Greetings and welcome to IPG Photonics' first quarter 2016 financial results conference call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Angelo Lopresti, Senior Vice President, General Counsel and Secretary for IPG. Thank you, please go ahead.

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, 2015, 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, April 28, 2016. 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.

IPG reported revenue and EPS in-line with our guidance for the first quarter as we continued to execute on our long-term growth strategy. Revenues of $207.2 million increased 4% year-over-year or approximately 7% on a constant currency basis. Furthermore, EPS was impacted by losses related to foreign exchange. First-quarter 2016 EPS of $0.92 included $0.07 per share related to foreign exchange losses, compared with Q1 2015 EPS of $1.08, which included $0.11 foreign exchange gain. First a few remarks on applications last quarter. Worldwide, cutting sales continued to grow, particularly in China, Turkey and North America. While welding was a bit weaker this quarter overall, we continue to see expanding opportunities in brazing and for our laser seam stepper. In addition, we developed a tri-focal welding laser for zinc-coated steel and aluminum. This solution resolves the problem of welding zinc coated sheets without a gap between the metal at first. Furthermore, we have been qualified by a major automotive firm for all of its transmission welding projects. Three other firms have qualified us for powertrain welding applications. These customers previously used CO2. As a result of these opportunities, we expect welding sales to improve this year. Currently our lasers have passed a qualification for many welding applications in aerospace, gas, oil, railway, and other industries, including use in the field conditions directly. For example, one of our tier one space rocket makers already uses our 30kw laser for the welding of their rocket body. As we know, such rockets have been launched into space already. For the other space rocket maker, we have shipped a unique completer portal laser station for the highly precise 5D cutting and welding of large scale shell parts for the new international space station. In the oil industry, we have overcome a symbolic milestone by…

Thank you Valentin and good morning everyone. First-quarter revenue grew 4% to $207.2 million from $199.0 million a year ago. Materials processing sales increased 3% year-over-year to $198.2 million, accounting for approximately 96% of total sales during the quarter. Within materials processing, sales for cutting applications continued to grew at a double digit rate and we started to see increasing demand for higher power lasers for this application. Several customers have launched their new cutting systems using lasers with 8-kilowatts or more of power this year so we expect that trend to continue. We also saw an increase in high power lasers used for additive manufacturing as Valentin mentioned. Overall, growth was partially offset by timing of automotive and other welding orders and lower orders for marking and engraving sales. Sales to other markets, including advanced applications, telecom and medical applications, which accounted for approximately 4% of IPG's total revenue, increased by approximately 30% to $9.0 million. The increase was primarily due to strong performances in advanced applications and telecom. High-power laser sales, which accounted for 57% of total revenue, increased 3% year-over-year to $118.2 million. Double digit growth in cutting applications was partially offset by a decline in welding related to the automotive industry which we believe is primarily due to the timing of projects and orders as we expect welding sales to improve over the remainder of the year. Affecting the comparison this year is that we benefited from several million dollars in revenue last year from a one-time order for a novel surface patterning application as well. We believe that we are at least maintaining market share as evidenced by the fact that total kilowatts of high power lasers increased by approximately 17% from Q1 2015 to Q1 2016. In part the difference between revenue growth and…

Thank you. At this time, the floor is now open for questions. [Operator Instructions] Our first question is coming from Patrick Newton of Stifel. Please proceed with your question.

Yeah good morning, Valentin and Tim, I guess a clarification before I get to my questions. Tim, I think I missed your quarterly pulse laser revenue and other revenue, if you don't mind repeating that for me?

Let me find it for you Patrick. Pulse revenue decreased 4% year-over-year to $28.6 million. Other revenue increased 35% year-over-year to $26.2 million.

Wonderful! Okay. Thank you. And then just getting into my questions, I guess, on the growth side, we're taking down the full year expectations, can you help us understand what changed? It just seems that China was a positive surprise in the quarter, the welding seems to be soft. You multiple times cited timing, so it appears somewhat temporary. So, can you help us understand the delta as you sit here today relative to entering the year?

Pat, I think you are right. There is positives and some negatives. China is performing well. North America is performing well. Japan is probably weaker than we wanted to be. I think when you start the year with a slightly weaker than expected quarter and you've got the drag on foreign exchange potentially affecting us a little bit more than we expected and then Q2 guidance being a bit lighter than we wanted to. The math simply - part of it like you have to look at the numbers and you're going to have to see a very large increase in the second half of the year in order to achieve that top end of the range. So we feel that it's prudent to give a wider range given those dynamics that exist today. So, it's a bit of a mixed bag and there are positive and some negative things out there. The welding side we do expect to improve. There is for example several significant orders for welding applications that should be delivered in Q2 and then we're expecting, as we mentioned, the qualifications from one company where we qualified for all of that transmission welding that should start to run, not just this year, but hopefully over the coming longer term as well. So I think it’s been a difficult - when you start the year in a difficult way, it’s difficult to make it up dramatically.

When we're talking well within the [Indiscernible] applications, but [Indiscernible] automotive due to some problem, troubles with some of the core automotive company had to [Indiscernible] and so on. But the implementation, our new brazing and the drive focal welding and other technology go in very well [Indiscernible] in the automotive next quarter. But we know our quality [Indiscernible] I mentioned some of them would be very volume application with much higher yield and profit margin than for automotive and so on. We are very optimistic for our welding business in near future.

And I guess for my follow-up I want to stick to the growth thought process. I think looking into 2Q and 3Q, investors were expecting strength from consumer electronics product refresh from a large industry player and then also I think there's an expectation that cutting OEMs in Japan will start to more aggressively move to fiber. So, I guess with the soft 2Q guide, are those two drivers perhaps coming in below expectations? Are they solid but offset by weakness in other areas? Or should the anticipated benefit from Japan and consumer electronics to be more of a 3Q phenomenon?

So on the consumer electronics side, you never get significant lead time on any of the - the lead time has given a very short, so the visibility into that is very limited, but the expectation is still there. On the Japanese side, one of the dynamics I mentioned was the two or three things actually, first of all there are significant orders placed by one of the main OEMs in Japan, which is expected to be ramping in demand probably more now in Q3. The other dynamic on Japan is that some of the demand from the Japanese cutting OEMs is actually driving improved performance in North America. And there is also a significant welding order from one of the major Japanese automotive companies that is being placed in North America as well for deployment in North American factories. That business was developed by our Japanese groups. So, you have to take that into account a little bit. That would how I’ll characterize the Japanese situation there.

Consumer electronics, we probably use integrator, we want to supply them laser, but now we are working diligently with some of the major customers in the field. Diligently we opened - one of them joined laboratory in California, so it’s a process in development. It’s a new process, but these customer along the biggest and largest customers in market. It’s all going very well, so not with - well, some others also working with better field and other field, so really it’s a new you process which indicates we’re working even to supply diligently full [Indiscernible].

Great and I appreciate the details. Thank you. Good luck.

Thank you. Our next question is coming from Joe Wittine of Longbow Research. Please proceed with your question.

Hi. Thanks. Good morning. In automotive, you addressed what's happening in welding, but in core cutting activity there seems pretty good. So, maybe expand a little bit more on your expectations or activity, let’s say, relative to investor concerns there were “peak automotive investment.” Are you still confident that fiber remains a strong priority in ongoing automotive investment? Thanks.

In general, yes, I mean there are many new applications being developed. On the cutting side, it’s very difficult to get direct information on how much is going into automotive, because you sell through the integrators. In general, we referenced the cutting demand by the total market. So, the fact that that business continued to grow at double digits and continue to pick up market share for cutting and continues to be the trends towards higher power lasers. It's a big benefit. And then on the other side of the automotive, we’ve already mentioned [Indiscernible] joining or cutting, right, so you’ve got the new trifocal system for welding of zinc coated steel that complements the brazing system that's been introduced. You've got the transmission win, so of course within automotive, the move towards lasers in total continues to be relatively slow and as Valentin mentioned, you’ve got some issues that some of the largest manufacturers are facing, with the trends continue, we don't think there's an underlying change to that trend.

In automotive, there is now the situation is, we practical [ph] all major carmaker, each of them [Indiscernible] component parts manufacturing is not great. A couple of years before it was sensed, but now 150 to 250, laser for one customer. It’s practical all major automotive markets. Now the ways are fully qualified by all these customers with major products for such as they use in [Indiscernible] we are sure they will use our laser definitely for these. But the problem is automotive, now they don’t - a few of them went into built new factories and current factories they don’t have problems in the production line. They use all technologies, they don’t change technologies much better - with technology much better in my product, but nobody look into invest in this. But we’re looking now at our positive influence, we started to work with customer, new car maker with electrical car who’s now building, started to build new factories. New factories is always [Indiscernible] for production, typically in market for the automotive [Indiscernible] but not by 100, but by 1000 lasers to cut.

Helpful thanks and then as my follow-up on the new diode development, can you talk to just practically and also financially, so first when is the timing of when you’ll ship and help us understand whether the benefit you're seeking is more cost and yield or more performance and, Tim, along with it on the financial side, can you address whether we should R&D dollars, I would assume rising throughout the year here along with sales at least?

We introduce new technology, new generation technology in the high-power laser, it includes new diode, new fiber, much more efficient, new fiber blocks - new alternate solution. It will present value power practical for one chip, new chip will grow 50%, even 70% per higher than before with [Indiscernible]. So as a result, we can decrease - drop the cost, additional we each year break 15% to 20% cost of our major products. Now, we would be able to make even much better selling and so our profit and so it will allow us to control pricing and not allow us –people to get more share of market, from the other side our margin will grow additionally. You might really watch [Indiscernible] multi ten million dollars additional profit only due to drop of our current product.

Tim, if you could just the cost side too, then I’ll follow up. Thanks.

We are not going to give anything specific on that yet. This development is just going on. The best way to reference this is with regard to the average increase in power that we're targeting, which would be 50% to 70% as Valentin mentioned without a significant change in the material cost of the chip. So you'd expect to see, I’ve done the math in my head, but that drives 30% to 40% decrease in average cost per watt.

That’s helpful. I mean more on the modeling side, should we have R&D scaling along sales as we go out throughout the year here?

No, I think R&D at the moment is pretty much fully baked in. There was a lot of cost that went into R&D both on materials and the diode cost allocations in Q1. So, we're not expecting that to ramp dramatically at the moment. There's a lot of activity that happened in Q1.

Thank you. We move along to our next question from Tom Hayes of Northcoast Research. Please proceed with your question.

Thank you. Good morning, guys. Tim I was just wondering you guys talked about the growth in the power level of lasers and additive applications. So I just wondering if you can talk about what are the average kilowatts going into the applications are now and so what is your expectations for that market?

You know with cutting for example, only people use - what was the most people used kilowatt power then we provide them about 20 tons or 4 kilowatt. Now the - half of customer start to use 6 kilowatts OEM customers and had them also dynamical than the ton –he 8 kilowatt power at one cutting station. We provide them now, they’ve also opened up our uses 10-15 kilowatt laser. We still trade them with very big win with that cutting with so high power.

On the additive side Tom, people are transitioning from 500 and 700 watt lasers to relatively low power on the kilowatt scale one and two kilowatts, historically we have had some customers buy lasers as high as 10 kilowatts and power for that additive applications, so that transitions are only just really starting.

Okay market size you think for that, I mean you talked about before has that changed at all?

Within the additive total additive markets, I think fundamentally changes the additive market, the moment it probably reduces some of the consumption of the lower power lasers because it makes the more efficient and effective to produce system using the higher power.

I think if you - market is not to address 3D printer is people on distance, it’s a lot of Collagen and others [indiscernible] powder so on to make protection and collagen of these many to a large part. Its market is much more collagen - it’s 10 times more than narrow 3D printing for [indiscernible] But this markets will grow much faster, we are used to very high power with it. And we develop again new technology, very high productive efficient technology for Collagen and many kinds of collagen is with bimetal production and many other application, it is really very large and application very large market that is growing.

Thank you [Operator Instruction] Our next question is coming from Jim Ricchiuti at Needham & Company. Please proceed with your question.

Hi. Good morning. My question is regarding bookings and backlog. Tim you gave a little bit of color in the last call about your year-end backlog and frame agreements was did you revise the thinking in terms of dialing back on the full year after conversations with customers on these frame agreements and just little color on the bookings.

No, I think one of the things we faced was bit of more difficult start to the year in terms of bookings. Bookings through - if you start to look at the end of the March and first three weeks of April have actually started to pick up very nicely. So the run rate on bookings in the last month is significantly higher. The problem is when you have a bit of slower start and opening backlog at April which is probably not as higher as we wanted there, which means that Q2 is a bit more - is impacted in terms of revenue expectations than we would like and making that up in the second half of the year is more difficult. A lot of those frame agreements are in, Europe and in China and there’s been no significant change then. We are expecting a good revenue quarter on China in Q2, probably a bit lower growth in China because had a very strong Q2 a year ago and we got the FX headwinds there. So there is no fundamental change for that, it is more than nuances around it affect the overall growth that you have made achieved for the year.

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

Thank you, I was - get some color on the new products that are introducing, there was some talk last quarter you were expecting 50 million to 100 million in revenue this year. And I wonder if that go on track from your initial expectation?

If you look at some of the newer products we got out there including the system, the accessories the QCW, the green, the high power pulse lasers, revenue from all of those products combined in the first quarter was about $30 million. Yes, we are tracking that significant revenue from product that if you go back three years, two years was not really significantly contributing to revenue. The further growth should be on the accessories and system side and then the continued growth on the high power pulse QCW should perform better in the remainder of the year and then you go some revenue that also came out of the cinema projections has been in the second half of the year, we expect to get something from that and then the picosecond in UV hopefully in the second half of the year will begin to contribute. So there is new products are genuinely contributing to the underlying revenue of the company at the moment and they are doing so on an increasing basis. We also as far some of the telecom products, perform a bit better in second half of last year and even into the first quarter of this year. Much of that is based upon some newer developments as well.

Thank you. Our next question is coming from Bobby Burleson of Canaccord Genuity. Please proceed with your questions.

Yeah, good morning thanks for taking my question. I just want to revisit pricing, you have talked about competitive pricing dynamics in China and I am wondering if we are at that point, where some of these price dumping companies are at a level that can’t continue lowering prices or if some of the government that you have got will allow them to sustain further price decreases, thanks.

Situation is [ph] not really clear. We do believe that they are limited in what they can do continuing to put pressure on it and people we speak to in China believe that there may be a period of time that you continue to have to endure but that doesn’t 18 month or so, the market will become a bit more rational. So people we speak to in China locally even some of the integrated think that some of the support, the companies are getting will be reduced. There are a couple of them that are stronger than those or will likely divide. And then you have got some other incumbents outside of China who come into the market, who have been very aggressive around pricing. We think they probably have to become a bit more rational because that probably trying to get into that market with very, very low margins on stuff and if they want to success in the way that they vision they might, they probably have to be a bit more rational in time going forward but the picture around that is not that clear, probably you never have a great intelligence around it.

According to the message from China, including our major OEM that no doubt reputation for [indiscernible] is a practical and working out with any margin at all or below with negative margin. So because they did not stay that way for long time even our OEM, Chinese OEM, large OEM working through a couple yield all the people will disappear from the market that they may have only few the main players. So it is - we still see weaken prices with few have very good margin of cost that you would have thought of it when you brought, from point of quantity we are still growing our quantity sales of the margin always in the Chinese market, we don’t like to give these reliance to these people.

Thank you. Our next question is coming from Jagadish Iyer of Redstone Technology. Please proceed with your questions.

Yeah, thanks for taking my question, before I have my question just a quick clarification, Tim did you call out the services number, services in part?

It is within other at the moment still. Other revenue including system service and accessories grew by 35% - 26.2 million.

Okay, the services was 26.2?

No, it includes all other revenue which includes - 26.2 includes amplifiers, laser systems, service parts, accessories and change in deferred revenue. It’s all embedded within that.

Okay got it, so two quick questions for you. First given how you’ve reset expectations for the growth, how should we think about your product portfolio mix as we go through the year in terms of the high power, medium power pulse and QCW and given this kind of growth rate situation, why are you adding - why are you spending additional CapEx and having inventory at this point of time and what does it mean for growth margin and then I have a follow up.

I think there are two questions thanks. You got, we don’t really give a lot of guidance on product mix. Clearly if you see the welding market pick up into the second half of the year and Q2, you will see an improvement in growth of high power lasers and QCW lasers. So we are expecting that to happen. You should continue to see some improvements in total sales if the consumer electronics built out, it is expected to happen that it should also benefit the QCW. And then we are continuing to expect to see growth on the system side the accessory side, we got a very good frame agreement to order for a significant quantity of medium power lasers. There is no fundamental change to the mix I don’t thing going during the course of the year. With regard to the investments in inventory, so first of all we see despite the slowest start for the year, you are seeing a pickup in revenue coming into Q2. So in order to achieve you have got a very strong target or significant target for china. China needs to have inventory on hand at the beginning of April in order just to meet the April revenue number and then we will continue to ship to them during the quarter. So the inventory build is partly driven by the dynamics on the revenue increases. In terms of the investments that we got out there, we are focused on building the company not just for the next quarter or two quarters. We are looking at building the company over the next two to three to five years and with all of the new product introductions, the increase demand that we expect to see in terms of components through put, systems development, we certainly have not given up on the UV and the picosecond lasers are going to be introducer very shortly does a tremendous amount of new product that would have to be built over the coming years. But the investments are required and even with these investments the capital intensity of the business remains relatively low. We continue to have a longer term focus on where we want to take the company over the next three to five years and maybe having a bit of weak time at the moment, so that certainly not coming we want to continue to live by.

Probably there were new and newer technology component technologies only this last couple of years including this quarter with a level for new technology, no linear increase that were never before made crystals grow and crystals made. Now we have to make is because we are going to UV business and so on and we need to make all these. If we develop 10,000 new components but also each of them have to very good high volume facility and so on. You have to take in mind the investments we have made because in unit, we are growing every year, minimum of 25% to 35%. high power mill for them, last year in unit we increased our production by 35%. This year also we have to increase production in high power again in addition with 70%. It is very serious, demands we have to build new facility much more perfected.

Thank you. Our next question is coming from Mark Miller of The Benchmark Company. Please proceed with your question.

You guys guided last quarter to $1500 million in new product sales and it seems like first quarter was on track for that, which from your revised guidance would indicate most of the growth was seen this year-over-year was coming from these new products. Are there any various that you expect year-over-year to decline?

It is difficult to put a thing on that. The other side, it is improving as the cutting market we mentioned is up 11%. Hopefully, if you are going to look at something that it is going to have difficult year it will be lower power pulse applications. That would be the one area where - that’s where the pricing pressure.

You combine in the revenue, but not in quantity or unit.

Thank you [Operator Instruction] Our next question is coming from Tom Diffely of D.A. Davidson. Please proceed with your question.

Yes, good morning. So it looks like Russia has been weak for a while now on security. What is the current size of the Russian explosion and what is the risk going forward do you think?

Total revenue it is still very limited, but third party customers, so Russia primarily is supplying product into China to support the pulse laser market, the medium power laser market, direct sales in Russia 2% of revenue at the moment.

Russia in revenue in total was 25% contributes total business, 25%, but is all practical sales in cycle roughly steel welding low due to the collapse in the currency and this traction and so on. So practical customer won’t sign in contracts and the [indiscernible] revise immediately again shortly budget and so on, so for three years we’re already [indiscernible]. Now we have moved to some stabilization, it’s recover this year and we’ll stay directly and Russia will start to jump very seriously.

Thank you [Operator Instruction] Our next question is coming from Brian Gesuale of Raymond James. Please proceed with your question.

Hey guys, most of my questions have been answered, but just wondering maybe if you could extend a little bit on, what you are seeing consolidation wise and what that is doing competitively, but also maybe ductile any thoughts you might have being a strategic consolidator putting some of that balance sheet to work towards M&A. Thank you.

Question is about [indiscernible] company is being consolidation in the industry.

Unless we don’t see it how it is going to - when we change the participant in market, we don’t give very difficult to manage, so [indiscernible] not so good managed conglomerate like [indiscernible]. I don’t understand how they will make this at all, what is and probably will create for them with much more problems than before, but for employee computation with fiber laser, we don’t see any chance for improvement.

In terms of IPGs view on consolidation we continue to believe that not the best way to growth the company. We are looking for continued to look for more technology add-ons and acquisitions that is really enhanced our product portfolio, technology leadership or leverage us into end market. We are not particularly strong, we want to get a stronger entrée into we are still not in view of - our strategy is not mere participants in the consolidation of the laser industry primarily because many of these technologies are not particularly complimentary to each other. We are looking for really complimentary and strategic acquisitions that grow our business.

Thank you. Our next question is coming from Grace Lee of CLSA. Please proceed with your question.

Hi, this is Grace sitting in for Jeremie Capron. We have a question about investment. Can you quantify the step up of OpEx and CapEx intensity and then also how it will impact the operating margin and then what kind of duration we should expect.

If you look at the even in Q1 where there are relatively low revenue numbers. The underlying operating margin is 36% if you exclude the FX, right in line with where I would have expected. With the guidance range as provided for the second quarter, I would expect to see that step up a little bit, I would expect it to be in the range like to of that range in my modeling like 38%. In our view there is a continue to be stellar operating margins and they are generated whilst we continue to invest in the business on sales and market side, the R&D side, even the G&A side just to cool the business as we go forward and we believe those investments are extremely important. So, I mean in terms of where the model stands right now, activity and impact of FX, I’m right where I expected to be and in operating margin for Q2 and the rest of the year we can achieve the continued growth where we still have a very, very strong model. In terms of CapEx I talked about that [indiscernible] asked the question, now our focus is building the company for the next multiple number of years and executing around a plan that involves in improving the product portfolio, improving total throughput of components, building new types of components, Valentin mentioned the crystal investment that we’ve got there. So our focus is more on the long-term with that product developments and those investments required. There’s also as Valentin mentioned, there’s a continuing investment in application laboratories all around the world. We’ll have a new lab in California that’s going to seek the support significant opportunities with some of the consumer electronics and Alabama where there’s significant automotive and aerospace industries. We’ve got a new lab in Brazil where we’ll be investing, so it’s across a different number of areas that the investment is and it’s very important for the growth of the company. I also reiterated that I don’t think the capital intensity of the business is particularly great given what we achieved in terms of revenue and profitability.

Thank you. At this time, I’m showing no further questions in the queue. I’d like to turn the floor back over to management for any additional or closing comments.

Okay. Thank you for joining us this morning. Again, we look forward to speaking with you on next quarter's call. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.