Good morning, and welcome to IPG Photonics' First Quarter 2023 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 Fedotoff, IPG's, Director of Investor Relations for introductions. Please go ahead, sir.

Thank you, Rob and good morning, everyone. With me today is IPG Photonics' CEO, Dr. Eugene Scherbakov; and Senior Vice President and CFO, Tim Mammen. Let me remind you that statements made during the course of this call that discuss management's or the company's 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, 2022, and other 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 May 2, 2023 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 or 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, which were above our guidance range despite the macroeconomic uncertainty that continued to negatively impact demand in general industrial applications such as cutting and marking. We reported another quarter of solid revenue growth in welding that was driven by a record sales in EV applications and an all-time high revenue for our handheld welder, LightWELD. Additionally, we saw strong results in cleaning and solar cell manufacturing. Demand for these products is driven by global macrotrends and increasing investment in renewable energy and eco-friendly solutions. IPG is developing innovative technologies that enable manufacturing of these products and improve speed and efficiency with benefits to society and environment. Recently, we published our 2023 annual sustainability report on our website, providing information on many of these trends and how IPG delivers on our new mission statement applying light in ways that improve life IPG has been making good progress in diversifying our revenue and reducing our exposure to cyclical and economically sensitive industrial markets. While these markets and applications are still account for a major portion of IPG revenue, we have been investing on our R&D sales and operating resources to support growth of emerging products and to drive further diversification of our revenues. In the first quarter emerging growth product sales grew both sequentially and year-over-year accounted for 45% of total sales. Many of these products are benefiting from global investments in e-mobility and renewable energy. We saw another quarter of record sales in AMB lasers, driven by growth in EV battery welding, as a global EV battery capacity build out continued. We also saw increased demand for our green lasers that are used in solar cell manufacturing applications, improving efficiency of these solar cells. We expect investment in solar cell…

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 on Slide 4. Revenue in the first quarter was $347 million, a decline of 6% year-over-year due to foreign currency headwinds, which accounted for approximately 4% of the decline in the telecom divestiture that reduced revenue by approximately 1%. Revenue from materials processing applications decreased 8% year-over-year, while revenue from other applications increased 10%. GAAP gross margin was 42.3%, a decrease of 410 basis points year-over-year due to increased manufacturing costs, higher inventory reserves as well as higher shipping costs and tariffs, which was partially offset by an improvement in absorption as a percentage of sales. On a sequential basis, gross margin did show some improvement. FX also had a negative impact in the quarter. If exchange rates relative to the U.S. dollar had been the same as one year-ago, we would have expected revenue to be $15 million higher and gross profit to be $8 million higher. GAAP operating income was $75 million and operating margin was 21.7%. Net income was $60 million, or $1.26 per diluted share. The effective tax-rate in the quarter was 28% and was impacted by certain discrete items. Foreign currency transaction gains related to remeasuring foreign currency assets and liabilities to period-end exchange rates had a positive impact on operating income of $3 million and positively benefited earnings per share by $0.06. Excluding the currency transaction gain and a small restructuring charge, operating expenses declined year-over-year primarily in research and development as we reduced spending on telecom product development as well as reduced expenses from the sale of the corporate aircraft last year. Moving to Slide 5, sales of high-power CW lasers decreased…

[Operator Instructions] Our first question comes from Ruben Roy with Stifel. Please proceed with your question.

Hi. Thank you. Tim, I was wondering if you could expand a little bit on the commentary around demand in China, remaining relatively muted. Recently, you characterized some of those applications in China that have been weak like cutting as sort of near or at trough level and just wondering at this point, if you think there might be a further leg down based on what you're seeing from the order environment or with reopening, I know there's been some mixed PMI data recently, but as you think about the second-half, do you think that we might see a little bit improvement off of what potentially could be a trough level. Thank you.

I mean I think at the moment demand remains relatively muted as we've said, the expected traction from a recovery is taking longer to really crystallize. I still think we're running relatively speaking on some of the older industrial applications like cutting and marking and engraving at that sort of trough level. But continuing to perform very well on EV and some of our precision applications, which now are a dominant part of our overall revenue there. I think our commentary is in-line with what other people are seeing, right. You're not just seeing a very strong rebound post COVID restrictions being lifted the PMI data is not particularly strong. But for example, in Q1 relative to our guidance, China did outperform a little bit, so that was a positive. So there was some evidence of a little bit of strengthening in the Q2 guidance is the reason, it doesn't show any material pickup compared to Q1, it's relatively flat, but it does point to stability. I think it's way too early to say where the second half of the year really ends up at this point in time.

Understood, that's helpful. Thanks Tim. As a quick follow-up, so I wanted to touch on some of the emerging markets, which obviously are doing very well. And then specifically, around EV and how to think about that marketplace, you've doubled revenues 2021 to '22, order rates continue to remain very strong. Eugene talked about a little bit of a slowdown in medical, as one of your large customers adjust against buffer inventory, I'm wondering how to think about EV and the order book going forward, do you think some of the new applications that you're addressing are going to continue to drive the momentum or new customer diversity et cetera or is there a period that we might see coming up, where you have some equipment utilization and pause in spend in that market, just kind of wondering how we should think about that for the rest of this year.

So overall, the EV demand environment remains really quite strong, right. I think the benefit is that where you might see weakness in one area, it's going to be picked up in other areas. So we're seeing a lot of demand coming out of North America at the moment, some of that's being driven by some of the benefits that came out of the Inflation Reduction Act is starting to see increased investments in Europe as well. China remains quite resilient in that area, but even if there is a bit of a slowdown in one of those geographies, we expect it continue to be strong in some of the other areas. This demand, we're expecting and we're seeing in some other areas in Southeast Asia as well like South Korea, and even in Japan. The other benefit is I think we're going to start to see orders for the drying equipment materialized during the second quarter and that should continue to diversify that revenue stream, so. I think we have to look at it more on a global basis rather than just specific geographies and we believe that the puts and takes around that will make this is still very sustainable revenue driver for the company.

Also, I would like to add. Very strong growth for revenue for pulsed laser applications. First of all, for cleaning, but for us, it's much more important that we are not selling only just lasers but also final system of cleaning including our laser scanners in some cases, monitor and other options. And selling for such kind of product, it's also the matter is a good opportunity for us to penetrate to many, many different markets, related to the cleaning applications.

Thank you, Eugene. Thank you, Tim, for all the detail.

No problem.

Our next question is from Jim Ricchiuti with Needham and Company. Please proceed with your question.

Hi, good morning. This is actually Chris Grenga on for Jim. Europe and Germany in particular saw sequential revenue growth. Could you provide some additional color on what you're seeing in that region?

I think actually Europe performed very well in the first quarter, given the challenges that that area has faced. I think you started to see really the energy issues that were key headwind in the middle and third quarters and even into the end of last year has started to abate, so the overall demand environment was quite strong. Some of that was EV, but there was also good demand for some of the cutting applications, particularly in Southern Europe, which helped some of that outperformance. So yes, I think the economic data has really stabilized, PMI's are still not very strong there, but at least the underlying demand was certainly stronger than we'd expected and the overall tone in the business for the first quarter was quite positive, and that carries on even in the second quarter with the guidance that we received from the individual entities.

And especially for EV applications we see such kind of trend that our main potential customer for battery production, they're shifting this production close to the real manufacturing, car manufacturer and of course, for us, it's much more advanced because we're using our portfolio for different kind of laser options for such kind of production.

Got it, great. Thank you. And with respect to the battery application, is there any carryover or overlap with stationary battery storage, that would be in use in like a residential or like a utility-scale solar application or is it mostly relevant for EV batteries?

Of course, EV battery now is firstly, but battery for storage also is very important, especially for Europe because its solar applications have been not so active now, but definitely it will be growing in the future, that's why the storage battery is very important part of this production. But on the first time, now it's on the first place of course definitely, it's battery for electrical cars.

The applications that would be very similar, whether it's on the welding, cleaning all of that. It's basically pretty standard across those.

Got it. Thank you. And just perhaps one more. So with respect to the migration of the production of components that were formal in Russia, just could you provide a status update on where that stands and perhaps any of those large remaining items on that effort.

First of all, it's not migration of production, we're expanding our production in Germany, because it's our standard product for many, many years. By the way, we introduced from Germany to Russia this production for some simple blocks. All technology we are keeping in Germany. Yes, first of all, we increased our production in Germany, but also installed a new manufacturer in place for in Poland and also in Italy. And from this manufacturing, now we will have visibility to eliminate any alliance to the Russian production for many different kind of components, including the final block, fibrous, and especially other fiber-based components.

Thank you very much.

[Operator Instructions] Our next question comes from Mark Miller with The Benchmark Company. Please proceed with your question.

Thank you for the question. Could you discuss the automotive market, excluding EV?

Well, excluding EV, now -- EV is substantial part of this production. All investment by the way -- all investment, for example, EV battery and car production company, mainly are going to EV production not to standard car production.

And -- excuse me.

Go ahead.

Emerging applications, was that roughly 45% of sales last quarter?

Yes.

Okay. Thank you.

We have 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 in IPG. 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.