IPG Photonics Q2 2022 Earnings Call Transcript

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Provided by Quartr
August 1, 2022

There are 11 speakers on the call.

Operator

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 Fedidov, IPG's Director of Investor Relations for introductions. Please go ahead, sir.

Speaker 1

Thank you, Rob, and good morning, everyone. With us today is IPG Photonics' CEO, Doctor. Eugene Sherbakov and Senior Vice President and CFO, Tim Momin. 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.

Speaker 1

These risks and uncertainties are detailed in IPG Photonics' Form 10 ks 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 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 Our expectations are as of today, August 2, 2022 only. The company assumes no obligation to publicly release any updates for revisions to any such statements.

Speaker 1

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 Cherbecome.

Speaker 2

Good morning, everyone. We are pleased with our results this quarter as we continue to diversify Our revenue across key regions and applications. 2nd quarter revenue increased to 1% year over year, but was Meaningfully impacted by strength of U. S. Dollars, which reduced revenue and revenue growth by $18,000,000 and 5%, respectively.

Speaker 2

I am proud that we are continuing to make progress On our key strategic strategies, first, we made progress to achieve a better geographic balances in our Business. Sales outside China accounting for 64% of our total revenue in grew Significantly this quarter led by strong revenue growth in North America and Japan. 2nd, 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 less than 10% of IPG total revenue in the quarter. This was another record quarter for welded revenue that benefited from growth in electric vehicle batteries, General manufacturing, medical device applications and the adoption of our high counter laser for manual welding applications.

Speaker 2

Laser welding adoption continues as our fiber laser enable faster, more precise welding for a wide Our adjustable mode beam lasers provide sputterless high quality, high speed And uniform welding or a broad range of different materials used in electric vehicle battery manufacturing and other applications. Our LightWeld handheld welder is superior tool for small, mid sized fabricator And brings easy of use to the welding process. Welding was the strongest driver The kind of our growth this quarter and the revenue from this application has become as important as our revenue from While our cutting business still accounted for a significant portion of ITG revenue, IPG is benefiting from current investment in eMobility, which may potentially accelerate in the near future as a result of higher energy cost across many regions. The EU market continues to drive our demand with new model launches And additional battery capacity announcements to support higher EV sales. We had record sales of 2 EV applications in the quarter With strong demand for our welding and Foil Cutting Solutions.

Speaker 2

We are also working on a number of additional opportunities, including the cleaning And share P Welding Solutions that increase our exposure to this growing market. Emerging Growth product sales were 40% of our total revenue in the Q2. 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 AMD lasers and high power pulsed lasers were driven by strong growth in electric vehicle applications. We saw continued sequential improvement in demand of our green lasers for solar cell manufacturing applications.

Speaker 2

This market is expected to grow as a result of increasing investment in Renewable Energy Solutions. We also saw strong performance in cleaning application, which is driven in part by sustainability benefits of our lasers, Medical revenue more than doubled year over year as our Turium lasers is considered the new world standard for laser horology market and has been rapidly gaining adoptions. Lightwell sales increased significantly and we have received CE Markant 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 Before I turn the call to Tim, let me to provide the update of our operations in Russia. As previously announced, I've discussed all new investment in Russia and prepared plans to increase manufacturing of critical components in United States And Western Europe, in order to reduce our reliance on manufacturing capacity in Russia.

Speaker 2

We continue to make progress With high end digital employees, allocating workspace for increased production and running second and even third shifts in certain locations. Our inventories of critical components increased and fuel lowered our risk We qualified some third party suppliers and now placing the orders for some of these components. In the Q2, we started setting up infrastructure for production increasing in Germany, Italy and United States. We expect that the most of the manufacturing capacity will be brought online during the course of the rest of the year, Enable us to reduce our reliance on the Russian components by year end. While our facility are moving toward Our ability to hire additional employees remains challenging.

Speaker 2

However, We are introducing the new production technologies and automation, which 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.

Speaker 3

Thank you, Eugene, and good morning, everyone. My comments generally will follow the earnings call presentation, which is available on our Investor Relations website. I'll start with the financial review on Slide 4. Revenue in the Q1 was $377,000,000 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%.

Speaker 3

2nd 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.

Speaker 3

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 $18,000,000 higher And gross profit to be $10,000,000 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.

Speaker 3

GAAP operating income was $72,000,000 and operating margin was 19%. Net income was $57,000,000 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 $18,000,000 or $0.28 per share, primarily related to the appreciation of the U. S.

Speaker 3

Dollar and Russian ruble. Moving to Slide 5. Sales of high power CW lasers decreased 14% and represented 2% of total high power CW sales. Pulse 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. Systems sales increased 30% year over year, driven by growth in laser systems and higher sales of Light Weld.

Speaker 3

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.

Speaker 2

In the

Speaker 3

Q1, we reported pull forward of demand in Europe Customers were securing supply, which negatively impacted demand in the Q2. 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 $1,200,000,000 and total debt of $32,000,000 Cash provided by operations was $79,000,000 during the quarter and capital expenditures were $35,000,000 in the quarter.

Speaker 3

Cash generation was negatively impacted by an increase in inventory during the quarter as we continue to build safety stock in order to keep reasonable lead times and secure critical components. However, in the Q2, approximately $40,000,000 The $72,000,000 increase in inventory value was due to the translation effect of exchange rates with $32,000,000 attributable to investment 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 $450,000,000 with $312,000,000 spent on share repurchases since the beginning of this year. During the quarter, we repurchased just under 2,400,000 shares for a total of $233,000,000 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.

Speaker 3

Given that we completed both May 2020 February 2022 share repurchase authorizations during the quarter, The Board approved a new $300,000,000 share repurchase authorization in July. Moving to outlook on Slide 9. 2nd quarter book to bill was slightly below 1. We saw some moderation of order flow across Europe as compared to record bookings in the Q1, but we are pleased to see continued strength in key applications and more stable demand in other key geographies. Macroeconomic indicators have been moderating, particularly in Europe, And posted a modest increase in July.

Speaker 3

While forecasting our business continues to be challenging in the medium term And our Q3 guidance remains subject to significant uncertainties, including the impact on the global business environment from geopolitical events, Trade restrictions and sanctions, COVID-nineteen, 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 to drive growth in electric vehicle battery manufacturing applications, light weld and medical sales. For the Q3 of 2022, IPG expects revenue of $350,000,000 to $380,000,000 The company expects the Q3 tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $1 to $1.30 with 51,000,000 diluted common shares outstanding. Continue to expect currency headwinds and estimate that Q3 revenue guidance range is reduced by about $15,000,000 due to the strength of the U. S.

Speaker 3

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

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from Jim Ricchiuti with Needham and Company. Please proceed with your question.

Speaker 4

Hi, good morning. I noticed that it's fairly healthy step down in Spending for R and D and Sales and Marketing Q2 versus Q1, just looking at your guidance for OpEx, Tim, for Q3, should we assume things 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?

Speaker 3

Yes. So in terms of Quarter, there's some benefit on OpEx due to the weaker euro, for example. But we've also on the R and D side Stated that we intend to rationalize R and 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 Being better control over some of the material expenses that were being outlaid for R and D.

Speaker 3

So there's a bit more discipline Around that, it's not the one defocusing investment on R and 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.

Speaker 4

And the follow-up question I have is and you

Speaker 3

provided a little bit of

Speaker 4

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

Speaker 3

Yes. There's no Significant change in the overall tone of bookings. We did come off this 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 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 tonally in Q2, Certainly in the middle of the quarter with the lockdowns in China, it was a little bit weak and then we saw some improvement in June. And then in general through July, Order flow has held up reasonably

Operator

well. Some of

Speaker 3

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

Operator

Our next question comes from Nick Todorov with Longbow Research. Please proceed with your question.

Speaker 5

Yes. Thanks and good morning everyone. 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?

Speaker 5

Thank you.

Speaker 2

About manufacturing of different countries, of course, we've had some time In Germany, but in Italy, it's much an easy situation with people. This is why we're increasing 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 already qualified Practically all components which we before received from Russia. And now we are placing orders for these Suppliers, I think we'll get the first big enough quantity of discarded components in 1 month And then we will start production our final devices in Europe based on these components.

Speaker 3

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 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 face, 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 on the expense containment on the business, Jim asked about on OpEx, I thought was all Pretty positive for us during the quarter.

Speaker 5

Okay. And just a quick follow-up on that. Tim, you touched on the inventory reserves. 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?

Speaker 3

I think 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. That's where I that's how I'd answer the question.

Speaker 5

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?

Speaker 5

And also can you kind of rank the visibility into the second half by regions that Based on bookings?

Speaker 3

No. I mean, I just 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 We referenced the total cutting into China both 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.

Speaker 3

I think there may be a moderate pickup 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 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 light well performed very well. When we referenced that we're kind of like watching Europe, which is It's got both the currency headwind and some slightly weakening PMI data at the moment.

Speaker 2

But also for China, for cutting applications. We are now introducing this quarter the new compact 8 kilowatt Lasers, as we can see, I think we will see the good adoption from the Chinese market for these new lasers. We also have additional opportunity to increase our presence in cutting applications in China.

Speaker 5

Thanks for the answers.

Operator

Our next question is from Paretosh Misra with Berenberg. Please proceed with your question.

Speaker 6

Thanks and good morning. Can you

Speaker 7

guys talk about your medical business as So 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.

Speaker 2

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 directly with these 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.

Speaker 2

But in total, you know, we demonstrated already our medical business is growing And we are seeing that this we see the good potential for our Business, Medical Business, this year and next year.

Speaker 3

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.

Speaker 7

Got it. Thank you for that detailed response. 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 would be built or added this year?

Speaker 3

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 2,030 now, Numbers are changing almost every month.

Speaker 3

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 huge capacity additions being planned, but it's almost a moving target, Bharatosh. It changes Good changes monthly, it seems.

Speaker 2

But also very important that when we're discussing about the new capacity There exists also visibility 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, I mean, it also will demonstrate very substantial growth.

Speaker 7

Great, guys. Thank you.

Operator

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

Speaker 8

Thank you 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 these emerging Products, is it higher than your overall margins?

Speaker 2

Depends which product you look at,

Speaker 3

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 When 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 that margin profile as we've reduced the Material cost 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.

Speaker 3

So there's a bit of a mix there.

Speaker 2

It's much higher than for the standard product.

Speaker 8

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

Speaker 3

So we've stated obviously that you've got Higher salary costs outside, 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 Doctor. Sherbicoff just mentioned, the introduction for example of the ultra compact lasers At higher power levels, there'll be a margin benefit from that. And I just talked about some of the margin Benefits we've seen from things like Light World and other product lines. So, we were hoping we can manage through that.

Speaker 3

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.

Speaker 2

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

Speaker 7

Thank you.

Operator

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

Speaker 9

Yes. Thanks. Hey, everyone. Thanks for squeezing me in. Tim, if we look back the last 10 years, like outside of 2020, Q4 revenue is like typically down sequentially.

Speaker 9

I'm curious if you think that normal seasonal trend plays out this year Or are we just in like a different kind of weird cycle given some of these lockdowns?

Speaker 3

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

Speaker 9

Fair enough. And then I guess then just with the inventory build, Like how does this play out in the second half? 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?

Speaker 2

First of all, we have some strategical plan how we can manage our inventory and there exist some Provid, 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 this 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 for these electronics components from outside vendors Increased dramatically up to 2, 3 times. And this is why we have to organize a strategic inventory.

Speaker 2

The second, of course, why is this event renewal growth because price for these components, First of all, electrical components also grow dramatically in several cases up to several times, up to 10 times for some components. Of course, it's also going to increase our inventory. But in any case, we have to We manage this inventory and we have to also satisfy our Internal request for delivery time. It's very important and we have to insist our customer to use our product. These are our main

Speaker 5

goal. Yes.

Speaker 3

Just to add into 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 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 supplies on that side, particularly on electronic component supply side. I think part of your other question, Mike, was that if you take inventory down, how does that impact gross margins? A lot of the inventory that we've got was purchased from 3rd parties.

Speaker 3

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 component side We're sourcing those from 3rd parties.

Speaker 9

Got it. That was 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

Operator

To some

Speaker 9

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 Natgas. But just curious and like high level, if you're see if those conversations are picking up And how do we even how do you even kind of think about that, and what that might entail?

Speaker 3

The potential guess?

Speaker 2

Yes, I understand. Yes. Of course, potentially, it will influence in our gross margin and also our productivity, it's 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 also energy

Operator

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

Speaker 6

Hi, good morning. Thank you for taking my questions. So First, what's the operating expense implication As we started to building the facility in the Europe and United States, I guess some of the potential impact should be embedded in the Q3 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.

Speaker 6

So just Kind of want to get idea like what kind of the implications for the OpEx in the second half?

Speaker 2

But first of all, we are not making I mean, 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 fiber production, the 3rd shift, 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.

Speaker 6

Got it. Got it. Okay.

Speaker 7

And then

Speaker 3

I think the other thing is that just and there's a 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 Replicating. So we're actually not seeing any we're not guiding to a change in our CapEx 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 sort of we don't have to invest $200,000,000 in additional Facilities to get where we want to be.

Speaker 3

On the OpEx side, there wouldn't really be any Significant change related to the manufacturing capacity additions we're making.

Speaker 6

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

Speaker 3

Yes, 3 d 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.

Speaker 9

It's not

Speaker 3

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 that. 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

Operator

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

Speaker 10

Hey, good morning. Thank you very much for taking my question. Just want to I'll ask about the China business and just some more colors on it. So you reported 14% year on year decline in Revenue in China. So I was wondering is that more because of their market share rules due to the competition from Chinese competitors like Max Photonics or Rakers or is it mainly because of the lockdowns in China?

Speaker 10

And just a quick question. Thank you.

Speaker 3

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 marking applications are stable. Other micro 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.

Speaker 3

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?

Speaker 2

But while we are speaking about the cutting market in China, we are taking in mind that it only for 2 d metal cutting applications. But there is also what Jim mentioned about, the battery production for our customers. It's also used by our lasers. And In this area, we don't have any big competitors.

Operator

Our next question is from Paretosh Misra with Berenberg. Please proceed with your question.

Speaker 7

Hi, guys. Thanks for taking my follow-up. So IPGP was doing about $100,000,000 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. Thank you.

Speaker 3

So Russian sales to China,

Speaker 2

Russia share in our decrease, 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 production of these lasers in Russia and substitute Production by Germany and Italy and United States.

Speaker 7

Great. Thanks, guys.

Operator

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

Speaker 1

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.

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Earnings Conference Call
IPG Photonics Q2 2022
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