IPG Photonics Corp (IPGP) Q1 2021 Earnings Call Transcript

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IPG Photonics Corp (IPGP 0.49%)
Q1 2021 Earnings Call
May 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to IPG Photonics' First Quarter 2021 Conference Call. [Operator Instructions] 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.

Eugene Fedotoff -- Director of Investor Relations

Thank you, Robin. Good morning, everyone. With us today is IPG Photonics' Executive Chairman, Dr. Valentin Gapontsev; Chief Executive Officer; 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 include the impact of the COVID-19 pandemic on our business and those detailed in IPG Photonics' Form 10-K for the period ended December 31, 2020, 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 4, 2021 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 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 Valentin.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Good morning, everyone. We made two announcements today. I will first discuss our results. I'm very pleased to report another quarter of solid performance and excellent execution with strong revenue and earnings. Our revenue increased significantly compared to the same period in the prior year, which was impacted by weak macroeconomic conditions and global lockdowns related to COVID-19 pandemic.

Revenue was also higher sequentially despite typical seasonality as a result of continued positive performance in North America and sequential improvement [Indecipherable] in sales in Europe. Our bookings remain at higher level, particularly in China and we expect growth will continue in the second quarter, and as we benefit from our technology leadership, leading-edge products and global footprint.

During the quarter, we demonstrated excellent progress in our core markets with strong growth in cutting and even stronger growth in welding applications. Ultra-high power lasers made up 55% of total high-power sales and increased 55% in the quarter. At the high end of the market, we've seen an increased interest and order volumes for our 20 and 30 kilowatt ultra-high power lasers and optical heads, that offer cutting speed improvement for materials up to 30 millimeters thick and replacing plasma cutting machine, other non-laser processses and lower power laser solutions.

Our lasers provide superior beam parameters, record wall plug efficiency and high reliability that are the hallmarks of the IPG brand. They also drive a great return on investment for our customers. Growth in welding applications stood out significantly this quarter. Sales of our high-power CW and QCW lasers for welding applications nearly doubled compared with the same period last year. Sales of our adjustable bode beam laser increased and continue to gain share in the welding industry for general manufacturing purposes and in electric vehicle battery welding applications. Our AMB products offer superior speed and weld quality over competing solutions with a broad range of beam tunability, enabling spatterless welding, which is extremely important for battery welding.

During the first quarter, emerging products grew by 64% and contributed 29% of total revenue as compared to 25% in Q1 2020. Emerging products growth was broad-based, but a highlight of this performance was the substantial growth in within green pulsed lasers. We doubled sales for green pulsed lasers for solar cell applications -- manufacturing and other applications, displacing competitors in some instances and scaling up manufacturing to meet demand.

Additionally, we are increasing the pulse energies of green lasers to enable next-generation applications in solar, drilling and copper welding for consumer electronics. Other emerging products that performed well were high power pulsed, ultrafast pulsed, beam delivery and monitoring and AMB. Customer feedback on LightWELD, our new state-of-the-art handheld laser welder is very positive. Consumers are excited about the ease-of-use, improvements in weld quality, diversity of materials that can be joined and programmed welding parameters for different types and thickness of materials.

In certain applications, LightWELD enables customers to decrease material costs for manufacturing parts because they can use metal that cannot be welded by legacy processes. LightWELD also cleans surfaces both before and after welding, further reducing cost and improving productivity. Additionally, our handheld laser help address shortage and cost of qualified welders because the training process takes only a few hours and the device is easy to use even for nonprofessional welders. Revenue from other applications decreased by 9% as higher revenue from advanced application and telecom was more than offset by low revenue in medical.

While revenue in medical declined due to the timing of orders, we have a strong order backlog for our thulium laser systems and the installed base for our consumable fibers for urology applications continues to grow. We continue to focus on product innovation. We have many tens of new projects across a wide range of applications. This includes processing of glass, ceramic, composite material, numerous crystals, circuit board, OLED film, batteries and solar cells.

Beyond material processing applications, we are developing new soft tissue medical treatment, mid-infrared lasers for molecular-level resolution online spectroscopy, inspection, sensing and biomedical research applications and new high-speed transceivers for the telecom and data com market.

In addition to reporting our first quarter results, we announced a management transition this morning, which follow a well-planned succession strategy that we had in place for some time. I'm happy to announce that Dr. Eugene Scherbakov, who I consider Co-Founder of IPG will succeed me as IPG's Chief Executive Officer. Dr. Scherbakov is a world-known scientist in the field of nonlinear and waveguide optics. He many years worked in General Physics Institute of Russian Academy of Science under patronage of Nobel Prizer Alexander Prokhorov, before to join me in IPG Laser Germany in 1995.

Many years, he managed the best branch of IPG Corporation, sharing the position with Corporate Chief Operation Officer duty during the last two years. I will transition in my new role of Executive Chairman of the Board and will continue to direct the research and development function and be involved in strategy.

In my new role, I will be spending more time on innovation and our technical capabilities, which are my passions to continue to promote development in lasers -- development in lasers, components and application that will drive future success and technology leadership of IPG. And it is an exciting evolution for me and a very good transition for the company. With that, I will hand the call over to Eugene, IPG's new CEO.

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Thank you, Valentin, and good morning, everyone. I feel extremely privileged to become the next CEO of this great company and look forward to continue the strategy of Dr. Gapontsev and deliver on our mission to make fiber laser technology the tool of choice in high-tech mass production.

Going back to our quarterly results, I will provide additional details of our operations and performance by region, and I'm happy to report that all our four major production facilities operating normally. IPG has adapted well to the new operating environment and is running production at high level to support increased demand for our products. Travel restriction and safety precaution limit customer visits, but we have seen the increase in traffic through our application labs. They are benefiting from a number of significant environment trends that includes increased investment in capacity for renewable energy and electric vehicles to support growth in sales. We are seeing increasing demand for our green pulsed laser, which are enabling significant improvements in solar cell efficiency.

We also supply a wide range of products that provide improvements in electric vehicle battery manufacturing process, including the speed of manufacturing, high process reliability and design flexibility that all lead to increased battery performance and safety while lowering production costs. We expect to benefit from growth of electric vehicle sales, driven by high emission standards and government policies, primarily in Europe and China. And that would require additional investment in battery production -- manufacturing. And our revenue in China increased 104% year-over-year in the first quarter, representing approximately 41% of our total sales.

We are seeing high demand of our ultra-high power lasers and laser heads from general manufacturing in China driven by this lasers' thin metal processing productivity and ability to cut thicker metals. First quarter booking in China were strong, benefiting from domestic infrastructure investment, EV and general manufacturing.

As a result, our outlook for the second quarter is robust, and we expect the demand trends to continue. Sales to -- sales rest of Asia increased 45% year-over-year. We are seeing strong demand for our welding and foil cutting solutions for electric vehicles battery manufacturing, growth in solar manufacturing and increased demand for our ultrafast lasers across all Asia. While sales in Japan decreased 21% year-over-year, macroeconomic indicators seems to be improving moderately. And we are hopeful that level of business activity will increase from current depressed level.

In Europe, revenue increased 14% year-over-year, and we saw an acceleration of demand from customers in the region, driven by growth in Germany. While COVID infection rates remain high in Europe, it appears that industrial growth is improving and bookings are incrementally positive, pointing to continuous recovery in the region.

First quarter revenue in North America continued to improve, increasing 9% year-over-year. Growth was primarily driven by automotive with investment in new battery capacity for electric vehicles being particularly strong. In addition to demand from EV battery manufacturers, there continue to be opportunities to replace old lasers at several auto manufacturers in United States. Laser system recovered from the low level in the prior year, although non-laser system sales remained weak. The pipeline of opportunity for lasers and non-laser systems has improved. And we are expecting booking to recover during the 2021.

As Valentin mentioned, medical revenue was lower, although increased medical bookings mean that medical revenue will also improve during the year. And we're particularly pleased with the growth in sale of medical consumable fibers as a number of procedures for our gold standard lithotripsy system increased along with growing installed base. We continue to benefit from our vertical integrated production model, which enables key technology advantages over the competition, while minimizing the cost and supply chain disruptions.

Gross margin improved to 47.5% this quarter as we benefited from increased volumes and our continued focus on cost reduction initiatives. Total SG&A and R&D expenses increased by approximately $5 million year-over-year to $82 million in the first quarter, but declined as a percentage of our revenue. We continue to believe that our large and diverse advanced materials and components technology platform, our efficient R&D model, our strong balance sheet and free cash flow provide us ample flexibility to respond to the business disruption and emerge from this pandemic a stronger company.

On behalf of Valentin and myself, I want to thank our employers for the execution during this first quarter. The health, safety and well-being of our employees, their families, our customers, our partners and our communities remains our highest priority. With that, I will turn the call over to Tim to discuss financial highlights in the quarter and the second quarter outlook.

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

Thank you, Eugene, and good morning, everyone. Revenue in the first quarter was $346 million, which increased 39% year-over-year and 3% sequentially. Revenue from materials processing applications increased 45% year-over-year and revenue from other applications decreased 9%. Sales of high-power CW lasers increased 43% year-over-year and represented approximately 49% of total revenue. Sales of ultra-high power lasers at six kilowatts or greater represented 55% of total high-power CW laser sales and increased 55% compared to the prior year.

Medium power laser sales increased 41% on growth in cutting, welding and sintering applications. QCW laser sales increased 38% year-over-year on increased demand from welding applications. Pulsed laser sales increased 74% year-over-year, with strong growth in green pulsed lasers used in solar cell manufacturing as well as higher sales of our high-power and ultrafast pulsed lasers. System sales increased 46% year-over-year as lower Genesis revenue was offset by higher sales of other IPG laser systems. Other product sales decreased six -- 6% year-over-year, driven by lower medical laser sales. First quarter GAAP gross margin was 47.5%, an increase of 620 basis points year-over-year.

Compared with the year ago period, the increase in gross margin was driven primarily by improved absorption of manufacturing expenses, a decrease in cost of product, inventory provisions and shipping costs as a percentage of sales, partially offset by lower pricing. GAAP operating income was $89 million, and operating margin was 25.7%. First quarter net income was $68 million or $1.26 per diluted share. The effective tax rate in the quarter was 23%.

During the quarter, we recognized a foreign exchange gain of $7 million, primarily related to appreciation of the U.S. dollar versus the euro. Foreign exchange gain benefited EPS by $0.09. If exchange rates relative to the U.S. dollar had been the same as one year ago, we would have expected revenue to be $17 million lower and gross profit to be $10 million lower. We ended the quarter with cash, cash equivalents and short-term investments of $1.4 billion and total debt of $37 million. Strong operational execution resulted in cash provided by operations of $88 million during the quarter. Capital expenditures were $27 million in the first quarter and we expect capital expenditures will be in the range of $150 million to $160 million for the full year.

During the quarter, we repurchased 15,000 shares for $3 million. Commenting on outlook for the next quarter, we expect a strong quarter for revenue as regional and global economic indicators remain positive. With continued improvement in manufacturing PMIs in the U.S. and Europe, but with some moderation to the economic indicators in China.

As mentioned previously, first quarter book-to-bill was meaningfully above one and order backlog has increased since the beginning of the year. Displacement of non-laser technologies, secular environmental trends and investments we have made in emerging products mean that we continue to see growth opportunities in ultra-high power cutting, electric vehicle battery production, solar cell manufacturing, medical procedures and advanced applications.

For the second quarter of 2021, IPG expects revenue of $360 million to $390 million. Given the increase in sales, we are returning to a more normal level of activity with moderately higher compensation and other operating expenses, which means that we expect total operating expenses to be in the range of $82 million to $84 million. The company expects the second quarter tax rate to be approximately 25%, excluding any discrete items. IPG anticipates delivering earnings per diluted share in the range of $1.20 to $1.50, with 53.5 million basic common shares outstanding and 54.2 million diluted common shares outstanding.

There are several risks to our outlook as recent growth in China tempers and from uncertainty regarding the rollouts and timing of vaccines in Europe, Japan and elsewhere, the resumption of normal business and travel activities, the impact of automotive plant disruptions from chip shortages, the resumption of spending in aerospace and stimulus efforts in the U.S. and China. Financial guidance provided this quarter continues -- this quarter continues to be subject to greater risk and uncertainty given the COVID-19 pandemic and its associated impact to the global business environment, public health requirements and government mandates.

As discussed in the safe harbor passage of today's earnings press release, actual results may differ from our guidance due to factors including, but not limited to, goodwill and other impairment charges, product demand, order cancellations and delays, competition, tariffs, trade policies, health epidemics and general economic conditions. 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. With that, Valentin, Eugene and I will be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from John Marchetti with Stifel. Please proceed with your question.

John Marchetti -- Stifel -- Analyst

Thanks very much. I wanted to come back to the comments that you made about the China business moderating a little bit. And just understand if that's a function of running up against now some more challenging year-over-year comparisons as we get into the June and September quarters? Or if there's -- maybe there was a situation where they were running a little bit hot post pandemic, and now that's more evening out to match supply and demand?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

John, our guidance for the second quarter continues to be same, good growth and performance in China, a sequential improvement in revenue. Order flow was very strong in Q1 and has continued to be strong in Q2. The reference is really to just some of the economic indicators having moderated a bit. So for example, PMIs in China have come back, they pulled back a little bit from 55% or 56% to about 51%. So it's just calling out that the economic expansion is maybe a little bit more moderate than it was or has been over the last three or four quarters with reference to some of those indicators.

John Marchetti -- Stifel -- Analyst

That's helpful. Thank you. And then if I can just follow-up real quick on maybe on the Japan outlook as well. That's been a market that has continued to struggle a little bit here for you over the last several quarters. Starting to see some early indications there, maybe those metrics heading in the opposite direction. Just curious if you could talk a little bit about your expectations for that Japan market over the next quarter and maybe looking into the second half of the year?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

We got certainly an improved guidance number for bookings and revenue in the second quarter. The general feedback that we're getting is that there is some moderate pickup in activity. I think some of the Japanese machine tool orders from an export basis have picked up and also from a domestic basis have picked up. And actually some of the investments in automotive and cutting should also start to improve. But we're looking for the transitions to happen over the next two or three quarters. It continues to be a difficult area to operate in from an economic perspective.

John Marchetti -- Stifel -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Good morning. First off, congratulations, Valentin and Eugene on the management transition. Question about Genesis. And the business still seems to be weak. I'm wondering how much of that is potentially related to automotive, although I think it's much broader in manufacturing. So I wonder if you could talk to that and then I have a quick follow-up.

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

So on Genesis, they're struggling to -- struggling maybe to close some of the orders. There's actually quite a healthy pipeline of orders. And the General Manager of Genesis thinks he's calling a bottom on that business. So they're actually waiting to close a significant number of orders, some of which are in excess of $5 million a piece.

Given the environment, some of those large-scale investments, Jim, have certainly been more moderate over the last year or so, and then they've also been impacted by some of the aerospace activity being a lot lower. So we're moderately more optimistic of that business. If they conclude some of these orders, we'll certainly reach a bit of a turning point. I think the big difference is that the size of the equipment they sell in terms of total value is significantly different from even some of our other systems businesses and also from the average ASP even of a high power or ultra-high power laser.

So that pipeline -- the message is the pipeline of order flow has certainly improved. They need to close some of those orders. And if they can do so, that will help to turn around that business.

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

I would like to add something. For Genesis and also for other -- our activity in system business, we start to supply the complete system for battery welding. It's only a few already supplied to our customers, but we see the very big perspective because for us, it's absolutely no new business, I mean not only supply lasers or laser components through such kind of applications, but complete systems, and we've already successfully installed it for a very important automotive customer, and we see very good perspective for such kind of activity.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. Thank you for that. And follow-up question, just with respect to the guidance, I mean if we look at the midpoint of the guidance, it would suggest -- I think that you're getting to gross margins close to the historical levels in the high 40s, not above certainly where you've been years -- several years ago. But am I looking at this the right way, Tim, should we assume that your gross margins have the potential to be north of 49% in Q2?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

My Q2 guidance on gross margin is basically in the range of like 47% to 49%. It's not above that. I think where -- we've provided some guidance on OpEx, where we're starting to see a more normalization of activity. So you may have gross margins a bit high and OpEx is a bit understated to get to the EPS number.

And then on EPS, I've got a 25% tax rate. So no discrete benefits in that. But certainly, we're pleased with the overall gross margin performance. I mean the underlying gross margin you exclude some of the onetime items and higher inventory provisions, has been pretty consistently in the mid-40s at the moment. And we hope to see it track up to the upper half of our range. We still don't have visibility in getting above 50%. So we're sticking with that 45% to 50% range, but really targeting being in the upper half of the range.

Jim Ricchiuti -- Needham & Company -- Analyst

Yes. No, I understand. It's just the fact that you can get as high as 49% is nice to see. Thank you.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

New product, which just introduced in the market and we expect this year, next year that will essentially impact the gross margin, will also allow to increase [Indecipherable].

Jim Ricchiuti -- Needham & Company -- Analyst

Thank you for that.

Operator

Our next question comes from the line of Nik Todorov with Longbow Research. Please proceed with your question.

Nik Todorov -- Longbow Research -- Analyst

Yes. Good morning, everyone. Tim, I guess you talked about China bookings being very strong in the first quarter and so far in the second quarter. But if I look at the guidance, I'm assuming seasonal North America and Europe, I think China growth is decelerating substantially from -- it's eventually mid-teens. And I think last year, comp was still favorable, down 11%. Can you maybe talk about what are you assuming for China? And do you see sequential growth besides the second quarter for the rest of the year in China?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

We're not giving any guidance for the rest of the year, Nik. The performance of China in Q2 continues to be robust and strong. This whole concept, I think there's been a couple of initial notes that have been issued around seasonality. This is an extraordinary time that all companies have been through over the last 18 months. And I don't think there is any concept of normal seasonality at this point in time. We're very pleased with the performance of the business.

Even in the second half of last year, the strong traction in overall revenue in Q4, a really good revenue number. We've just reported and very solid earnings for Q1 that normally can be a down quarter compared to Q4, where we've actually sequentially seen an improvement even with Chinese New Year. Pleased with some of the recovery in Europe in the underlying tone of the business there.

North America had started to recover in the second half last year, remains fairly robust. And so the guidance in Q2 relative to where the business has been -- is a strong guide. I just can't come back to having a discussion around seasonality and what's normal seasonality in this environment. I think it's a moot point. It's -- you can't call what is seasonality at this point in time.

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

It is a nice thing for us. It was important in the past, but now it's much more important vaccination of people. This is much more important percentage of vaccination in different countries.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Regarding China, we are saving the position here and driving to increase position for new products we introduced there. They don't have still any competitive version for that. Also have -- what we're talking in second quarter, it's far more that, but we have a lot of frame orders which in the year we're still waiting licenses, export license, so on. If compare this for even third quarter minimum, also we have a very good backlog here, even 80% [Indecipherable] as usual of these frame orders will convert to real orders.

Nik Todorov -- Longbow Research -- Analyst

Okay. Got it. And if I can follow-up, another question on gross margin. If I look at the midpoint of that gross margin, about 48%, Tim, when I compare that to your September quarter that you reported last year, you did 48% on a significantly lower revenue run rate. Can you maybe compare and contrast what's driving that lower incremental pull-through? And I guess, are you seeing any impact from either components or just higher logistics costs that could be holding this down? Thank you.

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

So there's some things in the second half of last year, we certainly benefited with some product mix. So we had referenced selling significant orders for single-mode lasers that have very strong margin on them.

In addition to that, we had sales of very ultra-high power lasers for advanced applications. So for example, 100-kilowatt lasers, those tend to be advanced applications, was good in Q1 and is good in Q2, but we don't have those orders on hand at the moment. They may pick up in the second half of the year. There is also some strong backlog for advanced applications that we're waiting for confirmation of when that should be delivered. It's unlikely to be in the second quarter.

So some of the mix side of it will have being one of the main differences compared to the third quarter and fourth quarter of last year. We're actually quite pleased with gross margin performance in Q1 given we didn't have those benefits in there.

Nik Todorov -- Longbow Research -- Analyst

Congrats. Thank you.

Operator

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question.

Mark Miller -- The Benchmark Company -- Analyst

Hi. Thank you for taking my question. Just wondering, you had very strong performance in Germany. Was that related to automotive and EV welding?

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Strong German and European performance, yes, in Q1, is it EV automotive?

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

[Indecipherable] Of course, first of all, it's driven by standard applications, I mean for cutting applications and also very important that for many quarters, first time demonstrated very good results for welding applications. It's connected to our new lasers. And new lasers and also high power, ultra-high-power laser which we are used for welding applications. And also, really demonstrated very good performance to supply to our customers high power pulsed lasers, again, for EV applications, for battery applications and also for some other applications.

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

And QCW.

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

And QCW is our new product. Yes. Thank you, Tim. And our [Indecipherable] for our sale several very important customers that accepted this, and it's not to supply not for single units, but tens of such kind of lasers to our customers. And we see a very good future for such kind of lasers and for these applications.

Mark Miller -- The Benchmark Company -- Analyst

Typically, IPG has reported about 20% of sales are from products introduced within the last two years. Are you still running at that level?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

Yes. We ended a great quarter on that. They were about 29% of sales of the emerging products. So that was the highest level they've been for, I think, ever since we've tracked them.

Mark Miller -- The Benchmark Company -- Analyst

That is good. Thank you.

Operator

Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely -- D.A. Davidson -- Analyst

Yes. Good morning. First, after 15 years of earnings call, Valentin, we're going to miss your insights going forward. It's been pleasure working with you. Eugene, welcome. And the first question to you. If you look out at the next five years, given kind of some nice momentum recently in welding, do you think the welding market is the biggest untapped market for IPG?

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

I don't think so it is the biggest market, but it will be substantial [Indecipherable] and such kind of application to our general material processing market. Cutting market after -- it will be dominated, it's clear, because a lot of different standard lasers installed now in the field. And we will -- continuously, we will substitute this old laser first of all and also new applications for cutting also growing. Welding application definitely will grow. Speed of this growing will depend, of course, on many parameters.

First of all, electric vehicle. You see one of the applications which demonstrated a very fast-growing application for our new lasers, especially for AMB laser. Why? Because just time, people can weld without practically developing any spattering. All it is possible with such kind of AMB technology. And of course, it increased immediately the processing of materials and quality of welding. Monitoring -- online monitoring during the welding.

Again, it also demonstrates that a very big perspective for future applications because you have the feasibility during the welding to online monitoring the quality of welding and to make immediate resolution, what you have to do. And for such kind of application with new components, the new possible application, I think welding will demonstrate a very good future.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Of course, our special -- we need to mention about this, our new product, [handheld laser] too. We see very big future for such kind of applications because it's very simple, robust and only in few minutes, practically non trained people start to weld. Not only weld, but weld with high quality. And I also see a very good perspective for such kind of applications, such kind of tool.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. No, thank you. That's helpful. It does seem like a pretty large untapped market, especially for some of these new technologies that are coming out. Maybe just a quick follow-up for Tim. capex of $150 million, $160 million this year. What are the main components of that? Is it expansion of capacity?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

There's a lot of -- of course, it's primarily expansion of capacity. We'll add some capability there for R&D and sales and service, but primarily on capacity, particularly for some of the newer products, some of the new additional diode manufacturing coming on stream. Yes, I think that covers it. It's a whole host of new products that we have to add production capacity pool and components production for those new products as well.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. Thank you for your time.

Operator

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

Michael Feniger -- Bank of America -- Analyst

Thank you, guys, for taking my questions. The gross margin in Q1 was very healthy. You're forecasting another healthy gross margin in the second quarter. With bookings in China being solid and recovering, is the pricing backdrop there, the standard competitive nature? Are you seeing a larger-than-normal step-down? Or is IPG just finding ways to contend with that pricing dynamic better than you did in the past?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

I mean price declined in the first quarter have been a lot more moderate than they were, say, in '18 and '19. So we're continuing to be disciplined about our approach to the Chinese market and to really sell on the basis of our quality and reliability and performance and specifications of the product. We're benefiting from the trend toward the ultra-high-power cutting, where competition and quality is significantly lower. We've got a very high market share on EV in China, where we benefit from ultra-high power pulsed laser sales that have a very good margin on them. And we've even started to see some of our AMB and LDD sales hold that.

So it's a question of the company being disciplined around pricing and really valuing the technology and proposition that we delivered to the market rather than necessarily being a -- just focusing on what our total market share is. And that's a strategy, I think we've been successful with over the last -- it's over a year now that we've been implementing this more disciplined approach.

Michael Feniger -- Bank of America -- Analyst

Got it. And I recognize that there's some -- the comps in China in the second half and that seasonality conversation is kind of difficult. If we just fast forward to 2022, if we're looking at a GDP of 5%, like global GDP, like how do you -- does IPG growth profile look in that backdrop? Is there going to be a potentially different mix of geography, new products, end markets as you're starting to see some of the secular discussions around energy efficiency and electrification start to evolve and pick up more steam?

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

I think, I mean if you got GDP growth rates that's sustained on a global basis of 5%, you'll see the overall laser market grow at a very significant premium to that. We'd expect to continue to execute very well, for example, in the laser welding applications, which we think would be a very strong growth area, potentially see some continued growth, obviously, in EV sales, like overall EV capacity over the next three or plus -- 3-plus years is estimated to triple. I think it's about 500 megawatts of capacity installed now. That's expected to get to $1.4 trillion -- 1.4 terawatts.

So that will be a core driver. And then you've got all of our new applications, right? So you've got the medical applications. You've got some of the solar cell applications. So if GDP holds up and PMIs remain strong, that will be a complement to our business and the new product growth will add an additional layer of growth on top of that. I'd certainly be very pleased to see global GDP transition into a 5% growth rate next year.

Operator

[Operator Instructions] Our next question comes from Paretosh Misra with Berenberg. Please proceed with your question.

Paretosh Misra -- Berenberg -- Analyst

Thank you and good morning. And congrats to Valentin and Eugene for the phases in their career. First, a question on the chip shortage issue in the automotive business. Were you impacted by that much in Q1? And is your automotive business, what's the geographic exposure there? Is China the biggest piece there? Or the rest of the world is bigger?

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

First of all, we don't have any problem with -- now with such kind of chips because they're leaving deals and don't use in our products such kind of chip. The second, no, our big activity not in China, automotive, it's rest of the world, first of all, Germany, of course, and United States also.

Paretosh Misra -- Berenberg -- Analyst

Got it. And then just want to come back on the -- some of the -- your comments on the welding market. For the electric vehicle battery welding, what are the most important products? Is it the CW-type products or maybe the QCW is the most important product that you're selling for that end market?

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Of course, we have to ask our customers. But our opinion, it's important all CW and also pulsed -- because of the different kind of applications, not the same processes, which we are making this CW and pulsed lasers. For example, CW is usually used for welding applications, welding cars and welding some parts of the battery. Pulsed laser, as usual, they're used for cleaning and for cut foil -- cutting foil or is used for producing this battery, different applications and, of course, important, also welding and cutting and cleaning.

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Pulsed laser for welding also, especially is battery contacts, it's very important, the most critical, sensitive. And with the -- we have two machines, the two different kinds of machine and now going to -- more and more customer looking at buying this machine from us.

And regarding this Genesis, I have to add that we developed robotics, this year introduced [Indecipherable] qualification so minimum fill order, for first quarter only three machines, different machines for different application [Indecipherable] welding for the glass cutting and for other kinds of pipe, different welding machine for mass usage will transfer. They develop in Russia [Indecipherable] qualification. Now they will entry to the world market and Genesis will transfer for mass production.

Now we have interest from other countries. For example, there is really new opportunities we -- and we have requests from other West companies. We'll be able to with only this machine will provide you many tens of million business, but we deliver in the world not now more than 10 new machine additions, which we'll introduce second half this year and next year.

This year, we'll fully operate in unique publication, highest quality systems. It's new generation. So with our policy from material, from components and so on after [Indecipherable] final machines and production line now in [Indecipherable] work and for volume.

Paretosh Misra -- Berenberg -- Analyst

Thank you. That was very useful. Appreciate it.

Operator

We've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to your host, Eugene Fedotoff, thank you, for closing comments.

Eugene Fedotoff -- Director of Investor Relations

Thank you for joining us this morning and for your continued interest in IPG. We look forward to speaking with you over the coming weeks, and we'll be participating in a number of virtual investor events this quarter. Have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Eugene Fedotoff -- Director of Investor Relations

Valentin P. Gapontsev -- Chief Executive Officer and Chairman of the Board

Eugene Scherbakov Ph.D. -- Chief Operating Officer, Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Dire

Timothy P.V. Mammen -- Senior Vice President and Chief Financial Officer

John Marchetti -- Stifel -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Nik Todorov -- Longbow Research -- Analyst

Mark Miller -- The Benchmark Company -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

Michael Feniger -- Bank of America -- Analyst

Paretosh Misra -- Berenberg -- Analyst

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