IPG Photonics - Earnings Call - Q2 2020

Transcript

Speaker 0

Good morning, and welcome to IPG Photonics Second Quarter twenty twenty 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.

Speaker 1

Thank you, Stacy, and good morning, everyone. With us today is IPG Photonics' Chairman and CEO, Doctor. Valentin Kaponcif Chief Operating Officer, Doctor. Eugene Sherbakov and Senior Vice President and CFO, Tim Mammes. 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-nineteen pandemic on our business and those detailed in IPG Photonics' Form 10 ks for the period ended December 3139, 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, 08/04/2020.

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 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.

Speaker 2

Good morning, everyone. Despite the continued challenges to our business from the COVID-nineteen pandemic, we delivered second quarter results above our guidance range. Our strong performance was driven by better than expected performance in China and strength in new products. Before discussing the latest trends in our business, I want to provide you with an update on our ongoing efforts to deal with COVID-nineteen pandemic. The well-being of our people, our customers, and our partners remains our highest priority.

We are continuing to manufacture and service our solution in all regions, having employed additional distancing, cleaning, and air purification and disinfection procedures while providing all employees with masks to wear in our offices. With the state of Massachusetts now in Phase III of its reopening plan, it has allowed us to bring additional employees back into our headquarters so that starting levels in The US will be more commercialized with our facilities in Germany and Russia. Our commitment and support of workforce health and safety extends to COVID-nineteen response efforts in local communities worldwide. In addition to donation in China, Russia, and Europe, we have donated essential parties of face masks to MJH Boston and one of the local county hospitals. Also, have recently made a sizable financial contribution to the Booster Education Development Fund to purchase Chromebooks for online education programs this fall.

IPG is committed to supporting economic empowerment and diversity efforts in our local communities. Further, we believe that cultivating of diverse and inclusive work environment, one that fosters a culture of mutual respect, help ensure our growth and success in the marketplace. Thirty years ago when I founded IPG, our vision was to create a company that would redefine our industry and whose day to day operations were committed to improving our communities and our society as a whole. Since that time, we have demonstrated a commitment to fostering, cultivating, and preserving a culture of merit where our greatest ideas and innovations have come from the diverse collaboration of experiences and backgrounds of our people. Turning to our results, we continue to benefit from signs of industrial demand recovery in select regions, most notably China.

In particular, demand for high power CWE pulse laser for cutting and battery processing application remains robust. However, global demand trends remain very uncertain at this time and we have seen continued push out and delays in select welding and system projects in Western Europe, North America, and other parts of Asia. This uncertainty continues to make forecasting of our business very challenging in the near to medium term. We continue to believe that our large, diverse, advanced materials and components technology platform, very efficient R and D model, as well as strong balance sheet and free cash flow provide us ample flexibility to respond to business disruptions and emerge from the pandemic in a stronger competitive position. Also, the demand environment remains mixed.

We are demonstrating good progress in our core markets thanks to our technology differentiation and low cost production capabilities. In the cutting market, we delivered strong sequential growth in both our recommended one to four kilowatt lasers for the high volume market and our ultra high power lasers for leading edge cutting systems. With the launch of our new ultra compact YLR W series of lasers, IPG is once again raising the bar for leading edge performance in the high volume cutting sector. The YLRWU has essentially extended optical performance. The smallest size and the lowest weight in the industry.

At first time for their range of devices, it's fully protected against soft humidity penetration, delivering unmatched performance in ultra compact form factor with a record power to volume ratio. At the high end of the market, we expect to benefit from the substantial increase in order volumes for our 30 kilowatt lasers and ultra high power optical heads. These lasers not only enable 50% to 100% faster cutting speeds than 15 kilowatt devices, but are capable of processing materials with 20 to 50 millimeters of thickness or even greater. This improvement in both productivity and flexibility is driving the replacement at first time of plasma cutting machines and lower power laser solutions, particularly in the machine shops and construction industries. Moreover, these lasers provide superior beam parameters, record wall clock efficiency, and unique high reliability that are the hallmarks of our solutions which drive superior return on investment to our customers.

Our adjustable mode beam laser continues to gain traction in the welding industry, most notably in electrical vehicle battery welding. Our AMB products produce superior speed and weld quality. Our competing solution tends to broader range of built in ability which enables spotless welding. During the quarter, we again note that doubled sales of high power nanosecond pulsed lasers used for foil cutting and other electrical vehicle battery processing applications. And we do expect strong growth in this application to continue during the second half of the year.

Product innovation remains core to IPG's success. During second quarter, emerging product and application sales were one quarter of total revenue, increasing nearly 20% sequentially despite software demand trends in several new product categories due to the COVID-nineteen pandemic. Sales of medical laser increased more than 150% year over year as we continue to sell our gold now already gold standard thorium laser solution and consumable fibers to urology and other soft tissue applications. Advanced application revenue increased more than 40% year over year in Q2, driven by strength in government, semiconductor and the resumption of cinema projection system shipments. Unfortunately, the COVID-nineteen pandemic limited our ability to make further progress selling our green ultra violet and ultrafast pulsing lasers into emerging microprocessing applications.

Given the restricted travel and shutdown of customer sites and application labs during the quarter. However, we continue to target more than 55 new projects for these lasers across a wide range of applications, processing glass, ceramic, composite materials, numerous crystals, circuit boards, or LED fumes, batteries, and solar cells. We continue investment in a number of next generation solutions that we plan to launch over the next six to twelve months with significant disruptive potential. This includes our newest outstanding handheld laser welding. I underline handheld.

It's the newest product with a series market chance. Multi channel QCW lasers for spot welding application and kilowatt scale pulsed lasers for ablation and cleaning application. As well as first time, multi chemowatt, thulium, and green fiber lasers. Beyond materials processing, we continue to develop new soft tissue and medical treatments, meet infrared lasers for molecular beam resolution, level resolution, underlying spectroscopy, inspection, sensing, and biomedical research application. New high speed transceiver for the telecom data core market, as well as new ultra high power single mode lasers and amplifiers for defense applications.

I want to conclude my remarks by thanking our people for their strong execution, one of the most challenging in our company's history. I remain confident that our technology and manufacturing leadership will enable us to accelerate growth out of this pandemic and deliver on our mission to make our fiber laser technology the tool of choice in mass production. With that, I will turn the call over to CEO, Eugene Sherbakov.

Speaker 3

I'll begin my remarks by discussing the effect of COVID-nineteen on our production. All three of our major production facility in Germany, The United States, and Russia remain open. We have increased production at our facility in Massachusetts as the state continue to progress on its reopening. Our facility in Germany and Russia are operating on a largely normalized basis, albeit with social distancing and enhanced cleaning and filtration measures in place. I want to reiterate that safety of our employers, their families, our business partners, and community remain our highest priority.

We continue to benefit from our vertical integrated product model, which enables key technology and cost advantages over the competition while minimizing supply chain disruptions. The current constraint on our business primary related restrictions on travel that affect of our sales and application development efforts, as well as our shipment of products around the world. Shipping costs were again elevated this quarter, while we see we saw a delay in and push out in project based work due to COVID-nineteen pandemic. However, we continue to believe we have ability to meet the near term demand for our products. We continue to benefit from cost reduction actions we undertook in the 2019 as the total manufacturing and operating expenses increased approximately $2,000,000 sequentially, while revenue increased $47,000,000 quarter over quarter.

Examining our performance by region, revenue in China decreased 11% year over year, but more than doubled sequentially, represented approximately 49% of our total sales. We benefited from strong sequential improvement in sales into cutting, welding, and battery processing, driven by a pickup in order activity in March and April that continues through the later half of Q2, albeit at more moderate pace. We continue to face aggressive competition in the region, but we continue to maintain share at key accounts while anticipating a strong mix of lasers at 10 kilowatts or greater in the second half of twenty twenty. In Europe, revenue decreased 24% year over year due to the effect of COVID-nineteen on many countries in the region. Similarly, revenue in North America decreased 60% year over year with strong growth in medical lasers and advanced applications more than offset by declines in laser and system sales for material processing.

Sales in Japan decreased 60 year over year, while COVID-nineteen infection in the region are below other countries, the continuous stopping and restarting of economic activity has delayed many significant projects with our welding and cutting businesses in the region. Sales in KAE decreased 33% year over year as economic activity in the region remained subdued. And sales in Turkey decreased more than 70% year over year as the COVID-nineteen pandemic severely affected cutting sales in the region. With that, I will turn the call over to Tim to discuss financial highlights in the quarter.

Speaker 4

Thank you, Eugene, and good morning, everyone. Revenue in the second quarter was $296,000,000 which declined 19% year over year, but increased 19% quarter over quarter. Revenue from materials processing applications decreased 21% year over year and revenue from other applications increased 36%. Sales of high power CW lasers decreased 26% year over year and represented approximately 53% of total revenue. Sales of ultra high power lasers at six kilowatts or greater represented more than 50% of total high power CW laser sales.

Pulse laser sales increased 4% year over year with growth in high power pulsed lasers, partially offset by lower sales of lower power pulsed lasers for marking applications. Systems sales decreased 37% year over year as growth in systems for medical device manufacturing was offset by lower sales of other IPG laser systems and Genesis non laser systems. Medium power laser sales decreased 31% on continued softness in additive manufacturing and the transition to kilowatt scale lasers in cutting, while QCW laser sales decreased 14% year over year, but increased 39% quarter over quarter from sequential improvement in consumer electronics applications. Other product sales increased 21% year over year, driven by growth in medical laser sales. Q2 gross margin was 46%, which declined three fifty basis points year over year.

Compared with the year ago period, the decline in gross margin was driven primarily by less favorable absorption of fixed manufacturing expenses. In addition, increased shipping costs were partially offset by lower inventory provisions compared with the year ago period. Second quarter GAAP operating income was $47,000,000 and operating margin was 16%. During the quarter, we recognized a foreign exchange loss of $13,000,000 primarily related to revaluation of U. S.

Dollar cash and other assets in Russia given the appreciation of the ruble versus the U. S. Dollar. In addition, we incurred a charge of $1,000,000 which includes non cash write off of machinery as well as other charges for severance and lease termination relating to our strategic decision to exit the submarine networking business. Foreign exchange loss and other charges reduced Q2 operating margin by approximately four seventy basis points.

Q2 net income was $38,000,000 or $0.71 per diluted share. The previously referenced foreign exchange loss and charges for restructuring and asset impairment reduced EPS by $0.20 The effective tax rate in the quarter was 23%. If exchange rates relative to the U. S. Dollar had been the same as one year ago, we would have expected revenue to be $8,000,000 higher and gross profit to be $4,000,000 higher.

We ended the quarter with cash, cash equivalents and short term investments of $1,200,000,000 and total debt of $40,000,000 Strong operational execution resulted in cash provided by operations of $73,000,000 during the quarter. Capital expenditures were $20,000,000 in the quarter. For the full year 2020, we now expect capital expenditures of approximately $100,000,000 below our prior target of $115,000,000 to $125,000,000 During the quarter, we repurchased 131,000 shares for $16,000,000 Second quarter book to bill was greater than one with strong bookings growth in China, offset by weaker order trends in other regions. As expected, the pace of order growth in China moderated in the second quarter as the quarter progressed, while we have seen modest improvement in order trends in other regions. However, visibility into a recovery in global demand remains uncertain at this time.

We continue to benefit from near term growth opportunities in ultra high power cutting, electric vehicle battery processing and systems and devices for the medical industry. We believe that the strides we are making in higher power products within our core materials processing business and new solutions will enable us to emerge from the pandemic in a stronger competitive position. For the third quarter of twenty twenty, IPG expects revenue of $280,000,000 to $310,000,000 Company expects the third quarter tax rate to be approximately 26%. IPG anticipates delivering earnings per diluted share in the range of $0.70 to $1 with 53,000,000 basic common shares outstanding and 53,500,000.0 diluted common shares outstanding. Financial guidance provided this quarter is subject to greater risk and uncertainty given the COVID-nineteen pandemic and its associated impacts to the global business environment and government policies.

As discussed in the safe harbor passage of today's earnings press release, actual results may differ from our guidance due to factors including, but not limited to, goodwill and other impairment charges, product demand, order cancellations and delays, competition, tariffs, trade policies, health epidemics and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the company's reports with the SEC. With that, Valentin, Eugene and I will be happy to take your questions.

Speaker 0

Thank you. We will now be conducting a question and answer Our first question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 5

Hi, good morning. A couple of questions. Just on the other applications area, you referenced that 36% growth, which is certainly a strong growth rate. But sequentially, it was down. And I just want to maybe square some of that with the commentary you made about the momentum from new products.

Was there some COVID related impact that sequentially affected that? Was it just more macro related?

Speaker 4

No. It wasn't really either of those things, Jim. First of all, the medical product for the lithotripsy application was launched in Q2 and we had very strong initial sales as the customer in that area built the inventory to launch the product. And I'd stated on the Q1 call that revenue from that application would still continue to be strong on a year over year basis, but the total demand would moderate a bit compared to that initial product launch. Interestingly, that customer, the launch has gone very well and we actually received an increase in the total orders that we've got on hand during the quarter, additional 4,000,000.

So that's more just timing of product launch rather than anything COVID or macro related in particular. The second thing is that defense and other advanced applications, including instrumentation and others had a very strong first quarter. We shipped 100 kilowatt laser in The U. S. So again, it's more timing of orders for those some of those other advanced applications, which performed again well in the second quarter.

But just relative to Q1, some of the unevenness around revenue was exhibited. Interestingly, we're working on several more orders for high power single mode lasers in The U. S. We have an order to be delivered to Asia in the second half of the year. There's little bit of uncertainty around the timing of that delivery.

So the backlog around some of the advanced applications continues to be big. The telecom business in Q2 was a bit weaker and that was COVID related demand there. I think that clarifies for you what's

Speaker 2

I can I can add for medical? Medical is the interest medical market revenue growth, so it depends strongly from FDA approval. First, number one, it's very successful in urology now. It's become gold standard now. Recognize gold standard in this urology application.

But only first we received FDA, for example, here in China, in Russia, we received only a few months ago. And they only started to save because before it was only for test and so on. So sales in this urology application only starting. Secondly, we developed new products not only for urology but for up to 10 other applications, medical applications. But some of the devices finished and so on, and also metodics.

But we still stage of certification to get FDA in other countries similar approval. We could not sell this in the market. But we expect next year, two years, we'll receive a lot of approval, and then we will open a deal to go to market, attack the market from many positions, from many applications. Medical business, we expect will grow very fast next two, three years. Got it.

Thank you.

Speaker 5

And just a follow-up on the guidance. Wondering if you're seeing any stronger demand in the consumer electronics market. There are some companies that have shown some or demonstrated some pickup in demand in this area. And I'm wondering, is that at all factored into your guidance?

Speaker 4

Yes, we saw some demand even in Q2, Jim, with the QCW improvement. But for us, the total demand environment for consumer electronics is certainly much more moderate than it's been historically. There's a bit of a benefit there for sales into consumer electronics in primarily in Asia. But it certainly hasn't got the momentum behind it that we've historically seen on the materials processing type applications.

Speaker 5

Thank you. And I'll jump back in the queue. Thank you.

Speaker 4

Thanks.

Speaker 0

Thank you. Our next question comes from Tom Diffely with D. A. Davidson. Please go ahead.

Speaker 6

Yes, morning. First, wondering what the relative strength in the pulsed business is coming from.

Speaker 4

So that was really on the high power pulsed. It's electric vehicle battery applications, including foil cutting, cleaning applications as well. So the ultra and the higher power pulse lasers that we have have a significant competitive advantage in the market for those types of applications. There may even be some limited amount of welding being done with those higher power pulse lasers alongside the QCW as well.

Speaker 2

Cleaning, example, very important cleaning starter to grow very fast. For this, we need 100 many 140 kilowatt power power from laser. We have all these set of lasers. It's not available from practical any other sources today. So it's about like 20 to 50 watt for marketing applications.

So it's practical. Our sales in China stopped because they sold crazy prices like for all marketing system, like only couple thousand dollars, not not serious at all. We withdraw from this market in China. In other countries, we're still selling this marking laser, but in China, not possible at all. They killed this market.

Speaker 6

Yeah. Okay. That makes sense. And then I'm curious, you know, how important is the auto industry, the global auto industry for you, for recovery? And what is your view of the, you know, the, auto recovery over the next, you know, several quarters to a year?

Speaker 4

Automotive industry continues to be an important part of IPG and laser usage. Many European auto manufacturers are almost exclusively using IPG products. So some recovery in main body applications and closures would help both on the welding and even the cutting market. But one of the primary growth areas we see on automotive outside traditional will be continued investments in electric vehicle manufacturing all around the world and that continues to have some particular strength behind it. Overall, some of the welding applications for automotive even on the traditional side were reasonable in Q2.

For example, one of the main Japanese manufacturers is continuing to roll out some of their specialty welding applications using IPG lasers.

Speaker 6

Okay. Thank you.

Speaker 2

Thank you, So all the practical way, the most you you will know the tier one is this automotive customer. They use IPG lasers. The question not we've been trade. We have they prove they use this in in not only in Germany, also in Japan, for example, in The US, and so on. But total demand now very low due to many problem when the automotive market also due to COVID, many other reasons, but total demand for laser very low.

But when they're looking for laser solutions, they're buying from IPG. It's a it's a car, but electrical car. It's situation. Also, Tesla, for example, our customer forgot.

Speaker 0

Thank you. Our next question comes from Joe Wattin with Edgewater Research. Please go ahead.

Speaker 7

Hey, thanks. First off, I wanted to try to bridge to the third quarter sales guide, is flattish sequentially at the midpoint. You have a benefit of a full quarter of activity in the West versus the second with April essentially being a lost month. So is there anything that's an offset there that's worth noting that's more of a headwind sequentially?

Speaker 4

I think we're seeing some moderate improvement in order trends outside of China in particular. So moderate improvements in North America, in Europe and not quite the same. China has still got some strong demand to it, but it hasn't got quite the same momentum in China that you had coming out of the crisis at the beginning of last quarter. So we said that total order flow in China had moderated a little bit. We've got a lot of backlog in China.

And some of that is actually also scheduled to ship in Q4 rather than Q3. I can't know anything in particular. I think you're dealing with an environment that's not exactly strong and have a lot of momentum behind it anywhere, right? You're in a situation of recovery and reasonable demand trends where we've guided to not particularly strong demand trends.

Speaker 7

Okay. Makes sense. And then, Tim, the gross margin was impressive. The only favorable comment I caught in your prepared remarks was a smaller inventory reserve. Is there anything else worth noting in that uplift, which was almost 500 basis points?

And any context with that on how you're looking at gross margin in the second half?

Speaker 4

I think the most pleasing thing about gross margin is that despite prices coming down, the gross margin that we're achieving off a product bill of material has actually stabilized and even gone up a bit. So that's been the main benefit. And that's even before we launch the smaller the YLRU U rack mounted lasers. So there'll be some additional cost benefit coming in from those as well. So I think the most pleasing thing is that despite continued pricing pressure in the market, IPG continues to execute very well around reducing cost of product and has further cost reductions coming through in the second half of the year.

In the second quarter, our guidance range for gross margin ranges from about 43%, 44% up to 47%. So a reasonable level.

Speaker 7

Okay. Maybe I'll squeeze in one more just on that topic on the new rack mounts, YLRU. Any comments on how you're envisioning the curve of adoption going forward? How quickly how much you think that could be an above trend benefit from a competitive perspective in the one three kilowatt China market? And if you're able to quantify any kind of corresponding impact to gross margin or how you're thinking about that from a bill of materials perspective that could be interesting as well.

Speaker 4

Pat, do you want to take the new YLRU product adoption and cost reduction? Well,

Speaker 2

yes, we only introduced the market to sell in volume, manufacturing volume this quarter. It's a great way that much more than much greater than current way that we sold before and not comparable with all in quality with Chinese product. It is very important that cost of manufacturing is laser also essential with us. So we hope that we'll go now we define the price policy for this laser in the market. It takes some time estimation also, but we hope this product will replace many Chinese at all because they could not move.

Absolutely. Non comparable. And very reasonable would be able we hope the price also competing price for this product. Now our market share this year in numbers, we are again growing in sales. First quarter, we grow in sales more than 20% compared to last year, So in numbers, but due to price drop, we see some drop in revenue.

But we hope now that our numbers increase more in second half of this year. So we have already done the our revenue also share the message with this low power of one to four kilowatt. Four kilowatts are not available at all from Chinese up to now. Any four kilowatt in the rec mounted, only three kilowatt maximum. But we increase our this also, this second half of the year, we increase our rec mounted into series up to eight kilowatts.

It's fantastic, unique way that we talk. So we have called this we have done our position series in this low power market. High power, absolutely no chance to other people to compete with us.

Speaker 7

Helpful. Thanks a lot.

Speaker 0

Our next question comes from Michael Feniger with Bank of America. Please go ahead.

Speaker 8

Hey guys, thanks for taking my questions. Tim, just to flesh out a previous question about the midpoint of your guide with flat sequentially, I'm just trying to get a sense if there's been a breakdown when we think of the PMIs and general manufacturing activity and your business. I think in July, we saw the PMIs recover actually go above 50, indicating some expansion. Usually, in that environment, you guys kind of see sequential growth. So I'm just curious if how much of it is conservatism because we don't know, obviously, what could happen in August and September.

Did you guys see at least that improvement that matches PMIs? Just any help more than you kind of flesh out around that?

Speaker 4

I think we're just in a phase of recovery from very slow economic activity in the second quarter. I agree that PMIs have improved a bit. We've also seen some improvement in order flow outside of China, as we said in other countries in Asia, in Europe and The U. S. It's just not that it's rebounded in quite the same way that it did in China initially.

I don't think there's necessarily a big disconnect from this. I think we actually performed very well in Q2 in fact. So perhaps the expectation is going to a stronger sequential growth is a bit more muted because of that underlying strong performance in Q2 relative to Q3. I'm not really seeing any fundamental dislocation between where the economic data is and where our revenue numbers are, I think there's a little bit more optimism out there, but I can't claim that it's tremendously strong at this point in time. And the other thing you got to factor in is a little bit that even though things are being shut down, like q three in August is always very slow in Europe, for example, just with the summer vacations and and Bountons viewers, maybe people work harder this year because they haven't been in the office.

I said, I think they're gonna still wanna get up, go go on holiday. So I don't see a big dislocation.

Speaker 8

That's good to hear. And the gross margin, this is the second quarter surprising to the upside. I think you might have mentioned before pricing kind of stable. It looks like your inventories are back under control. You have cost savings coming through.

I guess, Tim, if we get back, and this is a big yes, but if we get back to that $350,000,000 revenue run rate, is there any change you see in your gross margin range?

Speaker 2

First of price is not stable. It's not true. Now all messages, information we're getting with China, for example, again, Rayco and Mark Patonik claim again they drop additional price for them, for mid power laser one, two kilowatt, additional of, 15%, 20%, they drop price, promise to drop price against the first quarter of this year. It's crazy though, but it's the situation. Don't think they're on wheels.

They're pushed by Chinese government within this market. It's a real way policy, country policy. It's not a jobs company commercial policy. What is the situation? What how we can compete with this?

It's very serious. It's a revenue drop and destroys the market segment also. Regarding the sales in The US, for example, now the American officials help also to delay market again. For example, now only now from in this New England introduced new roads again. The commercial works.

Now that we could not go especially with new product. We can go they require more and more meetings to help installation, training the customers, and so on. But we're not not able to go inside of America. All the block now again stopped. We have to wait.

We could not work with customers. We're fairly sold and so on. It's a serious damage again. Very serious damage again. It's a how to work?

We don't know. We could not receive even now many cases what we purchased. We could not because the driver of trucks refused to go to Massachusetts from other states. So, yes, they refused at all. They don't understand the situation.

They refuse it or deliver it. What we purchased, we're waiting past components and so on. Materials, we could not get this materials. New England now full of.

Speaker 8

Thanks for that. Just to sneak a question in on reshoring. I'm just curious if you guys are hearing anything of customers signaling this in North America or your other regions. Is this if this is an opportunity, is it more on the welding side? Because the argument against reshoring has always been it's cost prohibitive, which is why automation would have to play a part.

So curious if you guys have any thoughts on that or seeing any early signs of that type of theme. You.

Speaker 4

Mike, just coming back to your other question, I think at the moment, we're happy with the range of 45% to 50% on gross margin. We get back to sort of $350,000,000 of revenue, we'd be hoping to be much more closely towards the top of that range. We're not going to be changing that range at this point in time to see how things plan out. On Shoring, I think it's a longer term trend. And if and as it happens, it's going to have to be driven by improvements in productivity and ensuring the cost is of manufacturing product onshore is low and that plays into utilizing more lasers and automation.

So I don't know there's been any huge announcements by companies onshore and I've heard of maybe one semiconductor company starting to do more onshore in The U. S. But I think if the geopolitical situation continues in the way it will, it's probably likely to become a longer term trend.

Speaker 0

Thank you. Our next question comes from Nick Todorov with Longbow Research. Please go ahead.

Speaker 9

Hey guys, thanks. Good morning. I just want to ask first that you mentioned seeing some signs of lasers displacing plasma cutting machines. I think you were specifically talking about the 50 kilowatt lasers that you're selling. But I wonder if you can provide a little bit more color on that dynamic, not also in that super high power lasers region, but also if you're seeing any of that happening in the more traditional 10 to 15 kilowatt laser space.

Yes, that will be my first question.

Speaker 3

Okay. But 15 kilowatt is not the limit. We already get some orders from our two zero three OEM customers for 20 kilowatt lasers for China, Japan, and other countries. And recently, we received order of the first order for 30 kilowatt lasers, also for cutting applications. And from this point of view, we see the good potential for our high power lasers definitely because no competition.

And performance of our lasers in any case is superior. And, this is trend. It's It's not only to substitute plasma cutting machine. It's one only one of the goal. Because based on these twenty and thirty kilowatt lasers, our customer can provide absolutely new approach to cutting applications with much more higher speed, much more reliable cutting machine, and also much more productive machine.

And finally, with much more lower price for cutting applications. This is much more important.

Speaker 2

I can remind you, only a few few years ago, most of the companies who produce CO2 lasers cutting is the same analysis, so on, work, this cry. So fiber laser only for cut very thin metal like two, three, five millimeters only. Now we developed technology to cut 50 millimeters. Then it said never more than 10 millimeters would be possible to cut fiber laser. Now we resolved this question.

We developed this technology. It's not only machine, basically, a lot of ways of optical heads, but also technology how to cut very thick metal sheets. The practical cover all needed to cut metal. Drill it now in one meter metal sheet. One meter metal sheet.

We are successful with good speed. We drilled in holes. It can cut even one meter. We demonstrated our method. Nobody did what was possible at all.

We so this plasma cutting is now don't have any chance for full future, though, not only plasma cutting. But next step is cutting not only metal cutting, metal sheets cutting and so on. Next step is cutting all other materials like ceramic, like Kenya, other if we develop this technology for cutting all this also. It's very serious new market when really still catching a use only for very thin, like one, two millimeter, for example, for sapphire or glass for iPhone, so on. With the way of technology, they receive a patent for paper, thick thick material, ceramic or this glass and so on, which cut up to many tens mill millimeter sheets.

It's nobody used up to now this technology. We have the technology in the world and use the market new family of machine to cut all such materials. For them, construction glasses for architectural glasses, it's huge market. All this cutting, three d cutting is still not very well distributed only to place in market. Practically strong premium industry and so on.

But now a new opportunity of three d cutting is also next generation when it would be used much larger scale in the larger applications range. That's helpful. Thank you.

Speaker 9

Thank you, Valentin. Just as a follow-up, you mentioned that I guess guidance implies that China revenue is going to be more flat to down sequentially. And you mentioned you're not seeing any disconnect economically. But I guess can you comment on the competitive environment a little bit? You mentioned that you're seeing it feels like seeing aggressive price action, but we also heard that there were some of the competitors there have some really high hopes for share gains, particularly in the

Speaker 2

six kilowatt and above place. I guess, do you see that as feasible?

Speaker 9

Or how did you plan on combating that?

Speaker 4

Competition hasn't really changed fundamentally. It's still the same players there. Of course, at the lower end there's been fierce competition. I think we're responding to that with the new product, which Fountain articulated was way ahead of where they are in terms of efficiencies, form factor, electrical efficiency, sorry, reliability. Yes, of course, at higher power levels, the competition is trying to get share there.

But we've referenced before that they see a lot of power degradation in their lasers even at lower power levels. So those power that power degradation becomes more of an issue as you go up to lasers with six, eight, and 10 kilowatts.

Speaker 2

So More power, more high degradation, much more danger and so on. If they still could not resolve for one two kilowatt degradation, degradation Chinese laser is 10 times higher than an hour laser, 10 times higher. So it's it's enormous difference and so on. At higher power, degradation is much more than a low power. It's number one.

Number two, then we introduced now this year in the market last year and last year and this year also new version of not only YLR U, but also YLS U. YLS U is a laser from four, five kilowatt up to fifteen, twenty kilowatt. Absolutely new also solution, much more again, more perfect, and more compact and cheaper in cost, much cheaper in cost. So for for this lasers, we don't have any problem with gross margin and so on. It's still now where we it's so competitive in both in not only quality but in cost and the pricing.

So it's clear that they don't have any chance, our opinion, to compete, penetrate in series in this market today.

Speaker 9

Got it. Thanks. Good luck.

Speaker 0

Our next question comes from Mark Miller with The Benchmark Company. Please go ahead.

Speaker 10

You mentioned strength in emerging products up 20% sequentially. I think you said cinema, I'm not sure if you include that in emerging products. But if you could break out some of these emerging products that are showing healthy demand.

Speaker 4

Mark, we don't go into that granular level on those. They include things like the higher power pulse for the cleaning applications and EV battery processing, which had strong sales, includes green lasers for solar cell and nonmetal processing, edge deletion, ablative processes, ultrafast UV has got many different types of projects we're working on there with high power systems, beam delivery and some of the defense and single mode applications are included in that. But we just don't get down into giving a granular breakdown between each of

Speaker 2

those individually. UNIDENTIFIED Only this year, second half this year and first half next year, we introduced on the market some cans new product. Most of them don't have any analog. Only this next twelve months, we introduced in the market, so many new product. Now the way to due to COVID because any new product, you have to work very tightly with customers.

You have to meet with them, have trained them, have installed, have sold. But now we're all the border closed. We're very limited. This is delay penetration, introduction to market. But it will go and so on.

It's this situation will resolve. The the but my product's practical already. You know, qualification process already and so on with so much production. It's a lot of new innovative products. Some TENS, not one, two, three, five, some TENS products different duplicates, we introduced only now in the market.

Speaker 10

Okay. And any further penetration in terms of lasers in the automotive industry replacing spot welders that was kind of a cost issue before?

Speaker 3

Yes. Recently, we installed in our for our German customer 16 c system LSS system for production automotive production. And from this point of view, we see the good potential for our system, not only for one application, but different kind of applications. It's also for EV, electrical vehicle, but we also see some opportunity for other. But, also, I would like to mention that such kind of system now we use it not only for automotive, agriculture.

For example, one of the big customer in The United States, also in Europe, they start to use our system for production their machine. And it's the first time they start to use the laser systems. And the first result is very good. And this is very important that we are not shipping only the small system, but we are shipping the complete production line for such kind of application.

Speaker 2

Thank you. And also, enter for this, now we introduce next this I will be press release this month. We introduce now very interesting new product, which automotive use in many yeah. I we have may not many 10,000, but even 100,000 units they're using the assembly facility. We introduced a a new solution, extremely interesting, much more high quality well, and so on.

Solution we're introducing this market as well. We believe that it would be accepted very fast by the most cutting, automotive, companies. But also from point of the in transportation, for them, we're working very closely to develop technology of cutting and welding technology for the aircraft manufacturers. It's and we ship them into now with the system. We're working in the prep prep system prototype, and they're very happy customers.

So we hope to distribute this experience. It would be also a serious additional business and cutting and welding application. Thank you.

Speaker 0

We've run out of time. I would like to turn the floor over to James Hillier for closing comments.

Speaker 1

Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking to you over the coming weeks and we'll be participating in a number of virtual investor conferences this quarter. So thank you. Stay safe and have a great day everyone.

Speaker 0

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.