IPG Photonics Corp (IPGP) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

IPG Photonics Corp (IPGP 0.32%)
Q4 2020 Earnings Call
Feb 17, 2021, 10:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to IPG Photonics' Fourth Quarter 2020 Conference Call. Today's call is being recorded and webcast.

At this time, I'd like to turn the call or to Eugene Fedotoff, IPG's Director of Investor Relations, for introductions. Please go ahead, sir.

Eugene Fedotoff -- Director of Investor Relations

Thank you, operator, and good morning, everyone.

It's hosted by IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev; Chief Operating Officer, and 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, 2019 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 prediction as of today, February 16, 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 to 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 are pleased with our fourth quarter results as we delivered revenue that was 10% higher than the fourth quarter of 2019 and above our guidance range. In addition, book-to-bill was above 1 in the fourth quarter as we saw the traction in order flow that had started in the third quarter continue during the fourth quarter and into 2021. We are continuing to benefit from the advantages of our leading-edge products, technology differentiation, low-cost production capabilities and -- and the global footprint.

We continued to see strong revenue in China, which was significantly higher on a year-over-year basis as volume growth more than offset lower selling prices in the region. We were also pleased to see a sequential improvement in revenue in Europe and strong sequential revenue growth in North America in the fourth quarter. Our systems sales also improved modestly, but continued to be below last year, primarily due to the impact on the economy from COVID-19.

We're demonstrating good progress in our core markets thanks to our technology differentiation and low-cost production capabilities. In high-power lasers, we delivered strong year-over-year growth in both our rack-mounted 1 to 4 kW lasers for the high-volume market and our ultra-high power lasers for leading-edge cutting systems as sales of lasers above 6 kilowatt increased 34% compared to the fourth quarter 2019 and were 56% of total high power sales.

At the high end of the market, we are benefiting from an increase in order volumes for our 20 and 30 kW ultra-high power lasers and optical heads. These lasers not only enable 50% to 100% faster cutting speeds than our 15 kW device, but are capable of processing materials with 20 to 50 millimeters thickness or even greater. This improvement in productivity and flexibility, coupled with super beam parameters -- superior beam parameters, record wall plug efficiency and reliability is driving the replacement of plasma cutting machines, other non-laser solutions and lower power laser solutions. We booked the first orders for the new unique ultra-compact rack mounted U series of lasers for low-cost cutting systems, and we expect to start shipping them shortly in volume. Not only do these lasers provide extended optical performance, record power-to-volume ratio and full protection against humidity, they are also significantly lower in cost to manufacture. As a result, we expect this new design to improve gross margin for these products.

We continue to focus on growing sales in other applications that are outside of our traditional cutting and welding markets. Last quarter, we launched our revolutionary, innovative handheld laser welding system, and the initial customer response has been extremely positive. We believe this system has great potential for IPG as it replaces traditional handheld welding products used in metal fabrication like TIG or MIG. The product offers orders of magnitude higher quality welding and speed with much greater precision, flexibility and ease of use to our customers around the world. In addition, for the first time, the product will simultaneously provide the highest-quality pre-cleaning and after-cleaning of the weld surface and weld itself, respectively. We have already sold a number of units in the last few weeks only and believe that there are many thousands of customers in the US alone, and many tens of thousands worldwide that could be interested in this unique product.

During the fourth quarter, emerging product and application sales were 28% of total revenue, increasing 22%. We are pleased with the performance of a number of products that are the key to the diversification of our revenue. Examples include, high power nanosecond pulsed lasers used for foil cutting and cleaning in electric vehicle battery processing as well as for ablation and cleaning; sales of medical lasers and consumable medical fibers, our gold standard thulium laser solution for urology; and green laser sales for solar cell processing. With record backlog, we expect sales of green lasers to continue to grow fast as our green pulsed lasers are enabling significant improvements in solar cell efficiency. In additional, high power lasers for defense applications performed well year-over-year. Despite the impact of the pandemic, ultraviolet and ultrafast pulsed lasers into emerging microprocessing applications showed strong growth for 2020.

Our Adjustable Mode Beam, AMB, lasers continue to gain traction in the welding industry, most notably in electric vehicle battery welding, and, as a result, we received significant orders for AMB lasers in Q4. Our AMB products offer superior speed and weld quality over competing solutions thanks to broadest range of beam tunability which enables spatterless welding.

The multiple QCW lasers for high-speed spot welding applications bring significant cost savings due to an increase in welding productivity and decrease in electrical consumption. Beyond material processing, we continue to develop new soft tissue medical treatments, midinfrared lasers for molecular-level resolution, online spectroscopy, inspection, sensing and biomedical research applications. In addition, we're continuing development of our new generation of analog and coherent digital silicon photonic devices for super high speeds and highest volume data processing for telecom, data telecom, and many other advanced future applications. Furthermore, we are extremely pleased by the growth we saw in advanced applications and medical applications.

Research and development has been a driving force behind IPG's success since the Company's inception. We spent over 10% of our total revenue on R&D in 2020 and have over 650 people in research and development, including many scientists and engineers who continue to develop new leading-edge solutions for our customers, helping drive efficiency and productivity in their operations and making our fiber laser technology the tool of choice in mass production -- for more than 20 years, tool of choice in mass production. Nobody can compare most of this, absolutely in quality. I would like to thank our employees for their strong execution during our fourth quarter despite the continuing challenging operating environment. As a result, the well-being of our employees, their families, our customers, our partners and communities we operate and remains our highest priority.

With that, I'll turn the call over to Eugene Scherbakov.

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

Thank you, Valentin, and good morning.

The impact of COVID-19 on our production capabilities continues to be minimal and we are focused on ensuring the safety of our employees with social distancing and enhanced cleaning and filtration measures in place. Otherwise, we are operating normally. Despite the increase in COVID-19 cases in Northern Hemisphere with the Fall and Winter, production remained fully operational and we managed COVID-related absences effectively. We are very pleased with the performance of operations during the fourth quarter as production ramped to meet the increase in demand, enabling us to exceed the top end of our guidance range. And it was first quarter of year-over-year growth in more than two years.

We are proud of the improvement in the underlying gross margin driven by an increase in revenue, product cost reduction and product mix improvement. Total SG&A and R&D expenses were $76 million in the fourth quarter and continued to benefit from lower travel and trade show expenses given pandemic-related restrictions. As the business activities start to pick up and some restrictions are lifted and life normalizes in the second half of 2021, we would expect our operating expenses to increase as well.

We remain committed to supporting our R&D while controlling the total operating expenses to drive operating leverage to the Company. We continue to benefit from reducing of the cost of devices, our vertical integrations and from expenses reduction initiative we undertook in the second half of 2019.

Examining our performance by region, revenue in China increased 52% year-over-year, representing approximately 42% of total sales. Demand and order flow in China remained resilient during the quarter and order booked in 2021 prior to Chinese New Year have been strong. While we face aggressive competition in the region, we believe that our products have superior performance and reliability and we are seeing strong growth in demand for our ultra-high power lasers.

In Europe, while revenue decreased 5% year-over-year due to the effects of COVID-19, it did grow sequentially. In addition, in Europe, order flow continued to get better despite the increased restrictions in Europe due to lockdowns.

Similarly, revenue in North America decreased 11% year-over-year but grew 37% on a sequential basis with a good improvement in materials processing sales for lasers and systems and year-over-year growth in medical and advanced applications. North America booking continued to be strong even relative to the exceptional order flow in Q3 2020.

Sales in Japan decreased 29% year-over-year. While economy in the region continues to be negatively impacted by COVID-19, some regional macroeconomic indicators have improved in the recent months.

Sales to the rest of Asia increased 3% year-over-year. Continued to recover from the second quarter trough and also benefit from shipment of green lasers for renewable energy. Sales in Turkey decreased 2% year-over-year and grew 21% sequentially.

Economic indicators continue to show improvement from significant contraction earlier in the year, and this is one factor behind the improving direction of our business. In addition, it seems there is some optimism for improving investment cycle driven by recent upgrades related to requirements for the flexible processing, automation and energy efficiency. Our leading-edge fiber laser technology offers significant productivity gains, electrical efficiency and lower cost of ownership over other lasers and non-laser tools. An increasing focus on the environment impact and commitment to the net zero emissions for large industrial manufacturers is creating additional opportunity for our lasers and bodes well for our long-term growth objective. We are already starting to see it with electrical vehicles and electrical vehicle battery production and are likely to see it with other industries. We believe that efficiency is likely to become a more meaningful driver in displacing processes that energy intensive such as plasma cutting or legacy welding processes.

Despite the challenging operation environment that we faced in year 2020 due to COVID-19, we believe that we are well positioned as we enter year 2021. In addition, we continue to believe that the breadth and depth of our product offering, 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 sample [Phonetic] flexibility and respond to business disruptions.

With that, I'll turn the call over to Tim to discuss financial highlights in the quarter.

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

Thank you, Eugene, and good morning, everyone.

Revenue in the fourth quarter was $337 million and increased 10% year-over-year, driven by growth from most of our key product lines. Revenue from materials processing applications increased 10% year-over-year and revenue from other applications increased 12%. Sales of high power CW lasers increased 17% and represented approximately 55% of total revenue. Sales of ultra-high power lasers above 6 kW represented 56% of total high power CW laser sales. Pulsed lasers sales increased 55% year-over-year, with strong growth driven by our high power nanosecond pulsed lasers used in EV battery manufacturing, green pulsed lasers used in solar cell manufacturing, as well as higher sales of our new UV and ultrafast pulsed lasers which were partially offset by lower sales of low-power pulsed lasers for marking applications. Systems sales decreased 20% year-over-year due to COVID-19 but did improve sequentially. Medium-power laser sales increased 25% as there was some recovery in additive manufacturing and other fine processing applications. QCW laser sales decreased 16% year-over-year due to lower sales for aerospace drilling applications. Other product sales decreased 11% year-over-year, primarily due to lower telecom sales.

Q4 gross margin was 44%, which increased 310 basis points year-over-year. The additional inventory charge reduced gross margin by 410 basis points. Excluding this impact, gross margin benefited from lower cost of products and a decrease in unabsorbed costs as a percentage of sales as compared to the year-ago period. The additional inventory charge of $14 million was related to optical components that have been replaced by components with better performance.

Fourth quarter GAAP operating income was $65 million and operating margin was 19%. During the quarter we recognized a foreign exchange loss of $5 million, primarily related to the depreciation of the US dollar versus the euro. Q4 net income was $49 million or $0.92 per diluted share. The additional inventory charge and foreign exchange loss reduced EPS by $0.27. The effective tax rate in the quarter was 24%. If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $12 million lower and gross profit to be $8 million lower.

We ended the quarter with cash, cash equivalents and short-term investments of $1.4 billion and total debt of $38 million. Strong operational execution resulted in cash provided by operations of $85 million during the quarter. Capital expenditures were $26 million in the fourth quarter. We expect 2021 capital expenditures will be in the range of $150 million to $160 million for the full year. Total capital expenditures in 2020 were significantly below our initial budget as we delayed some projects and some of these projects are now scheduled for 2021. 2021 capex includes facilities and equipment expenditure for production, R&D and sales activity to support our future growth. During the quarter we did not repurchase any shares.

In total, fourth quarter book-to-bill was above 1, and we were pleased with order flow across all of our main geographic regions. Geographically, most areas continue to show improvement with the only area that remains weak being Japan.

For the first quarter of 2021, IPG expects revenue of $310 million to $340 million. Company expects the first quarter tax rate to be approximately 25%. IPG anticipates delivering earnings per diluted share in the range of $0.90 to $1.20, with 53.2 million basic common shares outstanding and 53.9 million diluted common shares outstanding.

The improvement in macroeconomic indicators is now more broad based, and if sustained, gives us optimism for 2021. However, we are a little cautious given the resurgence of COVID-19 in Europe and North America as well as the uncertainty surrounding vaccination rollout and return to normalcy is unclear at this time. These uncertainties continue to make forecasting our business challenging in the medium term and our first quarter guidance remains subject to significant uncertainties, including the impact on the global business environment and expected recovery from COVID-19, economic trends, growth from emerging product revenue, competition and the lack of long-term binding order commitments.

That said, we continue to benefit from near-term growth opportunities in ultra-high power cutting, electric vehicle battery processing, renewable energy, microprocessing, medical procedures and advanced applications. We believe the strides we are making in higher-power products within our core materials processing business and new solutions are enhancing our competitive position. 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 cancellation 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] Your first question comes from John Marchetti with Stifel. Please proceed with your question.

John Marchetti -- Stifel. -- Analyst

Thanks very much. Tim, Valentin, I was wondering if maybe you could just talk about some of the puts and takes on the longer-term view. I know you mentioned that the underlying fundamentals continue to get a little bit better to you. But as we're looking out to the course of the year, all else being equal, would you expect that we're back to a -- sort of getting back in line with a double-digit revenue growth range, maybe also of '19 as opposed to '20, given that '20 was such a challenging year?

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

Yeah, we're not going to comment on annual guidance or target, so except for your last comment, John, I think they talked about puts and takes, a number of them articulated in the script. First of all, the continuing shift to higher power lasers for cutting applications, a lot of the new product introductions. We're very optimistic about the handheld welder and growth in revenues from that. All of our emerging products in Q4 performed really exceptionally well across a pretty broad portfolio of items that are starting to drive incremental growth, so whether it's the green lasers, the high power nanosecond pulsed lasers for EV, some increasing traction for ultrafast and UV. Medical's performed very well during the whole course of the year with the lithotripsy application.

Other newer product introductions, the multi-channel QCW displacing YAG lasers in spot welding, good orders for AMB. So we continue to see traction and momentum across what is now a pretty broad based and diverse set of products and applications. We continue to see improvements in -- we referenced again some of the key macroeconomic indicators that we follow. Certainly this year looks like it could be set up for being significantly better than the last two years we've been through, and the key issue will be to get out of some of the volatility that we've seen that sometimes impacted the second half of the year as happened in 2019 or has resulted in a slow start to the year as the pandemic did last year. So the main -- the main target is to get out of more of the -- the volatility and get to sort of consistent year-over-year growth on a quarterly business, and we've got significant drivers for that.

John Marchetti -- Stifel. -- Analyst

Got it. And maybe just as a follow-up on the gross margin side, as we're looking out over the next several quarters, any expectations that we should assume maybe some additional charges that we saw this quarter or really treat that more as a one-off for you in 4Q and we're back to a more normalized environment for gross margin as we're looking out over the first half and into '21? Thank you.

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

Yeah. I'm much more definitely expecting a normalized gross margin print over the coming year. With -- during the course of the year, not just in Q4, given some of the volatility related to the pandemic, we have had significant inventory provisions and charges. And the last -- the final charge in the end of the quarter I think positions us well for a more normalized operating position going forward. So I think we've got a good start to the year in that context as well.

And on the other side, on gross margin, we've got other benefits coming through from some of the product mix as we continue to grow revenue, better absorption of fixed costs, and then, for example, the ultra-compact laser starting to generate more meaningful revenue. There is a meaningful improvement in gross margin we expect from that, and then even taking the design changes on the ultra-compact and rolling them into higher power lasers up to I think 7 or 8 kilowatts -- up to 8 kilowatts are going to be used in. And so there's a lot of other initiatives on cost reductions as well that we are optimistic about.

John Marchetti -- Stifel. -- Analyst

Thanks, Tim.

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

Specifically speaking, we expect this year, our gross margin will return back to our usual trends, above 50% [Phonetic]. But we're going to be careful for the current quarter -- situation for quarter three, quarter four is not definitive. So quarter one and quarter two absolutely promising -- but [Indecipherable] our guidance is so very, very careful, very considerate.

John Marchetti -- Stifel. -- Analyst

Understand.

Operator

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

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

Yes, good morning. Thanks for the question. When you look at the strong activity, it sounds like you had pre-Chinese New Year in China on the order front. Do you expect China to grow as a percentage of the order book over the next couple of quarters or is that being matched by growth in some of the regions?

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

Tom, relative to -- like Q1 last year when China order flow slowed down dramatically and then it really picked up in in April and May. I would expect in total China order flow to remain relatively consistent as a percentage of the total because the growth in Europe and North America is also starting to recover more meaningfully. There is the growth in some of the emerging products as well that are not just strong in China but are strong elsewhere. So totally, we expect more of an even contribution and a rather less China-centric focus perhaps on revenue for the year. But notwithstanding that, China order flow has really been very strong prior to Chinese New Year. For example, not just of shippable orders, but even frame agreements has been very, very good. And those are generally placed to get licenses so that shipment can take place during the course of the year.

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

And a remarkable -- the more frame order -- the normal course of the frame order is practically double compared to last year or the last quarter to quarter, but the majority of these orders is for high-power, above 10, 15 kilowatt, when they -- they asking for right things to get for right situation. It's the growth of high power from that point. So we expect nobody can supply them -- support -- normally only we can supply working more than 15 -- 10, 15 kilowatt -- working [Indecipherable] IPG, all China done strategically. As Europe and the America much more neutral here, but there is much still -- because major integrators -- cutting system integrators in the Europe. In the US, they don't have own high-power lasers, don't have. And so they are stopping 10 kilowatt products. But China extremely active in the 15 to 20 kilowatt area.

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

Okay. No. Thanks for the extra color. That's helpful. And then as a follow-up, how big is the EV battery market right now for lasers and where do you think that goes over time?

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

I think it's -- I don't have a definitive number on that in terms of where it is today. The message we gave on it is that it is a potential decade long investment cycle and if EV vehicle production is going to get to the levels that are expected -- people are talking about 25%, 40%, even 50% of total vehicle sales over 10 or 15 years, it will drive hundreds of millions of dollars of laser-based investment for EV battery manufacturing and even laser based investments for EV auto vehicle manufacturing itself. So it's a long-term significant opportunity with hundreds of millions of dollars of laser-based processing required for that. Even some of the -- I noticed some of the battery -- older battery technologies are cylindrical which we're not using much laser-based processing seem to be evaluating lasers more and more now.

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

Okay. Great. Thanks for your time today.

Operator

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

Nik Todorov -- Longbow Research -- Analyst

Thanks. Good morning, guys. Tim, in the last up cycle, you guys have been very consistent, putting about 60% incremental gross margin. I understand you know guiding sales is difficult, but how should we think about the incremental gross margin? You highlighted multiple cost initiatives. Should we think about that 60% as a base case or you could see some upside? And also, can you talk about what are the limitations of rolling that ultra-compact design above 8 kilowatt? And then I have a follow-up. Thanks.

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

I think some of the incremental gross margins are probably not far off where we were historically, maybe a little bit below that 60% thing. But one thing below the line we're cautious on is, as you get into a more normal environment -- we tried to call this out on the script is that its operating expenses, you get more travel and trade for trade shows and other activity in a more normal environment. Opex will probably pick up in the second half of the year a little bit, so that drop-through won't be straight to the bottom line. In terms of the other question about migrating the design of the ultra-compact and higher power lasers, that Eugene, you'd like to talk about that and a potential rollout over time.

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

In principle, we have several generation of compact lasers. I mean, I'm talking about high-power lasers, of course, with power more than 2, 3 kilowatt. The first stage was already demonstrated and we already shipped thousands of such compact lasers. The next step was to use a rack mounted compact laser for high-power applications. I mean, with power, more than 1, 2, 3 and 4 kilowatt. Again, such kind of lasers already supplied to our customers effectively for -- first of all for cutting also -- for welding applications. The next generation introduced this year. It's much more compact, is output up to 8 kilowatt. It will be the next stage and the first results demonstrated very good performances. And we are absolutely sure that it will be the next generation our ultra-compact rack mounted laser first of all for cutting applications. And very important that based on this design, we can dramatically reduce our cost of production. Of course -- but of course to customer better price. Such kind of situation is compact and ultra-compact lasers.

Nik Todorov -- Longbow Research -- Analyst

Okay. Very helpful. Thanks. And just a follow-up. Maybe can you guys talk about the adoption curve that you expect for the handheld welding laser? It sounds like you guys have received you mentioned extremely positive feedback. How much do you think you have to educate the customer or to kind of prove their point -- it seems like they're seeing the benefits outright. Just trying to see what are you thinking in terms of the adoption curve.

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

VG, do you want to take that?

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

Yes. You know, our shipments have been normal. Only United States who have investigated more than 24,000 -- only small drop of -- which uses this manual welding tool -- instrumentation. 24,000 only US, but also large OEM like automotive and now they will also use but even they -- each of them will buy only one unit. It's 24,000 units -- 24,000 units worth $600 million. Only one unit. But if you could just more -- small drops. Not one, two, but 10. If you -- old world -- meaning, five times small, and so it's 100,000 shops. Each from there -- we now provide for testing for stimulation more than 71 US -- more than 70 charge drop the it fantastic devices no emerging only -- better [Phonetic] welding increased 6 to 7 times -- 6 or 7 times -- quality of welding much, much higher than with the regular. But also simultaneously clean -- immediately clean strategies and pretty, pretty welding and after welding. Now, with TIG and MIG regular, they have to use chemicals then to clean this in any case quality of final touches in order to have very -- they are now -- they don't need to make toward that for one-time import by way deal in additional motor operation, the same way that the -- clean the -- so the people saw fantastic improvement. So when you rates in a rate where were delivered only due to some formal bureaucratical qualification there for electrical emissions. So now we're fairly steep in the US on emission if that's, it only of our purely started to ship that's unit if you to sell to customer default we covered total order flows. So we'd be this year on year -- only some welding units. Next year, it would be 10,000 units. And so very fast introduction in market and we don't see competition that can make similar units one per year. Even now that would be difficult to -- a very innovative new technology -- any Chinese company has this.

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

And the other point. It's easier to use as well. So it's easier to use. So the training of the welder...

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

Yes. Very easy to use. Say with a normal welder, you have to train many months, even more difficult to some -- you don't see any person, a new student, after only a few hours' demonstration -- preliminary introduction, can weld immediately. So practically, it's available to everybody today. It's also normal advantage, because quantity of professional welder now decreasing -- decreasing.

Nik Todorov -- Longbow Research -- Analyst

Got it. Thank you.

Operator

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

Jim Ricchiuti -- Needham and Company -- Analyst

All right. Thank you. Just -- good morning. On the topic of the handheld laser, so I'm wondering, are you going to market any differently with this product offering, just given the size of the market and the price points and how are the gross margins on this front?

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

So, in terms of going to market at the moment we're rolling it out in a phased manner with some of the key -- we had a lot of job shops come into evaluate it, and we're also looking at potentially some distribution arrangements. But will potentially also have to expand some of the sales force as volumes ramp up to support what is a much broader base customer list compared to our typical OEM base. So we're continuing to evaluate how best to get to that efficient model around it, Jim, but -- and typically we've invested in the stuff as we've grown, the revenue on it to get that return simultaneously. We may use a few more distributors around this as well.

And the gross margins, by the way, on the product are very good, benefiting from some of the design improvements around the ultra-compact lasers.

Jim Ricchiuti -- Needham and Company -- Analyst

Thanks. And follow-up questions. You showed a nice recovery in the US, at least -- North America, at least on a sequential basis. And I'm wondering, as you look at that business over the next couple of quarters, how sustainable do you think it is? Is it broadly based and are you feeling comfortable that that recovery in the US is sustainable?

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

Yeah. I guess the underlying materials processing business has improved. In fact, some of the order flow in Q4 with some of our specialty AMB lasers for the battery processes was also in North America. We still have some revenue to recognize on advanced applications. Medical growth will continue to be -- not going to be quite as strong as it was last year because we cannot such a small base, but the medical business is continuing to perform well. We've got increasing visibility into medical sales in the second half of the year. The green lasers is going to Southeast Asia, although they are made in the US at the moment. The backlog for those I've mentioned is good. I think the only thing we don't have longer-term visibility into in which is more uneven and lumpy is some of the advanced applications, right. We're still waiting for some commercialization of the defense applications for that revenue to become more consistent and really start to grow consistently quarter-over-quarter and year-over-year.

Jim Ricchiuti -- Needham and Company -- Analyst

Thank you.

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

You were talking about increased share -- share of products, which do not really wait from China. It is product for other applications, in traditional cutting and welding of metal sheet. So then very positive increase essential up to 28%, but we are guided to increase up to 50% during a couple of years. 50% is the most of this product, new product, which we -- in other applications we develop internally in US. So it's increase essential -- sales in the US also increase. Gross margin in the US before the major contribution to the net income in US, we receive from sales of dies and temporarily last two years, sales of dies decrease. And so income from dies decreased also. Now we work for positive growth in dies sales, it's for -- approach it from dies. And so also growth of advanced application same from US and may develop in US, not develop in Germany and it is only in the US mainly for some revenue for -- so we deliver American company we become one of the major generation -- major generator of revenue, our target -- not just research centric, but also real, fast manufacturing of new.

Jim Ricchiuti -- Needham and Company -- Analyst

Thank you.

Operator

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

Michael Feniger -- Bank of America -- Analyst

Hey, guys. Thanks for squeezing me in. Tim, I recognize that you may not want to comment directly on one of your competitors. I was just hoping to get a sense of a big picture here. Some investors fear the bidding more could create a bigger competitor that could be much more aggressive attack in the industrial markets, being price aggressive scaled of R&D. Maybe you can help us understand the competitive landscape in laser technology a little bit more, how IPG positions itself to maintain that leadership. And does this type of bidding war, even if it's not direct to IPG does it validate some of the megatrends that are accelerating with automation, EV, dual supply chains? Do you see more consolidation going forward around laser technology and automation markets? Just curious on your thoughts on that one.

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

There is a lot of different elements to that question, Mike. The first is we were not going to make a comment on the transaction and the bidding war that's going on out there. I think the comment is really the focus on where IPG strengths are in not only the core industrial markets but also in a lot of these emerging product offerings. So, in our core industrial markets, none of the parties that are involved in the process that is ongoing at the moment really have any core strength and capability where IPG's core strength and capability is. So we don't -- we view this as being separate from our core strategies and capabilities. In addition to that, we've got a lot of emerging product development in areas that we've talked about that are driving our growth with inherent advantages around the products that we have. So whoever the competitor is, IPG's fiber laser technology is unique in very many different ways and we have this fundamental strength that comes from the vertical integration, the speed to development, the ability to get cost out and as you can see from an increasingly diverse product portfolio. I think the main point that we make on this is that we get a significantly higher rate of return on our internal R&D and making limited, very specific acquisitions that relate to our ability to leverage our own technology. So we don't view ourselves as being a consolidator in the industry.

With regard to some of the other trends, I think, yes, that's basically apparent, right, the flexibility, the automation, the increasing acceptance of lasers across many different applications and technologies, flexibility we call out for example energy is becoming perhaps more fundamentally a driver for IPG. We're the only company that has an electrical efficiency approaching 50%. Nobody else is close to us on that. So you really have to I think look into some of the very specific benefits that we have rather than -- and advantages we have rather than look at what may or may not be a larger scale company that will have competitive advantages against us. We don't think that they will.

Finally, I don't -- beyond -- there has already been quite a lot of consolidation within the industry. So there is a limited number of large targets that are left out there. Maybe the largest other competitor that's out there for us is actually a private German company. So consolidation has already taken place a bit more meaningfully to varying degrees of success, I'd say.

Michael Feniger -- Bank of America -- Analyst

Perfect. Thanks for that, Tim. Just following up, if we take the higher end of your Q1 guidance and you see a typical 15% to 20% sequential growth in Q2, you're kind of starting to knock on that $400 million sales figure level. Do you have more confidence around the ability to drive gross margins above 50% at that point? Just help us understand the type of margins when we start getting into these types of buckets of revenue ranges.

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

I think Valentin alluded to that earlier in the call that certainly getting back to the -- a little bit more concerned around but getting back to the top end of our 45% to 50% guidance range. And then really if you start to see revenue get back up to that $400 million level, without guiding about that at the moment, we've got all of these cost reduction initiatives, and Valentin is increasingly comfortable that we're going to get back into what I would call more of an optimal gross margin operating model as compared to just be investing class, which we are at the moment.

Operator

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

Mark Miller -- The Benchmark Company -- Analyst

Thank you for the question. You've indicated several times about the opportunity in battery welding for EVs but there is a chip shortage on its impacting auto sales. Do you see that having any impact on you over the next couple of quarters?

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

No, Mark, we don't think that the chip shortage in the semiconductor industry is going to affect us. But even though it is affecting the auto industry in terms of some facilities shutdown, we don't expect it to have an impact on our growth and we don't have any visibility into it having an impact on us. We do not have any similar supply chain issues facing us at the moment, given our vertical integration, and we also have inventory of electronic components, for example, that we've built up.

Mark Miller -- The Benchmark Company -- Analyst

Germany sales were also down sequentially and year-over-year. Is it -- is that COVID also, like the case in Japan?

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

I haven't looked at the German number. Overall, Europe was up sequentially. So you saw -- I can't remember exactly where it is. Maybe some slight variation in where revenue in Europe was generated. But overall, Europe, we're actually pleased with in total. Rather than looking at Germany specifically, we look at the whole of Northern Europe and then Italy and even in western Asia, Turkey, there was some sequential improvement even though down single-digits. Yeah. I haven't got any more commentary around that. I think Europe was better.

Mark Miller -- The Benchmark Company -- Analyst

Thank you.

Operator

Our next question comes from Joe Wittine with Edgewater Research. Please proceed with your question.

Joe Wittine -- Edgewater Research -- Analyst

Hey, thank you. Good morning. I wanted to ask on welding. Obviously, EV battery is up on AMB and there's also kind of interest in the handheld, which isn't surprising. But beyond that, how are you kind of viewing the broader macro welding market adopting laser? And that includes both stand-alone lasers and then your systems mix as the broader cycle turns here and cost of capital as well. Could there be kind of a tipping point in place for that market where the adoption has been slow over time?

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

Eugene will address this question.

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

Yeah, about the welding market. It is now driven by first of all, EV vehicle applications, battery welding, battery cutting and foil cutting and so on. But in principle, our advantage is that we are not supplying today for such kind of -- transistor-only [Phonetic] lasers. We're supplying also our components, I mean, different kinds of optical heads for cutting or for welding. The last monitoring system like LDG, the last single mode laser especially produce for such kind of applications as -- and finally, we start to produce a complete system for battery welding. Already supply to some customers -- automotive customer and now we are ready supply additional such kind of system to the customer. And for us, it's -- it's not a new product, but nevertheless for us, is a new opportunity. And we see a very good opportunity for us to supply, again, not only lasers, not only components for this application but complete systems in Europe, in China and also in United States.

In total, welding market is growing well. Of course, not only connected to the automotive applications, not only to EV vehicle, but also for other applications. For example, basically, of course, first of all from different kind of metal welding, but this demand is growing definitely year-over-year.

Joe Wittine -- Edgewater Research -- Analyst

Okay. I wanted to go back to the comments of rolling out features from the ultra-compact designs to higher power units up to, I think you said up to 8 kilowatts. I guess I'm curious there with sort of trade-offs you need to make. Is it efficiency or could it be flexibility and durability? And going forward from a product offering perspective, do you plan to offer those units side by side these -- your kilowatts, for example, with the ultra-compact functionality versus your kind of existing full featured, if you will, I think I'd be interesting. Thanks.

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

First of all, when we produce such kind of ultra-compact lasers, they also produce the special components of these lasers, of course. And this is why we have to dramatically decrease our cost of production for such kind of laser. But you see -- latest position such kind of moving our producers local cutting applications, but our customers must be ready to adopt this laser system. Of course, they need some time to also to change their design and to implement our ultra-compact laser for these applications. The exchange -- they said we're not exchange he'll be the new machines if will be much more compact, much more efficient final machines for example for cutting. From this point of view, you'll see very good opportunity. First of all, of course, better flexible -- better efficiency, better compactness, but first of all, better price, for our customers.

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

I'll remind all of you that for example that if we [Indecipherable] laser for cutting by fiber laser -- we work 10 years, not one, not two, in spite it from beginning -- it was obvious, so fiber was a much better in -- cutting quality from -- what we have two appraisal whether the margin where opinion point had to from point the both of menu hey heard customer and so on. 10-year, so it's granted now if correct go here full business but it 10 year not one puts in -- but in 10 years, not one, two, three, five, 10 years, you guys feel that we immediately during one of the few months for equates of this in your broad view fantastic new product. It's a long process. But now we dominate in cutting business. Nobody tries it out -- never will cut even the 2, 3 millimeter; they never will 5 millimeter. Now 50 millimeter we are cutting successfully, not only sheet metal -- cutting now -- which we never talked about replaced by -- for example. So it's about our own idea. It could be so naive that we are making much further than 100 people, but it takes time and education [Phonetic].

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

Sure. The only other part to your comment was there is no trade off. I mean, we've never introduced a new product that has less reliability or lower electrical efficiency. It uses all the same optical components, but it has a much more compact electromechanical and sophisticated design around the electromechanical. So there isn't really a trade-off in terms of those parameters.

Joe Wittine -- Edgewater Research -- Analyst

Perfect. That's great color. Just what I was looking for. If I could squeeze one more in, the 20 to 30-kilowatt, curious what geographies those units are shipping to, if that's just kind of the pandemic [Phonetic] and etc. of the world in China or is there interest in the West? And then what are the relevant applications there? I'm assuming for cutting perspective you run into some edge quality issues at that power level.

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

Probably not limited on 20 to 30 kilowatt. Recently already received the request for 40 kilowatt laser for cutting applications. Of course, we are ready for supply such kind of laser for these applications. First of all, applications for catching some -- but number of this laser also use it for welding complication, but for a special applications, like for special materials and so on. But mainly for cutting applications. And you're right. Unfortunately, the first customer now is in China for such kind of applications, not in Europe, not in the United States.

Joe Wittine -- Edgewater Research -- Analyst

Okay. Well, thanks. And congratulations.

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

Thank you.

Operator

[Operator Instructions] Our last question comes from the line of Paretosh Misra with Berenberg. Please proceed with your question.

Paretosh Misra -- Berenberg -- Analyst

Thank you. Good morning. And thanks for taking my question. Just curious with that capex guidance for the year, $150 million, $160 million. Can you provide some color as to some of the bigger projects included in that in that capex range and anything worth flagging as potential future growth driver?

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

Capex, first of all, we have to shift some capex construction, Eugene, first of all, for this year, you said 2020 because this construction and that represents hopefully for 20%, 30% all the time quality -- the way they did not get right material at the right time and so on. So all -- for example, one month delivery, but we will wait a couple of years to deliver -- to get even windows install and so on. It was awful time for construction this. Now we, of course, we need some additional first assembly facilities. We need most of the opportunity -- some new products in a while. We need new equipment -- we need for mass production and so on. It's a lot of time. We have to improve and we're creating now what are we invested now, we investing for future. We will work what will we need -- two, three years. But we won't involve, won't deal with new facility when by installing this equipment technology. Now, in two, three years, we would be able to start production and so on. We don't have huge gap. It's normal. And we still very small investment. We will double this investment more. We prefer to invest in this to increase facility, increase our production and also whole demand in the automate some facility -- not efficient acquisition new business. We are not buying a new businesses. We are not buying nickel [Phonetic]. We're buying only some technology growth with some technology. We increase our technology choice. So, it's our strength, it's our future, but not just to buy absolutely different, not possible to, well -- felt very good business last year, but to manage our research in different business and become a large company, not manageable. We don't see such mixture.

Paretosh Misra -- Berenberg -- Analyst

I understand. I really appreciate. Sorry go ahead.

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

It's OK, Paretosh. Next question?

Paretosh Misra -- Berenberg -- Analyst

Okay. Yeah, sorry. And my follow-up was that -- I was hoping if you could provide some high level color as to how pricing and volume changed last year. Any color you could provide would be great.

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

So, on a year-over-year basis, pricing was down in a more normalized 10% to 15%. It has been basically though much more stable over the last three quarters since Q2, Q3, Q4. So sometimes when you see an improving demand environment, some of the antics of the Chinese competitors are not -- are not so extreme. The other part of this that we've talked about is that we're being more disciplined around pricing. We believe that the value of the laser technology is extremely high and that is the current pricing in the market. We're already displacing many existing laser and non-laser technologies and more fundamental changes in pricing to drive that adoption are not required.

So it's been good to see a bit more stability. You've obviously also had some benefit going to higher power levels for cutting applications we have competitive advantage. And then outside of that, the emerging products, for example, even high-power nanosecond pulsed lasers are very -- almost exclusive to IPG where we have a good ASP for some of those applications. So mix has been a bit of a benefit too.

Paretosh Misra -- Berenberg -- Analyst

Great. Thank you so much.

Operator

That concludes today's Q&A -- question-and-answer session. At this time, I'd like to turn the call back over to Eugene Fedotoff 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 will be participating in a number of virtual investor conferences this quarter. Have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Eugene Fedotoff -- Director of Investor Relations

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

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

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

John Marchetti -- Stifel. -- Analyst

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

Nik Todorov -- Longbow Research -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Michael Feniger -- Bank of America -- Analyst

Mark Miller -- The Benchmark Company -- Analyst

Joe Wittine -- Edgewater Research -- Analyst

Paretosh Misra -- Berenberg -- Analyst

More IPGP analysis

All earnings call transcripts