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IPG Photonics Corp (IPGP) Q2 2019 Earnings Call Transcript

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IPG Photonics Corp (NASDAQ: IPGP)
Q2 2019 Earnings Call
Jul 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to IPG Photonics Second Quarter 2019 Conference Call. [Operator Instructions]. At this time I would like to turn the call over to James Hillier, IPG's Vice President of Investor Relations for introductions. Please go ahead, sir.

James Hillier -- Vice President of Investor Relations

Thank you, Omar, and good morning everyone. With us today on IPG Photonics are IPG Photonics' Chairman and CEO, Dr. Valentin Gapontsev 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 those detailed in IPG Photonics' Form 10-K for the year ended December 31, 2018 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 only as of today, July 30, 2019. 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 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 the 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. Our second quarter results were strong. Driven by improving trends in our China business during April and May, we sold a record number of high-power lasers during the quarter. Although the macroeconomic climate and the pricing environment both remain challenging, we delivered results in the upper half of our guidance range, while demonstrating solid traction in new products.

We continue to meet competitive challenges by substantially reducing component and manufacturing costs while introducing new products that improve productivity and increase flexibility for our customers. As widely reported, the macro economy has softened and the geopolitical climate has become more unstable over the last few months. As a result we again find ourselves in a more uncertain position with limited near-term visibility to improving business conditions. Despite the volatile geopolitical and business environment, we will continue to invest in new products and applications to substantially enhance our competitive position.

IPG remains the clear market leader in fiber lasers with hundreds of megawatts of installed capacity. During the second quarter, our megawatts of total optical power shipped reached a record level. We were able to successfully meet the strong sequential growth in demand for our laser products coming from China, with record shipments into the region. We continue to see aggressive pricing among China-based competition, which intensified toward the end of the second quarter. Nevertheless, we achieved strong sequential growth in high-power laser sales.

We have many laser products and systems that are unique in the industry. Chief among these, we continue to produce high-power CW lasers for cutting, welding and other material processing applications at industry leading power levels, beam stability and wall plug efficiency. Sales of ultra high-power fiber lasers at 6 kilowatts or greater accounted for nearly 50% of all high-power laser sales. Sales of lasers at 10 kilowatts or greater grew 16% year over year, driven by rapid adoption in cutting applications.

We have started shipping our new high peak power lasers, receiving encouraging feedback from our customers. These new products offer a differentiated solution to cutting OEMs, provinding us with a distinct advantage in a competitive market. This unique capability increases piercing speed, improves cut quality, delivers cleaner, more controlled drilling of thicker materials and reduces scrap by enabling closer nesting of parts.

We are seeing compelling customer interest in our new generation of lasers with adjustable mode beam capability that permits reliable adjustment of the output beam to process. AMB's shown to reduce spatter, increase speed and improve quality in welding applications, and our AMB products are being evaluated by leading edge battery producers. In the cutting market, OEMs can cut a wide range of material thicknesses range of material thicknesses using our AMB lasers or our standard high-power lasers with our unique family of high-power optical heads.

We delivered excellent progress in new product areas outside metal processing. Sales of green pulsed lasers used to improve solar cell efficiency increased 150% year-over-year and nearly doubled on a sequential basis. We increased sales of our ultrafast pulsed lasers more than 200% year-over-year and nearly 50% sequentially. We are actively working on more than 50 new projects for these lasers across a wide range of applications, processing glass, ceramics, circuit boards, OLED film, batteries and solar cells.

Sales of our newest pulsed lasers, which include those at visible and ultraviolet wavelengths and ultrafast pulse durations, now exceed $10 million per quarter and are growing more than 60% year-over-year. As we expand our portfolio of new pulsed lasers and capitalize on the many application opportunities for our differentiated fiber laser solutions, we expect revenue for these products to grow rapidly over the coming years.

Systems sales increased more than 50% year-over-year, excluding Genesis, driven by strong growth in macro systems for welding and other material processing applications. In addition, our seam stepper had a record quarter with sales into several large automotive customers. Sales of beam delivery accessories increased 10% year-over-year. Towards the end of the quarter, we received a large order for our medical laser solution addressing a surgical application, enhancing our visibility into strong growth in medical laser solution this year. Collectively, sales of newer laser products and systems into emerging applications grew 12% year-over-year in the second quarter and were 18% in total revenue.

I am pleased to report that we continue to demonstrate meaningful traction in ultra high-power fiber lasers while investing in new products and applications that expand our addressable market opportunity. While macro factors are creating near-term headwind in our business, our continued focus on developing and enhancing our differentiated laser solutions will drive the Company's growth for many years. As a reminder, our mission is to make IPG's fiber laser technology the tool of choice in mass production, and I remain confident in our ability deliver on this mission.

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

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

Thank you, Valentin, and good morning everyone. Revenue in the second quarter declined 12% year-over-year to $364 million. Revenue from materials processing applications decreased 12% year-over-year and revenue from other applications decreased 16%.

Examining performance by region, second quarter revenue in China decreased 19% year-over-year versus a record quarter a year ago and represented approximately 45% of the total. On a sequential basis, sales in China increased more than 40%, driven by cutting, welding and marking applications. Following the escalation of the US-China trade conflict, we have seen a slowdown in order volume growth during the month of June that has continued through the first three weeks of July. Unfortunately, we believe this is now likely to delay the recovery that had been under way in China.

The pricing environment in China remains intense, affecting the dollar value of units sold. Our team is focused on further cost reductions throughout the manufacturing process. These cost reductions will only partially offset more aggressive pricing actions by the competition, and weaker unit volumes arising from the challenging macroeconomic backdrop will be a headwind to growth during the third quarter.

In Europe, revenue decreased 22% year-over-year primarily due to softness in cutting and additive manufacturing, partially offset by growth in welding. While pricing pressure in Europe has not been as intense in China, the decrease in average selling prices in Europe has been above our historic average of late, affecting revenue during the quarter. Within the region, we have seen a slowdown in Italy, a market which had held up better during the course of 2018. Looking ahead, we believe the persistent macroeconomic weakness throughout Europe is likely to pressure results in the region.

In North America, revenue increased 34% year-over-year driven by the acquisition of Genesis. Excluding Genesis, sales in North America decreased 5% year-over-year with strong growth in welding and cutting, offset by declines in marking, telecom and government applications due to project timing and more challenging comparisons. Sales in Japan decreased 10% year-over-year on softness in marking, welding and cutting. Sales in Korea decreased 14% year-over-year, though strong bookings suggest improved Q3 performance, and revenue in Turkey decreased 31% year-over-year given macroeconomic pressures in the region.

Turning to performance by product, sales of high-power CW lasers decreased 20% year-over-year and represented approximately 59% of total revenue. Reduced revenue from high-power CW lasers in cutting, welding and additive manufacturing applications was partially offset by strength in other materials processing applications. Pulsed lasers sales decreased 2% year-over-year, with rapid growth in solar cell processing and fine cutting offset by reduced sales for marking applications.

Medium- and low-power laser sales decreased 50% on softness in additive manufacturing and the transition to kilowatt-scale lasers in cutting, while QCW sales declined 21% year-over-year due to softness in fine welding for consumer electronics versus the year-ago period. Systems sales increased 193% year-over-year, including Genesis, and 50% year-over-year excluding Genesis, driven by growth in macrosystems for welding and other materials processing applications. Other product sales decreased 9% year-over-year with growth in beam delivery accessories and service revenue more than offset by declines in communications and other laser products.

Gross margin of 49.5% declined 726 basis points from the second quarter 2018. Compared with the year-ago period, less favorable absorption of manufacturing expenses and foreign exchange reduced gross margin by 150 basis points. The acquisition of Genesis reduced gross margin by nearly 200 basis points and higher inventory provisions reduced gross margin by 150 basis points. Lower product pricing and other factors reduced gross margin by approximately 240 basis points.

Given the renewed uncertainty and increasing price competition, we have limited visibility and less confidence in getting gross margin back above 50% in the near-term. Holding other factors constant, we believe that recovery in our core laser business to more than $380 million in quarterly sales would enable us to get gross margin to 50%. Even at their current levels though, our gross margins are industry leading.

Second quarter operating income was $91 million or 25% of sales, down 1,430 basis points year-over-year. Excluding a foreign exchange loss of $5 million, operating margin was 26.4%. Excluding foreign exchange, operating expenses as a percentage of sales increased 600 basis points year-over-year due to lower revenue, investments in engineers, salespeople and IT systems, and the acquisitions of Genesis and our Brazil submarine networks division.

Net income was $72 million and earnings per diluted share were $1.34. Foreign exchange losses reduced EPS by $0.08. If exchange rates relative to the US dollar had been the same as one year ago, we would have expected revenue to be $18 million higher and gross profit to be $10 million higher. The effective tax rate in the quarter was 24%, which included certain discrete tax items.

We ended the quarter with cash, cash equivalents and short-term investments of $1.04 billion and total debt of $44 million. Cash provided by operations was $58 million during the quarter. Operating cash flow was reduced by $44 million outflow in accounts receivable related to the increase in revenue during the quarter. Capital expenditures were $54 million as we continued to invest in new plants and equipment to meet demand for our products over the next several years.

During the quarter we repurchased 15,000 shares for $2 million. We expect share repurchases to increase in the back half of 2019 and remain committed to offset dilution from equity issuance.

Turning to guidance, data points relating to the health of manufacturing economies in our largest regions have weakened over the last three months. Our second quarter book-to-bill ratio was above 1, but below normal seasonality as order volumes weakened in June. Furthermore, the competitive environment remains challenging due in part to the recent slowdown in industry demand levels. As a result, we expect pricing headwinds related to the competitive environment to continue. We do expect growth in our innovative new products, accessories and complete systems to partially offset softness in our core business as these solutions gain further acceptance in the market.

Based on these factors, for the third quarter 2019 we expect revenue of $325 million to $355 million. We expect our third quarter tax rate to be approximately 25%. We anticipate delivering earnings per diluted share in the range of $1.05 to $1.35.

Escalation of the US-China trade conflict and further macro softness have reversed the market recovery we had expected to strengthen in the second half of 2019. Our largest machine tool OEM customers have not provided us with expectations beyond the next few months given the weaker macroeconomic and geopolitical climate. As a result, we do not have the necessary conviction to provide an outlook beyond the current quarter. However, we believe strength in new products and ongoing enhancements to our core laser portfolio will enable us to better capitalize on the eventual rebound in end market demand.

As discussed in 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, product demand, order cancellations and delays, competition, tariffs, trade policies 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 and I will be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Michael Feniger, Bank of America Merrill Lynch. Please proceed with your question.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Yeah, thanks guys for taking my question. Just to help us understand the pricing comments, I believe at a conference, Tim, it was I think two months ago, you mentioned how pricing stabilizing somewhat sequentially. It sounds like things changed in June. So can you just remind us how much does pricing typically fall every year. I think it's like 5% to 10%. How much did we see that fall in 2018. And now, what are your expectations now for, as we think of the rest of 2019 there?

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

Typically you will see pricing go down 5% to 15%, historically. More recently, on average, pricing, if you look on a year-over year basis, it has been 30% or even slightly higher than that on certain product lines. The issue that has really become a part within the market is as soon as the macro environment weakens the competitors try and hold on to or increase share by decreasing pricing aggressively.

So it's very closely tied, we're seeing changes in the demand environment with the way that the competitors respond to that. Having said that -- you know, and the pricing is, it continues to be a challenge. We've had a lot of discussions internally at IPG about being certainly more selective and very strategic about how we're going to respond to these sort of reaction removed by the competition.

There are even some OEMs where we're looking at not responding to pricing in the way that they're demanding because we believe we do have a significantly better quality product, both in terms of, just for example, electrical efficiency, reliability, service and support, specifications, warranty and those are advantages that we believe people should be paying for and if everyone is going to be reactionary in this market, particularly in a volatile demand environment, it's really just a chase to the bottom. And our view is that, that's not a way to leverage the value of this technology which drives tremendous improvements in productivity and you really seen this sort of really rapid growth in demand for different applications coming from those improvements in productivity.

So it's certainly a challenging environment, but we're also looking at how we can add value around the lasers, the accessories, the -- for example, in the welding applications, some of the real-time weld monitoring capability; within systems, very advanced welding applications like titanium, copper welding, and these are in areas where the competition doesn't really have a lot of expertise or capability and there are areas where IPG is building a tremendous amount of depth in capability and that's excluding some of the newer product applications where we're starting to see some nice traction as well where there is an incremental margin profile that we have of that.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

And Tim, just can you help us, I understand the visibility is limited right now, but could we be seeing some type of replacement demand come through? I think systems are 7 to 10 years old. You guys have seen strong growth over the last few years now. I'm just curious if you are seeing maybe some baseline level replacement demand that has to occur. And then just secondly on that, I'm just hoping if you could give us any more color on the auto market. I know there's a lot of movement there with new UV investments, but also some of the traditional size, we're seeing capex maybe start to plateau, any type of color you can share on that as well. Thank you.

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

So the first part of the question, certainly for fiber lasers you've got some quantity of kilowatt scale and other lasers that are now 10 or more years old. The issue that we face is the real volume of kilowatt scale fiber laser started to increase probably in '14 or '15. So you're relatively early in that replacement cycle. What I will say though is there's still a very large installed base of CO2 lasers that needs replacing.

One of our competitors and other suppliers in the industry of components will quote that there is more than 70,000 CO2 lasers that are out there that would require replacement over time we believe with fiber. That -- as part of the investment cycle toward replacing those is one of the issues that everyone is facing a bit of challenge on, that has slowed down. When you get to some improvement in sort of the macro climate or you perhaps get some better visibility into what's happening with the geopolitical tensions around the world, that replacement cycle certainly has an opportunity to rebound pretty quickly and it is, as I said, tens of thousands of CO2 lasers that do require replacement.

The automotive market is, I think, obviously there's a lot of different analysis out there that shows that the automotive investment cycles are relatively low at the moment and if that's peak, but notwithstanding that, just going back to Q2, we just mentioned that we had the largest supply and purchase order that we supply for our Seam Stepper applications into major automotive OEMs in Europe. So that was actually a -- it demonstrates a change in technology is being invested in even when the market is relatively low.

There is a strong pipeline of automotive business we are working along in the US, again, driven by technology change and some of the benefits we have from the real-time weld monitoring capability that we're hoping will generate order flow. And then the overall outlook for the EV investment cycle remains very strong and that's a multi-year investment cycle. It is project-driven and it can be uneven from quarter to quarter, but there is certainly different areas of investment within the automotive that we believe that will be drivers for our business over the medium term and certainly for the longer term.

Operator

Our next question comes from Andrew DeGasperi, Berenberg. Please proceed with your question.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks, good morning. Thanks for taking my questions. I guess, one and maybe a follow-up. On -- first of all, I guess the $380 million core laser business you mentioned to get to the 50%, just for clarification, was this the midpoint of the 50% to 55% gross margin or was this just over 50%?

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

No, getting back above 50% would be the targeted level that we've talked about previously and on this call. So you'd start to see your absorption rates pick up. I think the thing to do is look at where we were $363 million, we're just below 50%, did have some relatively large inventory provisions in the quarter. But $380 million, it does give us some comfort of being able to get back there, but it is a different scale business. The one we're guiding up for Q3, obviously, which is the challenge.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Right. And then just on pricing and competition, is a 6 to 10-kilowatt seeing some pricing pressure because of competition at the lower end or are you not seeing competition and that's in that tranche of lasers?

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

Numerous of the competitors have announced product at that level and they're trying to sell them. The issue faced is that to a certain degree any customer looks at the average selling price per kilowatt of the laser and even if there is less competition at the higher levels, you can't price it at a premium and you get a very good gross margin on that product. But there is a certain flow-through on an ASP per kilowatt across the entire product line is how we like to think about that.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Got it. Thank you.

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

As more power for competition, more and more difficult to compete because they have [Indecipherable] power. [Indecipherable] information. We -- they have [Indecipherable] problem with lifetime or with -- they have to repair very often. With high-power, they practically know they [Indecipherable] not able to [Indecipherable] but not the real but not the real sales that we [Phonetic] will understand.

Operator

Our next question comes from John [Phonetic] Wittine, Edgewater Research. Please proceed with your question.

Joe Wittine -- Edgewater Research -- Analyst

Yeah, hey guys. It's Joe, first off, for high-power QCW, Dr. Gapontsev said you're now shipping. I'm wondering if you're offering in all geographies and that if you have any rough estimates on let's say what portion of the cutting base may realistically adopt HPP QCW over the next year or so?

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

So we are offering this throughout the world at the moment, Joe. It's still too early to say what proportion of, for example, the lower end of the market will transition to using that high peak power laser. So there's a lot of evaluation work ongoing. It's probably a quarter, if not two quarters early to be able to give more definitive information about the traction that we expect to see from that all, for example, what percentage of the low end of the market would start using a 2 kilowatt HPP or a 4 kilowatt HPP.

Joe Wittine -- Edgewater Research -- Analyst

Okay, got it; a little bit early. Tim, I know you can't quantify the fourth quarter and then that makes perfect sense. But in the event, let's say, headlines kind of stay with the status quo kind of similar to as they are today, would you expect, all else equal, somewhat typical seasonality off the third quarter base wherever that ends up being?

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

Do you know that I can't quantify it, but you're asking me to quantify it?

Joe Wittine -- Edgewater Research -- Analyst

I guess, I am.

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

We just don't -- I mean it's one of those extraordinary times where we just -- we need to get through the quarter to work out to see where order flow ultimately ends up, see where demand in China ends up, see whether there is going to be a bit of budget spend come through. There are certainly some projects around the advance that we're expecting order flow from that would be driven by some budget spending, there's a pickup in some of the medical business shipments that will take place in Q3 and Q4, they're still not very material.

But you kind of need to see where the trade war ultimately ends up and whether that stabilizes the situation in China. You want to see what happens with the European economic zone over the next eight to 10 weeks and then you've got this biggest, you know, around Brexit with the new Prime Minister in the UK being pretty aggressive there. It an uncertain time. So, I'm -- so that's the kind of like color I can give you around it, getting drawn into quantifying it at this point in time. If we've been able to quantify it, we would have done.

Joe Wittine -- Edgewater Research -- Analyst

All right. Understood. And then the last from me, can you remind us on what's driving the outsized inventory provisions on a year-over-year basis and what do you assume there within the third quarter guide? Thanks.

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

It's just you got a lower revenue level on relatively high buildup of inventory last year, so you've got inventories that just becomes a bit older. It's not -- it's still not a massive in terms of total impact, it's not massively significant. So I expect them to remain relatively speaking a little bit elevated for two or three quarters as we go through lapping the annual buildup in some of the inventory that happened a year ago, but I don't expect to have a much more material impact related to them.

Joe Wittine -- Edgewater Research -- Analyst

Thank you.

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

We try to manage that, Joe, as you know on a constant basis rather than suddenly looking at inventory provisions every two years and having to take a much larger provision. We're trying to look at the realizable value on a regular basis and manage it that way.

Operator

Our next question comes from David Ryzhik, Susquehanna. Please proceed with your question.

David Ryzhik -- Susquehanna International Group -- Analyst

Hi, thanks so much for taking my question. Tim, can you maybe elaborate on the ASP declines in Europe. Is that a function of competitive pressures increasing in Europe as well? And I had a follow-up.

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

Some of the Chinese are cleaning they're selling product in Europe. It's certainly been some of the pulse lasers in Europe they have been trying to get traction on. They are trying to introduce product there. They are based on how much success they've got in that regard given the quality of their ability to support it. Some of those, they are pricing just transitions through to the OEMs and in Europe because they're aware of what's happened in other geographies around the world. Often, some of them have JVs, for example in China.

So there are very aware of what happens to pricing. So the ability to totally differentiate pricing on a standard product across regions is more difficult. The ability to differentiate pricing on capability and technical specification which is a key strategy that we have is very important, right? So we believe that the HPP lasers, the AMB lasers are going through name. We're going to be able to premium price some of that product. Selling product with some of the weld monitoring capability and accessories adds a tremendous amount of value around it. But if you just selling a straight 3, 4 or 5-kilowatt laser, people understand what's happened to pricing in different regions around the world and unless you got some of the differentiating factor to some degree that pricing migrates.

David Ryzhik -- Susquehanna International Group -- Analyst

Understood, thanks. And just regarding the 3Q guide, I would love to get your assumptions for the new product category embedded in your third quarter guide. It increased nicely from 15% to 18% in 2Q. Just wondering what you expect for the third quarter?

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

We don't give specific guidance around different elements of the revenue streams. In the third quarter we continue to expect good traction around the green lasers, the ultrafast lasers, a pickup in some of the shipments for [Indecipherable] applications, continued strength in some of the laser systems business. So, we're looking for growth from those areas and we don't give specific guidance around those numbers. And we're looking for growth to drive the business forward, not just in Q3, but Q4 and the medium-term from those newer applications. There'll be a pickup in some of the medical shipments as well based upon the order that we got.

So we're actually pleased with some of the diversification in this business. When you look at -- and these are all areas we worked on for a long time and they are now starting to generate not the level of revenue we want, but they've got some nice traction in revenue coming from these leading-edge new products, and if we can continue executing with them, we've got to have a much more diverse business within 18 to 24-month period.

David Ryzhik -- Susquehanna International Group -- Analyst

Okay. Thanks, Tim.

Operator

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

James Ricchiuti -- Needham & Company -- Analyst

All right, thank you. Good morning. I'm wondering if there are any regions, geographic regions where perhaps the bookings have held up somewhat better. It sounds like it's been a, you know, you're clearly seeing some slowing in bookings in July in China. Where are you seeing other areas of weakness and where are you seeing some signs where it's holding up better?

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

So in China, Jim, actually bookings were relatively strong for the quarter, it's just there's some uncertainty about whether people are going to take that demand now so the revenue guidance was weak there. Order flow in Korea was actually very strong even though the macro data out of Korea wasn't that good, but that's again being -- that had a lot of our development to some of the new product introductions and got orders yet from AMB there specifically, but they've been doing a lot of work, for example, the AMB on welding applications, but a lot of the ultrafast, some of the UV, some of those newer applications and the welding business in Korea was strong.

Japan order flow was not great, but there is expecting -- was expecting a pickup in revenue from Japan in Q3. The US is continuing to hold up reasonably well. So that continues to be a more resilient area in the macro and also the US business is a bit more diverse, right? You've got the emerging medical business, you've got the advanced business which was revenue wise is a bit weak, but there's a lot of different projects being worked on that. We got an order for a 60-kilowatt laser in the last couple of weeks out of the US [Speech Overlap] two orders for 60-kilowatt.

So that would be for an advanced research application. Other areas -- Europe as a whole is pretty weak, and China is volatile, right? There is some underlying demand that exist in China but it's getting switched on and off as business uncertainty either -- it gets switched off when business uncertainty declines and it comes back when there is some confidence in the business environment. So I wouldn't say there is no demand for lasers in China, it's just volatile at the moment and that's the challenge that we're dealing with.

James Ricchiuti -- Needham & Company -- Analyst

Okay. Thanks for clarifying.

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

We have two months where we've had the growth of business in China. But after the new new increase of tariff immediate with quantity awarded from China drove minimum three times. Now with our customer remain with us, but they -- before they order by 500, 1,000, even 5,000 units per one order, now [Indecipherable] quantity of orders is the same as before, practically quantity per day, but instead of 10, 15 or 100 each order, now we will only one or two pieces. So they [Indecipherable] order, but waiting for events, what happened later and how they hold the practical rather than in quantity, well, because they need to [Indecipherable].

James Ricchiuti -- Needham & Company -- Analyst

That's helpful. On the systems side of the business, ex Genesis, I'm surprised that the business has been holding up and you're showing the kind of growth that you have -- you're showing in this kind of macro environment. Are you -- is it just because it's a relatively small business and you have new applications you're going after?

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

Specific -- some of the systems, I'll say the multi-axis and the small form cutting machine which is primarily sold in the US, right, does benefit from the US economy in relatively stronger. There is also relatively old capital equipment in terms of age in the US. So that investment cycle potentially, as the macro holds up, is stronger. The ILT business which is shipping into the medical device manufacturing industries had a good quarter in Q2, it is going to have another -- it's going to have a better quarter in terms of shipments in Q3.

Their total order flow is also held up. And then we did deliver quite a lot of higher power specialized, some of these are fairly specialized systems. There was one system for welding batteries that was delivered to the UK, Jim. There's another system for welding batteries in a consumer product that will be delivered or revenue will come through on Q3. So some of those more specialized systems, we did get some revenue off. And then, for example, the system that was sold for the battery welding is actually going to result in good order flow for some lasers for that battery welding application in the future. So yeah, the systems business, ex Genesis, for lasers performed pretty well.

James Ricchiuti -- Needham & Company -- Analyst

Okay, thank you.

Operator

Our next question is from Patrick Ho, Stifel. Please proceed with your question.

Patrick Ho -- Stifel -- Analyst

Thank you very much. Tim, maybe first off, you talked about some additional cost cutting efforts on your end. Given how you're already the lowest-cost supplier in the industry, are these additional cost cuts coming on the manufacturing side of the supply chain. Can you just give a little more color and details of where you can extract the additional cost savings?

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

It continue to come from the core optical components that we use, the diodes is obviously one that we talk about a lot. Increasing the power that you can get out of an individual fiber block. There are even some mechanical components where we're going to -- some of these design changes. So, for example, some of the heat sink designs we're looking at that are used in the modules, we're going to improve the quality of the cast aluminum in there to enable those heat things to more rapidly remove heat. That will enable us to produce modules of higher power level and increased reliability. That's something in the medium to near-term that we're looking at that isn't going to roll into the bill of material for a few months, but that would be an example of something that we think about and it's a bit more of a lateral way of thinking about it.

And then you got to look at where we are adding value around the accessories, which grew at 10% year-over-year. There's a lot of value-added around the accessories that we produce relative to the cost of an accessory and the selling price. The newer products, where we're taking cost out of the bills of material, for example, the cinema products continuing to ramp the demand for ultrafast pulsed, trying to get the cost of the green lasers down a bit more. So some of the newer products you'll see improving margin there as well. So it's a pretty broad based. As always said, the strongest part of IPG's DNA is not just the technology, it's really this ability to take cost out of products.

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

And very important, before we introduced about [Indecipherable] beginning of this year a new diode [Phonetic] which is much more power [Indecipherable] and also easier [Phonetic] to work whether it's [Indecipherable]. [Indecipherable] only introduced in the market only couple of months ago [Indecipherable]. So [Indecipherable] from this diode, we expect end of this year, next year, it would be [Indecipherable] from the market with these diodes.

Patrick Ho -- Stifel -- Analyst

Great, that's helpful. And maybe as my follow-up question. I think as Tim mentioned, Genesis has held up very well in this overall environment. How do you see expanding Genesis from kind of its core North American base. How do you I guess expand its opportunities into other regions and how do you look at that on a going forward basis?

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

As Tim mentioned before, it works only for American market. They don't help [Indecipherable] worldwide. Now we will extend the activity worldwide to Europe with [Indecipherable] Asian market for example, South Korea and Japan [Indecipherable] become worldwide [Indecipherable] and we expect -- and second also, now we redesigned the product using the lasers before the quantity of system they produced before with [Indecipherable]. Now the most new products [Indecipherable] based on laser technology, it takes some time to redesign [Indecipherable].

But we've already exceeded very large project now in the US, some in other country when we prepare now is very [Indecipherable]. So with the [Indecipherable] integrator would be [Indecipherable] and components [Indecipherable] our internal integrated all customers with whom we are working [Indecipherable] very excited now [Indecipherable].

Patrick Ho -- Stifel -- Analyst

Great, thank you very much.

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

[Indecipherable] starting from a little more billion [Phonetic] of this new full production line and [Indecipherable] now there's also some other [Indecipherable] whether unique accessories, optical accessories, now we [Indecipherable] we're able to make ourselves before. Now with Genesis we now go into production lines, production lines for [Indecipherable] and change technology in many large companies, full technology and that will be [Indecipherable] provide new projects, provides new solution and full solution in full production line. [Indecipherable] when you new approach for IPG, it takes some time, but what is success, we will go into this business.

Patrick Ho -- Stifel -- Analyst

Thank you.

Operator

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

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

Yes, good morning. Just a follow-up on Jim's question on the system side. Does that mean that pricing is holding up better on systems versus the kind of core fiber laser market?

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

I think it's different, it's a different dynamic. It depends how much -- where you adding a lot of technology and you're adding a lot of value and you're delivering complete processes, the relative price versus cost is strong. In some parts of the market though where there is more competition, the relative price to cost is lower. So it really depends upon what the application and solution you're delivering is in some of these core areas where we're seeing some growth, for example, we're doing the medical device manufacturing applications. The average selling price of those systems because you're delivering software as well as technology traceability. For example in the manufacturing process, certainly pricing is not being impacted in the way that it has in the other parts of the market. And it really comes down to the completeness of the technology and the solution that you're offering.

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

Okay, that's helpful. And then, Tim, when you look at the FX impact in the quarter, what region is driving most of that impact and what do you have in place as far as natural or synthetic hedges right now?

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

So, what was the last

Unidentified Speaker

the last part of the question, Tom?

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

What kind of natural hedges through operations or synthetic hedges might you have in place for FX?

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

So the transaction FX losses in Q2 were primarily renminbi versus dollar-driven, a little bit to a lesser extent on the euro. We try and -- I mean the natural hedges are pretty much the same. Sometimes those natural hedges don't work is effectively if exchange rate go in the same direction. So a weakening renminbi and a weakening euro, your natural hedges just don't work. If you have a weakening euro and a strengthening renminbi, those natural hedges work better.

I continue to be, particularly with the cost of hedging some of the renminbi exposures, skeptical about whether you just end up smoothing the losses, so we tend not to go into using the FX forward contracts for that. On the other side of it, if you look at the impact on revenue on a translation basis, the two biggest exchange rates that have moved over the last year again are, the renminbi has depreciated from higher 6.30 almost, if you go back to Q2 a year ago. It's touched lows, approaching 7.0. So that's a 10% depreciation and the euro, probably a year ago was 1.18, 1.19 and it's anywhere in the range of 1.11 and 1.12. The ruble, which is also an exposure we have is probably traded between 57 and 63-ish over the last year. Those would be the three main currencies that we were affected by.

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

Okay, thank you.

Operator

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

Nikolay Todorov -- Longbow Research -- Analyst

Thank you, good morning guys. So just to go back on the pricing headwinds comment, so obviously most of the headwinds are centered in China, but can you guys talk about if you're seeing anything in Europe or in North America, we're just picked up some commentary from the supply chain that some OEM cutting tools manufacturers have been kind of aggressive as well. And from what we know they're not your customer. So I'm just wondering if you're seeing any more aggressive discounts in Europe and in North America?

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

Yeah, I said that inevitably there is knowledge about what goes on in China from the cutting equipment manufacturers in different regions around the world, so that you can't isolate price changes in one region for another. And the second thing is that people tend to think about pricing in terms of the cost per kilowatt. So if you see decreases in one region, they tend to migrate to the other regions to a greater or lesser extent and it depends also on -- if you go into the higher power levels, it tends to be less so because there is less competition as an advantage that the cutting equipment manufacturers get in terms of productivity. Some of the electrical efficiency benefits have become more and more important as you go to higher and higher power levels, right?

A laser that operates at 20% electrical efficiency at 1-kilowatt, it's perhaps -- it's -- well, it's certainly not as important when you have 20% electrical efficiency competing against an IPG laser that has 50% electrical efficiency at 10 or 15 or 20 kilowatts. So as you go up in power, there's certain performance advantages that IPG delivers that are not matched by the competition. But you see pricing migrates around the world just because people understand what's happened in China. Several of the OEMs I mentioned have joint ventures in China. They've got intelligence on the ground about what the cost of a 1, 2, 4, 6, 8 or 10-kilowatt laser is.

Nikolay Todorov -- Longbow Research -- Analyst

Okay.

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

Don't forget the Europe, for example, it like 70% to 80%, it's only [Indecipherable] but not [Indecipherable] not inside of Europe, mainly in Asia, in China, so as work in for China mainly. So [Indecipherable] in China pricing change it immediately impactful [Indecipherable] and Europe is a [Indecipherable] correct the prices for the [Indecipherable].

Nikolay Todorov -- Longbow Research -- Analyst

Okay.

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

[Indecipherable] on this as well is, at probably 25, if you just looked at average selling prices across the board, about 25% of the total changes related to the FX that I addressed in the previous question, just on a translation basis with renminbi having depreciated 10% and the euro having depreciated 5% or 6%. If you saw the dollar start to weaken and some of those currency strengthen, there will be some recovery against that. So, even as the dollar may weaken if interest rates are moved down by the Fed tomorrow.

Nikolay Todorov -- Longbow Research -- Analyst

Yeah. Got it. And then you talked about demand being very volatile in China kind of related to changes in the headlines. Is it strictly demand being volatile or you're seeing also the same on the pricing front or prices have been kind of getting progressively weaker as we get into May and June?

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

I said at the beginning of the call that the demand volatility that tends to drive price volatility, right, particularly from the competition. I think the industry has to learn to become less reactionary to this because it's just kind of be a rush to the bottom and we're certainly being more selective and strategic about looking at pricing and the value that the lasers deliver. So the demand volatility unfortunately at the moment drives a reactionary response on pricing from particularly two or three of the competitors because they are just trying to fight for any revenue they can get. That's a very short-term view to have in our opinion around the markets and one of the reasons why we're looking to be more strategic and selective.

Nikolay Todorov -- Longbow Research -- Analyst

Got it. And last question from me, the last couple of quarters, you talked about some strength in aerospace and defense. Can you give us an update there. I didn't hear anything in this quarter, I think you mentioned some volatility probably in advanced products. Is that related to maybe some just temporary drop in demand end market or is there something else?

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

No, on the defense side, it's still very much -- there's some commercialized applications, but they're already developing, right. So a lot of it tend to be very project driven and you'll have very strong quarters and then the revenue can be uneven because order flow will be lower and people will be working on utilizing the lasers they bought. There's one application that's been developed for commercially at lower power single mode lasers where we're expecting to see some increasing demand in the second half of the year. We referenced that we got two orders for 60-kilowatt lasers that are going research. So that business is just uneven and it's expected to be stronger in the second half of the year.

What's the first part of the question, I can't remember it?

Nikolay Todorov -- Longbow Research -- Analyst

No, I think you answered it. I think you answered it correctly.

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

[Indecipherable] say for this application just lasers, but now we're going for the production sale [Indecipherable] system for this market. If that's I would different approach and much more valuable, it's [Indecipherable] for example, to aerospace and high energy market, it's on for oil and gas market. So [Indecipherable] complete solution in a unique [Indecipherable], we have developed that process, now we materialize in the full system. We feel [Indecipherable] when tested so on, but it's not easy process to introduce in this market. Qualification stage done a year since, but we're going very successful with some projects very difficult [Indecipherable] going extremely successful in future [Indecipherable] potential would be very large volume business.

Nikolay Todorov -- Longbow Research -- Analyst

Got it. That's helpful. Thank you, guys , good luck.

Operator

Our next question is from Tom Hayes, Northcoast Research. Please proceed with your question.

Tom Hayes -- Northcoast Research -- Analyst

Good morning, thanks for taking my question. I'll try to be brief. Tim, I was just wondering if you could maybe provide any other color as it relates to mix within your China sales as it kind of relates to moving up and down the power scale?

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

I will provide a little bit. Yeah, I mean the ultra power and the greater than 10 kilowatts performed very well in the quarter, that had rebounded strongly in April and May. So that was a bit of a benefit. The lower end of the market and units was relatively strong. I think that's really the high level stuff in terms of the high-power. Some of the welding applications in China in high-power as well performed reasonably well.

Tom Hayes -- Northcoast Research -- Analyst

Great, thanks for the color.

Operator

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

Mark Miller -- The Benchmark Company -- Analyst

Thank you for the question. I'm just wondering about programmability, is that becoming a bigger part of laser sales, you've seen growth in demand for programmable applications?

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

By programmability, do you mean the adjustable

Unidentified Speaker

adjustable mode, Mark, that's an area that we're working on with for example, customers both in cutting and welding applications. In welding, there's a substantial reduction in [Indecipherable]. With the programmability of it, you can also then cut varying thicknesses of material. It's important, but it's talked about a lot in terms of marketing materials by different companies around the world. Our view on it is actually the programmability is probably going to be more of an enhancement for welding applications than it is necessarily for enhancing thick cutting applications. Some of the quality people are getting to with our higher power cutting heads, for example, is achieving adequate cut quality when you're cutting materials of one and two inch thickness.

You don't require jigsaw quality cuts there, sometimes it's just the perception of the quality of the cut. If that's what you mean about programmability, it's going to have some niche applications particularly in welding, it's not going to be an overall dominant type of laser that's sold for materials processing.

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

You're citing, for example, application, many years people thought coil fiber lasers were very thin metal sheets like 1 millimeter, 2 millimeters and so on, and [Indecipherable] can provide much thicker -- process much thicker materials. Now people forget about this because fiber laser provides are the one centimeter and so on. Now with the available technology, to cut up to five [Indecipherable] centimeter [Indecipherable] very high quality cutting, nobody still have that technology. Nobody have this, only we have it.

It's not only a hardware very special and so also [Indecipherable] knowledge and so it's also priority. Now we introduced this technology to the market. Nobody can compete with us today so on. It's [Indecipherable] three to six even more centimeters, cutting very high-speed, high quality and so on, nobody can make the, for example, the birthplace five -- ten -- when 10 kilowatts, 12 kilowatts they tried to develop on cutting [Indecipherable] so on, we provide now with [Indecipherable] kilowatt and [Indecipherable]. In a way it's [Indecipherable] nobody can produce it because it's not only power, it's also very special solution on how they deliver this and so on and [Indecipherable] nobody can provide today to the market. And it's a process it [Indecipherable] know-how, but this business would be related [Indecipherable] stainless steel and so on. We have this process developed inside.

Mark Miller -- The Benchmark Company -- Analyst

Thank you.

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

And also [Indecipherable] cutting, for example and so on also, it's so on and welding [Indecipherable] people [Indecipherable] generated for example for very powerful [Indecipherable] provide excellent technology to make this now we discussed provide for them [Indecipherable].

Mark Miller -- The Benchmark Company -- Analyst

Thank you.

Operator

Thank you. At this time I will turn the call back to James Hillier for closing remarks.

James Hillier -- Vice President 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 our next quarter's call. Have a great day, everyone.

Operator

[Operator Closing Remarks].

Duration: 64 minutes

Call participants:

James Hillier -- Vice President of Investor Relations

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

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

Unidentified Speaker

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Joe Wittine -- Edgewater Research -- Analyst

David Ryzhik -- Susquehanna International Group -- Analyst

James Ricchiuti -- Needham & Company -- Analyst

Patrick Ho -- Stifel -- Analyst

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

Nikolay Todorov -- Longbow Research -- Analyst

Tom Hayes -- Northcoast Research -- Analyst

Mark Miller -- The Benchmark Company -- Analyst

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