Good morning, and welcome to IPG Photonics' Second 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, Mr. Eugene Fedotoff, IPG's Senior Director, 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, Timothy Mammen. Let me remind you that 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, 2022 and our reports on file with the Securities and Exchange Commission. Copies of these filings may be updated 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, August 1, 2023, only. And 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 financial data workbook posted on the Investor Relations site. 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. I am pleased with our performance this quarter. Second quarter revenue came in at the midpoint of our guidance range. Despite increased macroeconomic uncertainty, which resulted in project delays and impacted sales and outlook in industrial markets across many geographies, we reported another quarter of solid revenue growth in welding and cleaning applications. This growth was driven by strong sales in e-mobility and handheld welding solutions. Additionally, revenue improved in 3D printing and solar cell manufacturing applications as investment in these markets increased. Sales in flat sheet cutting applications declined year-over-year, mostly due to economic uncertainty and increased competition in China, which continued to negatively impact our results. However, cutting sales were up sequentially in China, North America, and Japan. Emerging growth products accounted for 41% of our total sales in the second quarter. We saw continued growth in AMB lasers, LightWELD, green and ultrafast lasers, as well as beam delivery, but sales declined in medical and advanced applications, as well as laser-based systems and high-power pulse lasers. We shipped our first 50-kilowatt AMB laser during the quarter and continue to invest in the international sales platforms for LightWELD. As we mentioned on our first quarter conference call, our medical business was impacted by a large customer working through inventory, which reduced sales in the second quarter. We expect medical sales to return to a more normal level in the third quarter and continue to focus on additional growth opportunities in the medical market. Despite a challenging operating environment, the positive results were driven by our progress in diversifying revenue and reducing our exposure to low-margin and highly competitive businesses. We have been focusing on products and applications which benefit from global investment in e-mobility and renewable energy, and this strategy is yielding good results. IPG had another quarter with strong sales in e-mobility applications driven by an increase in sales to geographies outside China, primarily in North America, Europe, and South Korea. EV-related investments in China slowed during the quarter, particularly into traditional prismatic cell batteries. However, we are seeing increased investment into new technologies such as large cylindrical cells and batteries for storage applications. Our team is working on new business opportunities for all cutting applications and electrical motor assembly. With the continued adoption of electric vehicles and growth in energy storage globally, demand for batteries should quickly catch up with recent capacity additions, and we expect investment in battery manufacturing in China to be stronger next year. Meanwhile, we are seeing increased investment in EV battery capacity outside of China and expect e-mobility orders to remain strong in the third quarter. Our welding sales are benefiting from growth in e-mobility applications where our complete solution, which includes AMD lasers and welding heads combined with our real-time weld monitoring and measuring technology, has become an industrial standard. LDD's real-time measurement can significantly reduce testing time, scrap costs, and failed parts for the customer, making a very strong value proposition and exceptional return on investment given the yield and cost benefits. LDD is also gaining great acceptance in applications outside of batteries, where the final cost of defect can be very high and lead to significant recalls. We are proud to deliver multiple solutions that can significantly reduce environmental impact for our customers, including our high-efficiency ECO lasers, its industry-leading wall-plug efficiency over 50%, environmentally friendly cleaning solutions, and high-efficiency laser diode drying and heating systems. During the quarter, we continued to see strong results in our laser cleaning solutions in e-mobility and other automotive and non-automotive applications. Laser cleaning provides sustainability benefits by reducing the use of abrasives, chemicals, and dry ice cleaning. Unlike chemicals, abrasive, and heat treatment cleaning processes, laser cleaning doesn't impact the material that has been cleaned and does not leave toxic waste, creating a safer and cleaner environment for employees. It can significantly reduce water consumption, and we are seeing an increase in interest in our laser cleaning solutions for various processes and applications, including paint and corrosion removal. Another recently introduced laser solution, which is replacing the less efficient infrared bulbs for drying and heating, is gaining interest, and we have booked our first order for EV battery applications, which will be shipped in the third quarter. The drying solution has been well received by customers and is gaining market acceptance because it significantly cuts down energy consumption and reduces environmental impact compared to legacy processes. Today, I'm happy to announce that the Board of Directors has elected Kolleen Kennedy as a new Director of the company. I'm looking forward to working with Kolleen and believe she will be a great contributor to IPG's strategy, particularly with our growth in medical applications, given her 25 years of experience in the medical system manufacturing industry. I would like to thank our employees for their strong contribution this quarter, and I will now turn the call over to Tim to discuss financial highlights.

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 second quarter was $340 million, a decline of 10% year-over-year, partially due to foreign currency headwinds, which accounted for approximately 2% of the decrease, and the telecom divestiture that reduced revenue by approximately 1%. Revenue from materials processing applications decreased 8% year-over-year, while revenue from other applications decreased 23%. GAAP gross margin was 43.4%, a decrease of 230 basis points year-over-year due to higher costs of products sold and charges for scrap, which were partially offset by lower inventory reserves, reduced shipping costs, and tariffs, as well as an improvement in absorption of manufacturing costs as a percentage of sales. On a sequential basis, gross margin continued to improve as we focused on reducing costs and improving manufacturing efficiency. We also benefited from slightly lower inventory provisions and shipping costs. As mentioned before, FX headwinds also had a negative impact in the quarter. If exchange rates relative to the U.S. dollar had been the same as last year, we would have expected revenue to be $9 million higher and gross profit to be $5 million higher. GAAP operating income was $72 million, and operating margin was 21.2%. Net income was $62 million or $1.31 per diluted share. The effective tax rate in the quarter was 24% and was benefited by certain discrete items. Foreign currency transaction expense related to remeasuring foreign currency assets and liabilities to period-end exchange rates had a negative impact on operating income of $1 million, with net after a tax benefit having no material impact on earnings per share. Excluding the currency transaction loss and a restructuring charge, operating expenses declined year-over-year, primarily in research and development and general and administrative categories as we reduced spending on telecom product development, implemented tighter cost controls, and reduced expenses. Moving to Slide 5. Sales of high-power CW lasers decreased 10% and represented approximately 43% of total revenue. Sales of ultra-high-powered lasers above 6-kilowatt represented 50% of total high-power CW laser sales, with customers outside of China moving to higher powers. The decline in revenue was primarily due to lower demand in flat sheet cutting applications as a result of softer demand and competition in China. Pulse laser sales decreased 24% year-over-year, as strong growth in cleaning and solar cell applications was offset by lower demand in foil cutting and marking applications. System sales declined 1% year-over-year, with growth in LightWELD, offset by a decline in other laser and non-laser systems. Medium power laser sales increased 18% driven by increased demand in welding and 3D printing applications, while QCW laser sales were down 2% year-over-year. Other product sales decreased due to lower revenue in medical and advanced applications. Looking at our performance by region on Slide 6. Revenue in North America decreased by 11%, with strong growth in welding and cleaning applications, offset by lower sales in advanced and medical applications, and lower cutting revenue and the divestiture of the telecom business. In Europe, sales increased 4%, driven by growth in welding and cleaning applications despite overall uncertainty in the economy. At the recent laser show in Europe, the tone of our business was muted, with most customers expecting a slowdown in the second half of 2023. Revenue in China decreased 28% year-over-year as demand declined across most markets and applications compared to the prior year, with the exception of cleaning and 3D printing. Moving to a summary of our balance sheet and cash flow on Slide 7. We ended the quarter with cash, cash equivalents, and short-term investments of $1.1 billion and repaid $16 million of debt in the quarter. Cash provided by operations was $67 million, and capital expenditures were $26 million during the quarter. We now expect capital expenditures to be between $130 million and $140 million this year. Our inventories decreased slightly, and we continue to target further reduction in inventories during the second half of the year. While maintaining a strong balance sheet, we have been returning a significant amount of capital to shareholders over the last year and in the first quarter. We did not repurchase shares in the second quarter. As previously reported, the Board announced a new $200 million share repurchase authorization in May, and we have a new 10b-18 repurchase plan in place. We intend to repurchase shares opportunistically. Moving to our outlook on Slide 9. Second quarter book-to-bill was below 1. We continue to see uncertain macroeconomic conditions and soft orders in all major manufacturing regions. Leading indicators in North America and Europe point to contraction in the industrial markets, while the timing of demand recovery in China remains uncertain. However, despite the weaker business conditions overall, the e-mobility sector was not affected in Europe and North America, and we're still seeing solid activity in orders in e-mobility for the third quarter. Furthermore, we expect to see normalizing demand in medical and advanced applications, as well as the systems business, which should help to offset headwinds in the rest of the business. For the third quarter of 2023, IPG expects revenue of $300 million to $330 million. The company expects third quarter gross margin to be between 40% and 42%. IPG anticipates delivering earnings per diluted share in the range of $0.85 to $1.15 with approximately 47.5 million diluted common shares outstanding. 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 safe harbor and the company's reports with the SEC. With that, we'll be happy to take your questions.

Tim, I wanted to focus a bit more on the commentary regarding the cuts. It seemed that the decline was more due to softer demand rather than competition in China. Can you remind us what percentage of revenues in China cutting represents? Also, was the comment on competition in China meant to be broader, including electric vehicles as well?

No, the comment on competition in China was really around the cutting market and not around the EV market. We continue to have a very strong presence in foil cutting, cleaning, and welding applications globally. Our cutting in China is certainly a much smaller share of total sales there now. We had said at the end of last quarter that it was less than 10% of consolidated sales, and it remains quite well below that level; the high-power cutting business in China. It was pretty stable from Q1 to Q2, but it certainly didn't perform well.

I appreciate that. And as a follow-up, Tim, can we talk a little bit about gross margins and some of the puts and takes? Good quarter here. Obviously, we're going into a little bit of a lower revenue environment in Q3. So thinking through sort of the rest of the year, you've got potentially some improving productivity coming up in the new factory in Poland and potentially New Hampshire. How are you thinking about gross margin playing out through the rest of the year?

Yes. We were actually very pleased with the sequential improvement in gross margin following the sequential improvement in Q1. So getting back up to a more reasonable level, certainly below our longer-term target level still. In Q3, really, the difference is just on lower revenue levels; the absorption of manufacturing costs will be lower. So going through the remainder of the year, it will really depend upon where the tone of the business ends up, and into next year, hopefully, with an improving outlook, we'd expect to see gross margins pick up again. But it really is just on the fixed cost base. You start to see some under-absorption at the guidance level we're at in Q3.

It seems that there has been some softening in the electric vehicle business in China. Could you discuss the broader market conditions outside of China? Tim, could you also provide insight into the EV business performance in the second quarter compared to the first quarter? Additionally, if possible, could you explain what portion of the EV business currently comes from battery welding?

Yes. So we are seeing some softness in the demand cycle in China, really related to the capacity additions that have already been built out there. You also started to see a transition more of the cylindrical battery investment. We think that's actually going to be a big driver next year as capacity utilization picks up. In the rest of the world, the demand cycle for EV has actually been pretty robust and strong. I'd say it's strongest in North America and then followed by Europe. There's good demand coming from South Korea and even in Japan as well. It's still dominated by battery applications. We're diversifying the battery applications; again, we've got the first orders for the drying equipment. We're starting to see some demand for additional foil-cutting applications. There are some cleaning applications in more of the main body in mainly North America. I'd still say, though, it's still very much battery-driven; motor manufacturing is still a sort of ancillary application in that area.

Got it. And my follow-up question is on the bookings trends. You mentioned book-to-bill below 1, and I'm wondering if you could provide any more granularity on that. And how it may be varying by region and including what you're seeing perhaps in the consumer electronics market, which I don't think you mentioned at all in your prepared text?

Yes. We said that it was softer, of course, in all of our major industrial geographies; that would be Europe, the U.S., and China. We actually had some pretty positive order flow out of Japan, which is holding up quite well. South Korea also performed pretty well too. That's sort of married to what you're seeing on some of the PMI data out there. Sorry, James, what was the second part of your question?

Well, just on some of the end markets, I assume that the legacy automotive is slower. I didn't hear any comments about some of the other end markets, including consumer electronics, which in the past, you've seen some seasonality in terms of orders. What does that market look like for you?

Yes. That will mainly be seen in the QCW sales, which experienced a slight decline compared to last year. There hasn't been significant progress in consumer electronics. However, other positive areas included cleaning, which performed very well globally, and additive manufacturing, which showed decent results in Europe and was particularly strong in China with several OEMs we collaborate closely with. In additive manufacturing, we have gained qualification due to the quality and reliability of our lasers.

And cleaning applications for us are very important because we are shipping not only pump lasers or CW lasers for the size kind of applications, but final systems for cleaning.

The inventories came down 3% quarter-on-quarter. I know that's been a target for you guys to make improvements there. But with book-to-bill less than 1x and some of the PMIs low, I'm just curious how you're thinking about inventories in the back half? Do we need to take out more? Are you trying to position to get to a certain level to position yourself for 2024? Any ways to think about that in the back half?

Yes, we continue to be very focused on managing inventory. We're not seeing some of the same supply chain issues that we had experienced for the last couple of years. So we continue to target bringing inventory down during the second half of the year and generating cash out of that. In the medium term, let's say, we want to get down to less than 200 days of inventory on hand and ultimately get back to a more normalized inventory level, which would be somewhere around 180 days, but that may take a bit longer to get to. But we're definitely looking to take some additional cash out of inventory and are pleased with the progress that we've made to date this year. And certainly, it's a significant change as compared to the investment in inventory we felt that was necessary last year.

Great. Tim, I want to follow up on the question about the production footprint. It seems like the under-absorption related to the volumes is impacting the gross margin, among other factors. Are you still confident that the changes in Poland and the increase in U.S. production will align with your cost base as we consider those gross margin targets, perhaps not for Q3 or Q4, but looking at the longer term?

Definitely, our goal is to optimize our cost. First of all, for production of some of the components like fiber blocks and others for our lasers. And, of course, working towards this goal. By the way, in Poland, we will increase our production dramatically and will increase further to the end of this quarter. The same situation in Italy; we also increased our production for these components and also in Germany. Each time we can optimize the costs of these components, as they ultimately influence our gross margin. The situation in the United States is much more challenging due to its higher costs. Nevertheless, we are looking forward to optimizing our costs, particularly for fiber components production.

Great. And then just on Europe, we're hearing from other industrial companies that kind of are flagging a weakening in Germany and Europe, the last month or so. Your growth was pretty resilient, even up a little bit in Germany. Just curious what you're kind of seeing there with the underlying demand versus your ability to offset that it looks like in some areas?

Yes. I mean, certainly, during the quarter, Europe was performing pretty reasonably and particularly compared to a year ago. The weaker guidance reflects some of the softness that other companies are seeing. For us, that's translating into Q3. There are positives and negatives, right? Some of the industrial OEM business is a bit weaker, while some of the welding applications have held up quite well, and cleaning is also performing well in Europe. But yes, I mean the PMIs in Europe are at 43%. They're some of the weakest they've been for quite a long time. I think that the German economy is quite weak at the moment, so we'll have to see how long it takes for that to turn around.

You mentioned there was a large customer inventory adjustment in the U.S. Could you give a little more color on what type of industry that was from?

Yes. Mark, obviously, the medical applications, which we'd called out in Q1 would be weaker in the second quarter, and now we're expecting a recovery in medical application sales in Q3, as the customers worked through their inventory adjustments that they signaled to us would happen in the second quarter.

Any opportunities such as in the consumer or consumer electronics area related to AI UC coming up?

I mean, there are some announcements out there that one of the major smartphone manufacturers is going to be using more additive manufacturing in their processes. That would be an opportunity for us, given the strength that we have within the additive manufacturing processes around the world. I think that would be one of the more significant opportunities that's been talked about. As you mentioned, the consumer electronics investment cycle overall with QCW lasers and even pulse lasers being relatively anemic is not strong outside of that right now.

Thanks for joining this morning and for your continued interest in IPG. We will participate 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.