IPG Photonics - Earnings Call - Q2 2021

Transcript

Speaker 0

Good morning, and welcome to the IPG Photonics Second Quarter twenty twenty one Conference Call and Webcast. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Pettitoff, IPG's Director of Investor Relations for introductions. Please go ahead, sir.

Speaker 1

Thank you, Kevin, and good morning, everyone. With us today is IPG Photonics' Executive Chairman, Doctor. Valentin Kaponso Chief Executive Officer, Doctor. Eugene Sherbakov and Senior Vice President and CFO, Tim Mamet. 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 12/31/2020, 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, 08/03/2021 only.

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 the Excel based financial data workbook posted on our Investor Relations website. We will post these prepared remarks on our website following the completion of this call. With that, I'll now turn the call over to Valentin. Good morning, everyone.

Speaker 2

We are pleased to report another good quarter for IPG. Our second quarter revenue was significantly above the same period last year and increased from strong results in the prior quarter, driven by improved macroeconomic conditions in most major geographies, growth in emerging products as well as excellent execution by the IPG team. We saw higher end market demand for our core material processing products where our fiber lasers are replacing traditional tools and other lasers and continued to pursue the opportunities in emerging markets. We remain focused on growing sales in applications that require innovative solutions. Our expertise in fiber laser technology is superior quality of product such as advanced applications, electric vehicle battery production, medical and microprocessor.

Our technologies are transforming the way products are created enabling production of smaller and more complex devices, improving the product we use every day and bringing advanced manufacturing capabilities to electric vehicle and to renewable energy industries, helping to address climate change and sustaining DOE initiatives. Our investment in new products and applications are paying dividends. In the second quarter, emerging product sales increased 47% year over year and accounted for 29% of sales compared to twenty five percent last year. We continue to focus on innovation at IPG and working on tens of exciting new opportunities. I hope to share more details about these opportunities with you on our future calls.

With that, I will turn the call over to Eugene Sherbuckov. Thank you, Amalyn, again,

Speaker 3

and good morning, everyone. During the quarter, we demonstrated excellent progress in our core material processing market across all major geographies with accelerated growth in high power and ultra high power lasers for cutting applications in The U. S. And Europe and strong growth in welding in China and Europe. We also delivered robust growth in emerging products and applications.

Revenue from material processing applications increased 27% year over year and contributed 93% of total revenue in the quarter. Sales in welding applications grew significantly in the last several quarters due to increased sales of our AMV adjusted motor beam lasers for general manufacturing purposes and electric vehicle battery welding applications. Battery manufacturers are facing challenges, welding together different type of materials such as copper, aluminum. These materials are extremely thin, reflective, and need to be welded with high precision and reliability. Each battery model requires hundreds of wells, and our AMD lasers can address these challenges, offering superior speed and well quality over competing solution with broad range of beam, tunability and sputterless welding.

We also saw strong demand in marking and micro material processing applications such as solar cell manufacturing and three d printing. Sales of our green pulsed lasers, which are used to improve solar efficiency, more than tripled compared to the prior year and becoming a more meaningful part of IPG's revenue. We are taking advantage of opportunities created by increasing focus on sustainability globally and expect future solar cell manufacturing capacity to grow, driving additional sales in our green lasers. We are also increasing the pulsed energy of the green lasers to enable next generation applications in solar, drilling and copper welding for consumer electronics. Revenue from our other applications increased by 5% year over year.

Medical sales showed a good growth both year over year and sequentially. As a result of improved demand of our surgical lasers. Advanced application sales improved year over year, while telecom revenue declined compared to the same period in the prior year. Examining our performance by region, our revenue in China increased 10% year over year in the second quarter, representing approximately 43% of our total sales. Year over year comparison for the region was more difficult as China sales rebounded from the pandemic earlier than other regions last year.

We saw strong demand in welding application for our AMB and other high power lasers, while demand in cutting, softener at the end of the quarter. So the sales of high power lasers increased only slightly compared to the second quarter last year. We continue to see solid demand in foil catching and welding applications related to electric vehicle batteries and are also starting to see some demand for the light rail handheld welding system in China. This should provide a modest benefit to revenue in the second half. While China's market remains very price competitive, we have continued to be disciplined with our approach to process our pricing given superior performance, quality, energy efficiency and reliability of our lasers.

However, there remains a significant part for the customer base that is very focused on the price alone. Sales to the rest of Asia increased 123% year over year with strong growth in Korea and other countries offsetting lower revenue in Japan. We are seeing a strong demand for the outer welding and foil cutting solution for EUV batteries in Korea and encouraged by improved booking in Japan. In Europe, revenue increased 50% year over year as we saw an acceleration of demand from customers in the region and strong growth in cutting, welding, marking and cleaning applications. Sales improved significantly in high power, ultra high power, AMD and QCW lasers.

European cutting customers are moving into the ultra high power lasers and are replacing CO2 lasers with fiber lasers to improve productivity. Bookings for the region remained positive pointing to continued recovery. Revenue in North America increased 23% year over year. Growth was primarily driven by material processing and increased sales of high power lasers for cutting applications. Sales to automotive was traditional electrical and solar markets remained strong.

We also saw solid improvement in micro material processing applications and strong growth in demand for light weld. Besides our normal direct sales model, we are leveraging the new third party sales with numerous welding stores and new direct online sales platform for light weld in The U. S. Laser system sales improved in the second quarter with both laser and non laser system, posting strong revenue growth. Bookings remain high, and we expect to see additional improvement in system sales in the third quarter.

We continue to benefit from our vertically integrated production model, which enabled key technology advantages over the competition while minimizing the cost and supply chain disruptions. However, we did experience shortage on certain components during the quarter and saw increasing lead time that impacted our and our customers' operations. We are also evaluating inflationary pressures on our input cost and reevaluate prior quotations when they expire. Despite these headwinds, we were able to deliver the revenue growth to the midpoint of our guidance and gross margin close to top of our expectations for the second quarter. IPG has been technology leader in fiber laser more than twenty years, and none of our competitors have been able to match or reproach the capability of our products.

Research and development is our DNA, and we are continuing to focus on reducing the cost and improving the quality of our components and products. We are also committed to expanding the range of products and applications. We address by pushing on a research and development project, but I believe we can commercialize in the near to mid term reach of significant market potential. We will continue to focus on opportunities where we can increase our value propositions to customers by delivering complete processing and technology solutions with our optical delivery and system capability. I want to thank our employers to their execution during the second quarter and thank our shareholders for your continued support.

With that, I will turn the call over to Tim to discuss financial highlights and the quarter and third quarter outlook.

Speaker 4

Thank you, Eugene, and good morning, everyone. Revenue in the second quarter was $372,000,000 which increased 25% year over year and 8% sequentially. Revenue from materials processing applications increased 27% year over year and revenue from other applications increased 5%. Sales of high power CW lasers increased 20% year over year and represented approximately 51% of total revenue. Sales of ultra high power lasers at six kilowatts or greater represented 51% of total high power CW laser sales and increased 15% compared to the prior year.

Medium power laser sales increased 70% on growth in cutting, welding, three d printing and semiconductor applications. QCW laser sales increased 13% year over year on higher demand from welding applications. Pulse laser sales increased 45% year over year with strong growth in green pulsed lasers used in solar cell manufacturing and higher sales of our infrared lasers for marking and cleaning applications as well as foil cutting applications in the electric vehicle batteries manufacturing process. System sales increased 19% year over year with improved sales for Genesis and ILT. Other product sales decreased 4% year over year.

We estimate that supply chain constraints impacted our revenue by 7,000,000 to $10,000,000 in the quarter. Second quarter GAAP gross margin was 48.6%, an increase of two sixty 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, partially offset by lower pricing and higher shipping costs as a percentage of sales. GAAP operating income was $92,000,000 and operating margin was 24.8%. Second quarter net income was $70,000,000 or 1.29 per diluted share.

The effective tax rate in the quarter was 24%. During the quarter, we recognized a foreign exchange loss of $3,000,000 primarily related to the appreciation of the Russian ruble and euro, partially offset by the appreciation of the Chinese yuan. The foreign exchange loss reduced EPS by $04 If exchange rates relative to the U. S. Dollar had been the same as one year ago, we would have expected revenue to be $23,000,000 lower and gross profit to be $13,000,000 lower.

We ended the quarter with cash, cash equivalents and short term investments of $1,500,000,000 and total debt of $36,000,000 Strong operational execution results in cash provided by operations of $116,000,000 during the quarter. Capital expenditures were $27,000,000 in the second quarter, and we now expect capital expenditures to be between 130,000,000 and $150,000,000 for the full year. During the quarter, we repurchased 185,000 shares for $39,000,000 Commenting on outlook for the next quarter, second quarter book to bill remained above one. While we expect continued improvement in sales outside of China, sales in China are likely to moderate in the third quarter due to more difficult comparisons and softer demand in cutting applications. However, displacement of non laser technologies, secular environmental trends and investments we have made in emerging products mean that we continue to see growth opportunities in high power cutting, oil cutting and welding applications for electric vehicle battery productions as well as opportunities in solar cell manufacturing, medical procedures and advanced applications.

We also see Light World sales gaining traction in multiple geographies in the second half of the year. For the third quarter of twenty twenty one, IPG expects revenue of $350,000,000 to $380,000,000 which implies a 15% year over year growth at the midpoint despite more difficult third quarter year over year comparisons, softness in the cutting market in China and ongoing supply chain constraints. The company expects the third quarter tax rate to be approximately 25%, excluding any discrete items. IPG anticipates delivering earnings per diluted share in the range of 1.1 to $1.4 with 53,500,000.0 basic common shares outstanding and 54,000,000 diluted common shares outstanding. Would like to remind you that financial guidance provided this quarter continues to be subject to greater risk and uncertainty given the COVID-nineteen pandemic and its associated impacts of the global business environment, public health requirements

Speaker 5

and

Speaker 4

government mandates. Please refer to the Safe Harbor passage of today's earnings press release for more details on risks and uncertainties associated with our forward looking statements. With that, Valentin and Eugene will be happy to take your questions.

Speaker 0

You. For participants on mute or using speaker equipment, it may be necessary to take your phone off mute or pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Jim Ricchiuti from Needham and Company. Your line is now live.

Speaker 2

Hi. Good morning. Tim, I

Speaker 6

I think I heard you say the impact that you saw from supply chain constraints in q two. I think you said around 7,000,000 to 10,000,000. So that is that just to be clear, is that a direct impact to you? Or is that what you're seeing from some of your what you've seen from some customers? It seems like a fairly modest number.

That's why I'm asking.

Speaker 3

Yes. It was a fairly modest number.

Speaker 4

I'd agree with that. It's a variety of things. It's both the impact internally on the ability to supply some product and also an impact from slightly lighter demand from some customers because they can't get components for some of their systems and therefore delaying shipments of their systems and then they don't want to take the lasers at the same time frame they did it. The other thing is that it is across most geographies, so it's not just in one specific location. China was impacted a bit, but also North America and even Europe as well.

Do you anticipate that being a little worse this quarter? No. It's probably going be on a similar level. So in Q3, it's a combination of that as well as some of the softness in the China cutting market that

Speaker 6

are really impacting guidance. It's not that that is specifically driving the guidance number down more significantly. And here's my follow-up question. Just with respect to North America, you showed strong year over year growth. And clearly, that's an easier comparison relative to the pandemic last year.

But on a sequential basis, I'm just curious, the decline there, 10% or so sequentially, is there are you seeing any signs of of The US, the North American market either slowing down or potentially being impacted by some of these external factors that we're all hearing about?

Speaker 4

No, not specifically. Think with North America, was more timing of revenue. We had a very strong start to the year in Q1. We still had some backlog, for example. I think one of those 100 kilowatt lasers was recognized as revenue in the first quarter, so that was a bit of a benefit.

Slightly slower quarter in Q2. I will say that overall North American backlog continues to be very strong. And the guidance number we have would sequentially, I think it will be basically flat, but again, to show growth on a year over year basis. So the backlog in North America remains pretty robust even though Q2 performance was a little bit lighter.

Speaker 6

Got it. Thank you. I'll jump back in the queue.

Speaker 0

Thank you. Next question today is coming from Nick Todorov from Longbow Research.

Speaker 5

Your line is now live.

Speaker 4

Yes. Thank you.

Speaker 7

I wonder I want to double click on the China demand, particularly in cutting. If we go back a quarter ago, I think you were talking about macro indicators showing signs of weakness, but I think your data points We're talking about strong trade agreements that are tied usually to high demand for ultra high power lasers. If I look at the high power sales and breaking down between ultra high power and below six kilowatt, we can see that ultra high power lasers grew very incrementally on a sequential basis. Also on the year over year basis, while below six kilowatt lasers grew, I think, 24% or 25% year over year and about 1015% sequentially.

So that implies that China sales are should have been strong. So I just want to double click and see the reasons, if you can give us more around the softness in China cutting.

Speaker 4

So China sales in the second quarter were strong, both on a sequential and even on

Speaker 2

a year over year basis, okay?

Speaker 4

The growth on a year over year basis was a bit lower than some other geographies. But don't forget that China had recovered already a significant round of revenue in the second quarter of twenty twenty. So the comparison there is a bit more difficult. I wouldn't say I was not concerned about performance in China in Q2. In fact, bookings as well were strong.

The issue is, is that I think a couple of companies even that have announced in the last couple of days have pointed out a weaker macro environment in China and even the government being concerned about a potential bit more of a slowdown. Yes, we'd highlighted that on some of the PMI data that initially come out, I think, in April. So there is a bit of a concern that China is a bit weaker than expected. And that's clearly driving some of our expectations in addition to the supply chain constraints in the third quarter. So I mean, bookings are good, but we expect those orders to be delivered over a slightly longer time than necessarily would have been if the demand environment had remained resilient or stronger.

It's still pretty resilient, just stronger.

Speaker 7

Okay. If I can click on the supply chain dynamics, I think we heard that there were some challenges with delivering chillers that were causing some lead times extension. Maybe can you give us what components are impacting your lead times? And when do you expect those to get results? And what are you doing to to address that?

Speaker 3

Yes. In reality, there was some delay with some components, but it's not critical components. It's, first of all, what also mentioned that the price for some materials also increased dramatically, for example, for copper welding and also for components based on these materials. For our production, it's not dramatical, and I think we will deliver in time not only churn but also other products during this quarter.

Speaker 7

Okay. Last quick one. Germany sales were down sequentially. I think European sales overall are very strong. What is the reason why Germany sales are kind of diverging from the rest of Europe?

Speaker 4

So think you should go and look at the data on that on which customer it was specifically there. We tend to focus on total European sales rather than just the individual countries there. And as you point out, total European sales continue to perform pretty strongly. I'd have to look at which customer was the change between Q1 and Q2. From other side, do want me to

Speaker 3

demonstrate is already high enough orders for ultra high power lasers. It's getting 20 kilowatt and more. That's the first time.

Speaker 7

Got it. Okay. Sounds good, guys. Thank you. Good luck.

Speaker 3

Thanks. Thank

Speaker 0

you. Next question today is coming from Tom Diffely from D.

Speaker 5

A. Davidson. Your line is now live. Yes. Good morning.

Maybe one more question on China. You talked in your prepared remarks and said that your pricing pressure remained. Curious if that has moved up into the high power region yet or most of the pricing pressure, is it still at the low power?

Speaker 4

Pricing some of the competitors are introducing product at higher power levels and trying to get into that ultra high power market, 12 kilowatt lasers even. And certainly, the only way they can compete is on pricing. So what we call the low end of the market, not just on power, but really on pricing, is moving up into higher power levels and impacting or reducing pricing there. Our strategy though is really, as we articulated, to continue to deliver behind the value proposition of IPG's product and not get drawn into what would be a terrific victory on pricing in terms of trying to compete at that low end of the market, which is just it's not focused on any kind of reliability or quality of devices, Susan. I think so far, our strategy has borne out pretty well with fairly robust China sales, but good profitability on those.

And we're pleased with the way that gross margin and even total operating margin has continued to track in the second quarter, John.

Speaker 5

Okay. Yes, a year or so ago, you talked about using your strong cost structure to maybe get more aggressive in the marketplace. And it sounds like you've been a little bit more disciplined than over the last year than I thought you may have been after some of those comments. But have you used pricing at all from your side? Or is it just in response to what you're seeing from the competitors?

Speaker 4

We've introduced some of the lower cost rack mounted lasers that's enabled us to reduce the selling price of those and make them a bit more competitive whilst maintaining margins on that. But we're not using pricing as our strategy within the China market. It really would be a bit of a pyrrhic victory in terms of gaining significant amount of share, but at a significantly lower average price per watt and then having to devote even more resources to building product that would have a lower profitability on it. So we're focused on the high end of the market. And also, of cutting, very strong growth in some of the welding applications for EV, the foil cutting applications for EV, even some mid power laser growth for some of the additive applications in China.

And then surprisingly, some of the pulse lasers, even at lower power levels for marking applications, where the quality of our product is recognized, have actually held up quite well. So there's a number of different areas we're focused on, on trying to drive that value at the highest level possible.

Speaker 5

Okay. That sounds great. Just one final housekeeping question. What's in your category of emerging products right now?

Speaker 4

Anything really introduced in the last three plus years. So it includes things like high power pulse lasers, the AMB, green, ultrafast, UV, some of the systems applications, accessories, so beam switches and cutting and welding head scanners, some of the telecom product, advanced applications as well.

Speaker 3

And also integrated systems and subsystems based on our laser scan components.

Speaker 5

Okay. Great. Thank you.

Speaker 0

Thank you. Our next question today is coming from Michael Feniger from Bank of America.

Speaker 5

Your line is now live.

Speaker 0

He jumped on the queue. Our next question is coming from Tarekash Misra from Berenberg. Your line is now live.

Speaker 8

Thanks, guys. Good morning. Maybe first off on the electric vehicle, if you could just talk about how is that market evolving in North America and perhaps maybe your most current estimate as to what percentage of your sales are now going to EVs?

Speaker 3

EV market, of course, is growing very fast and we see, first of all, for battery welding and cutting applications, different materials and production of components and some components for e vehicles. But also, you see the new tendency, especially in Europe, they start to produce and start to develop the new body in white for future vehicles because up to now, they're using the standard. And now based on the new technologies and new approaches are based also on laser welding and cutting using for such kind of production. They start to produce a new models based on such kind of approach. And this market grows dramatically, and we see also our opportunity to participate in this by using not only our lasers or components or subsystem, but also we had some proposal to produce a full production system from, for example, production or some other components or e e vehicles.

Speaker 2

No. The chart says c production system, production line. Correct. Full production line. That's correct.

Speaker 8

Got it. And currently, it's what, Nadeep, all these different sales combined to about, what, 5% of your

Speaker 3

total revenue, give or take?

Speaker 4

No. Previously, we sort of we said in a weak quarter, would be 5% and a strong quarter, it be 10%. In Q2, it's actually well above 10 of total sales in the second quarter, so continuing to grow strongly. And if you looked at like capacity rollouts on battery investments, that would potentially go meaningfully higher. Think if you looked at like total capacity investments, could get to like 20% of quarterly revenue over time.

Speaker 8

Got it. Interesting. And maybe just a quick one. Is there a way to think of your year over year sales growth in terms of how much was volumes versus pricing?

Speaker 4

Most of it would have been volume because average selling price per kilowatt across the if you look at it on a global basis was pretty stable. It was down very moderately on a year over year basis.

Speaker 8

Thanks, guys. That's all I had.

Speaker 0

Thank you. Our next question is coming from Joe from Edgewater Research. Your line is now live.

Speaker 9

Hey. Good morning. I wanted to ask on the China Cutting Competition. I know somebody already asked on this, but really just wanted clarification on whether the prepared remarks, you know, from doctor Sherbrokov had intended to signal there was more competition than than your expectations ninety days ago, or am I reading too far in?

Speaker 3

You see, in principle, we don't have any competitors because our product is the best in the world, and we are producing the best not only laser but also other components. From this point of view, again, we already mentioned in our presentation that up to now, more than twenty years, nobody could produce a product with parameters or performance better than IPG laser did. From this point of view, there no competition. Of course, there exists some competition for, first of all, in China and with Chinese production. But for this, some people using combination work like acceptable quality.

Maybe acceptable quality for China, but not acceptable quality for us. Our goal to produce best of the quality product. For this product, we can give guarantee and give guarantee not only three years right now. We can, in principle, guarantee up to five and seven years. This is our goal.

And from this point of view, again, nobody can compete with us after now.

Speaker 2

I can hear also not only in China. China is a dummy product. China is absolutely a low quality product up now, but nobody from the best American and European company not able. Many of them try try including military, bigger guys that try to make compete with us. Nobody was able to compete with us, not in quality, not in pricing.

So up to now, twenty years, typically, any new product need one, two years now to forty to provide something, this, similar product. And I would say unique situation. Twenty year, nobody, not in the East, not in the West, able to compete IPG product and quality and also in price cost and so on. We only one leader here. Yeah.

I mean, I don't think any

Speaker 9

of that's debatable. You know, your quality's proven out over over decades in the channel. But, you know, is is the market shifting more towards, you know, price focus a price first focus right now? Because this is the point in the cycle where you wouldn't necessarily expect that. Or, again, am I reading too far into just the second quarter trend, second and third perhaps?

Speaker 2

And also, you I have to wait. In China, very special situation today. Now this Chinese government, now all their politics are making house, not by they push their company, regular customers, not to buy outside of China. It's the government politics. They use all method financial means any other to stop them to buy outside.

Only made in China is quite much more more worst quality, so on, but made in China. You could not compete with this. Sorry. For regular customer, mass customer, it's Chinese police. Now it's not only China.

Many other country now is special after the trade regulation where they destroyed to us last year. There are many company now start to make such policy also, not only in The even America claim now made in US now. They are looking for any advantage to make, to buy only US made product. What what in twenty, thirty years ago situation, now they return to this situation, which was twenty, thirty years ago. When even laser from Germany was very difficult to sell in The US due to many regulation which create the cost to go to Europe to sell high quality products to US.

Now the situation returned to this this twenty years ago in beginning of this century. What can I make? It says with the new policy or government in destroy relations, create relations, regulation between worldwide regulation which were created during the last twenty years. Now they destroyed.

Speaker 9

Great. Maybe just for one follow-up just on that very topic. I'm curious on your take on Raikus being put on The U. S. Blacklist.

I don't think there's a bunch of Raikus units ending up in The U. S, so probably not much of an immediate direct impact on your business, but wondering if you may have any other nuanced views there. Thank you.

Speaker 4

Yes. We're not entirely sure how that's going to impact them. On the global stage and in terms of U. S. Sales, it clearly does.

And then we know that they are and believe, no note for certain that they're buying some components from U. S. Suppliers. Mean, I think we'll watch what they say in terms of what their impact on any critical components that they have and then how that may impact them going forward. It's obviously not a positive development for them at all.

Speaker 9

Great. Thanks, Tim.

Speaker 0

Thank you. Next question is coming from Michael Feniger from

Speaker 5

Bank of America. Your line is now live.

Speaker 10

Hey, guys. Yeah. Thanks for taking my questions. Apologies. I had some issues.

So if this was asked, apologize. But, Tim, what is the what's baked into Q3 on on the gross margin range? Can you can you kinda help us there?

Speaker 4

Yes. Mean, so very similar to Q2 in the range of 47% to 49%. And OpEx, I think last quarter, I guided like 83,000,000 to $85,000,000 We're more in that sort of $171,000,000 range for Q3 as well.

Speaker 10

Okay. Great, Ken. And look, there's much investor worry on on China right now. You guys face the tough comps. You mentioned the slowing and cutting.

Ken, can you just help us understand, you know, the the degree? Like, in 2019, obviously, your China revenue was down 25% sequentially. In other years, China's down a more moderate 5% sequentially. So just help us understand, you know, which way the the market right now is getting very worried. We're thinking of, you know, twenty eighteen, nineteen.

Where are we in that? The 1819 type drop off, is this a similar type of soda that we that we saw previously where a more moderate sequential decline? Just help us as as a stock up right now is showing a lot of worry on this in in q three, q four.

Speaker 4

No. It's not a it's a very at this point in time, it's not a similar comparison to eighteen or nineteen where you saw that very steep contraction and drop off. So we're seeing some weakness in the cutting market, but there's still a lot of strength and demand coming from a lot of the other applications where we have inherent advantages and which markets continue to grow both in China and outside. So I'm not going to give a specific number on what is baked into guidance, but it's nowhere near that 25%. It's much lower than that impact on Q3 sequentially compared to Q2.

It is a down quarter expected in China, but nowhere near like that level.

Speaker 2

Thank You not expect the cutting market will grow over the next fifty years. Each application has a duration, has peak, and the world has been going down. Cutting market exists fifteen years, huge, typically much more than many others. In our current catching market has saturation and will go unit down.

Why? Because trend to high power cutting lasers. One twenty kilowatt cutting system with 20 kilowatt laser replaced five five, even 10, more mid power cutting system. Five or 10. One.

Only one system, a new system. Much higher efficiency, much higher speed, and so on. As a result, it's a market going to high power, but once you see what the units will deteriorate, it will go down. This is the trend. You nobody can destroy and to to change this trend.

So cutting cutting to talk about, we develop new application. Even cutting, we develop new application for, for example, before for EV. Before it's now, we can draw maybe 80% of the foil mark. 80% is probably growing. Temporary is growing.

They say it's catching. We developed now this new process for cutting. It's a very thick metal. We've got the number only seven years, five, seven years ago, the best expect technical with flat set. All fiber is only for few millimeter, so our shield will never replace it with even five millimeters.

Now we developed process system. We developed machine, which cutting to 20 millimeters is still much faster and much higher quality than plasma cutting. Never before plasma cutting has been used laser for 20 millimeters at 25 centimeters. Now we have such process. We have them them units in exhibition.

In the new exhibition, we we demonstrate a few new machine with fantastic speed and quality. All we expect to solve this machine prototype also a no did not do it when we're making the samples, they did not do it without any correction now. This but the cartridge now but one such machine will replace it. New application of cutting instead of plasma cutting also very serious market. And we developed this process, introduced market, new application.

We get application for with the green kilowatt green lasers, for example, also for cutting battery metals, very high value production metals, and for microcatching for medical analysis. It's also very interesting in new markets. So all time, we develop new and new products. It's not commodity like China. China made in this, you know, like single time g dream.

So it's it's not high-tech product. It's not high-tech product. It's commodity product. We're not allowed to go to commodity with very low margin where for the we're high-tech company, unique high-tech company.

Speaker 10

Thanks. Thank you for that. And and with all that was just said, you know, about cutting, what you said about saturation and cutting, growth in new applications, and your view on China. Just, you know, helping to level set for everybody when we think of 2022. If if global GDP is at 5% next year and what you're talking about with new applications versus cutting, like, how do we normally should be thinking about the puts and takes for next year if if your backdrop is what you're you're playing out right now and you're thinking GDP might be in the 5%?

Can you help us frame some of the moving pieces there to think about? Thank you.

Speaker 2

Yes. I don't mind, I'm not going to get

Speaker 4

drawn on like guidance for 2022 at this point in time. But if global GDP remains strong, the underlying materials processing markets, particularly some of the growth coming from other areas and welding has been a standout performer, not just on EV but in other areas, recovery and additive, ablative processes for cleaning, the foil cutting applications and even the other cutting applications. Generally, that market will grow at a significant premium to global GDP, sometimes as much as twice that amount. And then you have expected growth from some of our newer and emerging products to be additive to that, like medical, for example, ultrafast microprocessing applications, the systems business and accessories and other areas. So that still gets us towards our double digit growth rate that we are targeting and continuing to target for the medium term for the company.

Speaker 2

You.

Speaker 0

Thank you. Next question today is coming from Mark Miller from The Benchmark Company. Your line is now live.

Speaker 6

Thank you for the question. The strong growth in green lasers besides solar, what else was the driver there in terms of the growth in green laser sales?

Speaker 4

Primarily, at the moment, the green is being driven by solar applications that actually improve the efficiency of the solar cells by a couple of 100 basis points, which is extremely it's actually quite an extremely high increase in total efficiency. There are other green applications we're working on in things like microprocessing and semiconductor. Valve just referenced now developments of much higher power green lasers for cutting and even welding of reflective materials. So but those need you to get to kilowatt scale green power.

Speaker 6

Do you have any estimates in terms of the supply constraints when they might ease? Would it be later this year, you feel?

Speaker 4

No. I mean, our insight into this is the same as everybody else's insight. It's relatively uncertain. A lot of it's around the electronic component supply chain and processes and CPUs and things like that. So it's

Speaker 9

probably going to take a

Speaker 4

few months for this to really fully alleviate or potentially a bit longer, but we don't have any

Speaker 2

specific Don't forget now inflation growing very fast. It will be more and more company. We're working with Western company, which now you and their way delivery shipment product because waiting when the price will grow to provide higher price. All that's waiting to increase price for their product because inflation is very fast. Nobody can predict whether we will be priced through three, four, four months, maybe even 50% more, even, sometimes even, two, three hundred time percent more.

Now with the many electronic components we have, now what happened?

Speaker 3

If such kind of components, the price was more than three times up to 10 times. Of course, it's not to be a component, but it's demonstrated also dependency of this market. It is. It is.

Speaker 9

You.

Speaker 0

Our next question today is

Speaker 3

a follow-up from Jim Ricchiuti from Needham and Company. I

Speaker 6

wanted to also go back to the growth you're seeing in emerging. And I wonder if you could just comment a little bit more specifically about the biggest components to the growth in that area?

Speaker 4

The biggest components of the growth in Q2 were the very high power pulse lasers for foil cutting, A and B, green, some of the accessories, I think, Medical as was it, yes, Medical as well. Those four or five areas.

Speaker 6

And just with respect to OpEx, you gave some color for Q3. It was your overall OpEx was up a decent amount sequentially. And how much of that is just the layering back of some of the temporary expense savings you saw coming back into the business in Q2? Or are there some renewed investments that are coming in?

Speaker 4

Some of those are just the layering back expenses. The other thing is that relative to the budget that was put together, our performance is above that. So total variable comp is a bit higher than not a bit higher, it's significantly higher than it was a year ago.

Speaker 3

So that will probably

Speaker 4

moderate over time. And then we're continuing to invest, for example, on R and D to ensure that we're getting more emerging products and applications to the market that are the future growth of the company. So we're not pulling back on things like R and D at this point in time. The other area on G and A, which requires some investment is the whole cybersecurity thing where you need to continue to invest on the IT infrastructure there. The cost of having a more significant cyber event on us, it's a challenge faced by every organization.

You've got to invest in that to make sure that you harden your security and protect yourself as much as possible.

Speaker 9

Thank you. We've reached the

Speaker 0

end of our question and answer session. I'd like to turn the floor back over to Eugene for any further or closing comments.

Speaker 1

Thank you for joining us this morning and your continued interest in IPG. We look forward to speaking with you

Speaker 4

over the coming weeks, and

Speaker 1

we'll participate in a number of virtual investor events this quarter. Have a great day, everyone.

Speaker 0

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.