stepper.

Seam stepper had passed the certification test very successfully into top German major automotive companies and now it’s going to the mass use. Also in Japan, they started to test the major players. In the Japan also, it’s very successful also in other application other than what also we found is serious customers, also very interested to use this seam stepper, so a very serious future. But this market is very slow international, so conservative with our own way to do OEM business with this large company. They have to change technology in all the assembly lines, then change technology cycle typical between 10 to 18 years for these major assembly lines.

3D printing has come on very strongly. I’m just wondering what should be surprise for this year in terms of growth in one-year opportunities?

The real problem metal processing. In metal, parts growing, printing. Steel market, it’s not logical always, but 20 years development, it still market small. In plastic materials, growth. Metal, steel, it’s only prototyping small parts, some aerospace parts and so on, but it’s more to large market, this company major player in this market more of them German, it’s midsize or low size [indiscernible] companies. The most of them use our lasers. But now the major problem with that, much use would be speed of growth both increased factor of 10 and more. So it’s possible only by use of mode beam system and our trend to use more and more beams in each system is going from many of these manufacturer developers now use two beams. Some of that start to claim four beam, but the real evolution would be when it would be like many times beam in each system and there they can reach, but it needs very serious new development. We are working in the right direction.

Thank you.

Thank you. Our next question is a follow-up coming from the line of Mark Douglass with Longbow Research. Please proceed with your question.

Hello again. Tim, you said $60 million in CapEx for '15?

Yeah, approximately that’s the…

Approximately.

Yeah.

That’s a big drop. And then obviously you really reduced your CapEx the last two years. So can you frame what you’ve invested the past couple of years? How long of a runway does that get you going within years or years or sales dollars before you need to step up the investments again?

Now this year we’re finishing the round of the investment in new facilities everywhere in Russia, in U.S., in Germany. Now, that is. So we invested both inside development, also in building also equipment capital equipment. So we balance capital expenses more normal. For three years it was very critical for us. Now our facility can double -- minimal to double our revenue using this facility.

Okay. Thank you.

Thank you. At this time, we have reached the end of our question-and-answer session. I will now turn the conference back over to Dr. Gapontsev for any additional concluding remarks.

Thank you for joining us this morning. We look forward to speaking with you on next quarter’s call. Hope it would be also good message for you.

Great. Thank you, everyone.