Good morning, and welcome to IPG Photonics’ First Quarter 2021 Conference Call. Today’s call is being recorded and webcast. At this time, I’d like to turn the call over to your host, Eugene Fedotoff, IPG’s Director of Investor Relations, for introductions. Please go ahead, sir.

Thank you, Rob, and good morning, everyone. With us today is IPG Photonics’ Executive Chairman, Dr. Valentin Gapontsev; Chief Executive Officer, Dr. Eugene Scherbakov; 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 the impact of the COVID-19 pandemic on our business and those detailed in IPG Photonics’ Form 10-K for the period ended December 31, 2020, 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 as of today, May 4, 2021, only. The company assumes no obligation to publically release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release and the excel-based financial data workbook posted on our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of this call. With that, I’ll now turn the call over to Valentin.

Good morning, everyone. We made two announcements today. I will first discuss our results. I am very pleased to report another quarter of solid performance and excellent execution with strong revenue and earnings. Our revenue increased significantly compared to the same period in the prior year, which was impacted by weak macroeconomic conditions and global lockdowns related to COVID-19 pandemic. Revenue was also higher sequentially, despite typical seasonality, as a result of continued positive performance in North America and sequential improvement in sales in Europe. Our bookings remain at high level, particularly in China, and we expect growth will continue in the second quarter as we benefit from our technology leadership, leading-edge products and global footprint. During the quarter, we demonstrated excellent progress in our core markets with strong growth in cutting, and even stronger growth in welding applications. Ultra-high power lasers made up 55% of total high power sales and increased 55% in the quarter. At the high end of the market, we are seeing an increased interest and order volumes for our 20 and 30 kilowatt ultra-high power lasers and optical heads that offer cutting speed improvement for materials up to 30 millimeters thick and are replacing plasma cutting machines, other non-laser processes and lower power laser solutions. Our lasers provide superior beam parameters, record wall-plug efficiency and high reliability that are the hallmarks of the IPG brand. They also drive a great return on investment for our customers. Growth in welding applications stood out significantly this quarter. Sales of our high power CW and QCW lasers for welding applications nearly doubled compared with the same period last year. Sales of our adjustable mode beam lasers increased and continue to gain share in the welding industry for general manufacturing purposes and in electric vehicle battery welding applications. Our…

Thank you Valentin, and good morning everyone. I feel extremely privileged to become the next CEO of this great company and look forward to continuing the strategy of Dr. Gapontsev and deliver on our mission to make fiber laser technology the tool of choice in high-tech mass production. Going back to our quarterly results, I will provide additional details on our operations and performance by region and I am happy to report that all our four major production facilities are operating normally. IPG has adapted well to the new operating environment and is running production at high levels to support increased demand for our products. Travel restrictions and safety precautions limit customer visits, but we have seen an increase in traffic through our applications labs. We are benefiting from a number of significant environmental trends that include increased investment in capacity for renewable energy and electric vehicles to support growth in sales. We are seeing increasing demand for our green pulsed lasers, which are enabling significant improvements in solar cell efficiency. We also supply a wide range of products that provide improvements in electric vehicle battery manufacturing process, including speed of manufacturing, high process reliability and design flexibility that all lead to increased battery performance and safety while lowering production costs. We expect to benefit from growth in electric vehicles sales driven by high emission standards and government policies, primarily in Europe and China, that would require additional investments in battery production manufacturing. And our revenue in China increased from 104% year-over-year in the first quarter, representing approximately 41% of total sales. We are seeing high demand for our ultra-high power lasers and laser heads from general manufacturing in China, driven by these lasers’ thin metal processing productivity and ability to cut thicker metals. First quarter bookings in China were…

Thank you Eugene, and good morning everyone. Revenue in the first quarter was $346 million, which increased 39% year-over-year and 3% sequentially. Revenue from materials processing applications increased 45% year-over-year and revenue from other applications decreased 9%. Sales of high power CW lasers increased 43% year-over-year and represented approximately 49% of total revenue. Sales of ultra-high power lasers at 6 kilowatt or greater represented 55% of total high power CW laser sales and increased 55% compared to the prior year. Medium power laser sales increased 41% on growth in cutting, welding and sintering applications. QCW laser sales increased 38% year-over-year on increased demand from welding applications. Pulsed lasers sales increased 74% year-over-year, with strong growth in green pulsed lasers used in solar cell manufacturing as well as higher sales of our high power and ultrafast pulsed lasers. Systems sales increased 46% year-over-year as lower Genesis revenue was offset by higher sales of other IPG laser systems. Other product sales decreased 6% year-over-year driven by lower medical laser sales. First quarter GAAP gross margin was 47.5%, an increase of 620 basis points year-over-year. Compared with the year-ago period, the increase in gross margin was driven primarily by improved absorption of manufacturing expenses, a decrease in cost of product, inventory provisions and shipping costs as a percent of sales, partially offset by lower pricing. GAAP operating income was $89 million and operating margin was 25.7%. First quarter net income was $68 million, or $1.26 per diluted share. The effective tax rate in the quarter was 23%. During the quarter we recognized a foreign exchange gain of $7 million primarily related to appreciation of the U.S. Dollar versus the Euro. The foreign exchange gain benefitted EPS by $0.09. If exchange rates relative to the U.S. Dollar had been the same as one year…

[Operator Instructions] Our first question comes from John Marchetti with Stifel. Please proceed with your question.

Thanks very much. I wanted to come back to the comments that you made about the China business moderating a little bit, and just understand if that’s a function of running up against now some more challenging year-over-year comparison that’s we get into the June and September quarters, or if there’s – maybe there was a situation where they were running a little bit hot post pandemic, and now that’s more evening out to match supply and demand?

John, our guidance for the second quarter continues to assume good growth and performance in China are sequential improvement in revenue. Order flow was very strong in Q1 and has continued to be strong Q2. The reference is really to some of the economic indicators having moderated a bit. So for example, PMI’s in China have come back. They pulled back a little bit from 55% or 56% to about 51%. So it’s just calling out that the economic expansion is maybe a little bit more moderate than it was – has been over the last three or four quarters with reference to some of those indicators.

That’s helpful. Thank you. And then if I can just follow-up real quick on maybe on the Japan outlook as well, that’s been a market that has continued to struggle a little bit here for you over the last several quarters, starting to see some early indications there, maybe those metrics heading in the opposite direction. Just curious if you could talk a little bit about your expectations for that Japan market over the next quarter, and maybe looking into the second half of the year?

Second quarter – I mean, certainly an improved guidance number for bookings and revenue in the second quarter. The general feedback that we’re getting is that there is some moderate pickup in activity. I think some of the Japanese machine tool orders from an export basis have picked up and also from a domestic basis have picked up. Potentially, some of the investments in automotive and cutting should also start to improve. So we’re looking for these transitions to happen over the next two or three quarters. It continues to be a difficult area to operate in from an economic perspective.

Great. Thank you very much.

Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.

Good morning. First off, congratulations, Valentin and Eugene on the management transition. Question about Genesis, the business still seems to be weak. I’m wondering how much of that is potentially related to automotive. Although I think it’s much broader in manufacturing. So I wonder if you could talk to that and then I have a quick follow-up?

So on Genesis that struggling, maybe it’s a close – some of the orders, there’s actually quite a healthy pipeline of orders and the General Manager of Genesis thinks he’s cooling a bottom on that business. So they’re actually waiting to close the significant number of orders, some of which are in excess of $5 million apiece. Given the environment, some of those large scale investments, Jim, have certainly being more moderate over the last year or so. And then they’ve also been impacted by some of the aerospace activity being a lot lower. So we’re moderately more optimistic that business, if they can close, some of these orders will certainly reach a bit of a turning point. I think the big difference is that the size of the equivalent they sell in terms of total value is significantly different from even some of our other systems businesses and also from the average ASP, even as a high power or ultra-high power laser. So that pipeline – domestic is the pipeline of order flow is certainly improved. They need to close some of those orders and if they can do so, that will help to turn around that business.

I would like to add something. For Genesis and also for other productivity and system business, their stuff will supply the complete system for battery welding. It’s only a few already supplied to our customers, but we see the very big perspective because for us, it’s absolutely a little bit more business. I mean, not on the supply lasers or the laser components those such kind of applications, but complete systems have already successfully installed, it’s a very important for automotive customer and you’ll see really good perspective for such activity.

Got it. Thank you for that and follow-up questions. Just with respect to the guidance, I mean, if we look at the midpoint of the guidance, it would suggest, I think that you’re getting to gross margins close to the historical levels in the high-40s not above, certainly where you’d been several years ago. But am I looking at this the right way, Tim, would you assume that your gross margins have the potential to be north of 49% in Q2?

Our Q2 guidance on gross margin is basically in the range of like 47% to 49%, it’s not above that, thing where we provided some guidance on OpEx, where we’re starting to see a more normalization of activity. So you may have gross margins a bit high and all packs a bit understated to get to the EPS number. And then on EPS, I’ve got a 25% tax rates. I know discreet benefits in that. And certainly, we’re pleased with the overall gross margin performance. I mean the underlying gross margin, you may exclude some of the one-time items and a higher inventory provisions has been pretty consistently in the mid-40%s at the moment. And we hope to see it track up to the half of our range. We still don’t have visibility in getting at all 50%. So we’re sticking with that 45% to 50% range, but really targeting being in the upper half of the range.

Yes. No, I understand. It’s just the fact that you can get as high as 49%. It’s nice to say. Thank you.

In our product, we’re suggesting that Euro terms might change and we’re experiencing this year and next year to well essentially impact the gross margin well above to increase to it center.

Thank you for that.

Our next question comes from the line of Nik Todorov with Longbow Research. Please proceed with your question.

Yes. Good morning, everyone. Tim, I guess you talked about China bookings being very strong in the first quarter until for in the second quarter. But if I look at the guidance on the CDM, seasonal North America and Europe, I think China growth is accelerating substantially from to eventually mid-teens. And I think last year accomplished still favorable down 11%. Can you maybe talk about what are you assuming for China? And do you see sequential growth besides the second quarter for the rest of the year in China?

Yes. We’re not giving any guidance for the rest of the year Nik. The performance of China in Q2 continues to be robust and strong. This whole concept, I think there’s been a couple of initial notes that have been issued around seasonality. This is an extraordinary time that all companies have been through over the last 18 months. And I don’t think there is any concept of normal seasonality at this point in time. We’re very pleased with the performance of the business even in the second half of last year, the strong traction in overall revenue in Q4, a really good revenue number, we’ve just reported in very solid earnings for Q1 that normally can be a downfall to compared to Q4 where we’ve actually sequentially seen an improvement, even with Chinese New Year. Please with some of the recovery in Europe and the underlying tone of the business there. North America had started to recover in the second half last year remains fairly robust. And so the guidance in Q2 relative to where the business has been is a strong guide. I just can’t come back to having a discussion around seasonality and what’s normal seasonality in this environment. I think it’s a moot point. You can’t pull what is seasonality at this point in time.

But now it’s much more important approximation for a lot of people, there’s a much more important our strength of preferred information in different countries.

Regarding China, we seeing the position in value to increase position for revenue growth, we internal users don’t have any competitive version for that growth. What are we talking in second quarter is second quarter, but we’re careful of important frame where that’s originally was still waiting to licensee expert or license owned. It’s compared this for even second quarter minimum offer, we have already good commodity given 80% value of future with this far more that’s way convert to a deal of it.

Okay, got it. If I can follow-up another question on gross margin, if I look at the midpoint of that gross margin about 48%, Tim, when I compared that to your September quarter, that you do reported last year, you did 48% on a significantly lower revenue run rate. Can you maybe compare and contrast, what’s driving that lower incremental fold through, and I guess are you seeing any impact for either component or just higher logistics costs that could be holding this down? Thank you.

So there’s some things in the second half of last year, we certainly benefited with some product mix. So we had drafted on selling significant orders for single mode lasers that have a very strong margin on them. In addition to that, we had sales of a very ultra-high power lasers for advanced applications. So for example, a 100 kilowatt lasers, those tend to be advanced applications, it was good in Q1 and is good in Q2, where we don’t have those orders on hand at the moment. They may pickup in the second half of the year. There is also some strong backlog for advanced applications that we’re waiting for confirm confirmation when that should be delivered. It’s unlikely to be in the second quarter. So some of the mixed side of it will have being one of the main differences compared to like the third quarter and fourth quarter of last year. I’m actually quite pleased with gross margin performance in Q1 given we didn’t have those benefits in that.

Thank you.

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

Thank you for taking my question. Just wondering you had very strong performance in Germany, was that related to automotive and welding?

It’s from German and European performance in Q1. It was EV, automotive.

Of course, first of all, it was dragging by standup applications and cutting applications, and also already important that for many quarters. First time, they must created a very good results for welding applications. It’s connected to our new lasers, AMB lasers and also ultra-high power lasers using for welding applications. And also, really materially, it’s a very good performance with fewer supply to our customers high power fiber lasers, again for EV applications, the battery applications and also for some other applications. With MQCW, our new product sales entered in. And so automotive customers, our sales was for several very important customers have accepted this and have enough to supply in order of single units, but those of such kind of lasers for our customers. And we see very good future for such kind of lasers in these applications.

Typically IPG reported about 20% of sales are from products introduced within the last two years. Are you still running at that level?

Yes, we entered the code from that they were about 29% of sales will be emerging products. So that was the highest level they’ve been thinking of since we’ve tracked them.

That is good. Thank you.

Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.

Yes. Good morning. First after 15 years of running calls with Valentin, we’re going to miss your insights going forward. It’s been a pleasure working with you. Eugene, welcome. And maybe first question to you, if you look out at the next five years, given kind of some nice momentum recently in welding, do you think the welding market is the biggest untapped market for IPG?

I don’t think. So it is the leanest market, but it is a substantial – it’s such kind of predication to our general material processing market. Cutting market out there, it will be dominated. It’s clear because a lot of different standard lasers installed now in the field. And we are continuously access this old laser and also new application for cutting and also drilling. Welding application, definitely even though it is growing, it will depend of course for many parameters. First of all, electric vehicles. You see one of those applications, which give us a fast running application for all the new lasers, especially for end laser. Why? Because just time, people can develop – practically developing battery. It’s only if it’s possible for such kind of in the technology. And of course, it increased immediately the processing of materials and quantity of loading. Monitoring, online monitoring business development again, it also demonstrates that the perspective for future applications, because you have to serve if you needed to do things a little bit. So online monitoring is a quality of welding. And so they needed a solution, what do you have to do? And for such pallet fixation is new components is a new possible application. I think welding will demonstrate a really good future. Of course our special, anything mentioned about this our new pilot welding tool. There is a feature for such kind of applications because it’s very simple, robust and only in a few minutes, practically non-trained people stop the weld, not the only stop the weld, cool it. And I also see a really good benefit application for such kind of tool.

Okay. Thank you. That’s helpful. This is like a pretty large and tough market, especially for some of these new technologies that are coming out. Maybe just a quick follow-up for Tim. You have CapEx at $150 million to $160 million this year. What are the main components of that? Is it expansion of capacity?

Yes, there’s a lot of – of course, it’s primarily expansion of capacity, but you’ll have some capabilities at the R&D and sales and service, but primarily on capacity, particularly for some of the new products some of the new additional diode manufacturing coming on stream. I mean, that covers it. It’s a whole host of new products that we have to add production capacity for and components production for those new products as well.

Okay. Thank you for your time.

Our next question is from Michael Feniger with Bank of America. Please proceed with your question.

Yes. Thank you guys for are taking my questions. The gross margin in Q1 was very healthy. You’re forecasting, another healthy gross margins in second quarter. With bookings in China being solid and recovering is the pricing backup there the standard competitive nature. Are you seeing a larger than normal step down? Or is IPG just finding ways to contend with that with pricing dynamic better than you did in the past?

I mean, price declines in the first quarter have been a lot more moderate than they were say in, 2018 and 2019. So we’re continuing to be disciplined about our approach to the Chinese market and to really sell on the basis of our quality and reliability and performance and specifications as the product. We’re benefiting from the trend towards the ultra-high power cutting, where competition in quality is significantly lower. We’ve got a very high market share on EV in China, where we benefit from ultra-high power pulse laser sales that have a very good margin on them. And we’ve even started to see some of our ANB and LDD sales of that. So it’s a question of the company being disciplined around pricing and really valuing the technology and proposition that we deliver to the market rather than necessarily being a – just focusing on what our total market share is. And that’s a strategy that I think we’ve been successful with over the last, over a year now that we’ve been implementing a small disciplined approach.

Got it. And I recognize that there’s some – the comps in China in the second half, and that seasonality conversation’s kind of difficult. If we just fast forward 2022, if we’re looking at a GDP of 5% like global GDP, like how do you – does the IPG growth profile look in that backdrop? Is there going to be potentially a different mix of geography, new products, end markets, as you’re starting to see some of these secular discussions around energy efficiency and electrification start to evolve and pick up more steam?

I mean, if you go on GDP growth rates that sustained on a global basis at 5%, you will see the overall laser market grow at a very significant premium to that we’d expect to continue to execute very well. For example, in the laser welding applications, which we think would be a very strong growth area, potentially see some continued growth, obviously in EV sales, like as they are all EV capacity over the next three plus – three plus years is estimated to triple it. It was about 500 megawatts of capacity installed now that’s expected to get to 1.4 trillion – 1.4 terawatts. So that would be a core driver. And then you’ve got all of our new applications, right? So you’ve got the medical applications, you’ve got some of the solar cell applications. So the GDP holds up and PMI has remained strong. That’ll be a compliment to our business and the new product growth we’ll add an additional layer of growth on top of that. I’d certainly be very pleased to see global GDP transition into 5% growth rate next year.

[Operator Instructions] Our next question comes from Paretosh Misra with Berenberg. Please proceed with your question.

Thank you and good morning, and congrats to Valentin and Eugene for the next phase of their career. First, a question on the chip shortage in the automotive business, were you impacted by that much in Q1? And is your automotive business, what’s the geographic exposure there? Is China the biggest piece or the rest of the word is bigger?

First of all, we don’t have any problem is now with that kind of chips because we didn’t use and we don’t use in our product such kind of ship. The second is no, our productivity in China automotive, because first of all, Germany, of course, and United States also.

Got it. And then just want to come back on some of the comments on the welding market. For the electric vehicle battery welding, what are the most important products? Is the CW type products or maybe the QCW is the most important product that your selling for that end market?

Of course, we have to ask our customer, but in our opinion, it’s important all CW and also both, because of the different kind of applications, not just saying process, I’m making this, see them all, you’ll have these lasers. For example, CW is usually used for welding applications, welding tasks, and welding some parts of their battery. CWQ is used for cleaning and to cut foil, producing this battery, different application and of course, important also welding and cutting and cleaning.

Optimizer for welding also is great. But it is compact. Fantastic, it is very important, the most critical sensitive. And with the welding machine, we have different kinds of machines and now we’ll go into the market and win customer who are looking at buying this machine from us. And in terms of regarding this, lasers, I have to add this, we’ve developed the worlds [indiscernible] qualification, all in three machines that different machine with different application and the welding for the cleaning and cutting and for other kinds of pipe, different welding. Now we have entered into Arab countries for example, where we see new opportunities. We have request from other country companies. The only machine that will provide many end user, we have more than 10 new machine edition which will introduce in the second half of the year next year. We are operating in the unique publication highest quality systems. It’s new generation, so with our policy from material from components and so on, the final machines and production wise now we are in full volume.

Thank you. That was very useful. I appreciate it.

We’ve reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to your host, Eugene Scherbakov. Thank you – for closing comments.

Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you on the coming weeks and we will be participating in a number of virtual investor events this quarter. Have a great day, everyone.

This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.