IPG Photonics Corp (IPGP) 2013 Q2 法說會逐字稿

Good morning and welcome to IPG Photonics' second-quarter 2013 financial results conference call. Today's call is being recorded and webcast. There will be an opportunity for questions at the end of the call. (Operator Instructions).

At this time I would like to turn the call over to Mr. Angelo Lopresti, IPG's Vice President and General Counsel and Secretary, for introductions. Please go ahead, sir.

Thank you and good morning, everyone. With us today is IPG Photonics' Chairman and Chief Executive Officer, Dr. Valentin Gapontsev, and Senior Vice President and Chief Financial Officer Tim Mammen.

Statements made during the course of this conference 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 known and unknown 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 those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2012, and other 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 at investor.ipgphotonics.com/SEC.BFF or by contacting the Company directly. You may also find copies on the SEC's website at www.sec.gov.

Any forward-looking statements made on this call are the Company's expectations or predictions only as of today, July 30, 2013. The Company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website following the completion of the call. Please go to www.ipgphotonics.com and select Investors to review these remarks.

I will turn the call over to Dr. Gapontsev.

Good morning, everyone. IPG performed well during the second quarter with 22% year-over-year revenue growth. Much of our growth came from sales of material growth system application with strong contribution from Asia and the US. Growth margins during the quarter were within our target range at 53.5%, and we grew our bottom line by 11%.

As Tim will explain later, our net income comparison was inadvertently impacted by the large effort to gain in 2012 and in 2015 by increased cost from the investments we are making in R&D, selling and other areas to support and drive future growth for IPG.

We continue to see solid demand in most of our end markets and we maintain a strong technological advantage over our competition. Our fiber lasers continue to take market share from conventional laser technologies like CO2 and YAG, particularly for cutting and welding applications.

Material processing applications account for 94% of our [total] sales. Many of our OEMs are increasing the percentage of fiber lasers they buy from us versus conventional lasers. Because of this success, our cutting OEMs set with fiber lasers for thin steel cutting demand for higher power lasers to cut thick metals is increasing as the coated tins people see metal cutting has improved.

Another application which presents exciting opportunities for growth of additive manufacturing is growth for additive manufacturing which includes 3D printing, [Covidien] and sintering. In this application the IPG lasers are useful to manufacture parts from powder made of metal or other materials. We have been using this application for years and most of the key mobile manufacturers for metals additive manufacturing use IPG's fiber laser.

With the unique performance of our fiber lasers, customers are developing terrific new applications. For example, recently, a customer in China manufactured a large recast, a record to watch in sophisticated aerospace spot out of special [efforts] with our 10 kilowatt laser. Additive manufacturing is an exciting application for IPG in the future.

We sell into many different industries and [photon logic] is a large portion of that business. Another significant portion of sales for material processing application comes from general manufacturing. This can include anything from consumer products to elevators as well as heavy industry sectors like [6 billion] or for example construction work.

We are going to put in an increase in sales for the aerospace industry where we are beginning to penetrate the market for very high speed drilling of holes in (inaudible) waves. The [coal] assists in the coding of (inaudible) a way of improving fuel efficiency because it allows the engines to operate at higher temperature.

Versions of aluminum and other (inaudible) industry is another application which we are working on and which we think could drive future sales. The same with processing of parts from Company's materials.

Other promotions in the second quarter was strong and the book-to-bill was substantially above 1. To accommodate demand, we are making continuing investment to support the expected growth of our business and strengthen our competitive valuations.

We are investing in sales and marketing support around the world. This year, we invested in our application within China, USA, Japan and Russia and expanded our overall sales headcount. IPG plans to open 140,000 square feet facility for -- in the new production R&D in the administrative buildings in Russia.

[Approximately] 210,000 square feet will be added at our Russian facility before the end of this year for fiber and system manufacturing.

This year, we will expense also our Oxford, Massachusetts facility by two new high standard buildings, 80,000 square feet for 3 billion of diode productions and for installation of manufacturing all visible and UV lasers as well 30,000 square feet for electronic metal past manufacturing.

We are opening a branch in Taiwan to support customers there in new opportunities, and we are expanding our Shanghai presence with a new and larger portion.

Looking farther out, we expect to begin investing in new geographies including Eastern Europe and South America to leverage their material processing market there. Both are focused on increasing our strong competitive lead by continuously introducing innovative products and improving the existing products.

For example, we substantially increased the bulk of our efficiency of our high-powered cutting lasers from 28% to [55%], a 25% improvement which not only reduced electrical consumption, but both are cost cooling requirements in our associated work.

Another great result in your third generation of our unique patent, first in the world, (inaudible). It has a great potential to give ways of widely used resistance for welded in the application of where the customer needs acquired [build] quality and productivity. Potentially it is enormous market for such devices.

In June, we continued its qualifications, there is still an international certificate that [collapsed] one device. [Risk] for distribution worldwide. We have them both with request from automotive and other industries.

[First of all] with resources of the mobile for 20 [SIMs] which we provided in the first quarter of this year to help our own efforts to develop fiber waste new deals laser fiber (inaudible). We expect to offer low-cost, more reliable and much better performing in UV lasers than [carrying] the lasers on the market.

We also have developed new prepared ultra fast fiber laser and explore with our customers' applications for them.

In total, I am taking this opportunity to claim that in spite of forecast of some markets generally, I bid you [share] in fiber laser material gross market is not impacted by repetition. It is growing here. Our year-over-year growth of 38% in the high power revenue don't remains any argument for [opponents].

In reality, the growth was even larger. In the units we raised our shipment this year more than 50%. The difference in the revenue is of course by further optimization of prices.

With that I am pleased to turn the call over to Tim Mammen, our Chief Financial Officer.

Thank you, Valentin, and good morning, everyone. I will start with a review of our end markets, products and geographic regions. After that I will provide highlights from our income statements and balance sheet and close with our guidance.

As Valentin mentioned, second-quarter revenue grew 22% to $168.2 million from $137.9 million a year ago, primarily driven by growth in materials processing. Materials processing sales increased 26% year-over-year to $157.6 million, accounting for 94% of total sales during the quarter.

We continue to make progress in penetrating OEMs for materials processing applications, particularly in China, Europe, Turkey and the US. We believe we are continuing to win significant market share versus conventional CO2 lasers used for cutting applications.

Other applications which include telecom, advanced and medical accounted for the remaining 6% of sales. Revenue from these other applications decreased 22% year-over-year to $10.6 million. Much of the decline was due to weak telecom demand, primarily in Russia.

Sales of high-power lasers which accounted for 51% of total revenue increased 38% year-over-year to $85.4 million. IPG's high-power fiber lasers are being widely accepted for cutting and welding applications particularly in the auto industry as well as with OEMs who serve various general manufacturing needs. We have begun to penetrate additional markets like aerospace, heavy industry and construction as the benefits of using fiber laser technologies become more widely adopted.

Recently IPG also started to market its laser seamstepper with potential new customers around the globe. This is the first time that IPG has marketed the newest version of this device on a more widespread basis. Not only to the automotive industry, but also to companies is producing other products such as kitchen appliances.

Pulsed laser sales were $40 million which accounted for 24% of total revenues and increased 5% compared with last year. Demand for pulsed lasers continues to be driven by marking and engraving applications across a wide variety of different industries. We introduced new and more sophisticated shorter pulsed lasers, which are starting to gain sales in more advanced marking applications.

Sales of medium power lasers increased to $15.7 million accounting for 9% of total revenues and increased 41% year-over-year. We had a record quarter for QCW laser sales which increased by more than 100% to $5.6 million compared with last year and accounted for 3% of sales.

A noteworthy accomplishment is that our unit sales for QCW lasers more than tripled. We have brought the manufacturing cost and sales price of QCW lasers down to make them an even more attractive replacement for laptop YAG lasers and welding and drilling applications.

Also we sold more than 50 QCW lasers for glass cutting, which is a new application developed by one of our customers. Sales of low powered lasers were down 14% year-over-year to $3.6 million, primarily due to lower sales in medical applications. Sales of other products which include amplifiers, diode lasers, green lasers, mid-IR lasers, integrated laser systems and certain components were $6.2 million. Service, parts, lease and other revenue including accessories totaled $9.6 million.

Now looking at our Q2 performance by geography. Asian sales which include Western Asia increased to $91 million or by 34% year-over-year. In China alone, sales increased to $58.5 million or by 54% year-over-year.

There has been some skepticism around the Chinese economy, but Q2 was a record quarter for IPG and their country. We have been successful in penetrating the Chinese market for cutting, welding, marking and additive manufacturing applications.

In Japan and Korea, we have invested heavily in our managements and are beginning to see the results. Sales in Turkey which is included in Western Asia have been strong due to increased demand from cutting OEMs there. European sales were flat year-over-year at $47 million. Although we have seen an increase in demand in Europe for cutting, welding and metal sintering, the telecom industry in Russia has been weak and ultimately offset some of the growth we are experiencing in other areas.

North American sales of $30.3 million for the quarter were up 34% year-over-year. The materials processing business in North America for automotive and other applications is continuing to perform well.

Now, working our way down the income statements. Gross margins were 53.5% compared with 54.3% in Q2 2012. This is within our target range of 50% to 55%. Margins were slightly impacted by geographic and customer mix, product mix and $0.5 million in fair value inventory charges related to acquisitions.

Sales and marketing expenses were $6.8 million or 4.1% as a percentage of sales, essentially flat with 4.2% as a percentage of sales in the year-ago quarter. General and administrative expenses increased to $12.8 million and as a percentage of sales were 7.6% compared to 6.3% a year ago. The increase was primarily due to increased salaries, benefits and recruitment expenses, driven in part by the addition of costs related to recent acquisitions and also our continued investment in resources and infrastructure to support and drive further growth.

Research and development expenses increased to $10.5 million. As a percentage of sales, R&D was 6.2% of total revenues which is up from 5.2% in the second quarter of 2012. Again, this represents our increased investments in product development to capitalize on future growth opportunities and includes the cost of the Mobius Photonics team which we acquired in Q1 of 2013.

Operating expenses for the second quarter of 2013 at $30 million include a foreign exchange transaction gain of $0.1 million as compared to a $3.4 million gain in 2012. Second-quarter operating income was $59.9 million or 35.6% of sales compared with $56.4 million or 40.9% of sales in the second quarter of last year. Excluding foreign-exchange gains, operating margins were 35.5% and 38.5% in 2013 and 2012 respectively.

The effect of goodwill written off net of contingent consideration payable related to acquisitions resulted in a net charge of approximately $350,000 during the quarter.

Our tax rate in the second quarter was 30%. We continue to expect that our rate going forward will be approximately 30%.

Our net income attributable to IPG for the second quarter increased 10.5% to $41.7 million on a diluted per share basis. We reported $0.80 for the second quarter compared with $0.72 a year ago.

We estimate that if exchange rates had been the same as one year ago, sales in Q2 2013 would have been $0.1 million higher, gross profit would have been approximately the same and operating expenses would have been $0.2 million higher.

Now turning to the balance sheet. We have a solid balance sheet and ended the quarter with cash and cash equivalents, including short-term investments, of $369.5 million. This is down approximately 3.8% from year-end because of a large tax payment we made in Germany in Q1, plus our investments in other working capital, plants, equipment and acquisitions.

At June 30, 2013, inventory was $154 million. The current level of inventory on hand amounts to 179 days compared with our target range of less than 180 days. If foreign-exchange rates were at the same level at the end of the second quarter 2013 as they were on June 30, 2012, the translated value of inventory would have been $152.6 million. Accounts receivable were $114.5 million at the end of the second quarter with 62 days sales outstanding, compared with $96.6 million at December 31, 2012, for 60 days sales outstanding.

Cash provided by operations during the quarter was approximately $35.3 million.

Capital expenditures and acquisitions for the quarter totaled $16.5 million and were $34.3 million year-to-date. There is a possibility capital expenditures for 2013 may increase to a range of $75 million to $80 million from $65 million to $70 million in the event we purchase additional real estate in Moscow to support engineering and sales efforts there.

And now, for our expectations for the upcoming quarter. Looking ahead to Q3, demand is solid in most of our significant end markets. In the second quarter our book-to-bill was substantially greater than 1, meaning we have built some backlog. We remain committed to making investments where necessary to support our customer needs now and well into the future. We have significant opportunities and we are excited about our ability to capitalize on them.

Our goal remains the same. Drive profitable growth while extending our technological lead in the industry.

IPG Photonics currently expects Q3 revenues in the range of $165 million to $175 million. The Company anticipates Q3 earnings per diluted share in the range of $0.77 to $0.87. The midpoint of this guidance represents revenue growth of 9% year-over-year. The EPS guidance is based upon 52,385,000 diluted common shares, which includes 51,462,000 basic common shares outstanding and 923,000 potentially dilutive options at June 30, 2013.

This guidance is subject to the risks we outlined in our reports with the SEC and assumes that exchange rates remain at present levels. I want to reiterate that we do not attempt to forecast gains or losses related to exchange rates.

And with that, we will open the call up for your questions.

(Operator Instructions). Krish Sankar, Bank of America.

I have a couple of them. Tim, in terms of the guidance can you tell what growth margin in OpEx are you forecasting in for September?

Gross margins we used on the guidance were in the range of 53% to 54%. So pretty similar to Q2. And OpEx should be relatively stable between the second and third quarter. So we didn't change any assumptions around that fundamentally.

Got it. Clearly it seems like you guys are doing a pretty good job in China with the strength in June despite the weakness that is happening in the macro. If I look at the last couple of years, should we assume nominal seasonality in China in Q4?

It's a little bit early to start talking about Q4, but I would expect yes, normal seasonality for the Q4 in China. It tends to be a weaker quarter there.

Got it. Final question. In terms of September quarter guidance, can you give us an idea of what would you have forecasted for the different segments high-powered, medium-powered, pulsed laser, either Q-over-Q or year-over-year?

We don't go into that kind of granularity relative to guidance on specific product lines. So, we have never really gone into that detail. I am not going to go there right now.

Got it. Thank you.

Patrick Newton, Stifel.

Good morning. Couple of housekeeping items. Tim, could you provide us with Russia's sales in the quarter and also what the contribution from Mobius was both in the quarter and expectations baked for September quarter?

Russia is less than 10% of sales so we don't disclose that. And Mobius is really an R&D team that was acquired. So at the moment the sales from those UV lasers are negligible. It is a -- very much a development program for the new product line. I will say that they have had -- starting to gain some traction in terms of accelerating that program. I think Valentin is pretty pleased with how that acquisition is being integrated on a technology basis.

With regard to Russia, it can (technical difficulty). Russia, it is very big manufacturing. 90% of Russia practical of the -- what they make contribution is expert to parts and final products outside of Russia. And Russia still business is slow due to what is specific condition there. I would measure problem with any American public company. It's such country Russia, India, and so, whether crime or corruption so could not use any distribution network there. We have to work, build our own network. It is a large country. It takes time by serious investment to be able to own distribution network protected against any corruption.

Other problem in Russia that Russia doesn't have integrated networks. So strong integrators practical. That's same for them as India. China having enormous arm's integration, network of companies, but Russia and India do not have problem there. We have supplied to customer need finish and view [the need for ARPU] complete solutions. They don't need only a waiver. In our target in Russia and we built in Russia it's a complete solution that where we were in rest of the world, we would be away for this year, we have each made a lot of progress in the direction so with (inaudible) very strong portfolio of the system products and also we will build net distribution [relational wide] network. How to provide service in all this in order to [end to user].

Tim, it seems good will declined sequentially from about $3.3 million to $500,000 roughly. Sequentially in the June quarter. Did that have -- was there a write-down that had any kind of impact on OpEx in the quarter?

As I mentioned in the script, the goodwill write-down net of contingent consideration payable which we don't think we are going to have to pay was about $350,000.

So nothing material. So as we think about OpEx, you have already alluded to this, there was no uptick from the goodwill, no material uptick in the June quarter that isn't going to run through into the September quarter.

Correct. We are not assuming any fundamental changes in OpEx. (multiple speakers) Q3.

And could you provide us with an update on that 100 unit automotive order? Can you help us understand the contribution of the current quarter? Any updated thoughts around the linearity of deliveries over the next nine months, plus or minus?

No, they started to call off units and there were several units delivered in June and units continue to be called off at this time. There is no specific updates on exactly how many units are going to be delivered each quarter over the coming year or so.

Still relatively linear, I think was how you talked about it last quarter.

We just don't have any new information about it in terms of specifically what is going to be core, Patrick.

And one last one on China just to dig into the strength there. I mean, great quarter up 50% year-over-year and looks like about 35% sequentially. How should we think about China specifically on a sequential basis? How sustainable is that given some of the macro trends?

I mean, clearly, you are able to buck them for quarter, but you have any concerns of tightening credit situations or of the industrial productivity slowing at all in that geography?

I would first take issue with the comment that we can buck them for a quarter. I think we have been bucking churns in China for about two years. That business is growing very well. We are strengthening the management team, diversification of applications, strong growth and real penetration on OEMs on the cutting business where our market share and displacement of legacy technologies has been tremendous. Growth in the welding applications. We still have a strong pipeline of potential automotive orders that we are chasing. We have closed a number of automotive orders. We mentioned that we are gaining some share on new additive manufacturing applications in Asia. Some of those were in China. We had very strong sales of QCW lasers for welding of consumer electronic frames. So it is a pretty diversified business.

Sequentially I don't think you are going to see any dramatic growth in China, but we have got a solid backlog coming into the quarter. And that is pretty much the trend that we see annually is that you ramp up into Q2 and Q3. Q2 and Q3 can be pretty similar. And then you have generally a bit of a seasonal weakness into Q4.

We are not seeing at this point in time a significant impact related to credit tightening or lack of liquidity. It is something that we monitor on an ongoing basis and clearly the situation can change pretty quickly.

Often what would happen if that does tighten you are unable to collect some of the prepayments from customers and you may have to delay shipments. But we are not seeing any of that at this point in time.

Great. Thank you.

Jim Ricchiuti, Needham & Company.

Good morning. Want to ask a question regarding UV QCW and the glass cutting application. Is this for a display glass application? And can you maybe elaborate on how you see that market developing for you?

We don't believe it's the actual displays. It is some smaller glass part. It's a relatively new application. There are projects, I think as a typical example, of applications where projects will come and cycle in and cycle out. I think it is a potential key area of growth as more and more people try to cut different types of glass with lasers over the coming years. But this is not yet into the display side. A lot of the display glass cutting applications are under development and using different types of technology. We can't really disclose that much more about it.

But it is not -- so it's -- is it a consumer electronics application or is it something outside of consumer electronics?

We believe it is within consumer electronics.

Of course it's consumer and not only ceramic and glass where we are without laser bit of the (inaudible) increase were a minimum 10 times before if compared to competitive technologies. But it's also, but it's not only consumer electronics it's also the construction new for example, new to market windows, now is going to construction of building and so on. And then also our lasers where we choose and where we develop not only a laser for this, we want to develop now the machine (inaudible) for special, and for construction work.

Thank you for that. And question on pricing. As you describe the competitive landscape and I am referring to the high-powered segment of the market.

It seems like you are still in a very strong position. And I am wondering if that is affecting the way you are thinking about pricing in terms of going after the market. You have obviously been moving doubt the price curve to spur adoption of the technology.

But at this point, is there any thought to taking the foot off of the gas pedal temporarily? I wonder if you would just talk about the pricing environment and how you view it.

Well pricing point is -- we are all working very hard over time to decrease cost of manufacturing of our lasers specials and marks products. And we are very successful program for high power lasers. Every year we drop [quarter] by 10% to 15% at minimum. Sometimes 20% per year. This year is not exception. So we have an enormous reserve in how to control pricing. Our price policy based on the press to open door for you is laser for more and more communications which is very sensitive to the price from other side also.

Of course we are working to control the situation in markets, not to allow our competition to enter into this market.

Thanks very much.

Avinash Kant, D.A. Davidson.

Good morning. A few questions. The first one. Could you give us some idea how much exposure did you have to the automotive market in the quarter? Like what percentage of business was it roughly?

It wasn't anything fundamentally different from previous quarters as obviously orders are being called off in Europe. We continue to see quite a number of lasers called off on a regular basis by some of the major Asian manufacturers. And we had good orders and deliveries in North America. So typically we can identify around 15% of sales and, then, there's some other portion of sales for cutting and marking systems that goes into the automotive that we can't really identify. So no fundamental change there that I've noticed.

Any visibility in terms of getting some of the larger orders from other automotive players beyond what you have already received? There was at least one that we were expecting.

It depends on market situation. In Europe, as we know, that now is the 50-year sales in automotive company that does not increase here when the increase for some of the bigger plays in the market segment. So of course they -- the way they planned for probably expansion of their production lines. But in other regions, they still have [breaking] situation and we are working with companies and we see production and perhaps which were we, first of all, to forecast on a full plan to increase, to install in your production line and to increase production.

In the case that they -- more open for new technology in currency production line, of course they were to compare with your markets. In spite they recognized the advantage of new technology and IPG technology particularly. But as they not hurry up to invest in this to replace all technology, it is a major problem. But it is growing, growing, big potential, but where it's go, special market is now not the best condition.

I want to check a number. Tim, maybe, what was the medium power sales? I may have missed it.

Medium power sales were $15.7 million.

Thank you so much.

Jagadish Iyer, Piper Jaffray.

Two questions, Tim. First, how should we be thinking about the gross margin trajectory? I think Valentin made some comments about expansion of capacities in Russia, as well as in the US as well as in China in the backdrop of expanding capacity, pricing that you are seeing and your cost reduction initiatives. I am not looking specifically for a number, but I just wanted to see how should we be thinking about it as we look at it for the second half of this year and into 2014? How sustainable could the gross margins be?

As I claimed before, that our policy is to hold gross margin between 50% and 55%. Of course, temporary we can increase margin even for 60% to 65%, but for the account to decrease sales, they are [marginal]. We are prepared to increase them to our [delivery] sales and production to distribute our laser to match in any minor or new application, [then to quote] just work for temporary per gross margin. Because it's strategic, for a long time you could not [perpetuate].

You have to invest. You have to develop new product. You have to prepare a new manufacturing capacity automation, to increase productivity and so on. It all costs money.

And we are working very seriously because we are not one year or a few years' company in the market. We are particularly looking for a long time to stay in hope for a leading position market. So 50%, 55%, we cannot promise you to grow gross margins further.

But we will -- however, we are sure we will hold this metal a long time.

Another question is how should we be taking about the systems business for the second half of this year in terms of contribution to the total revenue, please?

It depends where you are talking about in the world. So for example, there's quite a lot of orders we are working on in North America. There's a couple of orders in Europe. These are actually fairly high value-added systems.

It is still going to be a relatively small part of total revenue. In Q4, you could see some pick up in the systems business in Russia, but again it is still going to be well below 10% of total revenue.

So we continue to work hard in developing that business in specific geographies. Like Russia and outside of Russia, we are focused on very value-added type applications. There is a recent order we got for a cladding system that is extremely high value-add. But it is taking time to get some traction there. I think it is going to take time to build that business up to a $50 million run rate as we have always maintained.

And this is a question for Valentin. I had a quick question. I was wondering do you have any updated view in terms of the overall fiber laser growth for this year? And any thoughts early for 2014? Thank you.

Do you have an updated view on the growth of the fiber laser market at the moment?

It is still quite early on laser market still for the -- far from the situation, we expect next five years we already see this grow -- we're going to grow this market. It's a -- for main application we only start to introduce the appraisal test qualification for customer only. Here we [mark uses], we expect next two or three years, we will deal with still very big growth.

Thank you.

But we are not developing with a new product for a new application. For example, we hope that next year we will have serious contribution from the UV lasers, from new generation ultra fast lasers. And so on.

Now the situation is if market as I said before [to new] applications, so this market grows very limited use of breadth quality of lasers which -- and very high cost of this laser we charted a current laser in this market provide to customers. Customers not ready though, they expect new generation of lasers which will allow them to open door for much use of the laser for many applications. We are ready to provide to customers to meet their expectations.

Tom Hayes, Thompson Research.

Good morning. I was wondering maybe if you could elaborate a little bit on your involvement in the additive manufacturing space. Is that a new mark --? It doesn't sound like it is a new market for you, but I don't think we have talked about it in a while.

No, no, I think it's -- well, first of all it is a market we have been involved in for probably over 10 years. One of our oldest customers in Europe; has been around during this process for a considerable period of time. Just about all of the major manufacturers of additive manufacturing equipment are customers of IPG, bar a small company in the UK.

Our view on that market is a lot of the growth has come out of plastics additive manufacturing. I think the view is that the plastics side is going to slow down and really the value-add engineered parts is much more on the metal side. And that plays much more favorably into IPG's patterns. Because most of the deposition technology that our lasers are used on are on the metal side.

So, clearly, there is a lot of interest in this area. We believe that we provide the unique fiber laser solutions, [without a doubt], were then sold into most of the major customers in those areas for a considerable period of time.

We also think that additive manufacturing expands beyond just the simple engineered parts, but into strong growth. For example, for cladding, which is another deposition technology historically we think more and more lasers will be used for high-speed cladding and deposition processes as well.

(multiple speakers). Now that you told the one micron laser for them mostly. But now we provide also highest-quality and cheap, these two micron waves which are very suitable for plastics, [collagen], and the [sintering] printing and to we qualify those for application roles and now the overall price quality of high-power good in a way that also first success of this wafer by some customers that (inaudible) result, also manufacture more fine would be this sintering, and so it's a new way to open new opportunities for the (inaudible) wafer (inaudible). Now we open door for lasers for multiuse.

Is it mostly the high-powered lasers that get sold into that market?

Historically it is supposed to be medium power lasers. So we are now starting to see, as we mentioned, the customer that recently purchased a 10 kilowatt laser which is very high-powered fab application to produce a pretty large part from different types of alloys. So for some of the bigger parts, the power of laser is increasing.

We have also heard from one of our oldest customers who has historically bought 200 to 400 watt lasers. They are starting to consider moving up into the kilowatt scale range. So again probably to produce larger parts.

Larger part take much higher speed.

Just to follow up. It sounds like the seamstepper program's moving along nicely. Do you feel that the markets for the appliance is larger than the opportunity in the automobile sector for the seamstepper?

That is difficult to say. At this time we have started marketing to a couple of companies and the potential demand for welding on appliances and other general manufacturing is substantial. I can't quantify whether it's as big as the automotive or not. But it is pretty substantial in those areas as well with millions of units of products produced a year.

Great. Thank you.

(Operator Instructions). Mark Douglas, Longbow Research.

Good morning, gentlemen. In the prepared remarks you talked about German automotive being down or at least weak. Do you see this as more pause in spending? Are they slowing down investments in general for the foreseeable future?

I don't think we gave any specific commentary about European automotive. European automotive is recognized as being weak at the moment in terms of total output. We had core loss against our main agreement that we signed with one of the [mange] companies as well as other orders placed.

So it's -- in German automotive, that market has been relatively anemic for several quarters. Most of our growth in automotive is coming from Asia and North America.

So, I think until you see a little bit of an improvement in the economic situation there, you are seeing a little bit of a pause in some of the deployments for different applications. But we continue to work closely with just about every single company there. And some of them are deploying outside of Europe for their new factories, for example, in Asia. And we have got orders there as well.

And now the largest Japanese company qualify our laser for multiuse in their production lines, also they have grown very small but nowadays their finish and claim have provide profitable use [in days in our] Japanese automotive industry. And Korea wants a new phase of penetration Korean market with our new products for automotive.

The major, I would say, potential we have now with seamstepper, it is a unique product, which will open a lot of new opportunities there. It is here where we will place a [resistance] that's part welded. Now in use on the automotive industry up to 100,000 valves and spouts welded. 100,000, it will replace our seamstepper much better, provide much higher quality and also the best condition and wider (inaudible) so as a result even 10% to replace this result and a huge business. And we go in successful in our direction now many company making testing qualifications of power seamstepper with additive process outperform with a seamstep simplification only couple of months ago, will do it next year would be will start much penetration of the replacement of spot welder. Not only automotive, also manufacturer of refrigerators, many other when they produce it with new opportunities for them also.

But with that seamstepper are those sales coming --? Well, you already have a pretty good installed base. I see there's more growth available for the fiber lasers. Is this going to be a mix of currently installed fiber lasers plus new installs? Or is it mostly going to come along with new fiber laser sales as well?

It seems temporary [in pollute] fiber laser. Typical from total (inaudible) fiber laser inside of the seamstepper controller. But also it's very special optical (inaudible) press time where they could be useful without any protection (inaudible) the major problem with ways that now they have to put the laser also much when they watch cable. Very expensive, each such cable costs up to $1 million. It all creates a lot of problems, additional costs with some of these seamstepper press time is qualified without any protection against (inaudible). It is enormous step occurs. We are patented. We first introduced such technology in the market.

Thank you.

Jiwon Lee, Sidoti.

Just wanted to get back to the second-half expectations. So, mainly, the second-half growth is largely driven by those similar market dynamics or could you point to a couple of areas that might be a little bit different in the second half versus the first half?

I think the dynamics are broadly similar. You will have another good quarter in China because of strong backlog there. We actually had a very strong quarter in order flow out of Japan in Q2 whilst revenue was a little bit lighter there. That will -- if you are looking for a slightly changed dynamic, we are expecting growth in revenue out of Japan.

Clearly in the second half of the year, you expect Russian business to pick up because of the phasing of capital expenditures.

And then in Q3, we have got strong backlog coming into the quarter in North America. So you would expect a good quarter there.

In terms of end markets and products, product lines, I think you continue to see generally the same dynamics around areas.

That's helpful. And the second follow-up, the pricing dynamics outside of your own initiatives and whatnot, did you observe any different dynamics within the laser industry into July?

We haven't noticed anything in particular around the industry in general or pricing. Nothing that I have heard reported to me or from our sales groups. No. Have you heard something?

Not that I can recall. But try to think whether that includes the Chinese market, the Japanese market, not just here, but globally, your European markets.

We haven't really heard anything. I think there was a rumor out there that IPG was going to suddenly drop the price of pulse lasers by 25%, I think. I don't know where that came from. We clearly are always introducing new product that has lower cost related to it to try and penetrate new applications. We are looking at completely new design pulse lasers to try and get greater market share from very low-cost YAG lasers, but some of the rumors out there in the market I don't think they are with foundations.

Now it exists some problem will help competitor changes manufacturers for low end pulsed laser and low-end quality pulsed laser. They provide cheaper price. But now with the way we are developing even cheaper than they provide which remain perhaps the same high product. But our major -- the way we are looking for high grade pulsed laser. We developed during the last year, this year, new generation of a much higher peak power, the short pulsed lasers sophisticated now the [raw] customer, the metal customer, it is timed to this new product. You are much more profitable there form of product and high-priced also but so also (inaudible) performance for this new product than any other people in the market.

(multiple speakers) consumer electronics well last year we sold them to large quantity for (inaudible) and they were very high tech with this new laser.

Joe Maxa, Dougherty & Company.

In China you talk about a lot of diverse -- growth in diverse applications. I'm wondering if there are just one or two that saw the majority of the sequential growth that you could point to or what the real driver was for such a big movement?

Across the main applications, there was strong growth in some welding particularly strong growth in cutting where we highlighted, I think, this over the last year, year and a half, Joe. Those -- the rate at which fiber laser technology is being adopted by the major OEMs there as compared to CO2 is even faster than around the rest of the world although we have actually seen a big pick up in some of the main OEMs in Europe as well.

So people don't seem to be so wedded to some of the older technologies. They want the latest and best and most efficient and most productive technology. So we haven't lost any share against other fiber laser competitors on cutting applications and we have certainly seen our share of the cutting market grow very dramatically.

We saw strong growth for the QCW for some of the welding of the micro welding applications I had referenced with frames for consumer electronics. And another good quarter on some of the marking applications, both high-quality marking applications as well as some of the more general manufacturing. So it really was across the board on different applications with different OEMs.

And then, also, some of the very high-powered 10 kilowatts lasers on deposition manufacturing, additive manufacturing applications.

I see. And one other question. On the advanced application side, what are you seeing there and how long or when do you expect that could be a growth driver again for you?

The advanced application just continues to be an uneven business quarter to quarter. We did deliver several of the high brightness lasers in Q2. It was an order that was taken in the first quarter. Backlog, there is a couple of units to go out in the third quarter. So to get to more even growth in that end market with more even revenue with growth requires those applications to be commercialized.

I think we are probably still 18 months away from having serious visibility into that. There are other orders that we expect to get from time to time, but it's just -- it continues to be an uneven business. We are not losing that business to any of our competitors. Certainly no one else is capable of producing these high brightness lasers at the power levels or even lower power levels as compared to IPG.

So it is just a question of waiting for that market to develop more consistently.

Although why to get our lasers and all the going around, but they don't have budgets, most of these people don't have budgets. They are asking budget, but you understand they are depressed from -- this is a problem with advanced applications, it is a pretty slow business. But we don't have any competition, one day on the market for this product.

Thank you.

At this time we have reached the end of the Q&A session. I will now turn the conference back over to Dr. Gapontsev for any closing or additional remarks.

Thank you for joining us. We look forward to speaking with you next quarter with good news again.

Thank you, everyone.

And that concludes our conference call. Thank you for joining us today.