Q3 2021 IPG Photonics Corp Earnings Call

Good morning, and welcome to IPG Photonics third quarter 2021 'twenty.

<unk> 2021 conference call.

Today's call is being recorded and webcast at this time I'd like to turn the call over to your host Eugene Fedorov Ipg's director of Investor Relations for introductions. Please go ahead Sir.

Robin Good morning, everyone with US today is IPG Photonics, Chief Executive Officer, Dr. Eugene Shcherbakov, Senior Vice President and CFO, Tim Mammen statements.

Statements made during the course of this call that discuss management's or the company's it bounces 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 COVID-19 pandemic on our business and those detailed in IPG Photonics Form 10-K for the period ended December 31st 2020, and other reports on file with the Securities and Exchange Commission copies of these filings may be obtained by visiting the investors section of IPG.

<unk> website or by contacting the company directly.

May also find copies on the SEC's website.

Any forward looking statements made on this call are the company's expectations or predictions as of today November 2nd going into 'twenty. One on that 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.

The earnings call presentation, and Excel based financial data workbook posted on our Investor Relations website.

Post these prepared remarks on our Investor Relations website. Following the completion of this call with that I'll now turn the call over to Eugene as chairman.

Thank you Gina and good morning, everyone.

We are deeply saddened by.

Or is it pricing.

As a founder and.

<unk> executive chairman of IPG.

There's tremendous loss for our company.

The broader community check.

<unk> benefited greatly from he is technical innovations and strategic vision.

Because there isn't a M.

Santos.

For final laser curve become cost effective reliable and effective tools.

That's masked applications and global industrial production, and namely automation efficiency and developing those new products.

It was recognized as the father of their fiber fiber laser investor.

And the grades and temporary here.

Well she is footsteps they will continue to focus on innovation.

And then in total.

In manufacturing and research and development capabilities to make because it.

Quality components.

Reliable products.

At IPG, they're also exploring.

Our markets and applications.

Fiber laser scanner many place existing laser.

Non laser technologies by improvement officials here.

Activity or enabling technology technological breakthrough for our customers.

All of our technologies are playing well.

It was a major micro browse and then it looked in the last months and electrical vehicles and renewable energy.

As well as focus on energy efficiency industrial automation and Digitization.

Hey, shutdowns for them as a way products are created.

As a part of our strategy.

I've been diversify away from their high competitive or more of a cyclical khartoum market in China.

And already resolved this quarter demonstrate the successful execution.

This strategy.

We are pleased to deliver third quarter revenue and EPS at the top end of our guidance.

Well Brian.

Ah by stronger growth in Belgium, marking cities, bringing Jim.

That was a cleaning semiconductor spend number.

<unk> applications.

Demand for IPG laser continue to improve in North America and Europe.

Boswell and cut down on vacation, so China as a sort of girls.

We're also seeing increased orders and business activity in Japan.

This geographic is continuous 30 power from pandemic and saw increased investment in new factories and automation.

We are benefiting from widespread with investments.

Electric vehicles.

Production globally.

<unk> are used in a way where do you see them for welding.

Hello, Kai chain and cleaning applications for EV battery manufacturing.

We're also seeing opportunity for laser welding, and maybe Muhtar assembly and body and wide applications.

These investments are likely to continue for the next three five years is an automotive manufacturer to address their need for EV batteries and you're a technologist in order to meet agree with sort of global carbon emissions standards.

We are excited about increased demand we have seen it in the Americas product and applications, which contributed just under 30% of our total revenues this quarter.

Aircraft sales in AMB lasers and medical.

But I'm gonna holes and high power pulse lasers.

Bus AMV in high power pulse lasers are benefiting from increased investment in EV battery capacity worldwide.

Automated go product are rapidly gaining adoption and Bosch, our trillium laser and disposable fibers.

Can see that he was in New York, we'll stand up in the Investor.

We believe that our medical business, we will continue to grow significantly.

But actually the album King size or the next two or three years.

One of our newest products he has homefield.

Concept laser which could launch earlier.

Earlier this year.

We named widespread interest in gaining significant traction in the community.

Sure.

We launched our new and improved version of late September.

It also has cleaning capability and a decent dominium preset parameters.

Some customers may choose rollout lifeboat, Josh for a cleaner future as it's kind of save time money and reduced cost of consumables.

Landfill was China.

Our presentation at <unk> this year.

We have signed agreements with <unk>.

National wide just didn't operate.

Congress or welding retail stores in the United States.

You've got them they expect to sell tens of thousands of light rail system in the next three to five years.

As expected we saw.

Softer demand conditions in China cabinet market during the third quarter.

The combination of Monday, the demand environment by widespread supply chain issues.

Hi, shipping cost and power shortage as well as a more aggressive price competition from local manufacturer.

You got to be really impacted demand for cutting applications in China during the quarter.

At the same time, we're seeing record demand in the world in China as a result of strong sales and easy bet any obligations and then creating the new from Martin M City Deepak pinching.

And in several cases, we saw customers are coming back to IPG after low cost local supplier meet.

Customer quality and technical support expectations.

We continue to benefit from our vertically integrated model.

This enabled technology technological advantage, while minimizing the supply chain disruptions.

Oh yeah.

We have been seeing some impact on our and our customer operations from ongoing supply chain issues worldwide.

We were able to successfully overcome this quarter.

As we announced earlier the board selected John Peeler, as along as acuity a chair.

John has served as lead independent director since two.

<unk> thousand 17.

And his appointment and.

Juniors stability as the new shaft works together well all of the years.

These deployments continue to separate <unk> share of that.

It started in May we entered the range you want.

And I look forward to work on his job and he is the.

The new positions.

Is that Idaho doors at Kohl's, the team to discuss financial highlights in the quarter and fourth quarter outlook.

Thank you Eugene and good morning, everyone.

My comments generally will follow the earnings call presentation, which is available on our website.

I will start with the financial review on slide three.

Revenue in the third quarter was $379 million, which increased 19% year over year.

And 2% sequentially.

Third quarter GAAP gross margin was 49% an increase of 100 basis points year over year.

Compared with the year ago period, the increase in gross margin was driven primarily by lower inventory provisions and a reduction of Unabsorbed manufacturing expenses as a percent of sales.

GAAP operating income was $102 million.

And operating margin was 26, 9%.

Third quarter, net income was $75 million or $1 40 per diluted share.

Effective tax rate in the quarter was 26%.

As a reminder, last year's results were negatively impacted by a goodwill impairment charge.

$45 million.

During the quarter, we recognized an after tax foreign exchange gain of $2 million or four cents per diluted share.

Primarily related to the depreciation of the Euro and Chinese one.

If exchange rates relative to the U S. Dollar had been the same as one year ago, we would've expected revenue to be $9 million and gross profit to be $6 million.

Moving to slide four.

Sales of high power CW lasers decreased 4% year over year and represented approximately 47% of total revenue.

Sales of Ultra high power lasers at six kilowatts, or greater represented 51% of total high power CW sales.

Medium power laser sales increased 109%.

Growth in cutting welding three D printing and semiconductor applications.

Q CW laser sales increased 8% year over year on a higher demand for marking and engraving in drilling applications.

Pulsed laser sales, including our high power pulsed lasers.

Increased 16, 9% year over year.

With strong growth in foil cutting applications for EV battery manufacturing.

Solar cell applications as well as higher sales of our infrared lasers for marking and cleaning.

System sales increased 56% year over year with improved revenues for Genesis.

The Iot and a ramp up in light wealth sales.

Other product sales increased 58% year over year benefiting from higher sales in medical and beam delivery.

Examining our performance by region on slide five.

Revenue in North America increased 55% year over year, driven by materials processing with growth in welding and increased sales of high power lasers for cutting applications.

We also saw record quarterly revenue and medical as our products continue to gain acceptance.

System sales improved in the third quarter with both laser and non laser systems posting strong revenue growth.

In Europe revenue increased 50% year over year, driven by accelerating demand in cutting and welding applications.

As well as strong growth in marking an additive applications.

Our revenue in China decreased 7% year over year in the third quarter.

Representing approximately 36% of total sales.

Soft sales of high power lasers in cutting applications more than offset higher demand in welding applications.

High power pulse lasers for foil cutting and growth in marking additive applications.

Sales in Japan were up 11% and revenue in the rest of Asia increased 15% year over year.

Moving to a summary of our balance sheet and cash flow on slide six.

We ended the quarter with cash cash equivalents and short term investments of $1 5 billion.

And total debt of $35 million.

Strong operational execution resulted in cash provided by operations of $102 million during the quarter.

For our cash deployment capital expenditures were $40 million in the third quarter, and we expect capital expenditures to be between $130 million and $150 million for the full year.

During the quarter, we repurchased 200000 shares.

$36 million and.

And have bought approximately another 135000 shares so far in the fourth quarter.

Commenting on outlook for the next quarter.

Third quarter book to Bill remained above one.

We expect stable demand in North America, and Europe, and continued to see growth opportunities in welding and high power cutting in North America, and Europe coil cutting and welding applications for EV battery production across many geographies.

As well as opportunities in solar cell manufacturing medical procedures and advanced applications.

We also see like wealth sales continued to gain traction.

However, sales in China will be down sequentially in the fourth quarter due to soft demand in cutting applications.

Uncertainty due to supply chain issues and power outages that may impact demand for our products as well as ongoing competitive pressures.

For the fourth quarter of 2021.

IPG expects revenue of $330 million to 360 minutes.

The company expects a fourth quarter tax rate to be approximately 25%, excluding any discrete items.

IPG anticipates delivering earnings per diluted share in the range of $1 to $1 30, with approximately 54 million diluted shares outstanding.

I would like to remind you that financial guidance provided this quarter continues to be subject to greater risks and uncertainty given the COVID-19 pandemic and its associated impacts to the global business environment.

Hi chain public health requirements and government mandates.

Please refer to the Safe Harbor passage of today's earnings press release.

For more details on risks and uncertainties associated with our forward looking statements.

And with that we'll be happy to take your questions.

[noise]. Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

Press Star two if you'd like to remove your question from the queue.

We ask that you please limit to one question and one follow up.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Yeah.

Our first question comes from Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.

Hi, Good morning, I had a question about China, if we exclude the cutting business in China can you give us some sense as to how the business performed across the rest of the portfolio or are you still seeing weakness in China or did that business perform better ex China ex.

Cutting in China, and I have a follow up.

I know in Q3, <unk>, excluding touching the rest of the business was a very robust I mean, clearly EV battery applications are a very strong driver of growth.

We're actually really pleased as well we've got some good demand coming from additive applications, there which are.

With lower power, but very high quality lasers, so competitively.

Competitively that's been a very positive trend in the other good positive trend I think was on some of the marking and engraving applications, which are increasingly being used in automated production lines and therefore, where the quality of the laser is very important that also performed well that so yeah other applications outside of cutting.

<unk> more than robust I'd say, they're good but for cutting applications also referred to it.

See the law and applications of course, it sounds strong competition from Chinese.

But all right and exactly.

Except for the very good position.

But isn't the whole sort of Chinese competitors.

Got it and then a follow up question I have is just with respect to lightweight well I know, it's early days, but yeah judging by the interest that fab Tech I mean every time I saw the booth. It was packed people looking at the demonstration of that at what point are you will you see the ban.

To FID at the expanded distribution channels will that hit in Q4 or is that something that.

Really begins to benefit you in early 'twenty two.

I don't know if there's a high level of training that goes on with the channel partners, but can you give us a sense as to how youre thinking about light world.

Of course, I would like to get those.

Great benefits from this quarter, but all of them.

Of course, it will take time.

Because a lot of different opportunities.

And customers are ready to participate in this and we have to sometime to Russell ceased customer to use it.

And of course as a beacon.

We cannot benefit you'll get to the first quarter next year, but also it's very important that is.

<unk> introduced a new auctions for our Lightwave Division.

Demonstrating the.

And if it was this quarter and beginning of the first next year.

And this will be is do you anticipate this is going to be a catalyst for your systems business because the rest of the systems business also seems to be recovering, but as we look at the you know you're seeing clearly a turn in that part of your business.

Yes about the talking about catalysis.

I don't think so because all of a still probably themselves. So they will grow.

And we are optimistic about our drug laws and forecasts for the next year.

Okay. Thanks, I'll jump back in the queue.

Yeah.

Yeah.

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

Yeah, and things guys and good morning.

The gross margin is holding pretty well despite the softness in China cutting so that's obviously a change from the prior cycles.

Can you talk about the levers that are allowing you to maintain a consistent gross margin. Despite the decline in China cutting are you seeing offsets from new products or are you seeing more discipline in pricing what are the drivers of the Brazilian gross margin.

So there's a number of drivers I think the first thing is the strategy of pound being disciplined around pricing both in China and globally is really paying dividends in that regard.

The second there's probably two or three more drivers so with slightly lower sales of cutting applications in China and higher sales of other applications.

We generally have a mixed benefit from that in addition, you've got a geographic mix benefit with some of the strongest shales in euro.

Europe and North America are around both catching it other applications. Those are all show a benefit and then.

Yeah, we've got sort of strong sales coming out of areas like medical and even some of the semiconductor applications. So we're exactly trending in the direction that we'd like to see from a mix and diversification perspective, and there was a benefit on the gross margin side.

Uh huh.

From all of those areas and also continue to.

Prolonged our special project, which was installed set two years ago about optimization on our manufacturing costs.

Components, what do I see this as a real pools. This brand also is that next year definitely.

Okay as a follow up.

Tim can you provide any preliminary comments on 2022, I know you're not going to guide specifically, but I think last quarter, you talked about a double digit sales growth algorithm. How do you see maybe 2022 relative to that framework and make any comments would be would be helpful. There. Thanks.

Well I'm not going to comment on a double digit growth for next year I mean, we provided our medium term.

It's a long term target of continuing to grow the business at a double digit growth rate, we're not giving any guidance for next year at this point in time it would.

At the wrong point in time to do that we won't have to make a decision as to whether we provide annual guidance overall, though we remain.

Really quite optimistic about next year, you've got a major growth drivers that we talked about sort of macro trends out there with EV battery manufacturing EV motor manufacturing our body in white applications, new product introductions in the other parts of the welding market with light world growth.

Medical applications.

High power cutting market transitioning to a much higher power levels globally as well as in China, we're going to start rolling out our ultra compact laser at higher power levels then.

One and one and a half kilowatt so transitioning during the course of the year early on in the year. It's at three.

Three and six kilowatt and then ultimately probably in the second half the year to eight kilowatt with the ultra compact device. So there's a whole host of.

Different applications.

We think oh kind of really make next year, an interesting and exciting one and even from a geographic perspective, your contingency sort of robust.

Economic data and in North America, and in Europe, and maybe a little bit of a moderation, but no fundamental shift in geographically, we're starting to see some recovery in Japan as well.

They've got lots of opportunities in some of the other southeast Asian markets like Korea.

So totally where we're sitting here.

I'm pretty positive about next year at this point in time.

I would like to add that some customer.

Customer and also in China and outside of the China. They stopped to ask about this.

Yeah, correct lasers I mean.

Is this a IPG laser is if you don't see more than 50% nobody would produce such panic laser today.

So this also for us it will be opportunity to provide very high ball is the Susquehanna high efficiency and they would like also to demonstrate this.

Wow.

And through this quarter and also the beginning of the next quarter.

We've got some potential customers for this.

Got it.

Thanks, guys. Good luck.

Thank you.

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

Hey, guys. Thanks for taking thanks for taking my question I wanted to be.

Respectful and how I ask this question there are a lot of investors wondering.

Kind of what happens to U T. Valentine is trust and the voting shares as you did.

Shareholder in your 10-K filing obviously his ownership position cited as a material risk. We saw yesterday. There was some 13D filings that occurred last night, just because it does come out with investors could you provide an update given those filings what what is kind of a status on his own.

Shipments trust position at this point.

So Michael there's no no no material change to it.

Do your ownership structure the state planning.

Around Doctor coupons, there's ownership in IPG fee.

It was not only started but completed many years ago.

No change in the trustees.

Appointed to manage.

Trust and drawn Guards U K company.

There's no major change there is doctor shovel has been managing director and will vote those shares.

So I.

I think we've.

Yeah.

Just sort of transition.

Around this has been thought through.

And planned pretty well.

So sort of a decades long process.

So we started to look at this asset.

Okay.

Fair enough, Kevin I guess on that.

Is it I guess just my answers. This next question but.

Given the.

The circumstances is there any change in strategic direction for IPG. Following following the events any change in capital allocation with significant cash balance.

Any any change that we should be aware of.

Management, we saw the new executive chairman, but just curious as it can be any changes post this news on on strategy and IPG going forward.

I think the first statement is if we were going to make a fundamental change or anything it would be a material announcement that we'd have to make and we've made.

All of the announcements around the <unk>.

Events over the last couple of.

Last couple of weeks.

The strategy, we talked about that.

When doctors shcherbakov took over as CEO that.

At a high level on a broad level. This strategy was developed by Doctor show the call went off to the positive and even all the members of the executive team over many years, so continuing to pursue the.

Rollouts of fiber laser technologies across multiple applications and end markets. So there's no big change in that direction. Dr shall we call. It was mentioned.

You mentioned a couple of things are going to continue to try and optimize.

And then the manufacturing footprint and efficiencies that we have there.

No, we're not changing I'll call. It gross margin guidance range of 45% to 50%, although internally, we're getting increasingly comfortable of achieving the top end of that range and us pursuing initiatives that keep us on average at the top end of that range of course, there could be some variance depending upon where.

Quarterly revenues fall out.

And you know in terms of capital allocation, we've continued to enhance and develop the capital allocation strategy over time, we're executing a.

Very regularly against the existing.

Existing $200 million buyback that we have out there and.

Quickly and expeditiously completed the prior one.

So no no fundamental changes that are out there otherwise, we would've had to articulate to them.

Makes sense, thanks for that Tim and then how do we think about with all the supply chains.

And the cost inflation.

With you guys being so vertically integrated.

I'm curious how that kind of impacts you with some of these supply chains trying to you to get certain components, but also you know I I feel like the expense number was was it in line with your expectation around the $87 million like how do we think about you know are you seeing more cost inflation in the business as you kind of head into the fourth quarter and into <unk>.

22, how we kind of think about those moving parts on SG&A and in labor and things like that thank you.

Hum of course.

Yes.

Well first of all for our customers and also to all of our suppliers.

Okay.

There's some components.

Electronics soups and so on but we.

We have made some.

A question about this I mean, we have.

And I'll stop these components.

I've got laser stable production of lasers, and nothing that up.

Our customers, but of course, we have to think about without a strategy because you see the price for metal, but all of us, but I'm not particularly for on a medium to 90% booked up about 30%. So.

Some cheap price also increased 3%, but sometimes the city up to 10 times.

Susquehanna conditions of course, we have to see also.

Some possibility so.

Again, there's still optimization out of cost and also to discuss ways out of existing and potential customers about our future.

Hi, Paresh.

And of course, there is some uncertainty about what we believe is up.

Next theater, but much more stable conditions definitely up there.

And then just with regards to the operating expenses I can address that as SG&A.

R&D, we were right in line with.

What we've guided to for Q3, we're actually running at a bit higher level on some.

Some of those Opex.

Relative to a year ago festival, because all variable compensation accruals.

Given the overall performance of the business you know year to date growth that's close.

Close to 20% in Q3, 20% say, whereas you're slightly ahead of where our budget was our variable comp accruals are.

Slightly higher you've got some expense coming back from.

For example, trade shows and fairs on on the selling side, So fab tech.

The variable comp right relatively speaking next year, we'll probably moderates a bit.

Depending upon how we perform relative to next year's budget, so not seeing actually any fundamental shift in and that we're also looking for optimization of those expenses on the operating side as much as anything else.

Certainly looking to be very disciplined in the way that we manage that but you know we also got to make sure that for example on things like selling and R&D that we're focused on.

Hiring enough salespeople to grow the business and doing sufficient marketing activity and also focusing on R&D and getting key projects and products that we think will really drive revenue growth completed.

Yeah.

Yeah.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.

Yeah.

Our next question comes from Portage Misra with Bahrenburg. Please proceed with your question.

Thank you good morning, I guess, just going back to that inflation discussion so.

I mean looking at it a little differently. So some of your competitors have been cutting prices in recent years. So I'm just curious if there's inflation and component pricing and freight is making it more difficult for those guys to cut prices.

That's good disinflation lead to some sort of price stabilization.

Even for the low power lasers.

I mean, we can't really talk to our people in the competitive market will behave brokers I think it's interesting, though if you looked at the results of one of those competitors that was announced last week, even relative to Q1. The gross margins are down I think by almost 600 basis points.

So that's certainly been very aggressive around pricing.

And with that aggression around pricing, they're certainly not getting that cost base down because of that impact to the gross margin I can't say, how they're going to behave strategically and in the future.

Yeah.

Got it and then as a follow up maybe just if you could talk a bit more about your solar business.

Any thoughts on how big is that right now and how big you think it could be in the next several years and also where exactly are your products used in and that whole process.

So it's not all or one product. That's several products are unfortunately, I don't know exactly what kind of part of the solar business.

Hum.

Okay.

To date, but.

First of all there is any different kind of pulse laser huh.

This I mean microammeter.

Regional and also a good anyway.

Pulse lasers.

And for next year, we're also optimistic that I.

I think we have.

Oh.

And applications for this.

It leaves us.

Yeah.

We're optimistic about this business.

Yeah.

Okay. Thank you.

Our next question is from Joe <unk> with Edgewater Research. Please proceed with your question.

Hey, Good morning, My my condolences to everyone at IPG.

From an investor facing point of view I will Miss a b jeez spirited responses to any questions that we're focused on competition.

You know clearly show this technical problem the products so yeah my condolences.

China, Yeah, the prepared remarks piecing together two separate comments from the prepared remarks.

One in technology with the China competition is continuing but on the positive side and.

In discussing gross margin you mentioned price discipline. So hoping you can kind of expand upon those dynamics does that imply you're kind of walking away from certain machines or potentially even customers are.

Really changing and those dynamics.

In the second half of the year.

I don't think anything is really fundamentally changing there is a.

High volume low end of the market that really only buys on on price.

And then that continues to be a higher this is on the cutting side of things. There's there continues to be a high end of the market that generally serves.

Higher volume manufacturing and automated manufacturing systems, where reliability is very key to the systems. So for example in our production line. If you have downtime of even a few hours not even.

A day the cost of that downtime will be way in excess of the cost of the laser right. So it's in those areas that we continue to focus on where our share continues to be very high it's kind of a bit of a pyrrhic victory China play within the the very high volume low end of the market. What we did say though is that.

As we expand the offering of our ultra compact low cost lasers, there's certainly an opportunity to increase our share as we go to $3 six and ultimately eight kilowatts that.

And the rest of the China market Youre dealing with much more sophisticated applications and were all competitive.

Products are significantly better so whether it's the AMB laser or the high power pulse lasers or even at lower power levels. The single mode lasers that are being used on on some of the additives and even some some welding applications looking at using low power single mode. We caught it very very clear advantages.

And all of those areas.

Hum.

Thanks.

Maybe if you could just comment on automotive investments as well you know be out electric vehicles, which I think is understood. But I was just wondering if there's any impact to appetite to invest.

For the core body in white in tailor welded blanks type of applications with with production being generally depressed short term for for the light vehicle space.

Yeah, we're not seeing a very significant investment and that is a couple of there's one north American manufacturer. That's actually replaces started a program to replace some older lasers the.

Eight to 10 years old as a few orders I've seen coming in in Europe from some of the major manufacturers.

Some recovery in Japan from a major manufacturer there who's looking to rollout some of the more specialized welding processes more broadly both.

A lot of those are sort of on the non <unk> side.

But no we don't got major projects that we can point today, you know the EV market is really dominated in automotive at the moment definitely yes.

Great and then finally I'm just wondering if there are any notable supply chain driven callouts. This quarter I think at least in cutting your your downstream customers lead times are extending and it's often due to key components that aren't aren't the laser. So I'm wondering if that resulted in any kind of delays to to your shipments during the quarter.

No no.

Internally, we manage supply chain very well there are certainly some softness in the end market some of the issues in China, not just around supply chain, but power outages.

No higher shipping cost is certainly part of the impact on the cutting market in China.

But that was always all of our obligations to our customers.

Got it.

No special delay.

Our typical of a lifetime.

Lead time for our product is between six and makes it one eight.

<unk>.

Got it thanks very much.

Yeah.

Our next question comes from Mark Miller with the Benchmark Company. Please proceed with your question. Thank you for the question.

A COVID-19 related costs.

Broken them out previously how how important were they this quarter.

Yeah.

We haven't put any we haven't really broken out COVID-19 related costs are you getting confused with some other call small commercial are we.

We haven't.

There's no real significant impact on the cost structure related to Covid hit.

Historically like last year, you had some benefit from.

Lower travel and trade fast so you're starting to see some of those expenses pick up a bit and of course, there's some.

There's some cost related to <unk>.

Sanitation sanitizing and.

No providing PPE, but it's not it's not a material impact on that and we haven't I haven't broken that out before.

Okay I'm sorry.

In terms of component shortages electronic component shortages, how how big of an impact and what product areas are you seeing that impact if it has an impact.

First of all we have Oh, we have now.

Sufficient.

Quantity of components fishery need 12 production and also we're looking for.

Youll find the new suppliers and sometimes they're also making.

The design of a product so yours not component fish, where it was before but for the new ones.

We are flexible enough.

In this case.

Thank you.

Yeah.

Okay.

Our next question.

We're shooting with Needham <unk> Company. Please proceed with your question.

Hi, Thanks, Tim you you had called out and a couple of areas are additive manufacturing and I'm wondering if you could remind us if we went back prior years, where where that business may have peaked and and what youre seeing in the market. It sounds like you potentially could even be gaining some share back in in China, but.

Certainly Europe was was a contributor how how should we think about additive this year.

I think it peaked back in two.

2017, maybe the first half of 2018 Barrington.

Whether it was the strongest quarter as uncertainty since then in the European market has been very weak.

The China market is really more new developments and that starting to launch product there and you're starting to see some recovery in.

And the European end markets as well.

I think at its peak it was sort of driving.

Back at that time, 45% of revenue $50 million to $60 million annually.

And just based on what you're saying it sounds like you're optimistic there's some runway for growth in that market.

I think there is some recovery coming in the market and more players in the market, it's still quite a ways to go to be like a really fundamental driver in terms of like improving the speed the process isn't that kind of thing, but there's certainly some recovery coming back I think to recover in the aerospace market as well will help that because that's an area where quite a lot of additive process.

As well we used.

Okay.

Okay.

Excuse me for this city did apt.

Vacations, then I'll use is much more sophisticated machine.

Before he was always a useful one machine one lasers now after 12 laser so they're useful one machine to produce a big enough.

Components for them.

Metal or from other materials.

Hey, this is Chris.

Okay.

Got it and.

And the other area that we do get questions on a lot just because there seems to be a fair amount of activity is in directed energy is here are there any any update you can provide whether it's visibility into projects anything you can say along those lines. Because this is obviously an area of the market, where it's a little bit.

More competitive.

Yeah.

There's no really particular updates at the moment I think really the tipping point that people are looking for some commercialization of these different technologies that are a couple of things that have been launched by people.

Seeing material ramping in volume yet there is a lot of ongoing R&D projects.

And we continued to ship laser and knows the business is pretty stable at the moment, it's still pre commercialization on the competitive side.

Say that we play in a very different part of the market. We're not trying to do like the beam tracking and delivery of the beam, we're looking at being the light source in certain.

No broad sets of those applications that were not our customers are the ones who do the.

The beam to beam tracking in and.

Delivery capability.

So we're not so much on that competitive and.

Oh yeah.

Uh huh.

Up to now is not the competition for example.

Hi, Paul seemed somewhat lasers.

Deals that really demonstrate the 10 kilowatt single mode lasers more than 10 years ago.

After now nobody can produce such kind of lasers.

Yeah.

Thank you thanks very much.

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

Yes.

Yes, Thanks for squeezing me back in Tim the gross margin up 100 bps year over year to 49%.

Apologies I think he might have already broke some of this out but what were the main drivers. There I think there was like inventory provision fixed cost absorption can you just bucket that for us again.

Yeah inventory provisions and basically your unabsorbed manufacturing cost as a percentage of sales were down.

Relative to a year ago your product gross margin was relatively stable.

And those are the main the main the main areas.

Yeah.

Okay, and Kevin I think at a conference in August you felt that the China market was not as dire.

And in a dire situation as it was and obviously you got 2019.

Is that is that still the case given some of the other tailwind you're seeing there and just on the China pricing is it that the market has already taken a step down and you're just not following it down there or is it just you know if it does go down youre not youre not willing to tobacco and it followed there.

You guys are are diversifying a little bit away from some of that low end cutting.

Yeah.

So the first part of the question.

I think for us the China market like elsewhere is becoming more diversified and is benefiting from secular tailwind.

Driven by the EV investment cycles, we talked about attitude, we talked about some of the companies coming back to us on the marking and graving dock.

Totally the cutting market is weak at the moment in the supply chain issues.

Our outage issues.

They've got a busy evercrack, Chris I mean, none of these things are things we can control right. We can continue to compete very strongly in that market.

In terms of.

No opportunities or even on the cutting shut.

Sheldon referenced two or three.

The echo laser to move towards even higher power on cutting and then the ultra compact laser which you know it gives us an opportunity to compete.

The log cost part of the market on pricing.

Compared to competitive dynamics, we've taken many steps down on pricing and we have now been much more disciplined in our strategy around pricing and standing behind that.

Hardly a proposition of the technology that we deliver for.

Well over a year now so we've been and we're really pleased with the way that's transitioned into our business model as evidenced by.

Performance in this quarter and also important for high power laser cell splitting.

Not only source lasers also shipping.

In many cases, our article cats.

And some other components and in this case, we can compete much more successful there.

Yeah.

Yeah.

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

Yeah. Thanks for the follow up Oh follow up questions. I have are just on China again, how do you guys explain this bifurcation of demand in China, I think EV demand is obviously idiosyncratic we understand that the capacity needs to be added, but how do you explain the divergence and.

And cutting versus marking and traded pair printing given the backdrop of supply chains for all outages and things of that nature that you highlighted.

Yeah.

That's right, it's actually relatively easy to explain where anyone is using lasers in a highly automated or high volume production.

Environment, they really want reliability and quality because if a production line goes down.

On.

In an automated environment the downtime on a production line even four.

One hour two hours forget about one day, a far exceeds the cost of.

The laser, whereas if you go into like some of the job shop applications.

The job shop can be down for a day and wait for a replacement laser to be supplied by a competitor and it doesn't impact them from a cost perspective in that way and because they're paying so much less for the laser that prepared to put up with that and it's really I know I don't know how you describe it as the opportunity cost.

Automation versus very low end type applications, where people may be processing metal for example, thought I dunno furniture light fixtures that kind of thing.

That's really.

In my mind, that's the sort of.

The real novelty issue.

I would like to pause until some examples for example for some of them with you.

Our customers are you sure I've got some experience with it.

At the time.

It's Matt.

Laser installed and the production of light reaction time must be less than 20 minutes.

Can you imagine what kind of laser come off mid installed and what kind of training and pick up the supply what kind of support we have the supply to our customer.

It's not the supply laser reliable laser it's of course, it's very important but the organisers service and support.

The customer it's also anybody important and in many cases, because we're all using the our experience the workers.

All I'll tell my different customers in the world except for enough experienced also to support our customers.

The applications.

Yeah. That's very helpful. I think my question was more so from a macro perspective, why do you think in China cutting demand is soft, while you're citing strength in marking and treated printing and in some of the auto areas.

Just stand from your perspective, you know why there's a bifurcation between high end and low end and you explained that perfectly but just from a more macro perspective, why is cutting demand softer versus three D printing and marketing being stronger given the backdrop of supply chain and power outage and everything.

The additive as an emerging business, there and it's starting to support the more nascent aerospace industry. So that's a driver and it's really at the beginning of that.

Not just in aerospace, but the attitude is being rolled out.

And really a relatively early stage on the marking and engraving.

There's some areas for example, where you're supporting things like consumer electronics, where we've gained share back. So the market itself I haven't actually looked at trying to understand whether the where the total marking engraving market. He is but it's also a very very large market that's tens of.

Thousands of pulse lasers sold into that but we've kind of one of the reasons and.

One of the reasons supposedly performance that will be gaining share.

Back to the automated processes and then.

On EV, that's a well understood macro tailwind right.

Right Yeah, yeah, Okay. That's always looking for thanks appreciate it.

We have reached the end of the question and answer session I would now like to turn the call back over to your host Eugene said it all thank you.

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

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.