Q4 2021 IPG Photonics Corp Earnings Call

Good morning, and welcome to IPG Photonics fourth quarter 2021 conference call today's call is being recorded and webcast at this time I'd like to turn the call over to your host Eugene Fetterhoff Ipg's director of Investor Relations for introductions. Please go ahead Sir.

Speaker 1: Good morning and welcome to IPG Photonics fourth quarter twenty

Thank you Robin and good morning, everyone and foster days IPG Photonics CEO of Dr. Eugene Shcherbakov.

Speaker 2: Thank you, Robin. Good morning, everyone. For us today is IPG Photonics CEO Dr. Eugene Rybakov and Senior Vice President and CFO Tim Momin.

Senior Vice President and CFO , Tim Mammen.

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.

Speaker 2: 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 strategies that could cause the company's actual results to differ materially from those projected in such forward-looking statements.

Statements. These risks and uncertainties include the impact of the COVID-19.

Speaker 2: These risks and circumstances include the impact of the COVID-19.

And then they go on our business and those details.

Speaker 2: pandemic on our business and those details in IPG Photonics Form 10-K for the period ended December 31, 2020, 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.

P G, but the Onyx Form 10-K for the period ended December 31st 2020, 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 February 15 2022 only.

Speaker 2: Any forward-looking statements made on this call are the company's expectations or predictions as of today, February 15, 2022 only. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our rep-

The company assumes no obligation to publicly release any updates or revisions to any size statements for additional details on our reported results.

Please refer to the earnings press release earnings call presentation, and they excel based financial data workbook posted on our Investor Relations website.

Speaker 2: Please refer to the earnings press release, earnings call presentation, and the Excel-based Financial Data workbook posted on our investor relations website.

Post these prepared remarks on the Investor Relations website. Following the completion of this call.

Speaker 2: We will post these prepared remarks on the industry relations website following the completion of this call. With that, I'll now turn the call over to Eugene Sherbrooke.

I'll now turn the call over to Eugene share repo.

Good morning, everyone.

Speaker 3: Good morning everyone. We are pleased is our force water perform.

Our fourth quarter performance delivered revenue that was 8% higher than a year ago and above the top end of our guidance range.

Speaker 3: The derivative we knew that was 8% higher than a year ago and above the top end of our guidance array.

Although full year revenue was.

Speaker 3: Our full year revenue was record, slightly above our prior record revenue reported in 2008.

Slightly above our Apio reported revenues reported in 2018.

These strong results were driven by solid demand for our lasers in Europe , North America, and improving demand in Japan.

Speaker 3: These strong results were driven by solid demand for our lasers in Europe , North America and improved demand in Japan, which more than offsets off demand in high-power cutting applications in China.

It's more than offset soft demand in the high power cutting application in China.

This OEM career sales into Belgium.

Speaker 3: We saw increased sales in welding, high-power cutting outside of China, marking, 3D printing, foil cutting, cleaning, semiconductors, and a number of other products and applications that all contributed to our growth this quarter.

Power cutting outside of China, Martin <unk>, Khatun cleaning semiconductor and number of other products and applications that all contributed to our growth this quarter.

Oh, no sales outside of China.

Speaker 3: Overall, sales outside of China grew to 69% of total revenue.

With 69% of total revenue.

We have no seat in many years.

Speaker 3: However, we have not seen in many years showing our progress in achieving the better geographic balance and our abuse.

Our progress in achieving a better geographic balance in our business.

Sales of high power lasers benefited from increase in order volume.

Speaker 3: Sales of high power lasers benefited from increase in order volume in cutting applications in Europe , North America and Japan, as well as a strong welding revenue which was upset by lower demand in China high power cutting markets.

Cutting application in Europe , North America, and Japan, as well as a strong renewal, which was offset by lower demand in China high power cutting market.

This was due to a general market softness and increased competition and low cost portion of this market.

Speaker 3: This was due to general market softness and increased competition in low-cost portion of this market.

To successfully protect our market share in areas, which focus on reliability technology service.

Speaker 3: We continue to successfully protect our market share in areas which focus on reliability, technology and service.

Our high power lasers, and optical heads and deliver <unk>.

Speaker 3: Our high-powered lasers and optical heads can deliver.

But I've seen it yet.

Speaker 3: significant productivity improvement, electrical efficiency, flexibility, and ease of use and integration as well as the lowest total cost of ownership in global support unmatched by other lasers and non-laser tools.

Improvement in electrical efficiency flexibility and ease of use.

The integration as well as the lowest total cost of ownership.

And global support and much my other lasers and non laser tools.

At the same time, we are introducing an ultra compact Iraq mileage and <unk> lasers.

Speaker 3: At the same time, we are introducing the ultra-compact rack-mounting U Series lasers, which power up to 6 kilowatts, to be more competitive in low-cost cutting systems.

Power up to 60 kilowatt ytterbium.

Welcome to <unk>, Inc.

Low cost cutting system.

We're also pleased visa girls.

Speaker 3: We are also pleased with growth and we are seeing a medium power pulse and QCW lasers this quarter.

And lithium.

Sure.

Paul.

And usually that would always us this quarter.

Is that primarily driven.

Speaker 3: which are primarily driven by higher demand on emerging applications.

Hi, good demand.

In medicine applications.

I would like also to finalize our exceptional growth and developing of this year.

Speaker 3: I would like also to highlight our exceptional roles in the building this year.

Given by higher demand in the lasers used in EV battery manufacturer.

Speaker 3: Driven by a high demand of A and B lasers used in EV battery manufacturing and introducing light-weld, our hands held welders.

Just in light oil our songs.

Most products are example of IPG focus on innovation and ability to hit any of our solutions to our customers is that expand our total available market.

Speaker 3: Both products are examples of IPG's focus on innovation and ability to deliver solutions to our customers that expand our totally valuable market.

Our AMB laser providing a broad range of beam <unk> that enables superior speed better.

Speaker 3: Our EMB lasers provide a broad range of beam tunability that enables superior speed, better weld quality, ability to weld disparate materials, and spotless welding.

Williston ability at the world.

Barrett materials and.

Spotted last developing.

This is extremely important.

Speaker 3: which is extremely important in the EV battery manufacturing process.

EV battery manufacturing process.

Another driver besides a strong building results.

Speaker 3: Another driver behind the strong welding results is light weld. Compared to traditional MIG and TIG welding, light weld is easier to use, faster, more precise, welds in a wide range of materials better, and incorporates surface cleaning capabilities.

Quite well compared to traditional American, particularly out in life is easier to use faster more precise well.

Transfer of material better and there's a company at surface cleaning capabilities.

This call is the significant preparation processing and post processing times.

Speaker 3: This quality significantly reduced preparation, processing, and post-processing times, resulting in lower total operation costs for our customers.

In lower total exploration cost for our customers.

We're also in the way, Oregon is one of the many examples of successful revenue diversification strategy.

Speaker 3: Growth in welding is one of the many examples of successful revenue diversification strategy that IPG has been pursuing.

<unk> has been pursuing.

We're also pleased the performance of our medical business.

Speaker 3: We are also pleased with the performance of our medical business. Israel recorded revenue this quarter as our gold standard rosary lasers, and if possible, fibres continue to gain acceptance.

The related quarterly renewal is this quarter.

Our gold standard.

Lasers, and just possible fibers continues to gain acceptance.

Sydney, Australia, Israel positioned to benefit from global marker.

Speaker 3: Additionally, IPG is well positioned to benefit from global macro.

But on Slashdot, such as automation and Digitization as well as our focus on.

Speaker 3: such as automation, miniaturization, as well as a focus on sustainability, renewable energy and energy efficiency.

It's going to need it yet.

In renewable energy and energy efficiency.

As Europe and hit.

<unk> supplied all glide invest an enormous amount in new mobility.

Speaker 3: Automakers and suppliers worldwide are investing an enormous amount in new mobility products.

Liability products.

Existing investments to continue in the next three to five years or even <unk>.

Speaker 3: We expect these investments to continue in the next three, five years, or even longer.

Longer.

Our lasers are widely used in manufacturing of electrical vehicles.

Speaker 3: Our lasers are widely used in the manufacture of electrical vehicles. We are supplying laser solutions for battery welding and thin-foil cutting applications, cleaning, hairpin welding in electrical battery and motor assembly, as well as some body-wide applications.

Applying the laser solutions for battery welding.

Assuming full catching applications cleaning.

If you held them in electrical battery and Motor Assembly.

As well as some body and wide applications.

Demand in solar cell market.

Speaker 3: Demand in solar cell market can be cyclical, but strict emission targets are expected to drive significant investment in solar cell production in North America and China in the next three out of five years, resulting in high demand.

Cyclical, but strict emission packets I expect it to drive significant investment in solar cell production in North America, and China is the next three to five years.

Resulting in higher demand for green lasers.

This laser I used to improve solar cell efficiency and reduce the amount of wiring.

Speaker 3: These lasers are used to improve solar cell efficiency and reduce the amount of wiring needed in solar cell design.

<unk> and solar cell design.

Demand for our Green lasers increased by 50% in 2021.

Speaker 3: Demand for our green lasers increased by 50% in 2021.

Focus on.

Speaker 3: focus on sustainability and efficiency, as well as on some recent energy shortages in China.

So maybe this year and efficiency as well as some <unk> energias truckers in China.

And high energy cost in Europe .

Speaker 3: and high energy costs in Europe are driving an increased interest in our ecolasers that provide well-plugged efficiency of greater than 50%.

And an increased interest in our echo lasers.

<unk> been able to get 50%.

I am going to shop.

Speaker 3: and can help to meaningfully reduce.

So our main trulia reduce.

Okay.

Speaker 3: environment impact and energy cost for medium and large industrial manufacturing.

Vitamins.

Energy cost for medium and large industrial manufacturers.

During the fourth quarter American product imagine gross product sales.

Speaker 3: During the first quarter, emerging gross product sales were 38% of total revenue, increasing 57% year over year.

38% of total revenue.

In Canadian 57% year over year.

Yes, very well leased.

This performance of number of products exactly are key for our.

Speaker 3: with performance of a number of products that are key for our diversification of our revenue, including the AMV, high-power pulse lasers, light-weld, medical, beam delivery, laser-based system, and multi-channel QCW laser for high-speed spot welding applications. Backlog

Vacation.

Our revenue including <unk>.

<unk> high power pulse laser light rail medical being delivered in a laser based system.

Multi channel <unk> laser for Christ speeds, both welding applications.

Backlog for this product remains strong.

We entered 2022 and three focus on successfully established a large market with our innovative solutions.

Speaker 3: as we enter 2022, and we focus on successfully establishing a large market with our innovative solution.

<unk>.

Speaker 3: Let me share some of our expectations for 2022.

Let me share some of our expectation for 2022.

While we continue to Okay limited visibility.

Speaker 3: While we continue to have limited visibility and see uncertainty in the operational and geographical environment, we believe that

Uncertainty.

And separation and geographical environment, we believe that.

The breadth and depth of our product offering our innovative solutions for future LNG model strong balance sheet and free cash flow provide us ample flexibility to respond to the business this production and support growth.

Speaker 3: The breadth and depth of our product offering, our innovative solutions, efficient R&D model, strong balance sheet, and free cash flow provide us ample flexibility to respond to the business distractions and support growth.

We expect continued growth of the mountain development pattern market in North America, and Europe and Japan.

Speaker 3: We expect continued gross demand in welding and cutting market in North America, Europe and Japan.

Sales and I imagine growers biotics fruit and benefits from continued marketed brands such as investment into even better is solar sale automation of immediate utilization.

Speaker 3: Sales and emerging growth products should benefit from continued macro trend such as investment into EV batteries, solar cell automation and miniaturization.

Colorado.

Speaker 3: However, this will be a transition year for IPG with growth in focus areas and continued diversification away from the highly competitive portion of the high power-cutting market in China, leading to more moderate 3-6% revenue growth in 2020.

There'll be a transitional year for IPG These girls and focus areas and continue to give you a certification.

But I'm highly competitive portion of high power cutting market in China.

A leading tomorrow Monday city <unk> city of any growth in 2022.

That said we remain optimistic.

Speaker 3: With that said, we remain optimistic in our long-term growth opportunity for IPG and continue to expect double-digit revenue growth in the mid- and long-term.

Long term growth opportunity for IPG and continue to expect double digit revenue growth in the need and the long term.

I will turn the call over to the team to discuss financial highlights in the quarter.

Speaker 3: I'll turn the call over to Tim to discuss financial highlights in the quarter.

Thank you Eugene and good morning, everyone. My comments generally will follow the earnings call presentation, which is available on our Investor Relations website.

Speaker 3: Thank you, Eugene, and good morning, everyone. My comments generally will follow the earnings call presentation, which is available on our investor relations website. I will start with the financial review.

I will start with the financial review on slide four.

Revenue in the fourth quarter was $364 million up 8% year over year driven by growth in most of our key product lines and geographies, but declined 4% sequentially, mainly due to lower revenue and a high power cutting applications in China.

Speaker 3: Revenue in the fourth quarter was $364 million, up 8% year-over-year, driven by growth in most of our key product lines and geographies, but declined 4% sequentially mainly due to lower revenue in high-power cutting applications in China.

Revenue from materials processing applications increased 5% year over year and revenue from other applications increased 41%.

Speaker 3: Revenue from materials processing applications increased 5% year over year and revenue from other applications increased 41%.

Fourth quarter GAAP gross margin was 45, 5% an increase of 190 basis points year over year, driven by lower inventory provisions, which reduced gross margin last year.

Speaker 3: Fourth quarter gap gross margin was 45.5%, an increase of 190 basis points year over year, driven by lower inventory provisions which reduced gross margin last year. It was partially offset by increased shipping costs and lower fixed cost absorption.

It was partially offset by increased shipping costs and lower fixed cost absorption.

Sequentially gross margin decreased due to slightly higher cost of products sold inventory provisions shipping costs and unabsorbed manufacturing expenses.

Speaker 3: Sequentially, gross margin decreased due to slightly higher cost of products sold, inventory provisions, shipping costs, and unabsorbed manufacturing expenses.

In order to offset some of the inflationary pressures we are experiencing we have increased the selling price of some products.

Speaker 3: In order to offset some of the inflationary pressures we are experiencing, we have increased the selling price of some products.

GAAP operating income was $85 million and operating margin was 23, 3%.

Speaker 3: Gap operating income was $85 million, and operating margin was 23.3%. Net income was $65 million, or $1.21 per diluted share.

Net income was $65 million or $1 21 per diluted share.

The effective tax rate in the quarter was 23%.

Speaker 3: The effective tax rate in the quarter was 23%.

During the quarter, we recognized a foreign exchange gain of $7 million.

Speaker 3: During the quarter we recognized a foreign exchange gain of $7 million primarily related to the appreciation of the U.S. dollar versus the euro and Russian ruble and appreciation of the Chinese yuan.

Similarly related to the appreciation of the U S dollar.

Versus the euro and Russian ruble and depreciation of the Chinese one.

Exchange rates relative to the U S. Dollar had been the same as one year ago, we would've expected revenue to be $3 million high ASP and gross.

Speaker 3: exchange rates relative to the U.S. dollar had been the same as one year ago we would have expected revenue to be $3 million higher and gross profit to be $1 million higher.

<unk> to be $1 million higher.

Moving to slide five.

Sales of high power CW lasers decreased 19% and represented approximately 41% of total revenue.

Speaker 3: Sales of high power CW lasers decreased 19% and represented approximately 41% of total revenue.

Sales of Ultra high power lasers above six kilowatts represented 51% of total high power CW laser sales.

Speaker 3: Sales of ultra-high power lasers above 6 kilowatts represented 51% of total high power CW laser sales.

Pulsed laser sales increased 32% year over year with continued growth driven by high power pulse lasers used in EV battery manufacturing, which is partially offset by lower sales of green pulse lasers used in solar cell applications.

Speaker 3: Pulse laser sales increased 32% year-over-year, with continued growth driven by high-powered pulse lasers used in EV battery manufacturing.

Speaker 3: partially offset by lower cells of green pulse lasers used in solar cell applications.

System sales increased 28% year over year, driven by growth across laser systems and higher sales of light world.

Speaker 3: System sales increased 28% year over year, driven by growth across laser systems and higher sales of light weld.

<unk> power laser sales increased 28% on growth in three D manufacturing and semiconductor applications.

Speaker 3: Medium power laser sails increased 28% on growth in 3D manufacturing and semiconductor applications.

Q CW laser sales were up 30% year over year due to higher demand in welding.

Speaker 3: QCW laser sales are up 30% year over year due to higher demand in welding.

Other product sales increased 81% year over year, driven by higher sales in medical telecom advanced applications as well as beam delivery and Pos.

Speaker 3: Other product sales increased 81% year-over-year, driven by higher sales in medical, telecom, advanced applications, as well as beam delivery and parts.

Looking at our performance by region on slide six.

Speaker 3: Looking at our performance by region on slide six.

Revenue in North America increased 30% driven by growth in materials processing with strong cutting and welding revenue driven by higher demand in electric vehicles in traditional automotive industry.

Speaker 3: Revenue in North America increased 30% driven by growth in materials processing with strong cutting and welding revenue driven by higher demand in electric vehicles and traditional automotive industries.

We also saw record revenue in medical applications and improved sales in telecom.

Speaker 3: We also saw record revenue in medical applications and improved sales in telecom.

In Europe revenue increased 37% as a result of higher demand across many products and.

Speaker 3: In Europe , revenue increased 37% as a result of high demand across many products and applications, including cutting, welding, marking, and semiconductors.

And applications, including cutting welding, marking and semiconductor.

The region is becoming a close number two in terms of revenue contribution for IPG.

Speaker 3: The region is becoming a close number two in terms of revenue contribution for IPG.

Revenue in China decreased 20% year over year as we continue to see lower sales in high power cutting applications, which was only partially offset by growth in welding high power pulse cutting <unk> manufacturing marketing and cleaning applications.

Speaker 3: Revenue in China decreased 20% year over year, as we continue to see lower sales in high-power cutting applications, which was only partially offset by growth in welding, high-power pulse cutting, 3D manufacturing, marking and cleaning applications.

We're seeing order activity stabilizing and cutting to portions of the cutting market is a focus on price remain highly competitive.

Speaker 3: We're seeing order activity stabilizing in cutting. The portions of the cutting markets that focus on price remain highly competitive.

We're pleased to see a solid improvement in demand in Japan, this quarter, driven by higher demand in cutting and welding applications.

Speaker 3: We're pleased to see a solid improvement in demand in Japan this quarter, driven by higher demand in cutting and welding applications.

Moving to a summary of our balance sheet on slide seven.

We ended the quarter with cash cash equivalents and short term investments of $1 5 billion and total debt of $34 million.

Speaker 3: We ended the quarter with cash, cash equivalents, and short-term investments of $1.5 billion and total debt of $34 million.

Strong operational execution resulted in cash provided by operations of $85 million during the quarter.

Speaker 3: Strong operational execution resulted in cash provided by operations of $85 million during the quarter. Capital expenditures were $29 million.

Capital expenditures were $29 million in the fourth quarter.

We expect 2022 capital expenditures will be in the range of $130 million to $140 million for the full year.

Speaker 3: We expect 2022 capital expenditures will be in the range of £130 million to £140 million for the full year.

2022, Capex includes facilities and capacity expenditure to support our future growth.

Speaker 3: 2022 CAPEX includes facilities and capacity expenditure to support our future growth, as well as redundant capacity for critical components.

As well as redundant capacity for critical components.

During the quarter, we repurchased 345000 shares.

Speaker 3: During the quarter, we repurchased 345,000 shares.

For a total of $57 million and have approximately $80 million left under the May 2020 authorization.

Speaker 3: for a total of $57 million and have approximately $80 million left under the May 2020 authorization.

Last week, the board authorized an additional $200 million and share repurchases.

Speaker 3: Last week, the board authorized an additional $200 million in share repurchase.

<unk> this new program.

Speaker 3: Including this new program, the board has authorized more than half a billion dollars in stock repurchases over the last three years.

The board has authorized more than half a billion dollars in stock repurchases over the last three years.

Yes.

Moving to outlook on slide nine.

Fourth quarter book to Bill was close to one and we're pleased with order flow approach across most geographies.

Speaker 3: Fourth quarter book the bill was close to one and we're pleased with order flow across most geographies and products outside of China.

<unk> products outside of China.

Macroeconomic indicators have been moderating, but remained strong for the U S and Europe , while Japan continues to recover.

Speaker 3: Macroeconomic indicators have been moderating, but remain strong for the U.S. and Europe , while Japan continues to recover. And China has indicated it will focus on stimulating economic growth in 2022.

And China has indicated it will focus on stimulating economic growth in 2022.

We're also seeing China high power cutting demand start to stabilize albeit at lower levels.

Speaker 3: We're also seeing China high power cutting demand start to stabilize, albeit at a lower level.

Continuing to benefit from growth opportunities in electric vehicle battery manufacturing.

Speaker 3: continue to benefit from growth opportunities in electric vehicle battery manufacturing.

Rollout of light World.

Speaker 3: rollout of light world, growth in medical cells.

Growth in medical sales.

That said there is still a great uncertainty in the operating environment and price competition in China.

Speaker 3: That said, there is still a great uncertainty in the operating environment and price competition in China that make forecasting our business challenging in the medium term, and our first quarter guidance remains subject to significant uncertainties, including the impact on global business environment from geopolitical events.

It make full costing our business challenging in the medium term.

Our first quarter guidance remains subject to significant uncertainties, including the impact on global business environment and geopolitical events.

We are at 19 economic trends growth from emerging product revenue competition.

Speaker 3: COVID-19, economic trends, growth from emerging product revenue, competition, and the lack of long-term...

And the lack of long term binding order commitments.

We are closely monitoring the situation between Russia and Ukraine.

Speaker 3: We are closely monitoring the situation between Russia and the Ukraine as we have disclosed before. We supply components between our major manufacturing operations in the U.S., Germany, and Russia.

As we have disclosed before we supply components between our major manufacturing operations in the U S, Germany and Russia.

At this time, it's unclear if sanctions would be put in place and should they be if they would cover components portable solid from our Russian subsidiary.

Speaker 3: At this time, it's unclear if sanctions would be put in place, and should they be, if they would cover components bought or sold from our Russian subsidiary. Sanctions could also target Russian banks.

Sanctions could also target Russian banks and the banking system.

In response to this uncertainty, we're developing contingency plans to mitigate possible disruptions.

Speaker 3: In response to this uncertainty, we're developing contingency plans to mitigate possible disruption.

Including increasing local inventory levels of key important components and encasing increasing production.

Speaker 3: including increasing local inventory levels of key imported components and increasing production at other locations.

At other locations.

For the first quarter of 2022.

Speaker 3: For the first quarter of 2022, IPG expects revenue of $320 million to $350 million.

IPG expects revenue of $320 million to 350 minutes.

The company expects the first quarter tax rate to be approximately 26%.

Speaker 3: The company expects the first quarter tax rate to be approximately 26%.

Yes.

An increase in tax rate assumption is due to a decrease in the benefit expected from discrete items, such as the excess tax benefit related to equity compensation.

Speaker 3: An increase in tax rate assumption is due to a decrease in the benefit expected from discrete items such as the excess tax benefit related to equity compensation.

IPG anticipates delivering earnings per diluted share in the range of 85 to $1 15.

Speaker 3: IPG anticipates delivering earnings per diluted share in the range of $0.85 to $1.15, with 54 million diluted common shares outstanding.

With 54 million diluted common shares outstanding.

As discussed in the Safe Harbor passage of today's earnings press release.

Speaker 3: As discussed in the Safe Harbor passage of today's earnings press release,

Our guidance is based upon current market conditions and expectations.

Speaker 3: 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 Companys reports with the SEC.

Speaker 3: It 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, we'll be happy to take your questions. Thank you. At this time, we'll be conducting a question and answer session.

With that we'll be happy to take your questions.

Thank you at this time, we'll be conducting a question and answer session.

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'd like to remove your question from the Q.

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.

My first question comes from Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.

Alright. Thank you you may have.

Talked about this I joined a couple of minutes late but just with respect to the overall cutting business. It looks like it was down for the year.

Speaker 4: talk about this. I joined a couple of minutes late, but just with respect to the overall cutting business, it looks like it was down for the year in around 17 percent, high teens or so. When you talk about that market potentially stabilizing at a lower level, how do we think about?

Around 17% high teens or so when you talk about that market potentially stabilizing at a lower level, how do we think about.

That over the course of 'twenty two.

Speaker 4: that over the course of 22 are you seem to be suggesting some signs of stabilizing in China, but on the other hand, it looks like that that still has the potential.

You seem to be suggesting some signs of stabilizing in China, but on the other hand, it looks like that that's still has the potential to be weaker in the first half of the year, how do we think about the cutting market.

Speaker 4: in the first half of the year, how do we think about the cutting...

Okay.

So I think overall, Jim China started last year very strong on cutting and then as we're all aware it was weak in the second half of the year.

Speaker 3: So I think overall, Jim, China started last year very strong on cutting and then, as we're all aware, it was weak in the second half of the year. Order flow in January , for example, seemed to be a little bit stronger there. They've just come back from Chinese New Year, so really, we want to see what happens in March and April , particularly the next, actually, three or four weeks will drive some of that.

To flow in January for example seem to be a little bit stronger that they've just come back from Chinese new year. So really we want to see what happens in March and April .

Particularly the next actually three or four weeks will drive some of that.

Total.

Speaker 3: tonal feedback that we get.

The feedback that we get.

But the January pointed to at least some stabilization. It was very weak in the second half last year. The real positives I think on cutting that we're really with some of our more focus is now.

Speaker 3: But January pointed to at least some stabilization. It was very weak in the second half of last year. The real positives, I think, on cutting, though, are really where some of our more focus is now in other geographies. So we were pleased with the performance in cutting in Europe , in North America. We actually saw some recovery in that market in Japan as well. So we continue to hold a very strong position outside of China. The other thing we mentioned on...

In other geographies. So we're pleased with the performance in cutting in Europe , and North America, we actually saw some recovery in that market in Japan as well. So we continue to hold a very strong position outside of China.

China the other thing we mentioned on.

The script just now is that we're actually increasing the power level of the ultra compact lasers that were offering in China. So they've been primarily at three kilowatts, we mentioned that very soon we're going to six kilowatts and even towards the end of the year to eight kilowatts. That's a very competitive device for us that we're not going to compete on price with it.

Speaker 3: The script just now was that we're actually increasing the power level of the ultra-compact lasers that we're offering in China. So they've been primarily at...

Speaker 3: three kilowatts. We mentioned that very soon we're going to six kilowatts and even towards the end of the year to eight kilowatts. That's a very competitive device for us there. We're not going to compete on price with it, but it will enable us to price that device because it has a lower bill of material cost, a bit more.

But it will enable us to price that device because there's a lot of bill of material cost.

A bit more competitively.

And then the other side of this is the opposite ends of the spectrum. The really ultra high power lasers were seeing some demand there and as we mentioned in Europe for the Echo lasers with higher energy efficiency.

Speaker 3: And then the other side of the opposite end of the spectrum, the really ultra-high-power lasers, we're seeing some demand there, as we mentioned in Europe , for the echo lasers with higher energy efficiency. So the China cutting market remains subdued. We're pleased with performance elsewhere.

The China market remains subdued we're pleased with performance elsewhere.

And the other thing Thats out there is potentially some stimulus coming into China, which the.

Speaker 3: And the other thing that's out there is potentially some stimulus coming into China, which...

The government has really been more a contractionary phase where everybody else has been fiscally more expansionary so kudos.

Speaker 3: The government's really been a more contractionary phase where everybody else has been

Speaker 3: fiscally more expansionary, so that could also help to improve the tone of the business during the year.

Could also helped to improve the tone of the business during the year.

Follow up question is just on gross margins just given if we think about the year as being somewhat of a transition year with this much more a more modest growth rate, 3% to 6% in the past you've talked about.

Speaker 4: A follow-up question is just on gross margins, you know, just given if we think about the year as being somewhat of a transition year with this much more, you know, more modest growth rate, 3 to 6 percent. In the past, you've talked about, you know, a range of gross margins.

A range of gross margins in the 45% to 50% area.

In light of what Youre seeing in the market is there any update you can provide with respect to how we think about gross margins.

Speaker 4: You know, in light of what you're seeing in the market, is there any update you can provide with respect to how we think about gross?

So overall last year your gross margins performed pretty well right. There in the midpoint of our range or slightly above that clearly Q4 is a bit weaker as it wasn't anything specific in Q4.

Speaker 3: So, overall, last year, gross margins performed pretty well, right? They were in the midpoint of our range, just slightly above that. Clearly, Q4 was a bit weaker. It wasn't anything specific in Q4. It's a number of different things that we called out. You know, product cost a little bit with mix. There's some inflationary pressures there. Shipping cost, a little bit lower absorption.

There are different things that we called out product cost a little bit with mix that some inflationary pressures that shipping cost a little bit lower absorption.

Overall, though given a relatively slow start to the year.

Speaker 3: Overall though, given a relatively slower start to the year and that guide for the year of three to six percent, that actually requires revenue to pick up.

That guide for the year of 3% to 6% that actually requires revenue to pick up meaningfully in Q2 Q3 and Q4. That's the first benefit we will get on gross margin as we tend towards.

Speaker 3: meaningfully in Q2, Q3, and Q4, that's the first benefit we'll get on gross margin as we tend towards a.

The higher slightly higher revenue level and then in addition to that I mentioned that with <unk>.

Speaker 3: higher, slightly higher revenue level. And then in addition to that, I mentioned that we've started to increase the price of certain.

To increase the price of certain.

Products, we're also focused on.

Speaker 3: products. We're also focused on continuing to reduce the internal cost of components that the three

Continuing to reduce the internal cost of components that the three kilowatt ultra compact moving to $6 <unk>. An example of some of the cost initiatives that so yeah.

Speaker 3: Kilowatt ultra compact moving to six and eight is an example of some of the cost initiatives there. So, you know, overall, as we get to a slightly higher revenue level in the second half of the, not second half, but Q2, in the second half of the year.

Overall, as we get to a slightly higher revenue level in the second half of the second half of Q2 in the second half of the year I expect to see some.

Speaker 3: Expect to see some return to that, you know.

Return to that.

Upper half of our gross margin range, we're not stepping away from that.

Speaker 3: upper half of our gross margin range. We're not stepping away from that target of getting more consistently into that upper half of that range, Tim.

Target of getting into that more consistently into that up off of that range.

Okay. Thank you.

And also his such kind of margin.

Speaker 3: And also with such kind of margin, which today is IPG, IPG definitely is a leader in this industry. Nobody can reach such kind of results.

David IPG, IPC and definitely as a leader is invested.

Nobody can reach such kind of results.

Yeah.

Our next question comes from Patrick Ho with Stifel. Please proceed with your question.

Alright. Thank you very much Tim maybe just as a follow up to some of the comments you just made about gross margins.

Speaker 2: Thank you very much. Tim, maybe just as a follow-up to some of the comments you just made about gross margins, the supply chain, and you talked about shipping costs being higher, were there any challenges in procuring parts, or were they just more that you had to pay more for those parts because the revenues look pretty good for December ? What are some of the supply chain challenges that you're experiencing today?

Apply chain and you talked about shipping costs being higher.

Were there any challenges in procuring parts or were they just more that you had to pay more for those parts.

Because the revenues look pretty good for December what is some of the supply chain challenges that you're experiencing today.

Caused some challenges festival, but.

Speaker 3: Of course, there are some challenges, first of all, but taking in mind that IPG is a vertical integrated company. The main important components for our lasers we are producing ourselves inside the company. This means it's not any problems to supply any time.

Taken in mindset.

This vertical integrated company.

Main important components for our laser sale position ourself inside the company. This <unk>.

No any prominence to supply it in time.

Vito.

Uh huh.

Optimal cost buy this components, we're talking about.

Speaker 3: optimal cost for these components. We are talking about some components which are receiving from outside.

Some components, Michelle or would you see it.

From outside.

Of course that exist as soon as this festival price for some components increase dramatically.

Speaker 3: Of course, there exist some challenges, first of all. Price for some components increased dramatically.

<unk> electronic components for example, cheap.

Speaker 3: By the way, electronic components, for example, chips.

Chips, and some cases price increase up to <unk> at the 10 times.

Speaker 3: In some cases, the price will increase up to three, up to ten times.

Of course.

Speaker 3: Of course, it also influences our gross margin. Also, shipping cost, additional, yes, definitely.

It also influences.

For instance for our gross margin also.

The shipping cost additional yes definitely.

And the raw materials some metals also.

Speaker 3: And the raw materials, some metals, also price for this metal grows dramatically up to 25-30%.

But I suppose it's metals growth of that market or depth of 25% 30%.

Of course, its influence on our gross margin, but we are also working through optimization.

Speaker 3: Of course, it's influence on our gross margin, but we are also working to optimization.

Sure.

Every time, we're talking about this we are making.

Speaker 3: Every time we are talking about this, we are making this optimization. This is why we would like to keep our margin high.

Innovation is a while we would like to keep our margins high enough.

Great that's helpful and maybe as my follow up question.

Speaker 2: Great, that's helpful. And maybe as my follow-up question, this diversification strategy that you're taking on and obviously trying to accelerate, as we look at 2022 as a whole, given that you have new products, new markets, and also the regional expansion,

Vacation strategies.

Taking on and obviously trying to accelerate.

As we look at 2022 as a whole.

Given that you have new products in new markets.

And also just regional expansion.

Where do you believe the gradients.

Speaker 2: Where do you believe the greatest traction you'll get among markets, products, or regions? Where is that diversification going to greatly contribute to at least 2022 this year?

I guess traction youll get among markets products or regions, where is that diversification going too.

Greatly contribute to at least 2022 this year.

I think the.

Speaker 3: I think the main our contribution will be definitely from the United States and also from Europe , a different kind of application, including cutting market.

Our contribution to be able to definitely from the United States and also from Europe .

And kind of applications, including cutting market.

It's definitely but also our medical business <unk> in Denmark.

Speaker 3: definitely. But also our medical business is doing good enough and also we see a good opportunity first of all for the United States and Europe .

Good enough and also.

This is a good opportunity for us.

So clearly a nice density Europe .

And also there is some new product initiatives that are introduced now to the market.

Speaker 3: And also there is some new product which we start to introduce now to the market.

Speaker 3: And our main advantage for this year will be that we will not concentrate on the cutting only market in China. We will concentrate on different applications for different regions.

Our main.

The advantage for this year will be that we will not concentrated.

Cutting on the market in China.

Concentrate out of different applications for different regions.

Great. Thank you.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.

Our next question comes from Nick Todorov.

With Longbow Research. Please proceed with your question.

Yes.

Yes, thanks, and good morning, everyone.

Speaker 5: Good morning, everyone. I want to first double click on China. Is there any change in the strategy going forward? It sounds to me that

I wanted to double click on China.

Is there any change in the strategy going forward it sounds to me that you.

You're going to be even more selective in participating in deals and maybe you're seeing an incremental uptick in competition I know competition has been.

Speaker 5: You're going to be even more selective in participating in deals and maybe you're seeing an incremental uptick in competition. I know competition has been formidable there for a while, but maybe the pricing aggression is penetrating into the ultra-high power space. Can you give us a little bit of an update on the China strategy?

Formidable there for a while but maybe the pricing aggression is penetrating anybody even into the ultra high power space.

Can you give us a little bit of an update on the China strategy.

Jonathan It is very simple of course, we are not below this price.

Speaker 3: China's strategy is very simple. Of course, we are not calling this price.

Uh huh.

More.

Speaker 3: more, which produced our competitors in China for price strategy. In some cases, it's not.

<unk> produced our competitors in China.

In some cases, it's not.

Okay.

Not financial.

Speaker 3: It's not financial basis for this. It's definitely they would like to get some shares on this market.

Basis for this is definitely as I would like to get some shares on this market.

The result.

Speaker 3: without any consideration of the gross margin of profitability.

Consolidation of all the gross margin.

Affordability.

Oh understood outages early sample that produces the best product.

Speaker 3: Our strategy is very simple, we are producing the best product with high quality, with high efficiency. In this case we can keep also a premium price for our product without any problem.

Quarter two is high efficiency in this case, we can keep also female price for our product.

So it is all with anybody else who might be therefore, standup Robert Hi.

Hi, Paul.

Speaker 3: High power lasers, I mean, power more than 15, 20, 30, 40 kilowatt. Definitely, IPG is the leader, and they also can keep a good enough price for this product. By the way, the first order for ecolasers, 20 kilowatt ecolasers, also they ship for China.

I mean as volatile more than 15, 2030, and 40 kilowatt differently.

A leader in <unk>.

Within our price for this.

Got it.

<unk> is our first aircraft.

First the order for Echo laser three particular at Echo is also going to see for China.

Of course, that's also some demand in Europe , and the United States, But festival in China, and also finance growth opportunities. If of course, nobody can supply such panic laser dispatched branded bananas are like 50% ballpark officials also come back.

Speaker 3: Of course, there's also some demand in Europe and the United States, but first of all in China. And also for us, good opportunity because nobody can supply such kind of laser with such kind of parameter, like 50% fault lock efficiency.

Well there is different.

Speaker 3: There is a difference, I'm not talking about this only high power, also pulse laser.

Talking about this on the high power also pulse laser.

Well keep our portion of this market.

Speaker 3: to keep our portion of this market. And high-pulse lasers, which we're using for foil cutting and other applications. Green lasers, there is a lot of opportunity also to compete and to keep our part.

High power pulse lasers, which youre using for foil cutting.

Applications Green lasers that exited a lot of opportunity there also to compete.

To keep our partner in the Chinese markets.

Okay, and as a follow up Bob.

Speaker 5: Okay. And as a follow-up, Bob, you know, as you embark on this diversification strategy, how are you thinking about M&A? Traditionally, you've done some smaller tuck-in deals. How are you thinking about potential larger deals, maybe to accelerate the diversification plan?

As you embark on this diversification strategy how are you thinking about M&A traditionally you've done some smaller tuck in deals.

Are you thinking about potential larger deals maybe to accelerate with.

The diversification plans.

Definitely we are discussing about this.

Speaker 3: Definitely we have discussed about this, there is some opportunity, but we are very suspicious about this, because one of the big problems is not only to...

Just some opportunity, but they're already a suspicious about it because one of the big problem is.

The OLED door.

No.

Take some company the main provenance integrate and this is why they are looking for every time.

Speaker 3: take some company. The main problem is integrate and this is why we are looking for every time.

Or was I knew technologists.

Speaker 3: or for the new technologies which will be also added to our technology portfolio, or to companies which

I also added to our technology portfolio or two companies.

Okay.

Speaker 3: Can we easily integrate to our manufacturing process and also to integrate to our management system?

Is the integrated through our manufacturing.

Process and also to integrate auto management system.

These sellers.

M&A.

Okay last quick follow up just Tim.

Speaker 5: Okay, last quick follow-up. Tim, last year I think you said EV sales were I think 9% of sales. Can you share an update on how much EV-related sales were for 2021 as a whole?

Yes, I think you said EV sales were I think 9% of sales can you share an update how much easier.

<unk> related sales were for 2021 as a whole.

No I don't think we gave a specific number there I mean EV sales can range from like five to slightly above 10% each quarter.

Speaker 6: I don't know. We gave a specific number there. I mean, EV sales can range from like five to slightly above 10% each quarter.

And we haven't gone into more detail than that.

Speaker 6: And we haven't gone into more detail than that. So they were they were a meaningful contributor. Of course, Pulse Type R, Pulse A and B.

They were the remaining four contribution cost pulsed high power pulsed AMB.

Single mode kilowatt scale lasers, even <unk>.

Speaker 6: single-mode kilowatt-scale lasers, even LDDs.

Ldds overall for the year, probably slightly above 10% I think one thing I want to draw your attention to slide.

Speaker 6: LVD, so overall for the year, probably slightly above 10%. Nick, one thing I want to draw your attention to is like your comment about embarking on this diversification strategy. The company has been pursuing this diversification strategy for several years now, right? We introduced LightWorld over a year ago. We introduced higher power pulse lasers, AMB lasers, the QCL lasers for solar panels.

He will comment about embarking on this diversification strategy. The company has been pursuing this diversification strategy for several years now right. We introduced light well over a year ago, we introduced higher power pulse lasers AMB lasers.

And.

QTL lasers for spot welding.

Salaries, the green lasers being in the market for a long period of time, we actually find ourselves having embarked on that strategy. Some time ago better position now than we would otherwise have been so.

Speaker 6: The green laser has been in the market for a long period of time. We actually find ourselves, having embarked on that strategy some time ago, better positioned now than we would otherwise have been. So there's a lot of work that's already gone on to that, and we now want to really

There is a lot of work that's already gone onto that and we now want to really accelerate that and remain committed not to just being drawn into a price war on on certain parts of the China market, even in China, There's a lot of diversity in revenue last year compared to.

Speaker 6: Accelerate that and and remain committed not to just being drawn into a price war on on certain parts of the China market even in China, there's a lot of diversity and revenue last year compared to 2020 or even 2019

2020, or even 2019.

Yeah, Tim I agree I think the acceleration of that strategy is a more fair description. Thanks I appreciate it.

Speaker 5: Yeah, Tim, I agree. I think acceleration of that strategy is a more fair description. Thanks. Appreciate it.

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

Okay.

Hey, gentlemen, thanks for taking taking my call.

Speaker 7: Hey, gentlemen, thanks for taking taking my call. Can you touch on this earlier? I recognize this is a fluid situation with geopolitical tension and a scenario where Russia is kicked out of SWIFT. What does that mean exactly? And can you flesh out a little bit more your plans to build contingencies right now? What does that entail exactly?

Can you touch on this earlier I recognize this is a fluid situation with geopolitical tensions and in a scenario, where Russia has kicked out at Swift.

What does that mean exactly and can you flesh out a little bit more your plans to build contingencies right now what does that entail exactly.

So first of all I'm not a banking expert right I mean being kicked out of Swiss Swift is actually I don't think on the cost because they talked about swift.

Speaker 6: So first of all, I'm not a banking expert, right? I mean, being kicked out of Swift is actually, I don't think, on the cards, because they talked about Swift in 2014, and there's been a lot of pushback against it.

2014, and Theres been a lot of push back against that.

There's probably be like targeted sanctions against Russian banks, which would mean that you'd be limited in your ability to receive or pay cash out of that we also have international bank accounts and in Russia.

Speaker 6: There's probably like targeted sanctions against Russian banks, which would mean that you'd be limited in your ability to receive or pay cash out of there. We also have international bank accounts in Russia.

There is around sanctions and the other area is anything that we talked about at the moment is very speculative because there's a wide range of potential things that could happen.

Speaker 6: No, as around sanctions and the other areas, anything that we talk about at the moment is very speculative because there's a wide range of potential things that could happen.

A lot of what's being talked about incentives sanctions doesn't target a lot of our optical components.

Speaker 6: A lot of what's been talked about in terms of sanctions doesn't target a lot of our optical components. It may target some of them, you know, it depends whether they're retaliatory sanctions imposed or not by Russia. But at the moment, it's a very fluid situation.

May target some of them.

It depends whether there are retaliatory sanctions imposed on us by Russia, but at the moment, it's a very fluid situation. So.

And there is more positive I think this morning, even.

Speaker 6: And it's more positive, I think, this morning even, than it was at the end of last week. And we have obviously been...

And then it was at the end of last week.

And we have obviously been.

Looking closely at it and trying to mitigate those risks by putting inventory in different locations and also in the medium to longer term looking at how to.

Speaker 6: Looking closely at it and trying to mitigate those risks by putting inventory in different locations and also in the medium to longer term, looking at how to reduce some of those risks a bit more.

Reduce some of those risks a bit more.

And just following up on that Tim you mentioned, how I think the inventories your inventory levels were up 6% sequentially. Yet I think sales were down a little bit sequentially that the inventory to sales ratio kind of jumped how are we thinking about your inventory levels kind of going forward is there a specific region.

Speaker 7: And just following up on that, Tim, you mentioned how I think the inventories, your inventory levels were up 6% sequentially, yet I think sales were down a little bit sequentially. The inventory to sales ratio kind of jumped. How are we thinking about your inventory levels kind of going forward? Is there a specific region you guys are charging there of those inventories bills right now?

You guys are target there.

Those inventories builds right now.

So there's a lot of focused on inventory now I mean, there's some habitually.

Speaker 6: So there's a lot of focus on inventory now. I mean, there's some, you know, habitually there's some.

Things the way that inventory was managed historically within the company that had a lot of positives.

Speaker 6: I think the way that inventory was managed historically within the company, that had a lot of positives.

For example, right now when we talk about some of the risks, whether it's supply chain or political risk some of the increases in Q4 related to increasing inventory in different locations. Some of it relates to significant increase in electronic components right.

Speaker 6: For example, right now, when we talk about some of the risks, whether it's supply chain or geopolitical risk, some of the increases in Q4 relate to increasing inventory in different locations. Some of it relates to significant increase in electronic components, right?

You're kind of going to parse this out a little bit between some of the strategic things we've done around inventory that mitigate risks.

Speaker 6: You kind of got to pass this out a little bit between some of the strategic things we've done around inventory that mitigate risks and enable us to maintain lead times to customers.

Enable us to maintain lead times to customers and then also the fact that the company really is starting to look more holistically around inventory planning and management and target that is an area, where we want to improve execution and improve the processes in different areas, but at the moment.

Speaker 6: And then also the fact that the company really is starting to look more holistically around inventory planning and management and targeting that as an area where we want to improve.

Speaker 6: execution, improve the processes in different areas. But at the moment, there's puts and takes around it. But our overall target this year.

There's puts and takes around it but our overall target this year.

Don't want to talk about is on a quarterly basis, but would be to try and stabilize inventory.

Speaker 6: I don't want to talk about this on a quarterly basis, but it would be to try and stabilize inventory at the absolute level it's at, which would mean that we're not consuming cash on it and maybe even take a little bit of cash out of it, but we're not intending to...

And at the absolute level, its app, which would mean that we're not consuming cash on it and maybe even take a little a little bit of cash out of it but we're not intending to sell.

Suddenly grow it from the level, it's at at the moment, there's a lot of strategic inventory on hand.

Speaker 6: certainly grow it from the level it's at at the moment. There's a lot of strategic inventory on hand.

It's interesting and just lastly, I know theres a lot of focus on the 2022 with <unk>.

Speaker 7: Interesting. And just lastly, I know there's a lot of focus on the 2022 with the revenue growth range of three to six percent. How much do you think we're embedding cost

Revenue growth range of 3% to 6% how much do you think we're embedding costs going up in 2022 is it going up a similar amount of that revenue growth.

Speaker 7: up in 2022. Is it going up a similar amount of that revenue growth? Should we think about is it slightly below that revenue growth figure? Just curious on what you're seeing on the inflationary cost side and how to think about that as we go through 2022. Thanks, everyone.

So when you think about is it slightly below that revenue growth figure just curious on what youre seeing on the inflationary cost side and how to think about that as we go through 2022. Thanks, everyone.

Speaker 6: Yeah, there's costs on like the sort of material side that Dr. Shcherbakov talked about, but we've also got, continue to have initiatives where, for example, if you get more power out of an individual component, the cost.

Yes, there's costs, unlike the sort of materials side that <unk> talked about but we've also got continue to have initiatives where for example, if you get more power out of an individual component the cost.

Unit of power goes down a bit on the other side of it for example last year, we actually had a record year right and very strong revenue. So we had some of our variable compensation levels were higher last year. Those will probably go down not probably they will go down at our budgeted level of revenue.

Speaker 6: per unit of power goes down a bit. On the other side of it, for example, last year, we actually had a record year, right, and very strong revenue. So we had some of our variable compensation levels were higher last year. Those would probably go down, not probably, they will go down at the budgeted level of revenue. And that would be a benefit, both more on the operating expense side, that variable comp, a little bit on the manufacturing side.

And that would be a benefit both that more on the operating expense side that variable comp a little bit on the manufacturing side.

Looking really aligning and managing capacity on the manufacturing side, and making sure you're absorbing costs would be a benefit that may offset some of the inflationary pressures. So it's.

Speaker 6: looking really at, you know, aligning and managing capacity on the manufacturing side and making sure you're absorbing costs would be a benefit that may offset some of the inflationary pressures. So it's, you know, even with merit increases at a higher rate expected this year than they are historically, right? Historically, you can budget a sort of 3% increase this year or some regions that are at a higher, significantly higher level than that and on average at four to 5%. There are some.

Even with merit increases at a higher rate expected this year than they are historically right. Historically, you can budget as sort of a 3% increase this year youll. Some regions that are at a higher significantly higher level not at on average at 4% to 5% there are some.

Sure.

Benefits to the operating expense side that.

Speaker 6: benefits to the operating expense side that leave me with some degree that would actually create a total, for example, expense forecast relative to our revenue budget shows a little bit of leverage in it.

Leave me with some degree that would actually create a total for example expense forecast relative to our revenue budget shows a little bit of leverage in it.

Okay. Thank you thanks, everyone.

Our next question is from Tom definitely with D. A Davidson. Please proceed with your question.

Yes, good. Thank you for the questions today, Tim I was wondering if there's some way to quantify the impact of Russia.

Speaker 8: Yes, good. Thank you for the questions today, Tim. I was wondering if there's some way to quantify the impact of Russia You know, maybe the percentage of bill of materials that are sourced out of Russia or something along those lines

Maybe the percentage of bill of materials that are sourced out of Russia or something along those lines.

Yeah.

Yes.

Yeah.

Just at a high level of those 2000 plus employees in Russia.

Speaker 6: Just at a high level, there's 2,000 plus employees in Russia. They provide a significant amount of components. They sell some of our lower-cost lasers and make them for China there. You know, the headcount, if you approximate it, is, um...

To provide a significant amount of components they sell some of our lower cost lasers make them for China that.

The head count a few approximated days.

One third of total head count that we have.

Speaker 6: one-third of total head count that we have.

It's more on the component side of things optical the higher.

Speaker 6: And it's more on the component side of things, optical, the higher labor content optical components, but those are also the components that we think are pretty unlikely to be impacted by

Labour content optical components, but those are also the components that we think.

Pretty unlikely to be impacted by.

Bye bye sanctions and some of the work we've done on that particularly from the U S and euro side European site.

Speaker 6: by sanctions. Some of the work we've done on that, particularly from the US and Euro side, European side, indicates that those basic optical components wouldn't be part of any sanction. In any event, they're coming from Russia to our other manufacturing operations.

Indicates that those basic optical components wouldn't be part of any.

Sanction in any event that coming from Russia.

All the manufacturing operations.

Okay. No that's very helpful. Thank you Tim.

And then follow up question on China.

Speaker 8: And then, a follow-up question on China, you know, how much of the softness that you're seeing today is driven by just kind of depressed end-market demand versus, you know, kind of a recently intensified pricing environment?

How much of the softness that youre seeing today is it's driven by just kind of depressed end market demand versus then kind of a recently intensified pricing environment.

Our country market is both the combination of.

Weaker demand as well as this with stepping or not stepping away. We haven't competed on price in China.

Speaker 6: weaker demand as well as this, you know, we're stepping or not stepping away. We haven't competed on price in China for two years. So particularly the higher end of that market.

Two yes, so, particularly at the higher end of that market.

Automated investments may be a little bit weaker certainly China has not been stimulating they've been in a more contraction rephrase phase.

Speaker 6: for automated investments may be a little bit weaker. Certainly China has not been stimulating, they've been in a more contractionary phase. So it's a combination of probably a weaker macro environment definitely, some COVID impact, and then the pricing competition that continues to be aggressive from the main manufacturers there.

So it's a combination of.

Probably a weaker macro environment definitely some COVID-19 impact and then.

The pricing competition that continues to be.

Aggressive from from the main manufacturers that.

Okay, well, thanks, Tim I appreciate your time.

Our next question comes from parts and Mistral with Bamberg. Please proceed with your question.

Hey, everyone.

Speaker 1: everyone. First on your EV business, any color you could provide as to what you're hearing from your customers on battery capacity built out this year? Do you expect incremental capacity bill this year to be the same as last year or maybe higher? I'm guessing last year you probably had...

First on your EV business any color you could provide as to what youre hearing from your customers on a battery.

Capacity build that out this year do you expect incremental.

Basketball this year to be the same as last year or maybe higher I'm guessing last year, you probably had a two to 300 gigawatt hours incremental Tam.

Speaker 1: two to three hundred gigawatt hours incremental capacity or demand, so just any color you could provide for this year, that would be my question number one.

Capacity with Ya man. So just any color you could provide that that would be my question number one.

When you look at the data out there around battery capacity a.

Speaker 6: When you look at the data out there around battery capacity.

Basically kind of stabilizes and that 200 to 300.

Speaker 6: It basically kind of stabilizes in that 200 to 300.

Gigawatt capacity each year bought eight goes on being sustained for a multiyear period right. This is a decades long investment cycle, what we would see within that and would hope to benefit from.

Speaker 6: gigawatt capacity each year, but it goes on being sustained for a multi-year period, right? This is a decades-long investment cycle. What we would see within that and would hope to benefit from is, for example, an increased diversity...

As for example, an increased diversity.

All applications, whether they be increase in cleaning applications.

Speaker 6: of applications, whether they be, you know, increase in cleaning applications.

Thats more welding done.

Speaker 6: That's more welding done, benefiting also not just from the battery side of it, but from increase in electric motor manufacturing. And then as investments happen on body and white, you know, increases in laser demand from that. So all of the data you kind of look at doesn't say that.

Benefiting also not just from the battery side of it but from increase in electric motor manufacturing and then as investments happen on <unk> increases in laser demand from that so all of the data you kind of look at it doesn't say that.

Factory capacity sort of jumps from 300 to 600 Gigawatts a year in investment.

Speaker 6: Battery capacity sort of jumps from 300 to 600 gigawatts a year in investment, but it is a sustainable long-term source of revenue for the industry

But it is a sustainable long term source of revenue for the industry.

Got it and then can you also discuss your backlog.

Speaker 1: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.

I think <unk> been topped by a lot, but then at frame agreements declined so what's going on there.

So there are a lot of frame agreements come in China for the cutting applications.

Speaker 6: So a lot of frame agreements come in China for the cutting application. So sometimes it's timing of that, but given the weakness in that end market, that would be an explanation for that. In addition, our total backlog in China is still quite strong. So we actually have quite a lot of orders.

Sometimes it is timing of that but given the weakness in that end market.

That would be an explanation for that in addition, our total backlog in China is still quite strong. So we actually have quite a lot of orders on hand for crossing which we're waiting to see when they get called off and if that market continues to stabilize or even demand improves a little bit you would expect to see those orders cooled off so there isn't it.

Speaker 6: on hand for cutting which we're waiting to see when they get called off and if that market continues to stabilize or even demand improves a little bit, you'd expect to see those orders called off. So there isn't a pressing need for new cutting orders. We've got

The need for new cutting orders, we booked it's.

A question of them being called all the other components of backlog I think if you look at the shippable backlog that's up meaningfully.

Speaker 6: It's more a question of them being caught off. The other components of backlog, I think, if you look at the shippable backlog, that's up meaningfully.

Year over year, which again is a positive trend some of thats driven by some of the changes in the business. So for example, we have a lot of visibility into the medical.

Speaker 6: year over year which again is a positive trend. Some of that is driven by some of the changes in the business. So for example, we have a lot of visibility into the medical.

Not just for systems, but consumable fibers, we actually have from some of our semiconductor customers orders on hand that go out even for the full year and potentially even I think even into early 2023, so that would be.

Speaker 6: where not just for systems but consumable fibers. We actually have, from some of our semiconductor customers, orders on hand that go out even for the full year and potentially even, I think, even into early 2023. So that would be an emerging business line. The systems business, which is showing some recovery.

An emerging business line the systems business, which is showing some recovery. We've got very strong backlog for medical device systems, where the lead times are longer and then the other thing that I think is influencing backlog a little bit that's giving us a bit more than the normal.

Speaker 6: We've got very strong backlog for medical device systems, where the lead times are a lot longer. And then the other thing that I think is influencing backlog a little bit, that's giving us a bit more than the normal.

Three months trajectory into visibility is that given some of the supply chain issues, we are getting orders from customers.

Speaker 6: three month trajectory into visibility is that given some of the supply chain issues, we are getting orders from customers in Europe and North America with slightly more visibility or longer lead times because they want to make sure that they're getting allocated production.

In Europe , and North America, with slightly more visibility or longer lead times, because they want to make sure that they're getting allocated.

Production.

So that's sort of a number of different components of.

Speaker 6: So there's sort of a number of different components of the makeup of backlog that have changed.

The makeup of backlog that are.

Changed a little bit.

Got it thanks for the color and maybe just the last one on your share repurchase plan.

Speaker 1: On your share repurchase plan, is there a time horizon over which you're looking to execute this? I'm just wondering if there might be some opportunity for some sort of accelerated buyback.

Is there a time horizon over which you are looking to execute this just just wondering if there might be some opportunity for some sort of accelerated buyback.

But we're not done.

Speaker 6: We've not done ASRs before. We look at this more on the opportunistic basis. So depending upon where the stock is trading relative to our internal assessment of fair value, you'd see more shares repurchased. There is no specific timeline related to the.

Solved before we look at this more on the opportunistic basis, so depending upon where the stock is trading.

Relative to our internal assessments of fair value you would see more shares repurchase there is no specific timeline related to the new repurchase thats been.

Speaker 6: repurchase that's been announced, but the last two quarters, I think you've seen

Announced but the last two quarters I think <unk> seen.

So.

Speaker 6: some good level of repurchasing going on. Last quarter was almost $60 million, so that maybe gives you a timeframe over which that may get done.

Good level of repurchasing going on last quarter was almost $60 million. So that maybe gives you.

Timeframe over which that.

They get done.

Thanks, James Thanks, so much.

Our next question comes from Jamie Wang with Citigroup. Please proceed with your question.

And thank you for taking my question Josef quick one if I can.

Speaker 8: Thank you for taking my question. Just a quick one. If I heard you correctly, you mentioned about the green laser demand for the solar industry was also weak. So I was wondering, is that because of the industry growth slowdown or the competition in the sector? Was it getting more intensified? Thank you.

Heard you correctly, you mentioned about the green laser demand.

For solar industry was also weak. So I was wondering is that because of the industry growth slowed down or the competition in this sector was it getting more intensifying. Thank you.

But as I mentioned in our presentation that.

Speaker 3: But we mentioned in our presentation that this market is sickling. There is a why, maybe it's not too big, we don't have a big enough order for this year, but definitely it will grow.

This market is cyclical.

Why maybe it's not too big.

Yes.

So this year, but definitely it will grow.

Because demand for solar in China, and the United States It will definitely increase.

Speaker 3: because the amount for solar in China and the United States will definitely increase. This is why I anticipated that our

It is anticipated that olive green lasers will be used.

Definitive for this market, but not all of our solar applications. It's.

Speaker 3: Definitely for this market, but not only for sewer.

It's not a competitive issue, it's the cyclical demand side of it Jamie.

Speaker 6: It's not a competitive issue, it's the cyclical demands for it.

Yeah.

Okay. Thank you.

Speaker 8: Okay, thank you. Maybe just a quick follow-up, I'm sorry, a quick second question from me. Is it possible to share with us the gross margin differences between China and non-China? Because I found that after 2019,

Maybe just.

Quick follow up I'm, sorry, the second question from me.

Is it possible to share with us was.

Gross margin differences between China and non China.

Josh.

After 2019.

The revenue contribution from China somehow negatively correlated with the Europe worse margin trend. So I'm just wondering you've Danielle mass revenue contributing from Shanghai is actually good for your margin.

Speaker 8: The revenue contribution from China somehow is negatively correlated with the Europe's margin trend, so I was wondering if less revenue contribution from China is actually good for your margin.

Thanks.

No we don't give that granularity around it I mean, what we've said is that we're not competing on price in China.

Speaker 6: It's not, we don't give that granularity around it. I mean, what we've said is that we're not competing on price in China. You know, certainly when you look at like ultra high power laser sales, whether they're in China or elsewhere, they have very, very strong margin profile. The pulse lasers, high power pulse lasers have a very strong margin profile. So we don't. Yeah, well, first of all, we don't break it out. But we've also said that we're really selling on the value proposition that we deliver for the product.

Certainly when you look at like Ultra high power laser sales, whether they're in China or elsewhere. They have very very strong margin profile of the pulse lasers high power pulse laser very strong margin profile.

Yes, well first of all we don't break it out but we've also said that we're really selling on the value proposition that we deliver for the product.

Yeah.

Okay.

No more questions from me. Thank you. Thank you very much.

Speaker 8: Okay, got it, got it. No more questions for me. Thank you, thank you very much.

Thank you.

Our next question is from Mark Miller with the Benchmark Company. Please proceed with your question.

Thank you for the question I know you talked about green lasers put.

Speaker 9: of the question. You talked about green lasers, but what are the other drivers in terms of the emerging product sales?

What are the other drivers in terms of the emerging products sales.

Strong drivers in that things like the high power pulsed for.

Speaker 6: Strong drivers in that are things like the Hi-Power Pulsed for foil cutting applications, as well as cleaning applications and other ablative processes, the AMB laser for welding applications, the new Light Weld product.

Foil cutting applications as well as cleaning applications and other ablative processes.

The AMB laser for welding applications, the new light wealth products.

Which is the the handheld welding application that displaces.

Speaker 6: which is the hand-held welding application that displaces traditional MIG and TIG and brings numerous advantages to that process including speed, quality of weld, ability to incorporate cleaning functions within it.

Traditional make intake and brings numerous advantages to that process, including speed quality of weld ability to incorporate cleaning functions within it.

Obviously, the green the <unk>.

Speaker 6: Obviously, the green, the ultra-fast pulse.

Entre fast pulse.

We expect to start to more meaningfully contribute this year.

Speaker 6: we expect to start to more meaningfully contribute this year.

Some of the beam delivery applications, so whether it's weld monitoring all high speed scatter is.

Speaker 6: Some of the beam delivery applications, so whether it's weld monitoring or high-speed scanners.

Cutting heads welding heads that got delivered with.

Speaker 6: Cutting heads and welding heads that get delivered with the lasers, those would be the main medical sorry, I left out the medical application for urology, the surgical medical application.

With the laser those would be the main and medical sorry, I left out and medical applications.

Urology surgical medical application.

I would like also to add.

Speaker 3: but I would like also to add some systems for EV applications, which we already start to supply this year. And we have a strong backlog for this system for this year. And I think it will give us a good opportunity to produce and to supply to our customer, not only components like lasers and optical threads and LDD monitoring, but integrated system, subsystems for EV applications.

Some systems for applications of these relative step the supplies this year and we're here for.

Strong backlog because this system for this year.

And I think because it would give us growth opportunities.

And the suppliers.

Customer not only components like laser.

And political Scotts <unk> monitoring, but integrated system SAP systems.

<unk> obligations festival.

I was just wondering are any of your major customers experiencing component shortage and is that impacting their business to you.

Speaker 9: Just wondering, are any of your major customers experiencing component shortage and is that impacting their business?

Yeah.

Customers experienced component shortages. So yeah, I think some of the people on the cutting side have seen shortages.

Speaker 6: customers experience component shortages. So yeah, I think some of the people on the cutting side have seen shortages of linear motors and drives and electronic components. I mean, everybody's subject to the chip and electronic components supply chain issues that are affecting many different industries and that would be the main area that we've heard about.

Linear motors and drives in electronic components, I mean, everybody is subject to the to chip in electronic component supply chain issues that.

Affecting many different industries and that would be the main area.

You've heard about.

It's on a few because.

Speaker 3: But it's only a few, because as usual, our OEM customer, or cutting application, for example, no, they don't have any.

As usual our OEM customer.

Got him application for example.

Okay.

Thank you Nick prominence.

Thank you.

Yeah.

We have reached the end of the question and answer session I will now turn the call over to Eugene Federal for closing comments.

Thank you everyone for joining us this morning and for your continued interest in IPG, we will be participating in a number of investor events. This quarter and I'm looking forward to speaking with you over the coming weeks have a great day everyone.

Speaker 10: Thank you everyone for joining us this morning and for your continued interest in IPG. We will be participating in a number of investor events this quarter and looking forward to speaking with you over the coming weeks. Have a great day everyone.

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