IPG Photonics - Earnings Call - Q4 2020
February 22, 2021
Transcript
Speaker 0
Greetings, and welcome to IPG Photonics Fourth Quarter twenty twenty Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Bedatov, IPG's Director of Investor Relations, for introductions. Please go ahead, sir.
Speaker 1
Thank you, operator, and good morning, everyone. With us today is IPG Photonics chairman and CEO, doctor Valentin Kaponsov chief operating officer, doctor Eugene Sherbakov and Senior Vice President and CFO, Tim Moments. 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 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 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, 02/16/2021 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 Investor Relations website following the completion of this call. With that, I'll now turn the call over to Valentin.
Speaker 2
Good morning, everyone. We are pleased with our fourth quarter results as we delivered revenue that was 10% higher than the 2019 and above our guidance range. In addition, book to bill was above 1% in the fourth quarter as we saw the direction in order to go as that started in the third quarter continued during the fourth quarter and into 2021. We're continuing to benefit from the advantages of our leading edge product, technology differentiation, low cost production capabilities, and the global footprint. We continue to see strong revenue in China, which was significantly higher on year over year basis as volume growth more than offset lower selling prices in the region.
We were also pleased to see a sequential improvement in the revenue in Europe and strong sequential revenue growth in North America in the fourth quarter. Our system sales also improved modestly but continued to be below last year, primarily due to the impact of the economy from COVID nineteen. We're demonstrating good progress in our core markets since to our technology differentiation and low cost production capability. In high power lasers, we delivered strong year over year growth in both our rack mounted one to four kilowatt of lasers for the high volume market and our ultra high power lasers for leading edge catching systems. A sales of lasers above six kilowatt increased 34% compared to the fourth quarter twenty nineteen and were 56% of total high power sales.
At the higher end of the market, we're benefiting from an increase in order volumes for our twenty and thirty kilowatt ultra high power lasers and optical heads. This laser not only enables 50 to 100% faster cutting speed than our 15 kilowatt devices, but are capable of processing materials with 20 to 50 millimeter thickness or even greater. This improvement in productivity and flexibility coupled with superior parameters, superior beam beam parameters, record low block efficiency, and reliability is driving the replacement of plasma cutting machines as a non laser solutions and a low power laser solutions. We booked the first orders for the new unique ultra compact direct mounted u series of laser for low cost cutting system, and we expect to start feeding them for clean volume. Not only do these lasers provide extended optical performance, record power to volume ratio, and full protection against humidity.
They are also significantly allowing cost to manufacture. As a result, we expect this new design to improve gross margin for these products. We continue to focus on growing sales in other applications set outside our of our traditional cutting and welding markets. Last quarter, we launched our revolutionary innovative handheld laser welding system, and the initial customer response has been extremely positive. We believe this system has a great potential for IPG as it replaces traditional hand welding products used in metal fabrication like TIG or MIG.
The product offers orders of magnitude higher welding quality and speed with much greater precision, flexibility, and ease of use to our customers around the world. In addition, the first time, the product will simultaneously provide the highest quality precleaning and aftercleaning of the weld and weld itself, respectively. We have already sold a number of units in the last few weeks only and believe that there are there are many thousands of customers in The US alone and many tens of thousands worldwide that could be interested in this unique product. During the fourth quarter, emerging products and applications sales were 28% of total revenue, increasing 22%. We are pleased with the performance of number of products that are the key to the diversification of our revenue.
Examples include high power nanosecond pulse laser used for foil cutting and cleaning in electric vehicle battery processing as well as for ablation and cleaning, sales of medical lasers, and consumable medical fibers. Our gold solution for urology and greener laser sales for solar cell processing. With record backlog, we expect sales of green lasers to continue to grow fast as our green power laser are enable enabling a significant improvement in solar power efficiency. In additional, high power lasers for different applications performed well year over year. Despite the impact of the pandemic, ultraviolet and ultrafast pulsed lasers into emerging microprocessing applications showed strong growth for 02/2020.
Our adjustable mode beam AMV lasers continue to gain traction in the welding industry, most notably in electric vehicle battery welding. And as a result, we received significant products for AMD lasers in q four. Our AMD products offer superior speed and weld quality. Our computing solution tends to broadest range of beam and ability, which enables battery life welding. The multiple two CV laser for high speed spot welding application brings significant cost savings due to an increase in welding productivity and decrease in electrical consumption.
Beyond material processing, continue to develop new soft tissue medical treatments, meet infrared laser for molecular level resolution, online spectroscopy, inspection, sensing, and biomedical research application. In addition, we are continuing development of our new generation of analog and coherent digital silicon photonics devices for super high speed and highest volume data processing for telecom, data telecom, many and many other advanced future applications. Furthermore, we were extremely pleased by the growth we're scoring advanced applications and medical applications. Research and development has been a driving force behind IPG's success since the company's inception. We spent over 10% of our total revenue on R and D in 2020 and have over 650 people in research and development, including many scientists and engineers who continue to develop new leading edge solutions for our customers, helping drive efficiency and productivity in their operations and making our fiber laser technology that choice is in production.
More than twenty years to of choice in mass production, nobody can compare both of these absolutely in quality and other things. I would like to thank our employees for their strong execution during our first quarter despite the continued challenging operating environment. As a result, the well-being of our employees, their families, our customers, our partners, and communities we operate and remain our highest priority. With that, I will turn the call over to Eugene Scherbakov.
Speaker 3
Thank you, Valentina, and good morning, everyone. The impact of COVID nineteen on our production capability continues to be minimal, and we are focused on the ensuring the safety of our employment with social distancing and enhanced cleaning and filtration measures in place. Otherwise, we are operating normally. Despite the increasing of COVID nineteen cases in Northern Hemisphere, this fall and winter, production remain fully operational, and we managed COVID related absences effectively. We are very pleased with performance of operations during the fourth quarter as production ramped to meet the increase in demand, enabling us to exceed the top end of guidance range.
And report first quarter of year over year growth in more than two years. We're proud of the improvement in underlying gross margin, driving by an increase in revenue, product cost reduction, and product mix improvement. Total SG and expenses were $76,000,000 in the first quarter and continue to benefit from lower travel and trade show expenses given pandemic related restrictions. As the business activity start to pick up and some restrictions are lifted and life normalized in the second half of twenty twenty one, we would expect our operating expenses to increase as well. We remain committed to supporting our R and D while controlling the total operating expenses to drive operating leverage to the company.
We continue to benefit from the reducing of the cost of devices, our vertical integrations, and from expenses reduction initiative we undertook in the second half of twenty nineteen. Examining our performance by region, revenue in China increased 52% year over year, representing approximately 42% of total sales. Demand and order flow in China remained resilient during the quarter, and order booked in 2021 prior to Chinese New Year have been strong. While we face aggressive competition in the region, we believe that our product has superior performance and reliability, and we are seeing as a strong growth in demand for our ultra high power lasers. In Europe, while revenue decreased 5% year over year due to the effect of COVID nineteen, it did grow sequentially.
In addition, in Europe, order flow continued to get better despite the increasing restriction in Europe due to lockdowns. Similarly, revenue in North America decreased 11% year over year, but grew 37% on a sequential basis, with a good improvement in material processing sales for lasers and system, and year over year growth in medical and advanced applications. North America bookings continue to be strong, even relative to expansion of order flow in Q3 twenty twenty. Sales in Japan decreased 29% year over year, while economy in the region continues to be negatively impacted by COVID-nineteen, some regional macroeconomic indicators have improved in the recent months. Sales to the rest of Asia increased 3% year over year, continued to recover from the second quarter, and also benefit from shipment of green lasers to renewable energy.
Sales in Turkey decreased 2% year over year and grew 21% sequentially. Economic indicators continue to show improvement from significant contraction earlier in the year, and this is one factor behind the going direction of our business. In addition, it seems that there is some optimism for improving investment cycle, driving by equipment upgrades related to requirements for the FlexVue, processing automation, and energy efficiency. Our leading edge fiber laser technology offers significant productivity gains, electrical efficiency, and lower cost of over the other lasers and nonlaser tools. An increasing focus on the environment impact and commitment to the net zero emissions for large industrial manufacturing is creating additional opportunity for our lasers and bodes well for our long term growth objective.
We're already starting to see it with electrical vehicle and electrical vehicle battery production and are likely to see it with other industries. We believe that efficiency is likely to become a more meaningful driver in displacing processes that are energy intensive, such as plasma cutting or legacy welding processes. Despite the challenging operation environment that we faced in the year 2020 due to the COVID-nineteen, we believe that we are well positioned as we enter year 2021. In addition, we continue to believe that the breadth and depth of our product offering, our last university advanced materials and company and technology platform, our efficient R and D model, our strong balance sheet and free cash flow provide us sample flexibility and respond to business disruptions. 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 fourth quarter was $337,000,000 and increased 10% year over year driven by growth from most of our key product lines. Revenue from materials processing applications increased 10% year over year and revenue from other applications increased 12%. Sales of high power CW lasers increased 17% and represented approximately 55% of total revenue. Sales of ultra high power lasers above six kilowatts represented 56% of total high power CW laser sales.
Pulse lasers sales increased 55% year over year with strong growth driven by our high power nanosecond pulse lasers used in EV battery manufacturing, green pulse lasers used in solar cell manufacturing, as well as higher sales of our new UV and ultrafast pulse lasers, which were partially offset by lower sales of low power pulse lasers for marking applications. Systems sales decreased 20% year over year due to COVID nineteen, but did improve sequentially. Medium power laser sales increased 25 as there was some recovery in additive manufacturing and other fine processing applications. QCW laser sales decreased 16% year over year due to lower sales for aerospace and drilling applications. Other product sales decreased 11% year over year, primarily due to lower telecom sales.
Q4 gross margin was 44%, which increased three ten basis points year over year. The additional inventory charge reduced gross margin by four ten basis points. Excluding this impact, gross margin benefited from lower cost of products and the decrease in unabsorbed costs as a percentage of sales as compared to the year ago period. The additional inventory charge of $14,000,000 was related to optical components that
Speaker 5
have
Speaker 4
been replaced by components with better performance. Fourth quarter GAAP operating income was $65,000,000 and operating margin was 19%. During the quarter, we recognized a foreign exchange loss of $5,000,000 primarily related to the depreciation of the U. S. Dollar versus the euro.
Q4 net income was $49,000,000 or $0.92 per diluted share. The additional inventory charge and foreign exchange loss reduced EPS by $0.27 The effective tax rate in the quarter was 24%. If exchange rates relative to the U. S. Dollar had been the same as one year ago, we would have expected revenue to be $12,000,000 lower and gross profit to be $8,000,000 lower.
We ended the quarter with cash, cash equivalents and short term investments of $1,400,000,000 and total debt of $38,000,000 Strong operational execution resulted in cash provided by operations of $85,000,000 during the quarter. Capital expenditures were $26,000,000 in the fourth quarter. We expect 2021 capital expenditures will be in the range of $150,000,000 to $160,000,000 for the full year. Total capital expenditures in 2020 was significantly below our initial budget as we delayed some projects, and some of these projects are now rescheduled for 2021. 2021 CapEx includes facilities and equipment expenditure for production, R and D and sales activity to support our future growth.
During the quarter, we did not repurchase any shares. In total, fourth quarter book to bill was above one, and we were pleased with order flow across all of our main geographic regions. Geographically, most areas continue to show improvement with the only area that remains weak being Japan. For the first quarter of twenty twenty one, IPG expects revenue of $310,000,000 to $340,000,000 Company expects the first quarter tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $0.90 to $1.2 with 53,200,000.0 basic common shares outstanding and 53,900,000.0 diluted common shares outstanding.
The improvement in macroeconomic indicators is now more broad based and if sustained, gives us optimism for 2021. However, we are a little cautious given the resurgence of COVID nineteen in Europe and North America as well as the uncertainty surrounding vaccination rollout and return to normalcy is unclear at this time. These uncertainties continue to make forecasting our business challenging in the medium term, and our first quarter guidance remains subject to significant uncertainties, including the impact on the global business environment and expected recovery from COVID-nineteen, economic trends, growth from emerging product revenue, competition and the lack of long term binding order commitments. That said, we continue to benefit from near term growth opportunities in ultra high power cutting, electric vehicle battery processing, renewable energy, microprocessing, medical procedures and advanced applications. We believe the strides we are making in higher power products within our core materials processing business and new solutions are enhancing our competitive position.
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 cancellation 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. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you like to remove your question from the queue.
We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from John Marchetti with Stifel. Please proceed with your question.
Speaker 6
Thanks very much. Tim Valente, was wondering if maybe you could just talk about some of the puts and takes on the longer term view. I know you mentioned that the underlying fundamentals continue to get a little bit better here. But as we're looking out through the course of the year, all else being equal, would you expect that we're back to sort of getting back in line with a double digit revenue growth range, maybe off of 2019 as opposed to 2020 given that 2020 was such a challenging year?
Speaker 4
Yes. We're not going to comment on annual guidance or targets there. So except for your last comment, John, I think they're talking about puts and takes. There were a number of them articulated in the script. First of all, the continuing shift to higher power lasers for cutting applications.
A lot of the new product introductions, we're very optimistic about the handheld welder and growth in revenue from that. All of our emerging products in Q4 performed really exceptionally well across a pretty broad portfolio of items that are starting to drive incremental growth. So whether it's the green lasers, the high power nanosecond pulse lasers for EV, some increasing traction for ultrafast and UV. Medicals performed very well during the whole course of the year with the lithotripsy application. Other newer product introductions, the multichannel QCW for displacing YAG lasers in spot welding.
We had good orders for AMB. So if you continue to see traction and momentum across what is now a pretty broad base and diverse set of products and applications, we continue to see improvements in, we referenced again some of the key macroeconomic indicators that we follow. Certainly this year looks like it could be set up for being significantly better than the last two years we've been through. I mean, the key issue will be to get out of some of the volatility that we've seen that sometimes impacted the second half of a year as has happened in 2019 or has resulted in a slow start to the year as the pandemic did last year. So the main the main target is to get out of more of the the volatility and get to sort of consistent year over year growth on a quarterly business, and we've got significant drivers for that.
Speaker 6
Got it. And then so maybe just as a follow-up on the gross margin side. As we're looking out over the next several quarters, any expectations that we should assume maybe some additional charges like we saw this quarter or really treat that more as a one off here in 4Q and we're back to a more normalized environment for gross margin as we're looking out over the first half and into 2021? Thank you.
Speaker 4
Yes, I'm much more definitively expecting a normalized gross margin print over the coming year. We've during the course of the year, not just in Q4, given some of the volatility related to the pandemic, we have had significant inventory provisions and charges. And the last the final charge in the end of the quarter, I think positions us well for a more normalized operating position going forward. So I think we've got a good start to the year in that context as well. And on the other side on gross margin, we've got other benefits coming through from some of the product mix as we continue to grow revenue, better absorption of fixed costs.
And then, for example, the ultra compact laser starting to generate more meaningful revenue. There's a meaningful improvement in gross margin we expect from that. And then even taking the design changes on the ultra compact and rolling them into higher power lasers up to, I think, seven or eight kilowatts, up to eight kilowatts they're gonna be used in. So there's a lot of other initiatives on cost reductions as well that we're optimistic about.
Speaker 7
Thanks, Tim.
Speaker 2
Since we're speaking, we expect to the this year, our gross margin already done back to our usual frames, above 50%. But we're very careful in the forecast because the situation were quarter three, quarter four is not certain at all. So quarter one, quarter two, absolutely promising on the. But he, of course, still not getting it away. Our guidance is so very, very careful, very conservative.
Speaker 6
Understood.
Speaker 0
Our next question comes from Tom Diffely with DA Davidson. Please proceed with your question.
Speaker 8
Yes. Good morning. Thanks for the question. When you look at the, the strong activity, sounds like you had pre Chinese New Year in China on the order front. Do you expect China to grow as a percentage of the order book over the next couple of quarters?
Or is that being matched by growth in some of the other regions?
Speaker 4
So, Tom, relative to, like, Q1 last year when China order flow slowed down dramatically and then it really picked up in April and May, I would expect in total China order flow to remain relatively consistent as a percentage of the total because the growth in Europe and North America is also starting to recover more meaningfully. There's the growth in some of the emerging products as well that are not just strong in China but are strong elsewhere. So tonally, we expect more of an even contribution and a rather less China centric focus perhaps on revenue for the year. But notwithstanding that, China order flow has really been very strong prior to Chinese New Year. For example, not just of shippable orders, but even of frame agreements has been very, very good.
And those are generally placed to get licenses so that shipment can take place during the course of the year.
Speaker 2
And remarkable, the most frame orders, enormous quantity of frame orders is practically doubled to compare to last year or last two two quarters. But in the major, this one has hit four high power above ten, fifteen kilowatt. When they they're asking for license to get the license license. It's a normal growth of high power from the point. So we expect nobody can supply them support it.
Nobody is told only we can supply working more than fifteen, ten, 15 kilowatt working on lasers, and all the time for IPG, all China time for IPG today. It's a lot. It's a Europeans, America, much more neutral here. Today, much less steel because major integrator, cutting system integrator in Europe. In The US, they don't have own high power lasers.
Don't have. And so the and they they stop in 10 kilowatt practical. But China extremely active in 15 to 30 kilowatt.
Speaker 8
Okay. No. Thanks for the extra color. That's helpful. And then as a follow-up, how big is the EV battery market right now for lasers?
And where do you think that goes over time?
Speaker 4
I think it's a I don't have a definitive number on that in terms of where it is today. The message we give on it is that it is a, you know, potential decade long investment cycle. And if EV vehicle production is going to get to the levels that are expected, know, people are talking about 25, 40, even 50% of total vehicle sales over ten or fifteen years, it will drive hundreds of millions of dollars of laser based investment for EV battery manufacturing and even laser based investment for EV auto vehicle manufacturing itself. So it's a long term significant opportunity with hundreds of millions of dollars of laser based processing required for that. Even some of I've noticed some of the older battery technologies like cylindrical, which we're not using much laser based processing seem to be evaluating lasers more and more now.
Speaker 8
Okay. Great. Thanks for your time today.
Speaker 9
Awesome.
Speaker 0
Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.
Speaker 5
Thanks. Good morning, guys. Tim, in the last upcycle, you guys had been very consistent on putting about 60% incremental gross margin. I understand guiding sales is difficult, but how should we think about the incremental gross margin? You highlighted multiple cost initiatives.
Should we think about that 60% as a base case or you could see some upside? And also, you talk about what are the limitations of rolling that ultra compact design above eight kilowatt? And then I have a follow-up. Thanks.
Speaker 4
I think some of the incremental gross margins are probably not far off where we were historically, maybe a little bit below that 60%. The one thing below the line we're cautious on is, as you get into a more normal environment, we tried to call this out on the script, that operating expenses, you get more travel and trade for trade shows and other activity in a more normal environment. OpEx will probably pick up in the second half of the year a little bit, so that drop through won't be straight to the bottom line. In terms of the other question about migrating the design of the ultra compact to higher power lasers, perhaps Eugene, you'd like to talk about that and a potential rollout over time?
Speaker 3
In principle, we have several generation of compact lasers starting I mean, I'm talking about high power lasers, of course, with power more than two, three kilowatt. And the first stage was already demonstrated, and we already shipped thousands of such kind of lasers. The next step was to use a rack mounted compact laser for high power applications. I mean, this power more than one, two, three, and four kilowatt. Again, such kind of lasers already supplied to our customer effectively for, first of all, for cutting, also for building application.
The next generation, which we are introducing this year, it's much more compact with output level up to eight kilowatt. It will be the next stage, and the first result demonstrated very good performances. And we are absolutely sure that it will be the next generation of ultra compact, rec mounted laser, first of all, for cutting applications. And very important that based on this design, we can dramatically reduce our cost of production and, of course, to be proposed to our customer with a price. Such kind of situation is compact and ultra compact lasers.
Speaker 5
Okay. Very helpful. Thanks. And just to follow-up, maybe can you guys talk about the adoption curve that you expect for the handheld welding laser? Sounds like you guys have received a you you mentioned extremely positive feedback.
You know, how much do you think, do you have to educate the customer or to kind of prove their point? It seems like they're seeing the benefits outright. I'm just trying to see what are you thinking in terms of the adoption curve.
Speaker 7
PG, do want to
Speaker 4
take that?
Speaker 2
You know, our estimation is enormous. Only United States, which we investigated, more than 24,000 only small drop tops, which uses this manual welding tool instrumentation. 24,000 on The US, but also watch OEM like automotive, another the water also used. But even if they each of them will buy only one unit. It's 24,000 units.
24,000 units, like, $300,000,000. Only one unit, but typical that small drop drop is 10, not one, two by 10. It's the all world, it's a let's count minimum five five times more. So it's 100,000 shots. Each from the we now provide for testing for this estimation more than 70 on The US, more than 70 such drop.
They touching it fantastic devices. Let's imagine only speed of welding. Speed of welding increased six to seven times. Six or seven times. Quality of welding, much, much higher than with regular.
But, also, simultaneously, it's clean immediately clean surface and pre pre welding and after after welding. Now they with chicken and make regular, they have to use chemicals then to clean this in in any case quality Not very sufficient. Now they don't need to make nothing. That's for one time put by laser beam in additional mode operation the same laser beam.
Then all clean up. So the people with so fantastic enrollment, so they only waiting and waiting. We deliver delivery only due to some formal bureaucratical qualification, you know, for electrical emissions. So now we have received, in The US for this emission. It started only a few weeks, started to ship that unit, and they were to sell to customer before we collect it to all all the calls.
So we do it this year only. We will sell some thousand units. Next year, it would be tens of thousand units. So it's very fast introduction market, and we don't see competition. We can make similar during next one or two years.
Even a way that would be difficult because we have very innovative new technology, which any Chinese nobody has today.
Speaker 1
And the other point, it's
Speaker 4
easier to use as well. So Mhmm. It's easier to use. So the training of the welder Yeah.
Speaker 2
It's all very easy to use. If the normal welder, you have to train many months, even more. It could be some. You don't need any any person, your student. After only few hours, demonstration, preliminary introduction cannot go immediately.
So, practically, it's available to everybody today. It's also enormous benefit because quantity of professional welders now decrease and decrease.
Speaker 5
Got it. Thank you.
Speaker 0
Our next question comes from Jim Ricchiuti with Needham and Company. Please proceed with your question.
Speaker 10
Hi. Thank you. Just good morning. On the topic of the handheld lasers, I'm wondering, are you going to market any differently with this product offering just given the size of the market and the price points? And how are the gross margins on this product?
Speaker 4
So in terms of going to market at the moment, we're rolling it out in a phased manner with some of the key. We've had a lot of job shops come in to evaluate it. And we're also looking at potentially some distribution arrangements. But we'll potentially also have to expand some of the sales force as volumes ramp up to support what is a much broader base customer list compared to our typical OEM base. So we're continuing to evaluate how best to get to that efficient model around it, Jim.
But typically, we've invested in this stuff as we've grown the revenue on it to get that return simultaneously. We may use a few more distributors around this as well. And the gross margins, by the way, on the products are very good, benefiting from some of the design improvements around the ultra compact lasers.
Speaker 10
And a follow-up question is you showed a nice recovery in The US, at least on North America, at least on a sequential basis. And I'm wondering, as you look at that business over the next couple of quarters, how sustainable do you think it is? Is it broadly based? And are you feeling comfortable that that recovery in The US is sustainable?
Speaker 4
Yeah. The underlying materials processing business has improved. In fact, some of the order flow in Q4 was for some of our specialty AMD lasers for battery processes was also in North America. We still have some revenue to recognize on advanced applications. Medical growth will continue to be it's not going be quite as strong as it was last year because we came on such a small base, but the Medical business has continued to perform well.
We've got increasing visibility into medical sales in the second half of the year. The green lasers going to Southeast Asia, although they're made in The U. S. At the moment. The backlog for those I've mentioned is good.
I'd say the only thing we don't have longer term visibility into and which is more uneven and lumpy is some of the advanced applications, right? You're still waiting for some commercialization of the defense applications for that revenue to become more consistent and really start to grow consistently quarter over quarter and year over year.
Speaker 1
Yeah. Thank you.
Speaker 2
We're talking about increased share of products which do not relate from China. It is product for another application than traditional cutting and welding of metal sheet. So then then if we report this year, we increase potential up to 28%, but we are targeting to increase up to 50% during couple of years. 50% is the most of this product, new products, which we for another application, we developed, introduced in US. So it increased essential sales in The US, also increased gross margin in US.
Before, the major contribution to the net income in The US, we received from sales of diodes. And temporarily, last two years, of diodes decreased. So income from diet decreased also. Now we return back for further growing the diet sales. It's all the profit from diet.
It's a plus growth of this other applications sales from US and made developed in The US, not developed in Germany in the sales only in The US, mainly for some than before. So it's a real American company. We become one of the major generation real major generator of the revenue. Our target to make real, not just a research center, but also a real manu as manufacturing of new. Thank you.
Speaker 0
Our next questioner our next question comes from Michael Feniger with Bank of America. Please proceed with your question.
Speaker 9
Hey, guys. Thanks for for squeezing me in. Tim, I recognize that you may not want to comment directly on one of your competitors. You know, I I was just hoping to get a sense of of of the big picture here. Some investors fear that with this bidding war, could it create a bigger competitor that could be much more aggressive, attacking the industrial markets, being price aggressive with scaled up R and D.
Maybe you can help us understand the competitive landscape in in laser technology a little bit more, how IPG positions itself to maintain that leadership. And does this type of bidding war, even if it's not direct to IPG, does it validate some of the megatrends that are accelerating with automation, EV, dual supply chains?
Speaker 6
Do
Speaker 9
you see more consolidation going forward around laser technology and automation to markets? Just curious on your thoughts on that one.
Speaker 4
There's a lot of different elements to that question, Mike. The first is we're not going to make a comment on the transaction and the bidding war that's going on out there. I think the comment is really to focus on where IPG's strengths are in, not only the core industrial markets, but also in a lot of these emerging product offerings. So in our core industrial markets, none of the parties that are involved in the process that is ongoing at the moment really have any core strength and capability where IPG's core strength and capability is. So we don't you know, we we view this as being separate from our core strategies and and capabilities.
In addition to that, we've got a lot of emerging product development in areas that we've talked about that are driving our growth with inherent advantages around the products that we have. So whoever the competitor is, IPG's fiber laser technology is unique in very many different ways. And we have this fundamental strength that comes from the vertical integration, the speed to development, the ability to get cost out, and as you can see from an increasingly diverse product portfolio. I think the main point that we make on this is that we get a significantly higher rate of return on our internal r and d and making limited, very specific acquisitions that relate to our ability to leverage our own technology. So we don't view ourselves as being a consolidator in the industry.
With regard to some of the other trends, I think, yes, they're perfectly apparent. Right? The flexibility, the automation, the increasing acceptance of lasers across many different applications and technologies. Flexibility, we call out, for example, energy is becoming perhaps more fundamentally a driver for IPG. We're the only company that has a electrical efficiency approaching 50%.
Nobody else is close to us on that. So you really have to, I think, look into some of the very specific benefits that we have rather than an advantage we have rather than, you know, look at what may or may not be a a larger scale company that that will have competitive advantages against us. We don't think that that they will. Finally, I I don't you know, beyond beyond, you know, this has already been quite a lot of consolidation within the industry. So there's a limited number of large targets that are left out there.
You know, the largest other competitor that's out there for us is actually a private with German. Consolidation has already taken place a bit more meaningfully to varying degrees of success, I'd say.
Speaker 9
Perfect. Thanks for that, Tim. And just following up, if we get the higher end of your Q1 guidance and you see a typical 15 to 20% sequential growth in q two, you're kinda starting to knock on that 400,000,000 sales figure level. Do you have more confidence around the ability to drive gross margins above 50% at that point? Just help us understand what type of margins when we start getting into these type of buckets of revenue ranges.
Speaker 4
I think Alvin alluded to that earlier in the call that certainly getting back to the top I'm a little bit more conservative around it, but getting back to the top end of our 45% to 50% guidance range. And then really, if you start to see revenue get back up to that $400,000,000 level without guiding above that at the moment, we've got all these cost reduction initiatives, and Valentin is increasingly comfortable that we're going to get back into what I would call more of an optimal gross margin operating model as compared to just being best in class, which we are at the moment.
Speaker 0
Our next question is from Mark Miller with The Benchmark Company. Please proceed with your question.
Speaker 11
Thank you for the question. You've indicated several times about the opportunity in battery welding for EVs, but there's a chip shortage going on that's impacting auto sales. Do see that having any impact on you over the next couple of quarters?
Speaker 4
No, Mark. We don't think that the chip shortage in the semiconductor industry is going to affect us that even though it is affecting the auto industry in terms of some facility shutdown, We don't expect it to have an impact on our growth, and we don't have any visibility into it having an impact on us. We do not have any similar supply chain issues facing us at the moment given our vertical integration. And we also have inventory of electronic components, for example, that we've built up.
Speaker 11
Germany sales were also down sequentially year over year. Is that is that COVID also like the case in Japan?
Speaker 4
I'm going look at the German number particularly. Overall, Europe was up sequentially. So you saw I can't remember exactly where it is. There may have been some slight variation in where revenue in Europe was generated. But overall, Europe, we're actually pleased with in total.
Rather than looking at Germany specifically, we look at the whole of Northern Europe and then Italy. And even in Western Asia, Turkey, there was some sequential improvement even though it down single digits. Yeah, I haven't got any more commentary around that. I think Europe was better.
Speaker 5
Thank you.
Speaker 0
Our next question comes from Joe Whitting with Edgewater Research. Please proceed with your question.
Speaker 12
Hey. Thank you. Good morning. I wanted to ask on welding. Obviously, EV battery is up on AMP, and and there's also also a ton of interest in the handheld, which isn't surprising.
But but, Tim, beyond that, how are you kind of viewing the broader macro welding market adopting laser? And that includes both stand alone lasers and then your systems mix as the broader cycle turns here and cost of capital as well. Could there be kind of a tipping point in play for that market where, you know, the adoption has been slow over time?
Speaker 4
Eugene will address this question, Jerry.
Speaker 3
About the welding market. Yes. Now it's driving by, first of all, vehicle applications, battery welding, battery cutting, and foil cutting, and so on. But in principle, our advantage is that we are not supplying today for such kind of processes only lasers. We supplying also our components, I mean, different kind of optical heads for cutting or for welding, plus monitoring system like LDD, plus single mode lasers, especially produced for such kind of applications.
As and finally, we start to produce a complete system for battery welding. Already supplied to some customers, automotive customer, and now we already supplied additional such kind of system to the customer. And for us, it's it's not a new product, but nevertheless, for us, it's a new activity. And we see the very good opportunity for us to supply, again, not only lasers, not only components for these applications, but complete systems in Europe, in China, and also in The United States. In total, welding market is growing well.
Of course, not only connected to the, automotive applications, not only to e vehicle, but also for other applications. For example, for also, based of of course, first first of all, from different kind of metal welding. But this demand is growing definitely year over year.
Speaker 12
Okay. I wanted to go back to the comments on rolling out features from the ultra compact designs to higher power units up to eight kilowatts. I guess I'm curious there what sort of trade offs do you need to make? Is efficiency? Or
Speaker 8
could it
Speaker 12
be flexibility and durability? And going forward from a product offering perspective, do you plan to offer those units, you know, side by side? These, you know, you know, eight kilowatts, for example, with the ultra compact functionality versus your, you know, kind of existing full featured, if you will. I think that'd be interesting. Thanks.
Speaker 3
First of all, we'll make when we are we'll produce this such kind of ultra compact lasers. We also produce a special components of these lasers, of course. And this is why we have to dramatically decrease our cost of production for such kind of laser. But you see, lasers, we are producing such kind of laser, we are producing first of for cutting applications, but our customers must be ready to adopt this laser to their systems. Of course, they need some time to also to change their design and to implement our auto compact laser for these applications.
To exchange, it it will be not exchange. It will be some new machines. It will be much more compact, much more efficient final machines, for example, for cutting. And from this point of view, we'll see very good opportunity. First of all, of course, flexibility better efficiency, better compactness, but, first of all, better price for our customers.
Speaker 2
I will remind you all overview that, for example, to replace c o two laser for cutting by fiber laser. We worked ten ten years, not one, not two. It's five years. But from beginning, you know, it was obvious. So fiber laser much better in from point of cutting quality from point of cost of many use customer use and so on.
Ten years, we expanded now with practical q c o two cutting business. But in ten years, not one, two, three, five, ten years, you like that immediately during only a few months, we would equate all this with any new product, even fantastic new product. It's not serious to talk. It's a long process. But now we're eliminating cutting business.
Nobody trust it all. Then start to talk. Oh, it's only for very thin metal. Then so we'll never will cut even then two, three millimeter. Then never will cut five millimeter.
Now 50 millimeter for cutting successful. Not only the system with them. It my my we're catching our we replaced for plasma, which never talked about to replace plasma, for example. Oh, it's gone. It's about it's a long way.
Not to be so naive that we're making much faster than other people, but it takes time in any case.
Speaker 4
Joe, the only other part of your comment was there is no trade off. I mean, we we've never introduced a new product that has less reliability or lower electrical efficiency. This uses all the same optical components, but it has a much more compact electromechanical and sophisticated design around the electromechanical. So there isn't really a trade off in in terms of those parameters.
Speaker 12
Perfect. That's great color. Just what I was looking for. If I could squeeze one more in, the the 20 to 30 kilowatt, curious what geographies those units are shipping to, if that's just kind of
Speaker 0
the the pentas and etcetera of of
Speaker 12
the world in China, or is is there interest in the West? And then what are the relevant applications there? I'm assuming from a cutting perspective, you run into some edge quality issues at at that power level.
Speaker 3
Probably, level now not limited, only a range or a 30 kilowatt. Recently, received the request for 40 kilowatt laser for cutting applications. Of course, we are ready to supply such kind of laser for these applications. First of all, applications is for cutting. Some part number of these lasers also use it for welding application, but for special applications, like for special materials and so on.
But may mainly for cutting applications. And you're right. Unfortunately, the first customer now in in China for such kind of applications, not in Europe, not in United States.
Speaker 12
Okay. Well, thanks, and congratulations.
Speaker 3
Thank you.
Speaker 0
Our last question comes from the line of Paretosh Misra with Berenberg. Please proceed with your question.
Speaker 7
Thank you. Good morning, and thanks for taking my question. Just curious with that, CapEx guidance for the year of January to January, can you provide some color as to some of the bigger projects included in that in that CapEx range? And anything worth flagging as potential future growth driver?
Speaker 2
CapEx is first of all, have to shift some CapEx, construction, new building, first of all, so for this year, instead 02/2020, because this construction industry practically works only for 30% all time quality on the the the way they did not get the right materials at the right time and so on. So all our ship, they promised us, for example, one month delivery, but we wait half of year to deliver to get even windows and so so on. It was awful that time for construction. This now we are forced. We need a lot of additional first assembly facilities.
We need a lot of the cost to install new production line. We need a new equipment. We need for mass production and so on. It's a lot of time. We have to improve, and we're creating now what we invested now.
We're investing for future. It will work what we will need to two, three years. But if we want to involve we want to build this new facilities, one by install this equipment technology now, then two two, three years, we would be absolutely short in production So we don't wanna have future. It's normal. And we still very small investment.
We will double this investment more. We prefer to invest in this to increase facility, increase our production, not to hold the money in the bank or to make some of this absolutely not efficient. If we're using new businesses, we're not buying new businesses. We're not buying at all. We're buying only some technology group with some technology.
We increase our technology choice. It's all it's our strength. It's our future, but not just to buy absolutely different business. Not possible to well deal very good business, but to to manage all this absolutely different business and become the a large company and not manageable at all. We don't need such a mixture.
Speaker 7
Understand. I really appreciate sorry, guys.
Speaker 3
It's okay, Baragos. Next question.
Speaker 7
Oh, okay. Yeah. Sorry. My follow-up was that I was hoping if you could provide some high level color as to how pricing and volume changed last year. Any color you could provide would be great.
Speaker 4
So on a year over year basis, pricing was down in a more normalized 10% to 15%. It has been basically though much more stable over the last three quarters since Q2, Q3, Q4. So sometimes when you see an improving demand environment, some of the antics of the Chinese competitors are not so extreme. The other part of this that we've talked about is that we're being more disciplined around pricing. We believe that the value of the laser technology is still extremely high and that at the current pricing in the market, we're already displacing many existing laser and non laser technologies and more fundamental changes in pricing to drive that adoption are not required.
So it's been good to see a bit more stability. You've obviously also had some benefit going to higher power levels for cutting applications where you have a competitive advantage. And then outside of that, the emerging products, for example, even high power nanosecond pulse lasers are very almost exclusive to IPG where we have a good ASP for some of those applications. So mix has been a bit of a benefit too.
Speaker 7
Great. Thank you so much.
Speaker 0
That concludes today's question and answer session. At this time, I'd like to turn the call back over to Eugene Fetitov for closing comments.
Speaker 1
Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you over the coming weeks, and we'll be participating in a number of virtual investor conferences this quarter. Have a great day, everyone.
Speaker 0
This concludes today's conference webcast. You may disconnect your lines at this time, and we thank you for your participation.