IPG Photonics Corp (IPGP) 2022 Q2 法說會逐字稿

Good morning, and welcome to IPG Photonics' Second Quarter 2022 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Director of Investor Relations for introductions. Please go ahead, sir.

Thank you, Rob, and good morning, everyone. With us today is IPG Photonics, CEO of Dr. Eugene Scherbakov; and 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-looking statements. These risks and uncertainties are detailed in IPG Photonics' Form 10-K for the period ended December 31, 2021, and our reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investors section on our 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, August 2, 2022, only. The company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on our reported results, please refer to the earnings press release, earnings call presentation and the Excel-based financial data workbook posted on our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of this call. With that, I'll now turn the call over to Eugene Scherbakov.

Good morning, everyone. We are pleased with our results this quarter as we continue to diversify our revenue across the key regions and applications. Second quarter revenue increased 1% year-over-year, but was meaningfully impacted by strength of U.S. dollars, which reduced revenue and revenue growth by $18 million and 5%, respectively. I am proud that we have continued to make progress on our key strategic strategies. First, we made progress to achieve a better geographic balance in our business. Sales outside China accounting for 64% of our total revenue and grew significantly this quarter led by strong revenue growth in North America and Japan.

Second, we also made progress in diversifying across the different applications with record revenue in welding and strong growth in medical applications. As a result, the high-power cutting business in China contributed to less than 10% of IPG total revenue in the quarter. This was another record quarter for welder revenue that's benefiting from growth in electric vehicle batteries, general manufacturing, medical device applications and the adoption of our high continuous laser for many welding applications.

Laser welding adoption continues as our fiber laser enable faster, more precise well than for a wide range of materials, including tin foil, foils and higher reflective materials like copper and aluminum. Our adjustable mode beam lasers provide better fast high-quality, high-speed and uniform welding for a broad range of different materials used in electric vehicle battery manufacturing and other applications.

Our LightWELD handheld welder is superior to for small, mid-sized fabricate and brings ease of use to the welding process. Well, it was the strongest driver behind of our growth this quarter and the revenue from this application has become as important as our revenue from high-power cutting applications. While our cutting business still accounted for a significant portion of IPG revenue, welding revenue has surprised high-power cutting revenue in several key geographies. IPG is benefiting from current investment in e-mobility, which may potentially accelerate in the near future as a result of higher energy costs across many regions. The EV market continues to drive our demand with new model launches and additional battery capacity announcements to support higher sales. We had record sales of EV applications in the quarter with strong demand for our welding and foil cutting solutions. We are also working on a number of additional opportunities, including the cleaning and hairpin welding solutions that increase our exposure to this growing market.

Emerging gross product sales were 40% of our total revenue in the second quarter. Many of these products are benefiting from global macro trends such as automation, e-mobility and as well as a focus on sustainability, renewable energy and energy efficiency. More specifically, record sales in AMB lasers and high-power fast lasers were driven by strong growth in electrical applications. We saw continued sequential improvement in demand of our green lasers for solar cell manufacturing applications.

This market is expected to grow as a result of increasing investment in renewable energy solutions. We also saw strong performance in cleaning applications. which is driven in part by sustainability benefits of our lasers, which help to reduce use of toxic materials. Medical revenue more than doubled year-over-year as our thulium lasers is considered a new growth standard or laser urology market and has been rapidly gaining adoptions. LightWELD sales increased significantly, and we have received key market, and we are now selling LightWELD in several markets in Europe. We are also seeing the growth in laser-based system sales which are benefiting from complete solution designed for EV applications and other emerging applications such as laser cleaning.

Before I turn the call to Tim, let me provide an update of our operations in Russia. As previously announced, IPG stopped all new investments in Russia and prepared plans to increase manufacturing of critical components in the United States and Western Europe in order to reduce our reliance on the manufacturing capacity in Russia. We continue to make progress with high additional employees, allocated workspace for increased production and running second, and even set shifts in certain locations. Our inventories of critical components increased and it has lowered our risk on our supply chain disruptions. We qualified some third party suppliers and now placing the orders for some of these components.

In the second quarter, we started setting up infrastructure for production increasing in Germany, Italy and the United States. We expect that the most of the manufacturing capacity will be brought online during the course of the rest of the year, enabled us to reduce our reliance on the Russian components by year-end. While our facilities are moving toward ramping up production, our ability to acquire additional employees remains challenging. However, we are introducing the new production technologies and automation. It should eliminate some more labor-intensive steps and increase yield and productivity.

I will 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. I'll start with the financial review on Slide 4. Revenue in the first quarter was $377 million, up 1% year-over-year, driven by growth in most of our key geographies and increased 2% sequentially, mainly due to higher revenue in North America, China and Japan. Revenue from materials processing applications decreased 1% year-over-year, and revenue from other applications increased 29%.

Second quarter GAAP gross margin was 45.7%, a decrease of 290 basis points year-over-year due to increased inventory reserves as well as higher shipping costs and tariffs. We also had slightly lower absorption of manufacturing costs in the quarter, which negatively impacted gross margins. This was partially offset by lower cost of products sold, which benefited from stable selling prices, lower cost products introduced to the market such as the ultra-compact lasers and improved systems margins.

We faced strong currency headwinds this quarter with significant strength of the U.S. dollar. If exchange rates relative to the U.S. dollar had been the same as 1-year ago, we would have expected revenue to be $18 million higher and gross profit to be $10 million higher. Excluding foreign currency transaction losses related to revaluing foreign currency assets and liabilities to period-end exchange rates, operating expenses decreased slightly year-over-year, primarily in research and development. GAAP operating income was $72 million and operating margin was 19%. Net income was $57 million or $1.10 per diluted share. The effective tax rate in the quarter was 22%. During the quarter, we recognized a foreign exchange transaction loss of $18 million or $0.28 per share primarily related to the appreciation of the U.S. dollar and Russian ruble.

Moving to Slide 5. Sales of high-power CW lasers decreased 14% and represented approximately 43% of total revenue. Sales of ultra-high power lasers above 6-kilowatt represented 50% of total high-power CW sales. Pulsed laser sales increased 13% year-over-year with continued growth in high-power pulsed lasers used in EV battery manufacturing, but offset by lower sales into solar cell manufacturing. System sales increased 30% year-over-year, driven by growth in laser systems and higher sales of LightWELD. Medium-power laser sales increased 4%, while QCW laser sales were down 9% year-over-year. Other product sales also increased driven by higher sales in medical applications.

Looking at our performance by region on Slide 6. Revenue in North America increased 33%, driven by growth in cutting, welding and medical applications. In Europe, sales increased 2% as a result of higher demand in marking, cleaning and medical applications. In the first quarter, we reported pull forward of demand in Europe as customers were securing supply, which negatively impacted demand in the second quarter.

Revenue in China decreased 14% year-over-year despite strong growth in welding and foil cutting applications in the region. While revenue in high-power cutting applications stabilized at a lower level, in the last several quarters, it was still down significantly on a year-over-year basis.

Moving to a summary of our balance sheet on Slide 7. We ended the quarter with cash, cash equivalents and short-term investments of $1.2 billion and total debt of $32 million. Cash provided by operations was $79 million during the quarter and capital expenditures were $35 million in the quarter. Cash generation was negatively impacted by an increase in inventory during the quarter as we continued to build safety stock in order to keep reasonable lead times and secure critical components. However, in the second quarter, approximately $40 million of the $72 million increase in inventory value was due to the translation effect of exchange rates with $32 million attributable to investment in inventories of critical components.

While continuing to maintain a strong balance sheet, we have returned a significant amount of capital to shareholders with our ongoing stock repurchases. In the last 18 months, IPG repurchased shares for approximately $450 million with $312 million spent on share repurchases since the beginning of this year. During the quarter, we repurchased just under 2.4 million shares for a total of $233 million, a record quarterly share repurchase number for the company. We believe in a disciplined approach to share repurchases and have become more active as the share price declined in the recent quarter, providing a good buying opportunity. Given that we completed both May 2020 and February 2022 share repurchase authorizations during the quarter, the Board approved a new $300 million share repurchase authorization in July.

Moving to outlook on Slide 9. Second quarter book-to-bill was slightly below 1. We saw some moderation of order flow across Europe as compared to record bookings in the first quarter, but we're pleased to see continued strength in key applications and more stable demand in other key geographies. Macroeconomic indicators have been moderating, particularly in Europe, but remained in the expansionary territory for North America and Asia. Furthermore, PMI in China returned to growth in June due to easing COVID-19 restrictions and posted a modest increase in July.

While forecasting our business continues to be challenging in the medium term, and our third quarter guidance remains subject to significant uncertainties, including the impact on the global business environment from geopolitical events, trade restrictions and sanctions, COVID-19, economic trends, tariffs, currency fluctuations, growth from emerging product revenue, competition and the lack of long-term binding order commitments continue to benefit from growth opportunities created by major macro trends that drive growth in electric vehicle battery manufacturing applications, LightWELD and medical sales.

For the third quarter of 2022, IPG expects revenue of $350 million to $380 million. The company expects the third quarter tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $1 to $1.30 with 51 million diluted common shares outstanding. Continue to expect currency headwinds and estimate that third quarter revenue guidance range is reduced by about $15 million due to the strength of the U.S. dollar. As discussed in the safe harbor passage of today's earnings press release, our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our earnings press release and is subject to risks outlined in the company's reports with the SEC.

And with that, we'll be happy to take your questions.

(Operator Instructions)

Our first question comes from Jim Ricchiuti with Needham & Company.

I noticed a fairly healthy step down in spending for R&D and sales and marketing Q2 versus Q1. Just looking at your guidance for OpEx, Tim, for Q3, should we assume things begin to more -- begin to normalize in some of those expense levels? I don't know if you want to talk to some of those -- the variability we saw in OpEx in the quarter?

Yes. So in terms of the quarter, there's some benefit on OpEx due to the weaker euro, for example, but we've also, on the R&D side, stated that we intend to rationalize R&D expenditures to ensure we're focused on projects that are really going to add value, and we believe that we can commercialize in the medium term. So there's been some rationalization of expenses there. There's been better control over some of the material expenses that were being outlaid for R&D. So there's a bit more discipline around that. It's not that we're defocusing investment on R&D, but really trying to ensure that the projects targeting a meaningful return on them.

As you do get into Q3, we go through our merit salary cycle in July. So part of the increase of OpEx in Q3 relates to those merit increases coming through during the quarter.

And the follow-up question I have is -- and you provided a little bit of color on the book. Just in light of the changing macro environment, I'm wondering if you can give us some sense as to how the bookings have progressed through the quarter into Q3? And if there's been any significant variability in bookings by region? It sounds like you're seeing some softness in Europe.

Yes. There's no significant change in the overall tone of bookings. We did come off the sort of very spectacular level of bookings in Q1. So the book-to-bill in Q2 being below 1. For example, we took a very significant number of medical orders in Q1, but they're slated for delivery during the rest of this year and into next year. Some of the other orders we took in Q1 give us visibility into the second half of the year. So totally in Q2, certainly in the middle of the quarter with the lockdowns in China, it was a little bit weaker, and then we saw some improvement in June. And then in general, through July, order flow has held up reasonably well.

Some of the impact in Europe is really currency related as well. PMIs, if you're looking anywhere in Europe, the area we're watching closely though would be Europe given the weakening of PMIs there. It was good to see some improvement in PMIs in China. We had good order flow in Japan across multiple applications, and good order flow in North America as well during the quarter. So it's sort of we're watching things closely, Jim, rather than seeing any real fundamental changes at this point in time.

Our next question comes from Nick Todorov with Longbow Research.

I think I heard that you talked about some difficulties about finding employees in Europe to grow capacity in Germany and Italy. And you also mentioned that you've qualified some third party suppliers for some of those components coming out of Russia. Should we expect any of those to have any impact on the gross margin range that Tim, you gave in the last earnings call. It seems like no based on your guidance. Maybe can you talk of some of the offsets and the puts and takes offsetting those.

About manufacture different countries. Of course, we have some problem in Germany. But in Italy, it's much easy situation with people. This is why we increase in our facility and production in Italy, much easy.

About the components, which we are now buying from Russia, but now we are placing order for other suppliers. Yes, we already tested, we're already qualified. Practically all components, which were before received from Russia. And now we are placing orders for these suppliers. And I think we get the first big enough quantity of these components in 1 month, and then it will start production of our final devices in Europe based on these components.

On gross margin, I would say, in Q2, there's a lot of challenges around the business at the moment, right. So I was actually quite pleased with the gross margin performance even though our inventory provisions were high and inventory provisions are high as a result of carrying inventory to support the supply chain constraints and other issues that we faced. I thought what was really pleasing was the gross margin of the products sold was good, and we were able to offset some of the inventory provisions and then some of the higher costs related to shipping and tariffs and import duties. And so yes, the guidance for Q3 implies maintaining gross margin rather than seeing it get impacted any more than it has been. So overall, I thought the margin profile and the expense containment on the business, Jim asked about on OpEx, I thought it was all pretty positive for us during the quarter.

Okay. And just a quick follow-up on that. Tim, you touched on the inventory reserves. It seems like you've taken our reserves for 3 quarters in a row at least. Should we expect -- or should we model inventory reserves going forward given the supply chain challenges? Or how should we think about that?

I mean they're incorporated in our gross margin guidance that we provided. So if you're modeling gross margin within that range, you'll be taking into account where we expect inventory provisions to be. I don't know that's -- that's how I'd answer the question.

Okay. Last one for me. Just on the demand side, you talked about bookings in the prior question, but I didn't hear much said about China. You talked about stabilization in China cutting. What are the prospects of seeing some potential rebound in China cutting? And also, can you kind of rank the visibility into the second half by regions that you have based on bookings?

No. I mean I can't rank the second half into visibility on bookings. But overall, China bookings in Q2 were pretty reasonable. Obviously, compared to peak revenue that continues to be down. We referenced the total cutting into China, both the low end or less than 6 kilowatts and more than 6 kilowatts was less than 10% of our total revenue. So we've certainly managed to diversify away from that business and derisk it. I think there may be a moderate pickup in cutting applications in Q3 given some of the rebound from COVID, but certainly not expecting anything very meaningful there. And we're continuing to focus on many of the other applications that are driving the stability on China side.

We referenced on where bookings were in Q2. I was really pleased to see some of the improvement in Japanese bookings, and it was also fairly diverse. We've got very good backlog for medical applications. North American total bookings were good. The LightWELD performed very well. When we referenced that we're kind of like watching Europe, which is it's got both a currency headwind and some slightly weakening PMI data at the moment.

But also for China, for cutting applications, we are now introducing this quarter the new compact 8-kilowatt lasers, and we can see. I think you will see a good adoption from the Chinese market of these new lasers. It also gives us additional opportunity to increase our presence in cutting applications in China.

Our next question is from Paretosh Misra with Berenberg.

Can you guys talk about your Medical business as to are you selling to some sort of integrators or selling directly to customers? And then are you taking share from another laser producer? Or is that something you're developing a new market?

As usual, we are working with some OEM customers. And I mean we are talking about the medical business. We have some important OEM customers. We are working with different customers. And about the new applications, yes, we are thinking about this and also making the investigation in which kind of medical area, we have to also provide our advanced lasers. But in total, with respect to revenue our medical business is growing fast enough. And we are seeing there is -- we see there good potential for our business -- medical business this year and next year.

And just to add to that, some of the applications are displacing older laser technologies. But in each of the areas, even if there's a laser application that's there, our solution also is enabling displacement of, for example, surgical applications or ultrasonic sort of application as well. So it's partially displacing lasers, but it also is broadening the total application set.

Got it. And then also on your electric vehicle battery business, what are you hearing from your customers with regard to the rollout this year? Any sense of how much incremental capacity you think will be built or added this year?

Yes. There's a significant increase in capacity this year. We estimate that the laser demand for batteries is probably more than doubled this year. The view is that, that continues to be sustained for the next 2 to 3 years. If you go out to like 2030 now, I mean, these numbers are changing almost every month. The latest, I think there was a report out a couple of days ago that showed that total battery capacity may get as high as between 5 and 6 terawatts. And we're still -- I think we're still below a terawatt at the moment. So there's still a huge capacity additions being planned, but it's almost a moving target, it changes...

It changes monthly, it seems -- but also very important any discussion about the new capacity for battery production that exists also possibility to use laser for new applications, which we didn't discuss before. It's very important. And from the point of view of the laser applications, it also must a very exceptional growth.

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

For the question. I was just wondering, your emerging products has continued to grow 40% or so of sales. What is the margin profile of the emerging products? Is it higher than your overall margins?

Depends which product you look at, a lot of them have higher than corporate average margins. So particularly on the higher-power pulse lasers, the AMB lasers, the medical device lasers have very good margin on them, some of the renewable energy sources. And you get down to some of the systems, I said we've seen some improvement in margin, but they're below corporate average. If you look at the handheld welder which we classify within systems, when it was first introduced a year ago, the margin profile of that was quite low, but there's been significant improvement in our margin profile as we've reduced the bill of material costs but also added feature sets to that. And then some of the advanced applications, obviously, would have extremely good margins.

So -- if you take all of that together, the overall margin benefit of the emerging growth products is definitely positive, but there's a bit of a mix there.

It's much higher for the standard product.

Like to also ask, when you're shifting the operations out of Russia, how much of an impact is that on your margins once you get set up in the other countries?

So we've stated, obviously, that you've got a higher salary costs outside. At the moment, we think that we've got those factored into the gross margin guidance in the nearer term. The other way we're going to offset some of those costs are by introducing, we're not just replicating very manual processes, we're looking at more automation and improvement in yields. And then offsetting some of those higher costs are you've got -- as Dr. Scherbakov just mentioned, the introduction, for example, of the ultra-compact lasers at higher at higher power levels, there will be a margin benefit from that, and I just talked about some of the margin benefits we've seen from things like LightWELD and other product lines. So we're hoping we can manage through that. But certainly, Russia was a low-cost manufacturing area for us, and you've got to find ways to improve yields and lower costs in order to offset some of those headwinds.

It's very important because we have in our strategy to introduce automation and also some improved technology for some processes and so on. But under these conditions, we insist to increase our activity in this area. This is why we already started several projects concerning the automation assembly of some components, some subcomponents and some final devices. And I think during the 1 year will give a much more better improvement in this area than it was before.

(Operator Instructions)

Our next question comes from Michael Feniger with Bank of America.

Tim, if we look back the last 10 years, like outside of 2020, Q4 revenue is like typically down sequentially and I'm curious if you think that normal seasonal trend that plays out this year? Or are we just in like a different kind of weird cycle given some of these lockdowns?

Mike, I'm not going to give -- I'm not giving guidance on Q4 at this point in time. So I mean we're giving guidance quarter.

Fair enough. And then I guess, Tim, just with the inventory build, like how does this play out in the second half? But do you do you slow production to wind some of that inventory down? Or do you continue to build at this pace? Just curious since the inventory number does kind of stick out. And I'm curious how you guys kind of manage that over the next really 6 months into 2023?

First of all, we have some strategical plan, how we can manage our inventory. And there exists some permanence first of all. We would like to continue to supply our product according to our standard delivery time. It means from 6 up to 8 weeks is our standard delivery time for mainly our products. And we continue to insist our customer to use our product with short delivery time. Of course, for this, we have to get some strategical inventories cleaner or some components, first of all optical components, but much more important electronic components because in many cases, delivery time, physician electronics components from outside vendors increased dramatically up to 2x, 3x, and this is why we have to organize the strategic inventory.

The second, of course, why is this inventory of growth because price for these components, first of all, electrical components also grow dramatically and in several cases up to several times, up to 10x for some components. Of course, this also will increase our inventory. But in any case, we have to manage this inventory, and we have to also satisfy our internal requests for delivery time. It's very important, and we have to insist our customer to use our product. These are our main goal.

Just adding to that, I think we've clearly added a significant amount of inventory in the first half of the year. part of which has been driven by some of the translational currency. There's certainly a lot of focus in the company on ensuring that I'd say a lot of the investments we've made have happened, and we're targeting having a more stable level of inventory. We don't expect to see a massive decrease in it, but at least getting to stability and not seeing a significant amount of additional cash used to invest in inventory. We've clearly built a lot of strategic suppliers on that side, particularly on electronic component supply.

I think part of your other question, Michael, was if you take down as that impact gross margins, a lot of the inventory that we've got was purchased from third parties. It wasn't related. Some of it obviously is related to internal production of optical components but a lot of the increases on the electronic component side and even mechanical components side, where we're sourcing those from third parties.

Got it. That's really helpful. And I'm just curious, like we're seeing these headlines in Europe. Obviously, you're seeing as well. You guys have some production facilities in Europe and moving some capacity some of your facilities in Europe. How do we kind of -- how do you guys plan around this potential energy crisis? I don't know if your customers have talked to you guys about that. Obviously, we're all watching the headlines with nat gas. But just curious then like high level, if you -- if those conversations are picking up, and how do you even kind of think about that and what that might entail?

The potential gas. Yes. Of course, potentially, it will increase in our gross margin also productivity is clear. But how much, how strong today, is now difficult to say. But in any case, we are thinking about the optimization of our production from the point of view of energy consumption. It's clear. I work in this direction.

Our next question comes from Hans Chung with D.A. Davidson.

So first, what's the operating expense implication as we started building the facility in the Europe and the United States. Again, some of the potential impact should be embedded in the third quarter guidance. But what about the 4Q? I think you mentioned pretty much the new capacity will be coming online throughout the course of the year. So just kind of want to get an idea like what kind of the implication for the OpEx in the second half?

But first of all, we are not making -- increasing our capacity, we're using our existing capacity in Germany because we're using to increase our productivity by installations at second and in some cases, for example, for fiber production of the subset, but using the same capacity. In Italy, the same situation, we are not using the new capacity using our existing facility only to make some modifications and to install some additional equipment.

Got it, got it. Okay. And then...

I think the other thing is that just as, for example, in Oxford, there's a major new building that's been under construction for a while. So we're not seeing any -- that building is close to completion and will help us to expand capacity. We acquired a building in Germany at the beginning of this year that is being devoted now more fully to replicate. So we're actually not seeing any -- we're not guiding to a change in for the year in terms of any increase. In fact, for the first half of the year, I think we're well within the budget and guidance we gave. So we're kind of -- we're trying to do this as efficiently as possible rather than driving it with -- we don't have to invest $200 million in additional facilities to get where we want to be.

On the -- I think I get the question. On the OpEx side, there wouldn't really be any significant change related to the manufacturing capacity additions we're making.

I see. And then second question, just can you give some color around the demand trend or the order flow for the product used in 3D printing vertical?

Yes, 3D printing, additive manufacturing. It's come back a little bit, but it's still some way below peak levels. We're starting to see maybe a little bit of a renewed interest and resurgence in the industry, but it's certainly not increased by 30% or 40% year-over-year. The benefit of it as well has been some geographic diversity we've seen -- so we referenced before that we've seen some orders from customers in China and some other customers outside of Europe. But I would -- it's kind of improved. It's not a drag on growth at the moment, but it's certainly not increased by 50% on a year-over-year basis.

So I think the industry is still trying to resolve their -- some of the issues they've got where they've got to improve the speed of growth of product. They've got to improve the repeatability of it. You're starting to see systems with up to 10 lasers used in them, which would ultimately be a benefit to us if the commercialization becomes more successful.

Our next question is from Jamie Wang with Citigroup Hong Kong.

Just want to ask about China business, and just some more color around that record. You reported a 14% year-on-year decline in revenue in China. So I was wondering, is that more because of there the market share rose due to the competition from Chinese competitors like Maxphotonics or Raycus or is it mainly because of the lockdowns in China? Just this quick question.

It's primarily -- I mean, we had a significant decline in the cutting market, part of which was locked out, but obviously, a lot of which is also the competitive dynamics there. What really we thought was fantastic was the degree to which we were able to offset that by growing the other applications in China, such as welding and the marketing applications are stable. Other microprocessing and fine processing applications performed exceptionally well. So we're certainly benefiting from, for example, the battery investment cycle there. So yes, the cutting market was both impacted by competition was certainly slower due to lockdowns. There will be some moderate pickup in cutting in Q3. But it's really pleasing to see the diversity of the rest of the business in China that has offset some of those dynamics.

But when we are speaking about the cutting market in China. We are taken in mind that there will be 2D metal cutting publications. But there is also, as Jim mentioned about metal production for foil cutting also used by our lasers and -- in this area, we don't have any big competitors.

Our next question is from Paretosh Misra with Berenberg.

So IPG was doing about $100 million of sales from Russia to China. So I was just curious if you could give us any sense as to how that number looked in Q2 and how it will evolve as you conclude your risk reduction program through the year-end?

So Russian sales to China, which is -- Russia sale to China now decreased -- not dramatically, but essentially this quarter. And because we start to produce the same lasers, first of all, the mid-power lasers in United States, increased our production also in Germany. We also started production of these lasers in Italy. Our goal is to decrease essentially the production of these leases in Russia and substitute production by Germany and Italy and the United States.

We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Eugene Fedotoff for closing comments.

Thank you for joining us this morning and for your continued interest. We will be participating in a number of investor events this quarter, and are 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.