Good morning, and welcome to IPG Photonics’ Second Quarter 2024 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Senior Director, Investor Relations for introductions. Please go ahead with your conference.

Thank you and good morning, everyone. With me today is IPG Photonics CEO, Dr. Mark Gitin; and Senior Vice President and CFO, Tim Mammen. Let me remind you that statement 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 the 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 are detailed in IPG Photonics' Form 10-K for the period ended December 31, 2023, and our 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 on the SEC's website directly. Any forward-looking statements made on this call are the company's expectations or predictions as of today, July 30, 2024 only, and the 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, earnings call presentation, and the financial data workbook posted on the Investor Relations website. We will also post these prepared remarks on our website after this call. MD&A With that, I'll now turn the call over to Mark.

Good morning, everyone. I'm excited to be here with you on my first earnings call as CEO of IPG Photonics. I look forward to meeting many of you and to talking more about our story and our plans at IPG. Before diving into our second quarter performance, I'd like to spend a moment on my background, why I took this role and what I've been focusing on since I joined just over seven weeks ago. For the past 35 years, have been actively involved with lasers and laser applications, leading different functions at coherent and the Photonics Solutions Division at MKS Instruments. I joined MKS to integrate the Newport acquisition and significantly improve the performance of the business over five years. During my career, I've always admired IPG, its industry leadership, culture of innovation and ability to drive fiber lasers into new use cases. I'm thrilled to have joined such an innovative and dynamic organization and see a lot of great opportunities ahead of us. Since joining in June, I focused on diving deep into key aspects of the business. The dedication, creativity and passion of IPG's team is truly inspiring and conversations with employees have given me an even deeper appreciation of the team's knowledge and expertise. I'm especially excited about IPG's R&D pipeline. I believe we have a number of projects in process that will put us in a strong position to extend our industry leadership, provide further differentiation and reduce product costs. I know that in the current macroeconomic cycle, we've seen competitors get more aggressive, particularly in cutting. Competition is expected and as a leader, it's important to keep driving innovation. Our team has been focusing on multiple initiatives to increase technological moats around laser products and provide complete solutions and world-class support to customers, which…

Thank you, Mark, and good morning, everyone. My comments generally will follow the earnings call presentation, which is available on our Investor Relations website. I will start with the financial review on Slide 5. Revenue in the second quarter was $258 million, a decline of 24% year-over-year. Foreign currency headwinds reduced revenue growth by approximately 2%. Revenue from materials processing applications decreased 28% year-over-year, while revenue from other applications increased 24%. GAAP gross margin was 37.3%, a decrease of 610 basis points year-over-year due to lower absorption of manufacturing costs as a result of lower revenue and our continued effort to reduce inventory, which reduced gross margin by over 700 basis points. This was despite achieving a $23 million decrease in manufacturing expenses as compared to the prior year. Higher inventory provisions added another 200 basis points to the headwinds in the quarter. I'm happy with the progress we are making on the inventory side, but more work needs to be done before we get back to more normalized levels. These negative impacts to gross margins were partially offset by a decrease in import duty and shipping costs. Operating expenses came in at the low end of our expectations due to reduced variable compensation by the increased year-over-year primarily due to increased investment in research and development and sales and marketing. FX headwinds also had a negative impact on revenue and gross profit in the quarter. Exchange rates relative to the US dollar had been the same as 1 year ago, we would have expected revenue to be $6 million higher and gross profit to be $3 million higher. GAAP operating income was $12 million, and operating margin was 4.7%. Net income was $20 million or $0.45 per diluted share. The effective tax rate in the quarter was 19% and…

Hi. Thanks. I'm wondering if you could talk a little bit about whether you're seeing much variability in the book-to-bill by region. It looks like North America seems to be holding up, although, I'm sure you've seen some pockets of weakness in some of its industrial markets that you talked about. But maybe that's my first question.

Yes. Jim, yes, on the book-to-bill for the quarter was below one. The weakness continues to really be in Europe. So that was down compared to the first quarter. North America altogether was relatively stable, but we saw some headwinds around the industrial and other businesses, we actually had a strong quarter on bookings for medical. And then Asian bookings, actually, as we've alluded to, are really much more stable than Europe. So we're actually quite pleased with the performance of underlying bookings in Asia as a whole, both China, Japan and South Korea as well.

Ex cutting in China, are you -- I don't know how to think about what you're seeing in China, frankly, just because of what we're seeing now on the weakness on the EV side. How would you characterize the business in China, excluding the legacy cutting?

Hey, Jim, this is Mark.

Hi, Mark, welcome by the way.

Hey, thanks very much. Yes. So China is still a very important part of our business. It's about 25% of the business. And we've been able to, over time, really diversify that business. So the China cutting market, as you said, that's now become a very small part of our business. It's less than 5%. And we've been diversifying into areas like EV, the welding area. We've been very successful in that region because of the capabilities that we have in not only the -- we've talked about the AMB lasers, the special mode for being able to well without spatter. But that combined with our scanning capability and our sensing capability actually measure and look at the world in situ, right, to be able to do that has been really critical. That's the quality control for the customer and really a safety, prevention issue as well. So that's been really important in EV, and we've kept a significant market share there. And then also, in the area of -- another example would be 3D printing, where our lasers are really unmatched there because we have very high power single-mode lasers that are have low noise as well and that's really important to these very high-speed machines that need very high performance and key to those devices. So those are a couple of areas where it's really been important. And again, we have a significant business in China and continue to drive there a scenario also where in China, they're first to take some of the new technologies. So that's been important for us as we bring out from our road map, new technologies. China is a great place, because they're willing to start with those on an early basis. So again, able to diversify the business in that region and it's an important region for us.

Got it. Thank you. I’ll jump back in the queue, let somebody else.

Yes.

Our next question is from Ruben Roy with Stifel. Please proceed with your question.

Thank you very much, and Mark, welcome. Thank you for providing some, I guess, a preview on some of the areas of focus and how you’re thinking about things at IPG. I guess, Mark, a question for you. You made a comment on cutting still, obviously, big market small in China -- smaller in China. But still a big market for IPG and you made a comment. I think you were talking about Europe where you're talking about the decline is macro-driven. I assume you were implying that not a competitive issue. In the past, IPG management has talked about cutting ex China as a potential area of growth longer term as overall cutting in other geographies is still on the common, it really hasn't gotten to critical mass in some areas. I guess, as you think about cutting and R&D into cutting, maybe if you could give us a little more perspective on how you're thinking about that market, specifically in IPG positioning in some of these markets outside of China, that would be helpful.

Yes, absolutely, Ruben. Thanks very much for the question. As you mentioned, cutting is still an important piece of our business, although welding is now the largest part of IPG's business. And as you said, the competition for us has really been in China, and that part of the business is less than 5% now in Europe, in Japan and in the US, the OEMs, we have great relationships with them, and they really understand the value that we provide. This is a quality uptime on the systems, and it's very critical for those customers and we talk to them all the time. That's an area where we're not losing share because of that. It's a service, it's supportive or the full package with those OEMs. And yes, we are continuing to drive in that area. It's an important area. So you've heard us talk about our road map in cutting. So very shortly, we'll be releasing very new high-power lasers that are at the high end are very, very big change in the -- in the volume of the lasers. So smaller form factor and then lower cost, saving 15% to 20% cost. So again, very key. And we're also constantly working with the customers on -- I mentioned, the support infrastructure. So we've invest a lot in our service infrastructure to support those OEMs, and that's very key as well.

That's very helpful detail. Thanks, Mark. And then as a follow-up around the discussion on EV, I think most of us understand that adoption has slowed and then there's a lot of macro impacts, interest rates and otherwise kind of creating issues for the market. But when you talk to your customers, it sounds like you're pushing out any expectations for improvement out to somewhere in 2025. What drives that improvement? I mean, are we close on the inventory level? Are you seeing some signs from your discussions that there will be some capacity added as you get into 2025. Any detail on actual customer feedback would be helpful.

Yeah, I know, what I can tell you -- thanks for the second follow-up question. We're in a very good position in the EV. I mentioned earlier the kind of the technical solution that we provide in EV being able to lock up both the AMB laser plus scanning, plus the capability to measure those wells. So that puts us in a very good position, both at the component subsystem and systems level in that EV market. Now, I'm talking with the customers, last quarter, they told us they thought things were going to be coming back in the second half of the year and that we see some of those projects start to come back in, in the second half what they've been telling us recently is that they just see things really pushing to the right in 2025. So that's what we're hearing and that's what we're seeing right now.

Okay. Thanks, Mark. Just really quick for Tim on the model. In terms, Tim, of some of the new lasers coming out and the cost downs on some of the high-power stuff how is that looking from a timing perspective? Just wondering how you're thinking about gross margins given the reality of where revenues are into year-end here and maybe even early 2025 is sort of sort of how you're thinking about it a potential bottom for gross margin in some of those new products roll out? Or any color there would be helpful.

On gross margin, really, the underperformance continues to be related to under absorption even though we managed to take out a lot of manufacturing costs. So the product gross margin when I look at that on an isolated basis, is holding up very well. So what I would expect as we get some of those cost production initiatives actually rolled out into product towards the end of this year into next year, we'll start to see the margin of the product improve potentially a little bit because we're going to keep some of those cost reductions in hand. And then as we start to grow the business again you'll start to recover some of the under absorption on the fixed cost basis. I think at this level of revenue, if we can start to recover a little bit from here, you are talking about gross margin being kind of at a trough level. The other thing that's impacting us is the need at the time we've got the headwinds around revenue is to continue to take inventory down, right? So that is also driving some of the under absorption. As we get closer to a target level of inventory, I said, we've got more work to do on that in the second half of the year. But I expect that situation to ameliorate certainly into 2025, the sort of double whammy of lower revenue and getting inventory down really should -- we hope to turn that on both accounts, both on the revenue and the inventory side of it. So that will drive some improvement in gross margin as well.

And then Ruben as Tim was saying, this is largely an under-absorption issue. So we've been investing and are continuing to invest in our product road map driving differentiation. We've got a lot of exciting things in a number of areas. You've heard us talk about the heating and drying applications. We've been very successful on the medical products, those are growing. And you've heard us talk about LightWELD and the combination with Miller, those are all areas that are going to drive growth. And as that growth drives, of course, that's going to improve the absorption and we'll see the gross margins improve. So that plus the cost balancing that Tim was saying are important areas.

Thank you, gents.

Our next question comes from Keith Housum with Northcoast Research. Please proceed with your question. Q – Keith Housum: Good morning. Thank you. And Mark, congratulations and welcome aboard. The investment in SG&A and R&D, I guess, maybe if you look at the SG&A in particular, after several years of down results, obviously, I appreciate the investment in SG&A. But is there a particular strategy or the area that you guys are focused on in order to help drive growth into the future.

Yes. I can take that. Thanks very much for the question, Keith. So as we said, again, we have a very exciting road map and absolutely investing in R&D. We've got a lot of capability there. I have to tell you, I'm really thrilled coming, of course, was looking at the company very closely over a number of years. And then before coming to IPG, I looked very closely at what I saw as technology and product road maps but now being here, seeing under the covers, it's even better than I expected. So really great innovation. There are great things to drive the product road map drives differentiation. You've heard us talk about some of the new products. And it's beyond products now, just lasers and components, we've been investing into the applications and the process development side. So that's a very critical piece for us because we're able to go in, we're able to work with the customers. We now have these labs and these capabilities all over the world. We're working with the customers. We're seeing the problem that they need to solve. We're working with, and we're developing a solution, and that's the laser, but it's also beam delivery. It's also I talked about some of the sensing capability. So when you put all of those things together and wrap that process together and then be able to deliver to the customer a subsystem and a system that's a whole another way to put a moat around the product. So another area where we're absolutely investing on that SG&A side that will continue to drive growth in the business. Q – Keith Housum: Okay. So just so I understand, in terms of investing in the applications and solutions, are you expanding -- are you going to start competing with more with some of your OEMs and integrators or just developing beyond just the lasers and doing more of it for which they would have done themselves.

So what I would tell you is that we've got development on the lasers, development again on the delivery and process side. And a lot of the processes that we're growing in our new processes, things like heating and cleaning, which they're -- -- that's -- those are big areas for us to grow in particular markets. That's something that we've done in the EV, for example, the cleaning application where we can rid some of those processes of chemical kinds of processes and be able to do that with lasers. So there were really driving improvements or new laser parameters that can do that by understanding the process and then being able to provide some of the wraparound pieces that really are unique because of our process knowledge. So, that allows us to expand into unique new applications as well.

Great. Thank you. Good luck.

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

Hey everyone. Thanks for taking my question. Mark, you kind of touched on this, but I'm just curious about the driving the penetration of lasers in the industrial applications. Does IPGP have to think differently maybe on either pricing to help drive that adoption? Or is it market applications? Or is it maybe the go-to-market strategy in terms of -- I know it was touched on before when it comes to some of these the OEMs and distributors. I'm just curious if with fresh eyes, if you feel like getting that penetration up outside of China requires maybe a different approach?

Thanks very much. It’s a very good question and we are taking a deeper approach on some of these, that's a little bit different. So, even look at the handheld welding, we've taken a different go-to-market approach there. We've partnered with our LightWELD with premier welding supplier in North America, Miller Electric that supplies today or had supplied to-date with a conventional MIG-and-TIG experts in the welding they provide these systems and they're working with us in partnership to take that on to label. It is a Miller product. So, they're seeing that this is the right way to go in welding. And they're seeing that because you're able with our system, our LightWELD system, we build the process. So, again, this is talking about that process development. We've actually built it into the system. So, you can actually dial in, hey, I'm doing aluminum on aluminum or aluminum on copper and the system will set itself and you can go and do that welding, where in standard processes, if you're a MIG or TIG weld or you might have to apprentice for years before you can do those processes. Here, you can do that -- I've even welded with the system. So, you can go from years to hours being confidence. So, that allows us a different market -- go-to-market strategy, again with Miller and putting that into the market. And then again, pushing on that that application and that process development, again, taking and optimizing not only the lasers for a particular process, let's take something like cleaning we can -- that's, again, replacing a process that would potentially have been done with chemicals, right? So, something better for the environment now using a laser, but you have to optimize the laser to be able to do that. So we're making high-power lasers with short pulses that are optimized for that. But then you also have to drive -- the scanning has to work as well. So, we've actually developed case use scanners that are very high speed for that cleaning applications as tied to that laser, the tie to the process. And then working with the customer, be able to provide the solution, right, either in a subsystem or a system level. So, again, a different go-to-market strategy because we need to solve the problem in that non-laser space. right, and be able to provide that whole piece. So, that's an investment that we've been making, as I mentioned, and that's a change in go-to-market that we're going to continue to invest in.

Understood. And Tim, just curious on seasonality, like, if you look back, typically Q4 might be down a little bit versus Q3, depending on some years, but this year, obviously, because of some of the macros and the factors, it feels like Q3 is actually a little bit weaker seasonally than normal. I'm just curious, Tim, is there anything you want to flag in terms of, like, seasonal factors as we kind of think about this year, if it's different than what you kind of see in prior years when we think of the seasonality of the business?

Michael, it's completely different at the moment. I mean, any historic trends on seasonality right now can be sort of disregarded. I mean, we're in a pretty deep downturn, particularly in Europe. You've got a different dynamic to the China business and a weak demand environment, even though that business has stabilized. We'd often see Q3 and Q2 as stronger quarters, given some of those demand dynamics you'd see out of those areas. At this point in time, I think seasonality is not -- you can't pick anything from it. And what we've stated is we just don't see -- we don't see any meaningful recovery until sometime in 2025 at this point.

Fair enough. And if I could just squeeze one more in, Mark. I think you really are emphasizing, sounds like, really spending to drive the growth and investing the business. I'm just curious with where the balance sheet is, Mark, is do you feel like the growth can get revitalized just by the organic growth profile and some of these markers you guys are trying to attack? Obviously, I think the macro is important as well. Do you think you can get back to that double-digit kind of growth profile that IPG is -- was kind of used to before the softness we've observed? Or do you think M&A has to be a bigger component of us talking about, you know, the growth profile going forward? Thank you.

Yeah. Sure. Thanks for that follow-up question. So first of all, I just want to emphasize the -- again, the product roadmap and the technology here. So first and foremost is continuing to drive that. We've got a great lineup of things that we're working on that will be coming up that will absolutely drive growth. In the material processing side, you've heard me talk about the lasers and then some of the components like the fast scanning, tying those things together and driving growth with the subsystem and system capability. And then also in other areas like medical that we've seen that fantastic growth. And we've got a great roadmap that we're investing in that will give us great growth over the next years. And, of course, I'm always interested in anything that could drive that growth faster, give us differentiation, faster time to market put us into adjacent markets. So the M&A, I'm certainly always interested, looking, but in that area, not looking for any giant transitional kinds of acquisitions. Again, we have a really great opportunity to continue to grow that business.

[Operator Instructions] Our next question comes from Mark Miller with Benchmark. Please proceed with your question.

I, too, would like to welcome Mark, to IPG. And I had a question on General Motors and Ford recently reported strong EV sales. Just wondering, what you're seeing in terms of EV-related sales in both North America and China?

Yeah. I can take that. Yeah, Mark, thank you for the questions. Again, as I mentioned earlier in the call, we're in a really good position on the EV, because of the solutions that we bring, not only in the laser but also the wraparound process there. And so we have a great share in that. But what we've seen, again, as we talk to the customers, those projects are being pushed to the right where we thought they were going to come in, in the second half of this year, the customers in each of the regions are talking about those projects being more into 2025.

Mark, maybe just pick up on that. There's a couple of good data points. I think overall EV sales in the first half of the year are up 20%. In China, they're up 30%. Europe is a bit flat at the moment. Off a smaller base, North America has actually performed quite well. So total battery capacity utilization, we think, has increased by about 20%. That's going to help drive higher utilization overall globally, and I think supports the thesis that we start to see a recovery in this 2025.

Thanks. Last question is in terms of recently introduced products, what percent of sales at 45%.

46%, this quarter.

Thank you.

We've reached the end of the question-and-answer session. I'd now like to turn the call back over Eugene Fedotoff, for closing comments.

Thank you for joining us this morning, and your continued interest in IPG. We will be participating in a number of investor events this quarter and are looking forward to speaking with you soon again. 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.