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spk13: Greetings, and welcome to IPG Photonics' fourth quarter 2020 conference call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotov, IPG's Director of Investor Relations, for introductions. Please go ahead, sir.
spk00: Thank you, Operator, and good morning, everyone. This is today's IPG Photonics Chairman and CEO, Dr. Valentin Kapolintsov, Chief Operating Officer, Dr. Eugene Shcherbakov. and Senior Vice President and CFO at the moment. Statements made during the course of this call that discuss management or the company's intentions, expectations, or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include the impact of the COVID-19 pandemic on our business and those detailed in IPG Photonics Form 10-K for the period end of December 31, 2019, and our reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investor 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 of prediction as of today, February 16th, 2021 only. The company assumes no obligation to public entities 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 for a book posted on our investor relations website. We will post these prepared remarks on our industry relations website following the completion of this call. With that, I'll now turn the call over to Valentin.
spk06: Good morning, everyone. We are pleased with our first quarter results as we delivered a revenue that was 10% higher than the first quarter of 2019 and above our guidance range. In addition, Book-to-bill was above 1 in the fourth quarter, as we saw the traction in order flow that started in the third quarter continue during the fourth quarter and into 2021. We're continuing to benefit from the advantages of our leading-edge products, technology differentiation, low-cost production capabilities, and the global footprint. We continue to see strong revenue in China, which was significantly higher on a year-over-year basis as volume growth more than offset lower selling prices in the region. We are also pleased to see a sequential improvement in revenue in Europe and strong sequential revenue growth in North America in the fourth quarter. Our system sales also improved modestly, but continue to be below last year, primarily due to the impact of the economy from COVID-19. We're demonstrating good progress in our core markets thanks to our technology differentiation and low-cost production capability. In high-power wages, we deliver strong year-on-year growth in both our rack-mounted 1-4 kilowatt wages for the high-volume market and our ultra-high-power wages for leading-edge catching systems. as sales of lasers above 6 kilowatts increased 34% compared to the fourth quarter in 2019, and were 56% of total high-power sales. At high end of the market, we're benefiting from an increase in order volumes for our 20 and 30 30 kilowatt ultra high power lasers and optical heads. These lasers not only enable 50 to 100 percent after 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 super beam parameters, superior beam parameters, record wall plug efficiency and reliability is driving the replacement of plasma cutting machines, other non-weather solutions and low-power weather solutions. We booked the first orders for the new, unique, ultra-compact rack-mounted U-series of lasers for a low-cost cutting system, and we expect to start sweeping them shortly in volume. Not only do these lasers provide extended optical performance, record power-to-volume ratio, and full protection against humidity, they are also significantly evolving cost to manufacturers. As a result, we expect this new design to improve growth margin for this product. We continue to focus on growing sales in other applications set outside of our traditional cutting and welding markets. Last quarter, we launched our Revolutionally 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, for the first time, the product will simultaneously provide the highest quality pre-cleaning and after cleaning of the well touches and well itself, respectively. We have already sold a number of units in the last few weeks only and believe that there are many thousands of customers in the U.S. alone and many tens of thousands worldwide that could be interested in this unique product. During the fourth quarter, emerging products and application sales were 28% of total revenue, increasing 22%. We are pleased with the performance of a number of products that are the key to the diversification of our revenue. Examples include high-power second pulse waves are 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 standard solution for urology and green wages sales for solar cell processing. With record backlog, we expect sales of green wages to continue to grow fast as our green pulse weather are enabling significant improvements in solar cell efficiency. In additional, high-power weather for defense application perform well year-over-year. Despite the impact of the pandemic, ultraviolet and ultrafast pulse weather into imagined microprocessing applications show strong growth for 2020. Our adjustable mode beam, A and B lasers, continue to gain traction in the welding industry, most notably in electric vehicle battery welding. And as a result, we received significant orders for AMB lasers in Q4. Our AMB products offer superior speed and weld quality. Our competing solution sends the broadest range of beam tunability, which enables sputter-less welding. The multiple QCV laser for high-speed spot welding applications bring significant cost savings due to an increase in welding productivity and decrease in electrical consumption. Beyond material processing, we continue to develop new soft tissue medical treatments, meet infrared laser for molecular level resolution, online spectroscopy, inspection, sensing, and biomedical research applications. In addition, we are continuing development of our new generation of analog and high-tech digital silicon pathology devices for super high-speed and high-volume data processing. For telecom, data telecom, many and many other advanced future applications. Furthermore, we were extremely pleased by the growth we saw in advanced applications and medical applications. Associate development has been a driving force behind IPG's success since the company's inception. We spent our 10% of our total revenue on R&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 weather technology the tool of choice in mass production. More than 20 years, too, 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 hell in the operating environment. As a result, the well-being of our employees, their families, our customers, our partners and communities will operate and remain our highest priority. With that, I will turn the call over to Eugene Shcherbakov.
spk04: Thank you, Valentino, and good morning, everyone. The impact of COVID-19 on our production capability continues to be minimal, and we are focused on ensuring the safety of our employees with social distancing and enhanced cleaning and filtration measures in place. Otherwise, we are operating normally. Despite the increasing of COVID-19 cases in the Northern Hemisphere with fall and winter, production remains fully operational and we manage COVID-related absences effectively. We are very pleased with the performance of operations during the first quarter as production ramped to meet the increase in demand, enabling us to exceed the top end of the guidance range and report first quarter of year-over-year growth in more than two years. We are proud of the improvement in underlying growth margin, driving by an increase in revenue product cost reduction, and product mixed improvement. Total SG&A and R&D expenses were $76 million in the first quarter and continue to benefit from lower travel and trade show expenses given pandemic-related restrictions. As the business activities start to pick up and some restrictions are lifted and life normalized in the second half of 2021, we would expect our operating expenses to increase as well. We remain committed to supporting our R&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 2019. Examining our performance by region, revenue in China increased 52% year-over-year, represented 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 have superior performance and reliability, and we are seeing the strong growth in demand for ultra-high power lasers. In Europe, while revenue decreased 5% year-over-year due to the effect of COVID-19, it did grow sequentially. In addition, in Europe, order flow continued to get better despite the increase in restrictions in Europe due to lockdowns. Similarly, revenue in North America decreased 11% year-over-year, but grew 37% of sequential basis, is a good improvement in material processing sales for lasers and systems, and year-over-year growth in medical and advanced applications. North America bull can continue to be strong, even relative to expansion of order flow and Q3 2020. Sales in Japan decreased 29% year-over-year, while economy in the region continues to be negatively impacted by COVID-19. Some regional macroeconomic indicators have improved in the recent months. Sales to the rest of Asia increased 3% year-over-year, continue to recover from the second quarter, and also being hit from Shipment of green leads 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 decline in direction of our business. In addition, it seems that there is some optimism for improving investment cycle driving by equipment upgrades related to requirements to the flexible processing automation and energy efficiency our leading age fiber laser technology offers significant productivity gains electrical efficiency and lower cost of orange sheet over the other lasers and non-laser tools an increasing focus on the environment impact and commitment to the net zero emissions for a large industrial manufacturer is creating additional opportunity for our lasers and both well for our long-term growth objective we're already starting to see it's very with electrical vehicle and electrical vehicle battery production and are likely to see is with other industries we believe that efficiency is likely to become 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-19, we believe that we are well positioned as we enter the year 2021. In addition, we continue to believe that the breadth and depth of our product offering, our Russian diversity-advanced material and component technology platform, our efficient R&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.
spk07: Thank you, Eugene, and good morning, everyone. Revenue in the fourth quarter was $337 million 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 6 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 ultra-fast 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-19, 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 drilling applications. Other product sales decreased 11% year over year, primarily due to lower telecom sales. Q4 gross margin was 44%, which increased 310 basis points year over year. The additional inventory charge reduced gross margin by 410 basis points. Excluding this impact, gross margin benefited from lower cost of products and a decrease in unabsorbed costs as a percentage of sales as compared to the year-ago period. The additional inventory charge of $14 million was related to optical components that have been replaced by components with better performance. Fourth quarter gap operating income was $65 million and operating margin was 19%. During the quarter, we recognized a foreign exchange loss of $5 million, primarily related to the depreciation of the U.S. dollar versus the euro. Q4 net income was $49 million or $0.92 per diluted share. The additional inventory charge and foreign exchange loss reduced EPS by 27 cents. 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 million lower and gross profit to be $8 million lower. We ended the quarter with cash, cash equivalents, and short-term investments of $1.4 billion and total debt of $38 million. Strong operational execution resulted in cash provided by operations of $85 million during the quarter. Capital expenditures were $26 million in the fourth quarter. We expect 2021 capital expenditures will be in the range of $150 million to $160 million for the full year. Total capital expenditures in 2020 were 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&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 2021, IPG expects revenue of $310 million to $340 million. 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 $1.20, with 53.2 million basic common shares outstanding and 53.9 million 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-19 in Europe and North America as well as the uncertainty surrounding vaccination rollouts 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-19, 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 positions. 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.
spk13: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 Stiefel. Please proceed with your question.
spk09: Thanks very much. Tim Valentine, I 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 through, 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 19 as opposed to 20, given that 20 was such a challenging year?
spk07: Yeah, we're not going to comment on annual guidance or targets there. So except for your last comment, John, I think, 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 were 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 ultra-fast and UV, medicals performed very well during the whole course of the year with the lithotripsy application. Other newer product introductions, the multi-channel 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 more 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, you know, sometimes impacted the second half of a year as happened in 2019 or has resulted in a slow start to the year as the pandemic did last year. So the main target is to get out of more of the volatility and get to sort of consistent year-over-year growth on a quarterly business. And we've got significant drivers for that.
spk09: Got it. And maybe just as a follow-up on the gross margin side, as we're looking out over the next several quarters, any expectations that, you know, we should assume maybe some additional charges like we saw in 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 21? Thank you.
spk07: Yeah, I'm much more definitively expecting a normalized gross margin print over the coming year. We've, you know, 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, you know, 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, 7 or 8 kilowatts, up to 8 kilowatts they're going to be used in. So there's a lot of other initiatives on that. on cost reductions as well that we're optimistic about. Thanks, Tim.
spk06: As Tim said, we expect that this year our growth margin will return back to our usual frames, above 50%. But we're very careful in the forecast because the situation for Q3, Q4 is not certain at all. So what I wanted to do, absolutely promising on the . But still not definitely. Our guidance is so very, very careful, very conservative.
spk09: Understood.
spk13: Our next question comes from Tom Diffily with DA Davidson. Please proceed with your question.
spk08: Yes, good morning. Thanks for the question. When you look at the strong activity, it sounds like you had pre-Chinese New Year in China on the order front. Do you expect China to grow a percentage of the order book over the next couple quarters, or is that being matched by growth in some of the other regions?
spk07: So, Tom, relative to Q1 last year when China order flow increased, slowed down dramatically and then it really picked up in 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 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.
spk06: Remarkable. The most frame orders, enormous quantity of frame orders, is practically double compared to last year, last two quarters. But the major of these orders is for high power, above 10, 15 kilowatts. When they're asking for license to get license to license, it's enormous growth of high power from that point. So nobody can supply them. Nobody. It's all only we can supply working more than 15, 10, 15 kilowatts working. All the time for IPG, all China time for IPG today. It's a lot. Europe and America is much more neutral here. They much less. Because major integrators, cutting system integrators in Europe, in the U.S., they don't have own high-power lasers. Don't have. And they stop in 10 kilowatts. But China extremely active in 15 to 30 kilowatts level.
spk08: Okay. No, thanks for the extra color. That's helpful. And as a follow-up, how big is the EV battery market right now for lasers, and where do you think that goes over time?
spk07: 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 potential decade-long investment cycle, and if EV batteries vehicle production is going to get to the levels that are expected. People are talking about 25, 40, even 50% of total vehicle sales over 10 or 15 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. 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.
spk08: Okay, great. Thanks for your time today.
spk13: Our next question comes from Nick Tataroff with Longbow Research. Please proceed with your question.
spk02: Thanks. Good morning, guys. Tim, in the last up cycle, you guys have 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 where you could see some upside And also, can you talk about what are the limitations of rolling that ultra-compact design above 8 kilowatt and then how far up it is?
spk07: I think some of the incremental growth 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, is that operating expenses, you get more travel and 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?
spk04: In principle, we have several generations of compact lasers. I'm talking about high-power lasers, of course, with power more than 2, 3 kilowatts. 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 weather is 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, is output level up to eight kilowatt. It will be the next stage, and the first result demonstrates very good performances. And we are absolutely sure that it will be the next generation of our ultra-compact, rack-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 at a better price. Such kind of situation is compact and ultra-compact lasers.
spk02: 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? It sounds like you guys have received, you mentioned extremely positive feedback. You know, how much do you think 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?
spk06: You know, automation is enormous. Only United States, as we investigated, more than 24,000 only small drop shops which use this manual welding instrumentation. 24,000 only U.S., but also large OEM, like automotive and other, the world also use, but even each of them will buy only one unit, 24,000 units. 24,000 units, like $300 million. Only one unit, but typically the small job shop use 10, not one, two by 10. It's all voltage, let's count, minimum five times more. So it's 100,000 shops. Each from there, we now provide for testing for this estimation more than 70 on the U.S., more than 70 such jobs. They taught me 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 clean, immediately clean such as in pre- welding and after after welding now they with chicken and meat regular they have to use chemicals then to clean this in any case quality of final touch not very sufficient now they don't need to make nothing that for one time put by laser beam in additional motor operation the same way that them and all clean up ideal So the people, it's so fantastic improvement. So they only waiting, waiting. We delay delivery only due to some formal bureaucratical qualification for electrical emissions. So now we have received in the U.S. all these emissions. It started only a few weeks, started to shift this unit to sell to customers before we collect it to all the stores. So we believe this year only we'll sell some 1,000 units. Next year, it will be 10,000 units. So it's a very fast introduction market, and we don't see competitions we can make similar during the next one or two years. Even later would be difficult because we have very innovative new technology, which any Chinese nobody has today.
spk07: And the other point, it's easier to use as well. So it's easier to use. So the training of the welder.
spk06: Yes, it's easy to use. If the normal welder, you have to train many months, even more, it could be some talent. You don't need any person, your student, after only a few hours demonstration, presumably a traduction, can weld immediately. So it's available to everybody today. It's also a normal benefit because professional welders now decrease and decrease.
spk13: Got it.
spk02: Thank you.
spk13: Our next question comes from Jim with Needham and Company. Please proceed with your question.
spk03: Hi, thank you. 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?
spk07: In terms of going to market, at the moment we're rolling it out in – phase manner with some of the key. We 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 And, you know, 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 product are very good, benefiting from some of the design improvements around the ultra-compact lasers.
spk03: And a follow-up question is you showed a nice recovery in the U.S., at least on North America, at least on a sequential basis, and I'm wondering if You know, 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 U.S. is sustainable?
spk07: Yeah, the underlying materials processing business has improved. In fact, some of the order flow in Q4 was for some of our specialty AMV lasers. The 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 to be quite as strong as it was last year because we came on such a small base, but the medical business is continuing to perform well. We've got increasing visibility into medical sales in the second half of the year. The green laser is 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 as 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.
spk06: Thank you. We're talking about a share of products which do not relate from china it is product for another application than traditional cutting and welding of metal sheets so then if we report this year we increase essential up to 28 percent but we are trying to increase up to 50 percent during a couple of years 50% is the most of this product, new product, which we, for another application we developed, introduced in U.S. So it increased essentially sales in the U.S., also increased gross margin in the U.S. Before, the major contribution to the net income in the U.S. we received from sales of diets. And temporarily, last two years, sales of diet decreased. So income from diet decreased also. Now we turn back for fast-growing diet sales. It's all the profit from diet. It's a plus growth of these other applications, sales. from the U.S. and may develop in the U.S., not develop in Germany, and it is sold only in the U.S. many times than before. So it's a real American company. We've become one of the major generation, a real major generator of revenue. Thank you. Our next question comes from Michael Fenninger with Bank of America. Please proceed with your question.
spk12: Hey guys, thanks for squeezing me in. Tim, I recognize that you may not want to comment directly on one of your competitors. I was just hoping to get a sense 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, scaled up R&D. Maybe you can help us understand the competitive landscape 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? Do you see more consolidation going forward around laser technology and automation markets? Just curious on your thoughts on that one.
spk07: 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 view this as being separate from our core strategies 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 the 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&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 an 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 look at what may or may not be a larger-scale company that will have competitive advantages against us. We don't think that they will. Finally, beyond this, there has already been quite a lot of consolidation within the industry. So there's a limited number of large targets to the left out there. The largest other competitor that's out there for us is actually a private German company. consolidation has already taken place a bit more meaningfully to varying degrees of success, I'd say.
spk12: Perfect. Thanks for that, Tim. And just following up, if we did the higher end of your queue and guidance and you see a typical 15% to 20% sequential growth in Q2, you're kind of starting to knock on that $400 million 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 arrangers.
spk07: I think Valvin alluded to that earlier in the call that you're certainly getting 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 million level, without guiding above that at the moment, we've got all these cost reduction initiatives and Valentin's 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 the investing class, which we are at the moment.
spk13: Our next question is from Mark Miller with the Benchmark Company. Please proceed with your question.
spk01: 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 you see that having any impact on you over the next couple of quarters?
spk07: No, Mark. We don't think that the chip shortage in the semiconductor industry is going to affect us, even though it is affecting the auto industry in terms of some facilities shut down. 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.
spk01: Germany's sales were also down sequentially year over year. Is that COVID also like the case in Japan?
spk07: I haven't looked at the German number. Well, 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 they were down single digits. So, yeah, I haven't got any more commentary around that. I think Europe was better.
spk13: Thank you. Our next question comes from Joe Whitting with Edgewater Research. Please proceed with your question.
spk11: Hey, thank you. Good morning. I wanted to ask on welding. Obviously, EV batteries up on A and B, and there's also a ton of interest in the handheld, which isn't surprising. But Tim, beyond that, how are you kind of viewing the broader macro welding market adopting laser? and that includes both standalone lasers and then your systems mix as the broader cycle turns here and cost of capital is low. Could there be kind of a tipping point in play for that market where the adoption has been slow over time?
spk04: Eugene will address this question. About 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 supply also our components, I mean, different kinds of optical heads for cutting or for welding, plus monitoring system like LDD, plus single-motor lasers specially produced for such kind of applications. And finally, we start to produce a complete system for battery welding. Already supplied to some customers, automotive customer, and now already supplied additional such kind of system to the customer. And for us, it's fantastic. It's not a new product, but nevertheless, for us, it's a new activity, and we see a very good opportunity for us to supply, again, not only lasers, not only components for this application, but complete systems in Europe, in China, and also in the United States. In total, the welding market is growing well. Of course, not only connected to the automotive applications, not only to EV vehicle, But also for other applications, for example, also basically, of course, first of all, from different kinds of metal welding. But this demand is growing, definitely, year over year.
spk11: OK. I wanted to go back to the comments on rolling out features from the ultra-compact designs to higher power units up to, I think you said up to 8 kilowatts. I guess I'm curious there, what sort of trade-offs do you need to make? Is it efficiency or could it be flexibility and durability? And going forward from a product offering perspective, do you plan to offer those units side-by-side? these 8 kilowatts, for example, with the ultra-compact functionality versus your kind of existing full-featured, if you will. I think that would be interesting. Thanks.
spk04: First of all, when we produce such kind of ultra-compact lasers, we also produce the 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 lasers we are producing first of all 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 ultra-compact laser for these applications. To exchange, it will be not exchange, it will be the new machines. It will be much more compact, much more efficient, final machines, for example, for cutting. And from this point of view, you'll see very good opportunity. First of all, of course, better efficiency, better compactness, but first of all, better price for our customers.
spk06: I remind all of you that, for example, to replace here two lasers for cutting by fiber laser. We worked 10 years, not one, not two, despite it was from beginning, it was obvious. So fiber laser much better in from point of cutting quality, from point of cost of many years. customer use, and so on. Ten years we've spent now with practical CO2 cutting business. But it's ten years, not one, two, three, five, ten years. You like it immediately during only a few months to replace 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 dominating cutting business. Nobody trusts it all. They start to talk, oh, it's only for very thin metal. And so on. Never will cut even two, three millimeters. They never will cut five millimeters. Now 50 millimeters for cutting successfully. Not only the... Cutting now will replace plasma. We never talk about replacing plasma, for example. It's so on. But it's one way. Not to be so naive that we're making much shorter than other people. But it takes time in any case.
spk07: Joe, the only other part you're calling was there is no trade-off. I mean, 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 uh perfect that's great color just what i was looking for if i could squeeze one more in the 20 to 30 kilowatt
spk11: Curious what geographies those units are shipping to, if that's just kind of the pentas and et cetera of the world in China, or 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 that power level.
spk04: Probably a level now not limited on the 20 or 30 kilowatts. Recently, we already 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 for cutting. Some part number of these lasers are also used for welding applications, but for special applications, like for special materials and so on. But mainly for cutting applications. And you are right. Unfortunately, the first customer now in China for such kind of applications. Not in Europe, not in the United States.
spk11: Okay, well, thanks, and congratulations.
spk04: Thank you.
spk13: As a reminder, please limit to one question and one follow-up. Our last question comes from the line of Paritosh Misra with Barenburg. Please proceed with your question.
spk10: Thank you. Good morning, and thanks for taking my question. Just curious, with that CAPEX guidance for the year 150 to 160, can you provide some color as to some of the bigger projects included in that CAPEX range? and anything worth flagging as a potential future growth driver?
spk06: We have to shift some construction, new building for this year instead of 2020 because This construction industry practically works only for 20-30% all-time COVID-19. The way they did not get the right materials at the right time and so on. So all the ships they promised, for example, one month delivery, but we wait half a year to deliver, to get even windows and so on. It was awful that time for construction industry. Now we need a lot of additional assembly facilities. We need a lot of new production lines. We need new equipment. We need 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. We'll work what we'll need for two, three years. But if we won't involve, won't build these new facilities, won't buy and install this equipment technology now, then for two, three years, we will be absolutely short in production and so on. We don't want to have future. It's normal. And we feel 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 acquisition new businesses we're not buying new businesses we're not buying it 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 fuel very good businesses, but to manage all these types of different businesses becomes the large company not manageable at all. We don't need such a mixture.
spk10: I understand. I really appreciate it. Sorry, guys.
spk07: It's okay, Paratoch. Next question.
spk10: Okay. 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.
spk07: 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 is 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 coupling 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.
spk10: Great. Thank you so much.
spk13: That concludes today's question-and-answer session. At this time, I'd like to turn the call back over to Eugene Fedotov for closing comments.
spk00: Thank you for joining us this morning and for your continued interest in FPG. We look forward to speaking with you over the coming weeks and look to participating in a number of virtual investor conferences this quarter. Have a great day, everyone.
spk13: This concludes today's conference webcast. You may disconnect your lines at this time, and we thank you for your participation.
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