Good morning and welcome to IPG Photonics Third Quarter 2018 Conference Call. Today's call is being recorded and webcast. At this time, I would like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introductions. Please go ahead, sir.

Thank you, Rob, and good morning, everyone. With us today is IPG Photonics Chairman and CEO, Dr. Valentin Gapontsev; and Senior Vice President and CFO, Tim Mammen. Statements made during the course of this 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 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, 2017, 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, October 30, 2018. Company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and Excel-based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call. With that, I'll now turn the call over to Valentin.

Good morning, everyone. Q3 was a challenging quarter as macroeconomic and geopolitical factors reduced demand for our laser products. Despite these challenges, IPG made important progress driving higher power solutions into the market and generating meaningful traction selling our newest product and solutions. We believe our progress in high power and new products will help us emerge from the current downturn in a stronger competitive position with greater opportunities to address the growing market for laser solutions. As noted in our preliminary earnings release, we believe tariffs and trade-related headwinds were the primary driver of weaker than expected performance for our business in China and Europe, where China is the main market for perfect European metal processing machines. Indication from our customers suggest that the purchases of laser system in these regions are being pushed out. We believe uncertainty resulting from the ongoing US-China trade conflict is reducing overall demand for industrial capital equipment purchases, predominantly in China. In addition, we believe the softening macroeconomic climate in China and Europe, as indicated by lower manufacturing PMI and reduced levels of infrastructure investment, is affecting near-term demand for laser systems. However, we remain confident in the longer term secular growth of fiber laser technology over other lasers and non-laser tools. During prior business downturns, we have seen customers begin to increase investment in transformational automation and miniaturization technologies that include our laser solutions in order to improve productivity and launch new products. We continue to expect our solutions to gain share from traditional tools and process technologies due to the superior productivity, flexibility, precision and power of fiber laser systems. We remain the clear market leader in fiber laser technology. That said, competition in continuous wave laser products at less than 4 kilowatts has increased. Some competitors have also announced continuous…

Thank you, Valentin, and good morning, everyone. Revenue in the third quarter declined 9% to $356 million. Foreign exchange headwinds during the quarter relative to sales assumed in our Q3 guidance reduced revenue by $5 million. Without this impact, revenue would have been slightly above the low end of our guidance range. Revenue from materials processing applications decreased 11% year-over-year and revenue from other applications increased 22%. By region, third quarter revenue in China decreased 9% year-over-year and represented approximately 45% of the total. Modest year-over-year growth in sales of high-power CW lasers for cutting applications was more than offset by declining sales of lasers into welding applications. In macro welding, saw reduced demand from traditional automotive and electric vehicle battery welding applications on a year-over-year basis. However, during the third quarter, we received the largest order for battery processing applications in the company's history. As such, we believe this business should begin to strengthen in Q4. In micro welding, we continue to see reduced demand related to the consumer electronics investment cycle. Past investment cycles for consumer electronics have materialized every other year, which would suggest that we should see better performance in 2019. In Europe, revenue decreased 25% year-over-year, primarily due to softness in cutting, additive manufacturing and welding. As Valentin noted, we believe a weaker macroeconomic climate in the region is the primary driver of reduced demand for lasers serving the cutting market. In addition, we faced a challenging comparison versus the year-ago period when we achieved record sales within cutting applications and record shipments of ultra-high power lasers. As we noted last quarter, we continue to expect lower sales into European additive manufacturing due to excess inventory at one of our larger customers. In North America, revenue increased 29% year-over-year, driven by strength in cutting, welding…

Thank you. Thank you. The first question comes from the line of Joe Wittine with Longbow Research. Please go ahead with your questions.

Hi. Thank you. So, we've seen a slowdown here and competition is creating a little bit more pressure than in the past. Yet, the gross margin is holding up, I believe, better than most would have expected. So, can you discuss maybe a little bit further how you're defending the GM, including precisely where you are in realizing those cost savings from the diode efficiencies? I want to say that full benefit is beginning in the fourth quarter but won't be fully realized until the first? Thanks.

So, Joe, as you alluded to, we continue to focus on taking cost out of the entire bill of material. Diode is obviously an area we focused on. We are now producing a significant quantity in the U.S. exclusively of the new diode types and packages with the new chip design. So, you are – as you come into Q4 seeing a significant proportion of cost of sales running with those diodes. There's still some of the older packages being produced in Russia, but it's a pretty low quantity of that. The other things that we focused on in the third quarter, which has certainly helped gross margin is that total manufacturing expenses are also down substantially compared to the second quarter. Absorption, unfortunately, is also down, and it's down significantly enough that it hasn't fully offset the unabsorbed manufacturing expenses. But I was actually very pleased to see the total reduction in manufacturing expenses and albeit a lower absorption rates on the lower revenue level which would be expected. So, that puts a focus on the bill of material as well as actually a focus on manufacturing expenses. For example, overtime is being drastically reduced. Headcount increases are very much limited at the moment. And then the throughput of expenses on some of the processes is also down as total throughputs on manufacturing processes like the chip manufacturing are also reduced. So, at a high level, I think that's a good summary of the way we're managing through this at the moment.

Okay. Great. And then on China, can you discuss any further those potential green shoots that certain Chinese customers that you referenced? How much confidence do you have? Is the tone actually improving or are you skeptical at all if that could merely be kind of typical out quarter or next year optimism? How can we handicap the likelihood of that uptick materializing? Thanks.

So, the tone right now is certainly not improving, but the general feeling is that there is likely to be a pick-up in demand just because of the way the CapEx cycle functions. I think some of the Chinese companies are looking for greater stimulus to the private sector from the government, which will give the private sector more confidence in their ability to make CapEx decisions. From what we're hearing, a lot of the government support so far has been more to the public sector. The private sector is optimistic that some of that support and confidence may come in the near term and would give them some sense that they'd see some improvement into the first half of next year. But it really is more just a reflection of their sentiments and thinking rather than anything definitive at this point in time.

That's great. And finally, for me...

According to our situation and our Chinese competitors in many case price is cheaper than material cost. And so who can say the difference how they reports on profit, we don't understand at all. Or cover their expenses.

Thank you. Just a clarification point then I'll step aside. Dr. Gapontsev, your prepared remarks mentioned competitive commentary of up to 10-kilowatt competition. Was that referring to China-based competition or was that from the U.S. peer? Thank you.

We don't believe – they claim they have this in (00:33:12) two years ago. It was (00:33:15) Chinese. They have 10 kilowatt. But up to now, we don't believe any (00:33:18) product can provide any (00:33:23) on. And even the low power (00:33:28). For example, our new products now – even old products which we shipped 5, 10 years ago, demonstrates statistics only one fifth of the lasers that need service for one year. The (00:33:48) don't need service more than one year. But for a new product, for one, two three years. Only a few percent of lasers need during the year operation service, only a few percent. So, (00:34:01) average lifetime without service up to three, five years. So, regarding this Chinese laser, it's only a few months without service, a typical situation. We check ourselves their lasers and customer also return customer opinion, Chinese customer in China have many such information, also very concerned about their ability on low power. What about high power (00:34:31) is not possible. But (00:34:34) achievable functionality. Also, there's very limited source. It – whether it's more than 5 kilowatt breakeven, 4, 5 kilowatt, they're not practical in our opinion.

You get what you pay for.

So, this competition, can they improve during next few years, also very small. They are not able to reach quality of power, not able during the next some years.

Thank you.

The next question is from the line of Michael Feniger with Bank of America. Please proceed with your question. Michael Feniger - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Hey, guys. Yeah. Thanks for taking my questions. Just the first one, you mentioned, obviously, the biggest weakness. It seems like it's still tariff and trade related. You also cited consumer electronics. I'm just curious what you're seeing on the auto side. We're starting to see auto sales disappoint in North America, but in China, CapEx for auto seems to be a little bit more stickier than just sales from month to month. I'm just curious if you're seeing CapEx plans on the auto side for your auto customers shifting at all and getting pushed out, and what the dialogues there into 2019.

So, Mike, we've previously said that the automotive in Europe has been weaker this year than it was in 2017 and the same can be said of Japan. Both the traditional and the EV, auto in China as well was weaker, but we're pleased that we've got a significant order. We've said that's the – it's the largest order for both welding and foil cutting applications for EV in China. So, it's good to see that start to pick up. The North American automotive sales have been reasonable this year and have grown. There continued to be several projects that we're working on. So, it's – yeah, the automotive cycle is not – certainly has not got a tailwind behind it and it has had a headwind particularly from the traditional side in numerous different geographies. There are several projects that we're working on, some of them in Europe. We'd expect to see some order flow and revenue coming out of them. But they're not fundamental game changers. They tend to represent changes in the way that the technology is being used by the automotive companies. Michael Feniger - Merrill Lynch, Pierce, Fenner & Smith, Inc.: That's helpful. And I know you just got asked about the gross margin. I mean this is the first quarter where you're kind of back inside that guidance range, which was expected. If we don't see that resolution on trade and we continue to see this type of environment, particularly on the price, is IPG – are you guys comfortable maybe going even to that low end of the range to make sure you protect that market share and even win new customers to push back on those more aggressive peers? Thank you.

So, in the short-term, we would be prepared to defend market share with our superior technology and reliability in high-power lasers. And if you've got a lower level of revenue, that may come with a lower gross margin. If you defend that share and then you get into the recovery or a recovery period with increasing contribution not just from recovery in the metal processing market but also from growth in the new products that we're introducing to the market, we'd expect to then see our gross margin pick up from that. But yes, we are prepared to defend – we think it's very important to defend market share in the near term. And doing so may lead to some lower gross margin, particularly at the lower end of the 1 to 3 kilowatt range of lasers. It's important to note though as well we continue to take cost out of those devices. So, we've made significant progress on that which has enabled us to continue to report what we think is stellar gross margins even as pricing has been aggressive in Q3 and Q4.

Tim mentioned that we'll introduce now a new diode, a new fiber module into already much more integrated electronics, a new generation high-power laser from 1 kilowatt up to 50 kilowatt and so on. And will – next year, will contain these new components, and cost of these components, cost per 1 kilowatt or 1 horsepower, 25%, 30% (00:39:36) components we use now. So, we expect (00:39:39) have very serious impact improvement of fast growth of gross margin. But the production of them, the new generation, very efficient and more powerful diodes. We started only this October, so impact of this (00:39:58) margin we expect next year. Michael Feniger - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Perfect. Thanks, guys.

The next question is from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question. James Ricchiuti - Needham & Co. LLC: Hi. Good morning. Tim, you alluded to a large win in the EV market. You also talked about winning some share back from competition in China. Is that all related or is that EV win that you discussed in addition to the share gains that you think you've managed to capture in China?

No. That's completely discrete relationships and EV battery orders are separate from the wins that we've had on the cutting, the sort of Tier 2 and Tier 3 cutting customers. James Ricchiuti - Needham & Co. LLC: Got it. And can you talk a little bit about how you saw push-outs in both Europe and China as you progress through the quarter? Was this broadly based or was it concentrated among a handful of customers?

On a year-over-year basis, if you looked at the performance within China, you'd actually see some OEMs growing, who, for example, made significant gains. There are leaders at the higher power level who performed strongly. In other parts of the customer base, you'd see their sales are down year-over-year. I'd say that coming into the end of the quarter and into the beginning of Q4, that tone has softened across the board for the cutting applications. Offsetting that a little bit is the win on the battery welding side. In Europe, on a year-over-year basis, basically because of weakness on cutting, welding and additive for the reasons we've articulated, there's a significant decline in revenue. I'd say the European order flow is basically much more stable and our expectations for Q4 are in Europe more stable than they are in China. And then, we're expecting, for example, outside of those two areas, some growth sequentially in Japan and solid performance in the U.S., which would probably show year-over-year growth but sequentially a stable situation. So, the way I'd characterize it, outside of China, we're seeing, I think, some better sense of stability, whereas China continues to be soft and has softened a bit since the end of Q3. James Ricchiuti - Needham & Co. LLC: So your overall book-to-bill was below 1. It was weakest in China, closer to 1 in Europe, and was it around 1 in the U.S.?

Jim, we don't get into giving book-to-bill by specific region. I think that my tonal comments about that by geography are the ones that you should reference. James Ricchiuti - Needham & Co. LLC: Okay. Thanks a lot.

Thank you.

The next question is from the line of Tom Diffely with D.A. Davidson. Please proceed with your question. Thomas Robert Diffely - D. A. Davidson & Co.: Yes. Good morning. One more question on the Chinese market. So, the slowdown there that you're seeing, is it just nervousness or are they actually having an issue with access to capital or can you tell?

So, I think one of the issues, Tom, is that the Chinese government had been through a period of tightening during the first half of the year. That then has got compounded by the definite uncertainty related to investment decisions that has come out of the increasingly aggressive stance on the trade war. And now you're actually in a period where, I'd say, it's more the macro than the credit access that's the – and the uncertainty around the macro that's impacting things. At the same time, I think you're starting to see the Chinese loosen credit policy. And let's see where they go with that. I think they have to also do some stuff on the infrastructure side to give the private sector some comfort about the decision-making process on future investments, but I'd say that the tightening process got overshadowed with the very increased uncertainty around the CapEx investment cycle driven by the trade war. I don't think that's the primary driver of the weakness we're seeing at the moment. Thomas Robert Diffely - D. A. Davidson & Co.: Okay. That makes sense. And then if you look at China in general – go ahead.

I'd like to say even without this trade war, the policy of Chinese government to help anyway to the Chinese companies to get in to the fiber laser market. They include in the list of the strategic technology fiber laser 10 years ago. 10 years Chinese customer try to make copies of these products and tools and to install some production. And Chinese government up to now helped their own manufacturer anyway to win this market. It is strategic (00:45:45), you could not stop the changing situation. Now they start to make even (00:45:48) product that have huge help by any means from Chinese government state-owned companies and so on. It's the same happened in the electronics many years ago. Then all the budget electronics they won, now it's all moved to China. All the high-end electronics still remain in Western countries, but these most electronics now it's in China. They (00:46:20). The same situation now attempt to get the fiber laser technology strategic to China. To control this, we see it here with such strength that they will go with (00:46:33). We still have very good (00:46:34), much high quality. It's a huge gap between poor quality with these guys, but it's a situation, nobody can change this. That's why trade war, no trade war, but we have to fight for this technology. Thomas Robert Diffely - D. A. Davidson & Co.: Yeah. That makes a lot of sense. So, when you look at the Chinese market down 9% year-over-year, is there any way to quantify how much of that is pricing driven versus unit driven?

Not definitively. We just don't give that information. So, 80% of it overall was really unit – I'm trying to come up with a reasonable number. I'd say 80% of it was driven by unit volume decreases and then the remaining 20% was being compounded by some pricing declines, particularly at the lower level. If you look at the high level, you'd also see some pricing declines, but that's actually on the back of very significant volume increases in some of the ultra-high power lasers. Thomas Robert Diffely - D. A. Davidson & Co.: Okay. That's very helpful. Thanks for your time.

Our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question. Patrick J. Ho - Stifel, Nicolaus & Co., Inc.: Thank you very much. Tim, maybe just you could provide a little more color about the comments you made about the tone for the early parts of 2019 that appear to be obviously better relative to what you're seeing today. Is it coming from a specific market application within China or is it as broad based, where the weakness appears to be much more broad based? Is the potential recovery broad based or is it more in one application?

I would say some of the comments we've had from companies in the cutting market, conversely some of the other cutting customers are bit more circumspect. So, one of the comments we've had is that they're looking for a bit more guidance from the government for the private sector and I think that would require some supports around infrastructure spending, a continued loosening on the credit cycles. The broader based aspect of it though is reflected in the orders that we've had for the battery welding. So, if that investment cycle now continues, you'd expect to see that perform better in 2019 than it has in 2018. And for the consumer electronics cycle, we don't have visibility into anything definitive at the moment. But in general, that is a biannual investment cycle. So, that's the basis upon which we're reflecting some of the comments from the customers but also how our business cycle has also functioned historically. Patrick J. Ho - Stifel, Nicolaus & Co., Inc.: Fair enough. And as my follow-up question, just to go to the gross margin performance, which has been pretty strong given the lower revenues and the pricing pressure you're seeing, how is the product mix shift as you detailed the 6 kilowatts and above are now approximately 50% of your high-powered laser business? How much is that shift helping the overall gross margins stay at relatively elevated levels despite the weaker absorption that you're seeing?

No, it certainly helps. That's one of the benefits on product mix, so that then some of the higher powered QCW lasers that we sold during the quarter. I think the QCW lasers actually performed very well given that this was an off cycle from the consumer electronics investment and most of those QCW lasers or a significant numbers of them will have been at the higher power levels. The continued strength and performance of those higher powered pulsed lasers and also the newer pulsed laser product offerings including the green, the UV, and the ultra-fast would also – if those shifts on product mix can continue, they would also help to sustain the gross margin profile. So, yeah, product mix is certainly helping us and it's always been part of our strategy to shift the customer base towards these higher performing – higher performance lasers that enable improvements in productivity and drive efficiency. Patrick J. Ho - Stifel, Nicolaus & Co., Inc.: Great. Thank you very much.

Also say on gross margin in order to (00:51:49) only one way, to generate (00:51:54) once product for new application also to develop and implement. It's only one way. Our policy to run faster than any competition, we're able to make these (00:52:09) new product when we implement, market provides much higher gross margin and so on. With time, with volume, of course margin going down, it's typical with business law so nobody can change this. And our target, we introduced now for development, we have already now more than 10 new families of product. Next year would be the year when we will do a mass introduction of this product. Each of this product will cost 10 times more than current product, which now could bring for us revenue with much higher margin. If you first market, then (00:52:54). If you (00:52:57) so margin, of course, would be much less. We have opportunities for these new product and new application. This year, it was very critical (00:53:10) excellent result this year. And so now we see (00:53:15) with many new applications, very good prospective results with much higher margin than current product, in spite still current product due to our very hard policy to decrease cost, very efficient policies. (00:53:33) still bring for us very good margin. But up to now in spite of China, our cost of this current product – top current product for us, minimum 3 times cheaper than any competition of manufacturing. It will go and go and decrease and decrease, but very competitive still with all products. New products, (00:53:56) most of them, nobody produce the same today. So, we'd be first in the market. Patrick J. Ho - Stifel, Nicolaus & Co., Inc.: Great. Thank you very much.

Thank you. At this time, I will turn the floor back to Dr. Gapontsev for closing remarks.

Okay. Thank you for joining us today. We look forward. We are sure that next time we'll provide you much better results. Have a great day.