IPG Photonics Corporation (IPGP) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to IPG Photonics' Second Quarter 2015 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. 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. Angelo P. Lopresti - Secretary, Senior Vice President & General Counsel: 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. These risks and uncertainties include those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2014 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section of IPG's website or by contacting the company directly. You may also find copies on the SEC's website. Any forward-looking statements made on this call are the company's expectations or predictions only as of today, July 28, 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'll now turn the call over to Dr. Valentin Gapontsev. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Good morning, everyone. First of all, I want to congratulate our management team and employees worldwide for a truly outstanding quarter. Sales grew 22.3% year-over-year, EPS increased 25% to a new record, margins expanded and book-to-bill exceeded one considerably. Revenues rose to $235 million as we continue to expand market penetration of fiber lasers in materials processing at growth rates that outpace the competition. Gross margin was 54.7% and EPS was $1.15, including $0.04 per share in foreign exchange losses. I'd like to note here that the year-over-year growth in the first half of 2015 would be higher considerably if to exclude the forced drop of prices of our major products in dollars due to 18% drop of exchange rate between euro and dollars. For example, in units, we increased sales of our kilowatt class fiber lasers by 40%, whereas in dollars it was fixed sales growth of 27% only. The same situation happened with mid-power lasers where we have 55% growth in units and QCW lasers, where we increased unit sales by 116%. IPG's performance indicates that our fiber laser products continue to displace CO2 and YAG lasers in many applications. In addition to the gains made by high and mid-power products, we have seen increased traction from our QCW product. We continue to gain sales over our competition because in addition to the already recognized benefits of fiber lasers, IPG has the scale to produce optical components and finished product in high volumes with very short lead times and also deliver exceptional service and support. We are extremely flexible and can respond to customer demand to produce devices for their specific application needs with increasing integration of optical delivery accessories, software and application know-how. We have a strong position in our core markets because of our technology and performance advantages. Our proprietary components and vertical integration provide us the best-in-the-industry cost structure. The scale of our manufacturing process is unmatched by anyone, even competitors who have been manufacturing fiber lasers since the early 2000s. We will not be complacent with our current technology. As other companies begin development, we continue to push the technology forward and raise the bar for the competition. Areas of development include new materials, new technology, new components, optical subsystems, more sophisticated electronics, software packages, new kind of lasers, output for optical accessories, perfect material process technologies, laser-based macro and microsystems, and wide range of new applications. For example, in materials area, we developed a new, highly efficient technology for growing nonlinear LBO crystals, unique zinc sulfate and selenide crystals doped by chromium and iron for the high power lasers in the mid-infrared range, perfect crystals for acousto-optic modulators, unique low index polymers for fiber cladding, new technology to make large diameter fiber preforms, efficient photorefractive glass for volume Bragg gratings and some new thin film technologies. These will form the basis for the development of new components, fibers, diodes to improve existing products as well as development of new products. I would like to take a moment now to address some recent news that one of our large laser customers in China has announced plans to develop fiber lasers. There have been concerns regarding the near-term impact on IPG. First and foremost, this company remains an IPG customer. Their announcement has not affected orders or our current relationship with them and we are confident they will remain our serious customer in future. As you may know, they are not our first customer or competitor to try to develop a fiber laser. Practically all our OEM as we know tried to make fiber lasers themselves. The long-term reliability, performance and price points that IPG offers have so far been unmatched by competition due to our continued investments in technology. Further, development of an internal supply chain will take others several years and is subject to many risks. We are now many generations beyond further limiting, we believe, the ability of the competition to catch-up. For example, two of our competitors have been manufacturing fiber lasers since the early 2000s. However, neither has been able to achieve significant share or match IPG's competitive performance during this time period. We have a robust head start on the competition, but we are also not standing still. We are currently and continually developing the technology for the next generation of fiber lasers demanded by the market, which we believe provides us with an important step up on the competition. We believe that announcements of our Chinese customer and others recently validates – and recently announced validates IPG's long-held belief that fiber lasers are the winning solution now and for the future. The acknowledgment of the benefits of the fiber lasers compared to the legacy technologies may actually hasten the displacement of CO2 and other conventional lasers by fiber lasers and create a larger opportunity for us to take market share. The total laser market was estimated to be $4.7 billion in 2014 with fiber lasers accounting for $1.1 billion, or about 23% of that market. Through 2019, fiber lasers are projected by modest analysts to grow 15% annually to account for 35% of total laser sales, which is estimated to be $6.6 billion market in 2019. I can say with confidence that IPG will be at the forefront of the expansion of the fiber laser market and we are in the best position to compete with legacy technologies and newcomers to the fiber laser field. We are strengthening our relationships in China with all customers and winning accounts from other fiber laser companies. IPG looks to expand its internal footprint as demand increases for its products and to better serve its customers globally. We have plans underway to establish new sales centers in Europe and South America and other locations over the next quarters. As our results indicate, we maintained our strong momentum in Q2. Our backlog, order flow and book-to-bill remain at strong levels in our three main geographies and we expect that to continue in the near term. We continue to be focused on gaining shares in our established materials processing applications, developing new product applications successfully that will expand our available market, and applying our lasers in novel applications beyond our core applications in materials processing. With that, I'll turn the call over to Tim Mammen. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Thank you, Valentin, and good morning, everyone. Second quarter revenue grew 22% to $235.1 million from $192.2 million a year ago. Materials processing sales increased 21% year-over-year to $224.5 million, accounting for approximately 95% of total sales during the quarter. The continued strong performance of materials processing was driven primarily by cutting, welding, and additive manufacturing applications such as 3D printing, where we expanded in many existing accounts and added new accounts. Sales to other markets, including advanced applications, telecom and medical applications, which accounted for approximately 5% of IPG's total revenue, increased by approximately 54% to $10.7 million. The increase was primarily related to medical and telecom sales and to a lesser extent, advanced applications. High-power laser sales, which accounted for 56% to total revenue, increased 27% year-over-year to $131.8 million. This growth was driven primarily by strong demand in cutting, welding and brazing applications. We saw demand from cutting OEM's expand and stronger growth in welding and brazing. In addition, we experienced an account win from a fiber competitor. Pulsed laser sales decreased by 1% year-over-year to $32.1 million. While pulsed laser sales had a slight decline, we continue to see growth in our high-power pulsed products with strong demand from marking and engraving applications as well as for cleaning and ablation. At the same time, we saw our recent pricing strategy in China for low-power pulsed lasers achieve success in both unit and revenue growth. Continued demand for fine processing applications, particularly cutting of thinner materials as well as 3D printing applications, resulted in medium power sales increasing 23% year-over-year to $26.6 million, or 11% of total revenues. Sales of QCW lasers, which are mostly used for fine welding, percussion drilling of holes and some glass cutting, increased by 95% year-over-year to $15.7 million and accounted for 7% of total revenues. QCW fiber lasers are displacing lamp-pumped YAG lasers at an increasing rate. Revenue from low-power lasers increased 21% to $3.7 million due to strong growth in medical applications. Sales of other products, which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems, and certain components, increased 40% year-over-year to $9.4 million, primarily as a result of higher telecom sales and sales for advanced applications. Service, parts, lease and other revenue, including accessories, totaled $15.7 million, a decrease of 3% from $16.2 million last year; including $1.8 million of deferred revenue recognized in this quarter as compared to $4.1 million of deferred revenue recognized in Q2 2014. Now looking at our Q2 performance by geography. Sales in Asia increased to $137.5 million, or by 35% year-over-year. Within that region, China sales increased 42% to $92.9 million. We saw strong demand from cutting, welding and marking and engraving applications. Further, we won an account from a fiber competitor for mid-power lasers and are pursuing growing our business with large OEMs and integrators there. In Japan, sales increased 28% year-over-year to $18.8 million as a result of demand from cutting OEMs as well as increased sales in welding applications for the automotive industry and heavy industry. Finally, Western Asia, which includes Turkey, continues to be an area of good growth with sales there focused on cutting OEMs. European sales grew 10% year-over-year to $70.5 million, driven by gains in cutting, sintering, welding and cleaning, and stripping applications offset by decrease in sales for marking and engraving applications and by some weakness in Russia. In addition, U.S. dollar reported growth in Europe was also most affected by the depreciation of the euro as we discuss later. We're pleased to note that during the quarter, we received a multiple unit order for our new 3-beam brazing laser from a European automotive customer and have strong interests from several other automakers. North American sales increased 2% year-over-year to $26.7 million, primarily due to increases in welding and telecom applications, offset by declines in marking and cutting applications as compared to a reasonably strong cutting applications performance in Q2 2014. Now working our way down the income statement. Gross margins of 54.7% were at the high end of our range of 50% to 55% as a result of the strong revenue performance and manufacturing efficiency. Sales and marketing expenses decreased to 3.4% of sales as compared to 4.2% of sales a year ago, while remaining consistent at $8 million in real dollars in both periods. As a percentage of sales, R&D expenses were down at 6.4% compared with 7% of sales a year ago. In real dollars, R&D expenses increased to $15.1 million from $13.4 million a year ago, as we continued to focus on launching innovative new products in order to maintain our technology lead. The increase in R&D spending related to increased personnel cost and increased cost of materials used in R&D development projects. General and administrative expenses decreased to 6.4% of total sales as compared to 6.8% one year ago. General and administrative spending increased to $15 million from $13.1 million a year ago. The increase in real dollars was primarily due to increased personnel costs as well as increased accounting and legal costs, depreciation and bad debt provisions. Operating expenses for the second quarter were $41.3 million, including a foreign exchange loss of $3.2 million, compared with $35.5 million a year ago, which included a foreign exchange loss of $0.9 million. Excluding the foreign exchange loss, operating expenses for the second quarter were $38.1 million compared with $34.5 million a year ago. The foreign exchange loss of $3.2 million related primarily to the U.S. dollar weakening against the euro during the quarter. The FX loss amounted to $0.04 per share. Second quarter operating income was $87.4 million, or 37.2% of sales, compared with $68.7 million, or 35.8% of sales, in the second quarter of last year. Foreign exchange transaction losses reduced operating margins by 1.3 percentage points and 0.5 percentage points in 2015 and 2014, respectively. Our tax rate in the second quarter was 30% and does not include any benefit related to potential R&D tax credits that might become available later in the year if the credit legislation in the U.S. is reenacted. Net income for the second quarter increased by 26.1% to $61.3 million. On a diluted per share basis, we reported $1.15 for the quarter compared with $0.92 a year ago. If exchange rates relative to the U.S. dollar had been the same as one year ago, which were on average €0.73 per $1, Russian ruble 35 and Japanese yen 102, respectively, we would have expected revenue to be $19.7 million higher, gross profit to be $9.9 million higher, and operating expenses would have been $4 million higher. Now, turning to the balance sheet. We continue to maintain a strong balance sheet, ending the quarter with cash and cash equivalents of $571.5 million and $22.3 million of debt including lines of credit. During the quarter, we repaid $11 million related to the remaining balance on one of our U.S. long-term notes. At June 30, 2015, inventory was $190.8 million, up 12% from $171 million at year-end 2014.Our current level of inventory on hand amounts to approximately 163 days compared with our target range of less than 180 days. Accounts receivable were $169.8 million at the end of the second quarter, or 66 days sales outstanding, compared with $143.1 million at December 31, 2014, or 63 days sales outstanding. Cash provided by operations during the quarter was $49.4 million. Capital expenditures for the quarter totaled $18.6 million. Continue to expect the CapEx run rate for the full year 2015 to be approximately $60 million to $65 million, excluding business acquisitions. In the second quarter, book-to-bill was above one. As we enter the second half of 2015, we remain focused on establishing partnerships with new OEMs and end users, deepening our relationships with existing customers, and developing the next generation of fiber laser-based products to address new markets and applications. And now for our expectations, we currently expect revenues for the third quarter to be in the range of $235 million to $250 million. We anticipate Q3 earnings per diluted share in the range of $1.15 to $1.30. The midpoint of this guidance represents quarterly revenue and EPS growth of approximately 21% and 17%, respectively, year-over-year. However, it should be noted that net income in the year-ago quarter included a foreign exchange gain of $0.05 per share and, excluding this gain, the midpoint of EPS guidance is equal to growth of approximately 23%. The EPS guidance is based upon 53,442,000 diluted common shares, which includes 52,657,000 basic common shares outstanding and 785,000 potentially dilutive options at June 30, 2015. This guidance is based upon current market conditions and expectations, and is subject to the risks we outline in our reports with the SEC. It also assumes exchange rates relative to the U.S. dollar of €0.092 (sic) [€0.92] (25:36), Russian ruble 57 and Japanese yen 124, respectively. I want to reiterate that we do not attempt to forecast transaction gains or losses related to changes in exchange rates. With that, Valentin and I will be happy to take your questions. Thank you.

Thank you Thank you. Our first question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question.

Hi. Thanks for taking my question. I have two of them. First one either Valentin or Tim, thanks for the clarification on the Han's Laser. I'm kind of curious, you did say that many of your OEM customers have tried to make fiber lasers themselves and I do understand it's a very difficult technology and that you guys have a significant cost advantage. So why do your customers still try to make these captive lasers when they learn from other folks that it's not that easy to do it or get any cost advantages? Valentin P. Gapontsev - Chairman & Chief Executive Officer: It's mentality of people typical with one of the OEM customers clearly (27:17) woven laser or (27:20) we have some worry about if their concerns, okay, we'll have some sales advantage, but it's not serious, practical. Second, it is also they hope to get some of the cost advantage, but we control the prices and we dictate this in our sales prices typical lower than the cost of manufacturing of such laser with some customer who are really making some prototype. And so they are much more expensive than our sales price.

Got it. And then as a follow-up, given all the noise around China both in terms of macro and how the market environment there is doing, have you seen any slowdown? And I remember asking you this question in the past, too, and you guys seem to be defying all the China trends. So I'm kind of curious A, have you seen any kind of change in China after a record quarter? And B, is it again a function of the fact that your technology is more replacing legacy technologies or is it the fact that the ASPs are pretty low? Thank you. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: So to-date, we have not seen any change in order flow out of China. We had a very good quarter and guidance includes another strong quarter from China. So, right now, with all even the economic uncertainty out there and all the noise, we are not really seeing any changes around demand patterns. I think you continue to see local suppliers in China gain traction as well as a diversification of the application set and displacement of traditional technologies with lasers. I've talked previously about the desire of Chinese manufacturers to come view it as more high quality manufacturing. And I think that trend continues to take hold. There's a lot of R&D that's going on not just around the cutting applications that are well developed, but in more advanced welding application, some of the most advanced 3D printing applications we've seen has happened in China. So that thesis around improving the quality of manufacturing, increasing drive towards automation using robotics also helps laser sales. So we think that continues to provide the momentum that we are seeing in China.

Got it. Valentin P. Gapontsev - Chairman & Chief Executive Officer: (30:00) some increasing problems. There is many manufacture work for new technology to improve this position in the market. So even it's not for the mix shift, it's the total drop of economy with sales of high-technology product.

Got it. Thanks, Valentin. Pretty helpful.

Our next question comes from the line of Mark Douglass with Longbow Research. Please proceed with your question.

Hi. Good morning, gentlemen. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Hi, Mark. How are you?

Good. Tim talking about automotive, so can you walk around the globe? It sounded like – I think it's good everywhere, but can you describe some of the developments in automotive and where they're investing and how they're investing? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Yeah. Demand from the automotive all round the world continues to be good. I think our penetration into both the end manufacturers and Tier 1 and Tier 2 suppliers is very strong. It's across the usual applications as well as the more specialized applications, the cutting applications for 3D, which one of our OEMs supply, the welding applications we've seen good traction out of. And then we started to get orders for these brazing lasers in Europe and have got many different people evaluating that product. We mentioned in Japan we're seeing good demand out of welding applications as well. There are some slightly lower volume much more advanced application. We're seeing people using the lasers for structuring, for example, the internal cylinder chambers to improve fuel efficiency and reduce, I think, its friction between the piston head and the cylinder. So you can get down to some very specific and very specialized applications as well. Some of the welding applications are going into the air bag detonators too. So we're helping to solve some of the problems that have been encountered in that industry. So it's a pretty diverse and continues – I think we're actually sort of seeing some additional traction on the automotive side. People are starting to re-appreciate the value of the lasers and I think our competitive position particularly with regard to the main manufacturer in Germany has been strengthened over the last couple of years. I think people – if you go back two years, were giving some weight to the main competitor in Germany where as we think now where we're starting to gain some additional – over the last few years have worked very hard to gain back some of the traction with everybody around the world.

Okay, that's helpful. On the brazing orders in Europe, is this – are these new platforms that are transitioning to brazing or is this substitution of other brazing lasers that are already in place? Valentin P. Gapontsev - Chairman & Chief Executive Officer: The conventional lasers control a very serious problem with new materials and so on for braze quality was very critical. We develop what they ask us to develop. We helped them after many attempts before to make their sales force with added partners and we very shortly developed an excellent technology for brazing which resolved all their problems. So it's fully qualified, now we started mass use in all production line. In other case, the brazing market now know about this result and also start asking us to test and are extremely interested in this new technology, new patent technology. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: So the existing product lines and existing platforms, it's not just waiting for new platforms.

Right. Okay. And then finally, Seam Stepper, how is that working in the quarter and the year? Valentin P. Gapontsev - Chairman & Chief Executive Officer: Well, also now we are past qualification – and now we've started the process of mark our OEM purchase, before it was only the shipment for test with a few units now although we are starting to see real OEM business with Seam Steppers.

Right. Thank you.

Our next question comes from the line of Joe Maxa with Dougherty & Company. Please proceed with your question. Joe Maxa - Dougherty & Co. LLC: Thank you and congrats on a nice quarter and outlook. Question I have is – it's a pretty big step-up in revenue, let's say, over the last four quarters, Q2 and then Q3 going up to perhaps as high as $250 million, talked about a lot of new applications, lot of strength, but I am wondering if there is a few that are really driving that growth – that big growth from let's say the $200 million level up to perhaps $250 million? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: It continues to be the – probably the four main applications primarily, cutting, welding, brazing, additive manufacturing clearly is growing very strongly this year and marking and engraving while it is not growing strongly it continues to be a very, very significant application for us. The other newer applications like cleaning and stripping are still relatively small. They are sort of 1% or 2% of revenue and still represent significant opportunities in the future. So the additive – the deposition as well as the ablative process is still really starting out. Some of the microprocessing applications continue to be small, Joe. So this growth is really being driven around the core applications and we still have to benefit from significant demand traction on newer applications that we continue to work on and develop with customers. Joe Maxa - Dougherty & Co. LLC: And so what's the growth in the core? Is that clearly driven by increases in technology efficiencies? More lasers being qualified at various customers and that's really what we are thinking about when we're saying driving by the core? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: I think it's just the acceptance of fiber laser technology around all metal processing within materials processing and that's enhanced by all of the advantages that IPG has both in terms of the scale of manufacturing, short lead times that Valentin talked about, the efficiency of the lasers, the technical advantages of the lasers, our worldwide service and support in which we've invested increasingly. The other areas that we're also investing in the optical delivery systems, which makes the supply chain more simple to the end user, increasing investment in know-how around, for example. Now if you look at the brazing application, the know-how for the application there, not only the laser, but the know-how around the application was developed internally at IPG. So as you deepen your integration across all of these different areas, you are developing and enhancing and strengthening your customer relationships and we're doing that we think very, very well at the moment. Joe Maxa - Dougherty & Co. LLC: That's helpful. Thank you. Last thing I wanted just to note that or have you discuss a little bit about the fourth quarter. I know you provide guidance but last year fourth quarter was higher than the third quarter, which is different than the prior three years. Can you talk to what maybe drove that and/or is that something maybe we see again? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: We really don't get into discussing Q4 at this point in time. Q4 last year was benefited by very strong U.S. sales. So you'll remember we had 350 kilowatt lasers that shipped out for advanced applications as well as lot of automotive projects. There was a high volume cutting project in the U.S., funding up a lot of the automotive projects this year and sort of there's some large welding orders that are actually falling into Q3. So the U.S. which has not performed year-on-year very well in Q2 I think it was better in Q1, is going to have a very strong Q3. There's one 50-kilowatt laser that's probably going to ship out in Q4, it may now be Q1. There's some other advanced application orders though that are coming in Q3 this year in the U.S. So we got a couple of orders in June. So, it's a sort of project nature of that in the U.S. So I mean that's the color I can give you around what happened last year and what we expect in Q3. It's still way too early to talk about Q4. Your order flow in September and October, it's going to drive that, the bottom-up bookings forecast that we reviewed within the company which goes out several quarters continues to be robust and strong. So we are not seeing any fundamental changes to the business. Joe Maxa - Dougherty & Co. LLC: Thank you. Valentin P. Gapontsev - Chairman & Chief Executive Officer: We expect very strong Q3. we expect very strong Q3 and our book-to-bill rate is still much higher than one saw and we will see what will happen in the September/October. Joe Maxa - Dougherty & Co. LLC: Great. Thank you very much.

Our next question comes from the line of Patrick Newton with Stifel. Please proceed with your question. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Yeah. Good morning, Valentin and Tim very solid results. And thank you for taking my questions. One is that I wanted to clarify, Tim; did I hear correctly that China revenue was $92.9 million in the quarter? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: Yeah, $92 million odd. I can't remember whether it's $99.9 million – yes, $92.9 million-plus. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Okay. So, I guess, just focusing in on that I think you answered earlier question on Chinese demand that you are not seeing any type of slowdown at all despite having, I guess, a significant number of infrastructure data points that have definitely been coming under pressure. And I think you said that the main reason is in essence China focusing on becoming high-tech manufacturing. But I guess, as you sit here today and you just printed your fastest year-over-year growth in China in roughly two years, do you have any creeping concerns at all maybe that cutting penetration in China is higher than in other markets so that could lead to slowing growth, that sell-through of auto is showing some signs of fatigue, that household softness could pressure white goods, any creeping concerns there at all from your end or do you see this acceleration in China as being sustainable? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: You know, I've said within the Q3 guidance, we continue to have a strong number from China within that guidance. We've continued to see strong order growth year-over-year through the second quarter. It's being driven by the materials processing and manufacturing areas. I think the cutting business in China, as I mentioned, is strong because the OEMs there continue to develop and sell equipment directly into the market and are gaining share. I think we've always said that the share of the cutting business in China has been relative, for example, to Japan and even a little bit relative to Europe the penetration there has been high because they were very early and fast adopters of fiber laser technology. In addition to that the growth has come from some of the medium-power lasers for fine metal cutting that's being driven by consumer electronics and batteries. So that's a, sort of, worldwide demand phenomenon rather than just China based and that's the medium-power. And then the QCW lasers also performed very well in China driven by displacements of YAGs so that's more of an adoption story around the welding side. And interesting even though pulsed laser sales were flat to a little bit down on the consolidated level. In China, our pulsed laser sales were actually up about almost 10% on the back of the aggressive pricing and new product introductions that we had there. So, I mean, I see the same data on the macro side that you see about China, and we continue to monitor that closely. I've always said that what I follow is more the availability of liquidity in China with regard to our business in the near to short-term and that's the sort of insights I can give you around our view on China. Valentin P. Gapontsev - Chairman & Chief Executive Officer: And I can add only that, for example, our cutting business, the biggest OEM customer not in China for cutting business. So they are not currently the number one from our OEM customer in cutting application. It's now a fast-growing application. We have the orders in – for cutting in Japan. They started to replace CO2 for fiber much later than other people, but now they are becoming very aggressive with not one of the group of OEM customer. The biggest customer for OEM we have in Europe not in China. Secondly, for example, replacements (42:49) five years ago, we introduced QCW laser was extremely fantastic laser compared to the flash-pump YAG and so on but China was the most many years tried to hold and use own YAG lasers, Han's and others were major manufacturers. Now practically we see they come to QCW and start mass order for QCW laser. They are starting use own YAG lasers produced in-house all of them. And this year we have for half of the year we have already in units sales of QCW laser for 115%, but the booking much, much larger, so we expect to grow sales of QCW lasers many thousands this and next year. Then we'll come with our new recourse (43:50), one of the major recourse (43:52) in our business. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Okay. Thank you for the details. Valentin P. Gapontsev - Chairman & Chief Executive Officer: And we don't have any constitution with QCW laser at all Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Thanks for the details. And I guess just as kind of a follow-up to that. If we take inverse of the China strength and we look at your entire revenue outside of China, the growth rate here has kind of been stuck in the low teens now for about five consecutive quarters. And I think in the answer to the last question Valentin just brought up that, your largest OEM is actually in Europe and not in China and he also talked about some cutting strength in Japan. I am curious even given those kind of dynamics is there something fundamentally that's going on outside of China as to why the growth rate is kind of in the lower teens? Is that more function of cutting penetration or is that is a function of what you touched to, Tim, that some of your Chinese OEMs are actually gaining some share? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: No. I think that that's a very basic question to answer. First of all, Japan, this last quarter was almost 30%, so 28.5% year-over-year. Japan can be a bit volatile quarter-to-quarter given the way they structure their financial years into the two six-month periods. We got another big order in Japan for cutting applications which points to continued good growth on an annualized basis there. The European question is very easy to answer. It's the exchange rate. So if you look at that $19 million impact on the top line, probably 90% of it is out of Europe and would have been on the high power lasers in Europe. So whilst you reported 10% growth in Europe, the underlying growth Valentin mentioned in units what it is but excluding that exchange rate impact, the growth in Europe is substantially above probably 25%. So the exchange rate is affecting things most predominantly there. In the U.S., we mentioned, for example, like cutting sales here were a little bit down and then there is a volatility because U.S. is not an OEM market, it's much more project driven. Some of the cutting sales in terms of equipment coming into the U.S. is coming directly from Europe. So lasers are being bought in Europe and Japan, and equipment being shipped in here. So you can't look at the U.S. sales just on the devices that are shipped in here from the OEM perspective. I would like to see, obviously, the U.S. growing a bit stronger than the 2% it did last quarter. We're going to see that growth in Q3, but it's a bit more difficult to predict just because of the project driven nature of it and the more diversified business that we have here around advanced applications, telecom and the medical side of things as well. So its bit more less predictable in terms of just straight line underlying growth. But really the European performance is much better than the 10% that we showed here just given the exchange rate. Valentin P. Gapontsev - Chairman & Chief Executive Officer: In America, we expect fast growth, now in Mexico, Canada, now in Brazil. In Brazil we are now creating very flexible infrastructure project. We expect during next two, three years we will have very serious growth, very fast growth sales in Brazil. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: And Valentin in an answer to an earlier question on Han's Laser, you had made the comment that I guess the question was saying given all the barriers to entry and all the failures of competitors trying to go head-to-head IPG, why would a large customer announce their intention to try to vertically integrate? And you gave some answers, but I'm curious is, do you think there is any concerns by your customers that your system strategy and your systems business is going to eventually compete head-to-head with them in their core markets, and that's what's driving them to seek vertical integration? Valentin P. Gapontsev - Chairman & Chief Executive Officer: Well, of course, some of them worry about this, but it's not serious. We never will destroy business of our OEM customers. We're working with our system strategy for new application as these OEM customers see that it's not working at all today. So, for us, no sense we compete for them, for example, with cutting business except in some – except some small area when the area we're not working. We develop excellent new application, for example, we're reaching – now in Russia with good result, with oil industry, we'll hope it would be a very serious, very large business with oil not only in Russia but also worldwide. We develop excellent system now in field trials, very successful and so it's a very large business we expect next – starting from next year, even fourth quarter this year, we'll expect very serious order, multi, multi million orders in this year end. It's only one example of new project win. We never compete any of these OEM – compete with any of our OEM. Patrick M. Newton - Stifel, Nicolaus & Co., Inc.: Okay. Thank you for taking my question.

Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question. Jim A. Ricchiuti - Needham & Co. LLC: Hi. Thanks. Good morning. I was wondering if you might be able to size this opportunity for the three beam brazing application that you are having some traction in the automotive market. Is there – is it too early to size that? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: I think it is a little bit too early to be able to size it, Jim. As we said we've got some initial orders from one automotive company and other people are evaluating it. I don't know whether it's going to be a – do you have any idea, even it's like a 100 units a year or 200 units a year for brazing? We just don't know at this point in time. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Brazing, it's a large business. It's a large business and so on. Before they use from the diode systems for these but were very – lot of problem with the quality. It's very serious problem and we resolve of this problem, but today – now it qualifies (49:52) in the major, largest of the customers, open door for application for all the factories worldwide and the others also looking to use this. So we expect sales of only brazing lasers would be many hundred units per year. Jim A. Ricchiuti - Needham & Co. LLC: Okay. Valentin P. Gapontsev - Chairman & Chief Executive Officer: But brazing is only one of the application. Now with our credibility and connections in the automotive market, we improved our margin. Now (50:28) or the customer – major customer opened door for us, working with us, we now understand where they have problem and the very value that we needed (50:40), very shortly able to resolve this problem. And new request for us new application automotive, now they are going to us, asking us help us because for many other ways they try to resolve before, now they don't have a good return. So now we were friends with many major customers. Before we work only – nobody allowed us to come inside production line and so on. But only working inside together with the real – operator manufacturer, you are able really to see where you can help, how to help, and solve/resolve the problem. Now we absolutely see a different situation, our connection in cooperation with major customer in Europe, in Japan, and so on. So it's been absolutely new situation. Jim A. Ricchiuti - Needham & Co. LLC: That's good color, Valentin. Thank you. Additive manufacturing, the 3D printing market, I think in the past you had talked about it perhaps generating as much as $30 million of revenue this year. Is that still a way to think about that or is the market for you accelerating? Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: I think still the run rate through half year is slightly above $30 million. So that still represents more than 50% growth compared to last year. So we are right on track with the numbers that I have given. I still think that the market probably can grow in terms of applications in the near term $50 million and then it will depend upon, beyond that, how much volume manufacturing is really developed around the additive side. So we still view the metal processing aspect of that to be ultimately a very significant contributor to the industrial market, Jim. Jim A. Ricchiuti - Needham & Co. LLC: Okay. Valentin P. Gapontsev - Chairman & Chief Executive Officer: We're working – in this application, we're working by two way. One is to sell – just sell our own lasers for existing system manufacturers, integrators, most of them buying other laser is growing, the demand growing where we see during these two quarters a lot of new orders and large volume of each order growing. But from other side, we develop new application and new technology in this area when we develop full process starting from technology, hardware, software and so on. It's a long process and not one quarter. So it takes few years. But we have preliminary good result is the reaction we develop for some application, more than – of about 10 prototypes for new solutions. And we're working together with very serious partners, which means very top, very large industrial companies in the U.S., in Europe, and in Russia. So we believe with time we'll introduce new, much more perfect, more efficient process with them, and we'll provide system solution. Prototype level and we're selling some prototype. I don't – I'm not able to mention company, but a top Tier 1 company in the world.

Our next question comes from the line of Jeremie Capron with CLSA. Please proceed with your question.

Thanks. Good morning and congratulations on your continued strong performance. I wanted to ask Tim about the margin trajectory. Obviously, you're trending towards the high end of the target range for gross margins and we're seeing good operating leverage here. Could you comment on what we should expect as your volumes continue to grow? Orders seems to be very healthy here and also tie this into your pricing dynamics, how the average selling price is falling in recent months. Thanks very much. Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: So we're not providing any change to the margin profile in terms of like gross margins. We still think that the top end of the range of 55% is reasonable. It still fits with the overall strategy that we have to drive increasing use and penetration of lasers into many different applications. As usual, you will have puts and takes around gross margin. You will have some probably pricing pressure at the lower end of the product line. We've seen that with pulsed lasers and that will – that pricing pressure on those products would reduce those margins slightly. And then you've got new product introductions at the higher end of the line that will improve your gross margins. You've got transitions in cutting lasers that continue to move up power level that should benefit margins a bit and the new product introductions in micro processing and the optical heads and other areas. So it continues to be a strategy that's not driven by driving gross margins up to 60%, it's a strategy that's driven by driving laser adoption into existing and new applications. In the third quarter, the top end of the range, if you build your models out, it would assume that operating margins are quite high. They are above the sort of underlying 38% that we had in Q2. But you have to remember that we are now continuing to invest on, for example, the selling side we mentioned that we are going to open up some new sales offices around the world. So we need to continue to invest on those operating expenses, on selling, on R&D and continuing to invest on G&A. So I don't expect operating expenses to continue on a downward trajectory. This is a complex business. We have operations all around the world, and we need people on the selling side, the application side and the G&A side to support all the work that's done to bring new product to work to market on the R&D side. So, you may see, as I have always mentioned, very strong revenue quarters made from time-to-time left operating margins above sort of medium-term trajectory that we estimate. But, overall, we don't see any fundamental shift in the business model nor are we targeting one at the moment. We're very happy. We think the business model is basically stellar.

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.

I was just wondering an update on some of your newer opportunities. I think you mentioned stripping was rather small, but what about 3D printing? And I apologize if I missed this, if you give us an update on the UV fiber laser? Valentin P. Gapontsev - Chairman & Chief Executive Officer: UV fiber laser, we didn't make a great development there, but still – now we still – we started to sell such lasers. But most of them are still in a stage of verification testing and certification. So, we lifetime test and so on. But principal development are going extremely well and really we'll soon introduce market family of such lasers for different application. Very different, very much more efficient, compact and reliable and also much cheaper than existing market. So this way we hope to become major player in the market niche. We developed this perfect technology for non-linear crystals and more bigger programs from point lifetime the year which it's sold (58:56). Now with this technology with so much production in Marlborough, Massachusetts, crystal growth and processing center, we really hope it would be (59:09) not possible to make (59:10). Timothy P. V. Mammen - Chief Financial Officer & Senior Vice President: And then just on the additive manufacturing, Mark, we had mentioned that the run rate on sales was about on a – above a $30 million a year basis and that represents more than 50% growth compared to last year. And Valentin gave some color on additional additive manufacturing work that's going on. Most of the other applications tend to be 1% or 2% type applications. There is an increasing diversity of them. The cleaning and stripping has become more of an OEM business in the last year than it was in 2014, for example, it's still relatively small. The cladding business continues to grow some of the industries we served there, for example, the oil and gas industry. The aesthetic applications have continued to perform well. That generally tends to be a function of actually a positive signal on the economic growth. So, people tend to use the dermatological and the aesthetic side of things when the economy is looking a bit stronger because they've got money to spend. We are seeing also good sales in Asia because our lasers function well there. So there's a diverse – an increasingly diverse set. The drilling application, for example, that's going pretty well this year. It's still relatively small, but it's a couple of million dollars a year.

Thank you. At this time, we have reached the end of the question-and-answer session. I would now like to turn the conference back over to Dr. Gapontsev for any closing or additional remarks. Valentin P. Gapontsev - Chairman & Chief Executive Officer: Thank you. Thank you for joining us this morning. We look forward to speaking with you on next quarter's call.

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