IPG Photonics Corporation (IPGP) CEO Eugene Scherbakov on Q3 2021 Results - Earnings Call Transcript

IPG Photonics Corporation (NASDAQ:IPGP) Q3 Earnings Conference Call November 2, 2021 10:00 AM ET

Company Participants

Eugene Scherbakov – Chief Executive Officer

Eugene Fedotoff – IPG's Director of Investor Relations

Tim Mammen – Senior Vice President and CFO

Conference Call Participants

Jim Ricchiuti – Needham & Company

Nik Todorov – Longbow Research

Michael Feniger – Bank of America

Paretosh Misra – Berenberg

Joe Wittine – Edgewater Research

Mark Miller – The Benchmark Company

Operator

Good morning, and welcome to IPG Photonics, Third Quarter 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 Fedotoff, IPG's Director of Investor Relations for introductions. Please go ahead, sir.

Eugene Fedotoff

Thank you, Rob, and good morning, everyone. With us today is IPG Photonics Chief Executive Officer, Dr. Eugene Scherbakov, and Senior Vice President and CFO, Tim Mammen. Statements made during the course of this call that discuss management's or the Company's intentions, expectations, or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those projected in such forward-looking statements. This risks and uncertainties include the impact of COVID-19 pandemic on our business and those details in in IPG Photonics Form 10-K, for the period ended December 31st, 2020, in our reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investor section of IPG 's website or by contacting the Company directly.

You may also find copies on the SEC's website. Any forward-looking statements made on this call are the Company's expectations or predictions as of today, November 2nd, 2021 only. The Company assumes no obligation to publicly release any updates or revisions to any such statements. For additional details on the reported results please refer to their earnings press release, earnings call presentation, and Excel based financial data we'll post it on our Investor Relations website. We will post this prepared remarks on our Investor Relations website following the completion of this call. With that, I will now turn the call over to Eugene Scherbakov.

Eugene Scherbakov

Thank you, Eugene. And good morning, everyone. We are deeply saddened by the passing of Valentin Gapontsev, the Founder and Executive Chairman of IPG. This tremendous loss for our Company and the broader Photonics community has benefited greatly from his technical innovations and strategic reasoning. Because of his reason, and lessons, work, finally they have become cost effective, reliable, and effective tools that have mass applications in global industrial production. And they [Indiscernible] efficiency, and development of new products. He was recognized as a father of the fiber laser industry and a great entrepreneur. Following at his footsteps, we will continue to focus on innovation and invest internally in manufacturing and research and development capabilities to make the highest quality components and the most reliable products. At IPG we are also exploring new markets and applications.

The fiber lasers replace existing laser and non-laser technologies by improving efficiency, productivity, or enabling technological breakthrough for our customers. Our technology are playing well into the major micro trends and include investments in electrical vehicles and at renewable energy, as well as focus on energy efficiency, industrial automation, and media utilization. This shall transform the way products are created. As a part of our strategy, we have been diversified away from the high competitive or more cyclical copy market in China. And our results this quarter demonstrate a successful execution of this strategy. We are pleased to deliver the short quarter revenue and EPS at the top end of our guidance. Results were driven by strong growth in emerging markets, [Indiscernible], and as well [Indiscernible] the cleaning semiconductors and number of other products and applications.

Demand for IPG always are continuing to improve in North America and Europe. It involves welding and cutting application throws us sort of the [Indiscernible]. We've also seen increased orders and business activity in Japan. These [Indiscernible] continues to recover from pandemic and so increased investment in Europe factories and automation. We are benefiting from widespread investments in electric vehicles production globally. Our lasers are used in a variety of welding, [Indiscernible], and cleaning application for EVM battery manufacturing. We're also seeing opportunity for laser welding in EV motor assembly, and body-in-white applications. These investments are likely to continue for the next 3, 5 years as automotive manufacturer address the need for EVM batteries and new technologies in order to meet aggressive global carbon emission standards.

We're excited about increased demand. We have seen it in [Indiscernible] product and applications. Each contributed just under 30% of our total revenues this quarter with a record sales in AMB lasers and medical, and strong growth in high power pulse lasers. Both, AMB and high power pulse lasers are benefiting from increased investment in EV battery capacity worldwide. Our medical products are rapidly gaining adoption. And both our thulium laser and IPG disposable fibers are considered in [Indiscernible] standard in the industry. [Indiscernible] our business will continue to grow significantly, fantastically doubling in size for the next 2-3 years. One of our newest product is Conoco laser, which got launched earlier this year, is winning widespread interest in gaining a significant reaction in welding community.

We launched our new and improved version of LightWELD in September. It also has cleaning capability in addition to many preset welding parameters. Some customer may choose LightWELD just for clean future as it can save time, money, and reduced cost conceivable. [Indiscernible] was the highlight of our presentation at FABTECH this year. [Indiscernible] sign agreements with nationwide distributors that operate hundreds of [Indiscernible] in retail stores in the U.S.. We can't expect to sell tens of thousand per client rail system in the next 3 to 5 years. As expected, software demand [Indiscernible] China capital market during the second quarter.

The combination of moderated demand environment by widespread supply chain issues, high shipping cost, and power shortage, as well as a more aggressive price competition from local manufacture negatively impacted demand for cutting applications in China during this quarter. At the same time, we are seeing record demands in the world and in China has resulted in strong sales on EV battery applications and increased revenue from marking and 3D part printing. In several cases we saw customers coming back to IPG, after lower-cost local supplier didn't meet customer quality and technical support expectations. They continued to benefit from our vertically integrated product model, which enabled technological advantage while minimizing the supply chain disruptions.

However, we have been seeing some impact on our -- in our customer [Indiscernible] from ongoing supply chain issues worldwide which we were able to successfully overcome this quarter. As we announced earlier, the board selected John Peeler as non-executive Chair. John has served as Lead Independent Director since 2017, and his appointment provides continued stability as we have worked together well over the years. These deployments continue to separate [Indiscernible] that started in May 2021, and I look forward to working with John and his new positions. With that, I will turn the call to Tim to discuss financial highlights of the quarter and Fourth Quarter outlook.

Tim Mammen

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 3. 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 a 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. The effective tax rate in the quarter was 26%. As a reminder, last year's results were negatively impacted by a goodwill impairment charge of $45 million.

During the quarter, we recognized an after-tax foreign exchange gain of $2 million or $0.04 per diluted share, primarily related to the depreciation of the euro and Chinese yuan. If exchange rates relative to the U.S. dollar had been the same as 1 year ago, we would have expected revenue to be $9 million lower, and gross profit to be $6 million lower. Moving to slide 4, 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 6 kilowatts or greater represented 51% of total high-power CW sales. Medium power laser sales increased 109% on growth and cutting, welding, 3D printing, and semiconductor applications. QCW laser sales increased 8% year-over-year on a higher demand for marking and engraving and drilling applications.

Pulse laser sales, including high power pulse lasers, increased 69% 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 and ILT. 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 5, 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 in medical, as our products continued 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 accelerated demand in cutting and welding applications, as well as strong growth in marking and 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 and cutting applications, more than offset higher demand in welding applications, high power pulse lasers for foil cutting, and growth in marking and 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 6, we ended the quarter with 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. Brought 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 200 thousand shares for $36 million and have bought approximately another 135 thousand shares so far in the fourth quarter. Commenting on outlook for the next quarter, third quarter book-to-bill remained above 1. We expect stable demand in North America and Europe and continue to see growth opportunities in welding and high-power cutting in North America and Europe. Foil 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 LightWELD sales continued to gain traction.

However, sales in China will be down sequentially in the fourth quarter due to softer demand and cutting applications. Uncertainty due to supply chain issues, and power outages that may impact demand for our products, as well as ongoing competitive process. For the fourth quarter of 2021, IPG expects revenue of $330 million to $360 million. The Company expects the 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 $1.13 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 risk and uncertainty given the COVID-19 pandemic and its associated impacts to the global business environment, supply 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.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] One moment please while we poll for questions. Our first question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.

Jim Ricchiuti

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? Are you still seeing weakness in China or did that business perform better, ex cutting in China? And I have a follow-up.

Tim Mammen

The Q3, Jim, excluding cutting, the rest of the business was very robust. I mean, clearly EV battery applications are a very strong driver of growth. We're actually really pleased as well, we got some good demand coming from additive applications there, which are with lower power, but very high-quality lasers, so competitively, that's been a very positive trend. And the other good positive trend I think was on some of the marking 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 there. So other applications outside of cutting were more than robust. I'd say they're good.

Eugene Scherbakov

But for cutting applications also, we have to see the lower-end applications, of course there's some competition from Chinese. But for high-end, we have a very good position with competitors, also Chinese competitors.

Jim Ricchiuti

And the follow-up question I have is just with respect to LightWELD. I know its early days but judging by the interest at Fabtech and every time I saw the booth, it was packed with people looking at the demonstration of that. At what point are you -- will you see the benefit of the expanded distribution channels? Will that hit in Q4 or is that something that really begins to benefit you in early '22? 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 you're thinking about LightWELD?

Tim Mammen

Of course, you would like to get a great benefit from this quarter. But, of course, it will take time because a lot of different opportunities, and more a lot of different customers already participated on this. And we have to sometime -- we also [Indiscernible] customer to use it. And, of course, is that they cannot benefit who will get to the first quarter next year. But also it is very important that we introduced the new options for our LightWELD. And they will demonstrate in the end of this quarter and beginning the quarter 1st next year.

Jim Ricchiuti

And this will be -- 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're seeing clearly a turn in that part of your business.

Tim Mammen

Yes. About the -- talking about Catholicism. I don't think so it will be. Of course our -- rest of our business also has grown. And we are optimistic about our prognose and forecast for the next year. Definitely.

Jim Ricchiuti

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

Operator

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

Nik Todorov

And thanks 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 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?

Tim Mammen

So there's a number of drivers. I think the first thing is the strategy about being disciplined around pricing both in China and globally is really paying dividends in that regard. The second, there's probably 2 or 3 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 sales in Europe and North America are around both cutting and other applications, those will also benefit. And then 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 -- we'd like to see from a mix and diversification perspective. And there is a benefit on the gross margin side from all of those areas.

Eugene Scherbakov

And also we continue to prolong our special project which was installed 2 years ago about optimization on the manufacturing costs for our components, for our devices and this is a real for this trends also next year. Definitely.

Nik Todorov

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 depth framework? Any comments would be helpful there. Thanks.

Tim Mammen

Well, I'm not going to comment on a double-digit growth for next year. I mean, we provided a medium-term to 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 be the wrong point in time to do that. We'll also have to make a decision as to whether we provide annual guidance. Overall though, we remain really quite optimistic about next year. You got major growth drivers that we talked about. The macro trends out there with EV battery manufacturing, EV motor manufacturing, Body-in-White applications, new product introductions in the other parts of the welding market with LightWELD, growth in medical applications. High-power cutting market transitioning to 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 than 1 and 1.5 kilowatts, so transitioning during the course of the year, early on in the year to 3 kilowatt and 6 kilowatt, and then ultimately probably in the second half of the year to 8 kilowatt with the ultra-compact device. So there's a whole host of different applications that we think are going to really make next year an interesting and exciting one. Maybe from a geographic perspective, you continue to see robust economic data in North America and Europe. And maybe a little bit of a moderation, but not fundamental shift and geographically we're starting to see some recovery in Japan as well. And we've gotten lots of opportunities in some of the other Southeast Asian markets like Korea. So totally we're sitting here pretty positive about next year at this point in time.

Eugene Scherbakov

I would like to add that some customer and also in China and outside the China. They start to ask about this Deka lasers, I mean, ECO lasers, IPG laser has efficiency more than 50%. Nobody will produce such kind of laser today. And this is also for us, it will be an opportunity to provide very high-power laser with this kind of high efficiency. And they will also demonstrate this product this end of this quarter and also beginning of the next quarter. We already with some potential customer for this.

Nik Todorov

Got it. Thank guys, good luck.

Tim Mammen

Thank you.

Operator

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

Michael Feniger

Hey, guys. Yes. And thanks for taking my question. I want to be respectful on how I ask this question. There are a lot of investors wondering what happened to Valentine, his trust and the voting shares, as he's a significant shareholder. In your 10-K filing, obviously, his ownership position is 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 is the status on his ownership and his trust position at this point?

Tim Mammen

So Michael, there's no material change to the ownership and structure. The estate planning around Dr. Gapontsev ownership in IPG P was not only started, but completed many years ago. There's no change and the trustees appointed to manage the trust and [Indiscernible] U.K. Company. There's no major change there as Dr. Scherbakov is being managing Director and will vote those shares. So I think we're -- this sort of transition around us as being thought through and planned pretty well. It's a sort of decades long process that we started to look at this.

Michael Feniger

Fair enough, Tim. And I guess -- on that, is -- I guess this might answer this next question, but given the circumstances, is there any change in strategic direction for IPG following the events? Any change in capital allocation with the significant cash balance? any change that we should be aware of? Management, we saw the new Executive Chairman but just curious as there can be any changes post this news on strategy and IPG going forward?

Tim Mammen

I think the first thing is if we were going to make the fundamental change or anything, it would be a material announcement we'd have to make, and we've made all of the announcements around the events of the last couple of weeks. In terms of strategy, we talked about that when Dr. Scherbakov took over as CEO that at a high level and a broad level, the strategy was developed by Dr. Scherbakov and Dr. Gapontsev and even other members of the executive team over many years. So continuing to pursue the rollouts of fiber laser technologies across the multiple applications in end market, so there's no big change in that direction. Dr. Scherbakov has mentioned a couple of things.

We're going to continue to try and optimize the manufacturing, footprint, and efficiencies that we have that we're not changing our gross margin guidance range of 45% to 50% or low internally, we are getting increasingly comfortable of achieving the top end of that range and 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 so as a capital allocation, we've continued to enhance and develop the capital allocation strategy over time with executing very regularly against the 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 them.

Michael Feniger

Makes sense. Thanks for that, Tim. And then how do we think about, with all these supply chains and the cost inflation, With you guys being so vertically integrated. I'm curious how that impacts you with some of these supply chains, trying to get certain components. But also, I feel like the expense number was in line with your expectations, around $87 million. How do we think about -- are you seeing more cost efficient in the business, as you head into the fourth quarter in 2022? How we think about those moving parts on SG&A, and labor and things like that. Thank you.

Eugene Scherbakov

Of course, you see this influence of, first of all, for our customers and also our power supply. [Indiscernible] there's some components. First of all for electronic chips and so on, but we made some request about this. We have enough in our stock of this components to organize a stable production of our lasers and not to interrupt our customers. But of course we have to think about our strategy because you see the price for metal grows dramatically for aluminum 20%, for copper about 30%. Some chips price also increased not to 20 or 30%, but sometimes has 3 up to 10 times. And as such kind of conditions of course we have to see also some possibility to again customer optimization and our cost, and also to discuss with our existing and potential customer about future preparation. Of course there is some uncertainties, but we believe that next year it will be much more stable conditions.

Tim Mammen

Then just with regards to the operating expenses like can address those SG&A and R&D. We were right in line with what we've got you too for Q3. We're actually running at a bit higher level on some of those OpEx relative to a year ago. First of all, because our variable compensation accruals, given the overall performance of the business year-to-date growth that's close to 20% in Q3, 20%. So which is slightly ahead of where our budget was, so our variable comp accruals are slightly high. You got some expense coming back from, for example, trade shows and fares on the selling side, so Fabtech, but the variable comp, relatively speaking, next year, will probably moderate a bit depending upon how we perform relative to next year's budget. So not seeing actually any fundamental shift in that, we're also looking for optimization of those expenses on the operating side as much as anything else.

So certainly looking to be very disciplined in the way that we manage that. But we've 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.

Operator

As a reminder, if you'd like to ask a question, [Operator's instructions]. One moment while we poll for questions. Our next question comes from Paretosh Misra, with Berenberg. Please proceed with your question.

Paretosh Misra

Thank you. Good morning. I guess just going back to that inflation discussion. So looking at it a little differently. So some of your competitors have been cutting prices in recent years. So I'm just curious if this inflation and component pricing and freight is making it more difficult for those guys to cut prices. In other words, could this inflation lead to some price stabilization even for the low power lasers.

Tim Mammen

No, we can't really talk to how people in the competitive market will behave because 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, their gross margins are down I think by almost 600 basis points. So they are certainly being very aggressive around pricing, and with that aggressiveness around pricing they are certainly not getting their cost base down, because of that impact to the gross margin. I can't say how they are going to behave strategically in the future.

Paretosh Misra

Got it. And as a follow-up, 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 that whole process?

Eugene Scherbakov

It's not only 1 product, it's several products. Unfortunately, I don't know what kind of part of the solar business to date. But [Indiscernible] the areas in different kind of pulse laser spot. These, I mean, micrometer region and also getting very good in power pulse lasers. For next year also optimistic y I think we have new applications for lasers. We're optimistic again, about this business.

Paretosh Misra

Okay. Thank you.

Operator

Our next question is from Joe Wittine with Edgewater Research, please proceed with your question.

Joe Wittine

Hey, good morning. My condolences there on IPG from an investor facing point-of-view, I will miss [Indiscernible] spirited responses to any questions that were focused on competition, clearly showed his technical pride in the products, so my condolences.

Tim Mammen

Thank you, Joe.

Joe Wittine

[Indiscernible] China -- yeah. The prepared remarks -- piecing together two separate comments on the prepared remarks. One an acknowledge of the China competition is continuing, but on the positive side, when discussing gross margin, you mentioned price discipline. So being kind of expand upon those dynamics, does that imply you're kind of walking away from certain machine s or potentially even customers, or is anything really changing in those dynamics in the second half of the year?

Tim Mammen

I don't think anything is really fundamentally changing. There is a high volume, low end of the market that really only buys on price. And then there continues to be a higher -- this is on the cutting side of things, as that continues to be a high end of the market that generally serves high volume manufacturing and automated manufacturing systems where, reliability is very key to the systems. So for example, in a 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. So it's in those areas that we continue to focus on where our share continues to be very high. It's a bit of a pyrrhic victory trying to play within the very high-volume, low-end of the market. What we did say though was that, as we expand the offering of our ultra-compact lower-cost lasers, there's certainly an opportunity to increase our share as we go to 3, 6, and ultimately 8-kilowatts there.

And then in the rest of the China market, you're dealing with much more sophisticated applications and where our 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 some of the additive and even some welding applications looking at using low-power single-mode. We got very clear advantages in all of those areas.

Joe Wittine

Thanks. Maybe if you could just comment on automotive investments as well. Beyond electric vehicles, which I think is understood, but I'm just wondering if there's any impact to appetite to invest for the core Body-in-White and tailor-welded blanks type of applications with production being generally depressed short-term for throughout the light vehicle space?

Tim Mammen

We're not seeing a very significant investment in that as a couple of one North America manufacturer that's actually replaced, -- started a program to replace some older lasers. that are 8 to 10 years old. There's a few orders I've seen coming in in Europe from some of the major manufacturers. There's some recovery in Japan from a major manufacturer there who's looking to roll out some of their most specialized welding processes more broadly, but both that -- a lot of those are sort of on the non-EV side. But no, we don't got major projects that we can point today. The EV market is really dominating automotive at the moment.

Eugene Scherbakov

Definitely, yes.

Joe Wittine

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

Eugene Fedotoff

No. Internally, we've managed supply chain very well, but certainly some softness in the end-markets, some of the issues in China and orders around supply chain, but power outages. Now, higher shipping costs are certainly part of the impact on the cutting market in China.

Eugene Scherbakov

But now there is our obligation to our customers where we made it. No special delayed, no. Our typical last time -- lead time for our product it's between 6, maximum 8 weeks.

Joe Wittine

Got it. Thanks very much.

Operator

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

Mark Miller

Thank you for the question. In terms of COVID -related costs, you've broken them out previously. How important were they this quarter.

Tim Mammen

We haven't put any -- we haven't really broken out COVID related costs, we're getting confused with some other cost small commercial. We haven't -- we have no real significant impact on the cost structure related to COVID. Historically, like last year, you had some benefit from lower travel and trade fare. So you starting to see some of those expenses pick up a bit. Of course that some -- that some cost related to sanitation, sanitizing, and no providing PPE. But it's not -- it's not a material impact on that. And we haven't ever broken that out before.

Mark Miller

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

Eugene Scherbakov

First of all, we care now sufficient corn to Geo Components issue need for our conduction. And also we are looking for, to find the new suppliers. And some times, we're also making a redesign of our product to not use components this year used before, but for the new ones. They are flexible enough. In this case.

Mark Miller

Thank you.

Operator

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

Jim Ricchiuti

Hi, thanks. Tim, you had called out in a couple of areas, additive manufacturing in. Wondering if you could remind us if we went back prior years where that business may have peaked and what you're seeing in the market. It sounds like you potentially could even be gaining some share back in China, but certainly Europe was a contributor. How should we think about additive this year?

Tim Mammen

I think it peaked back in 2017, maybe the first half of 2018.

Eugene Scherbakov

'17.

Tim Mammen

We are the strongest quarters and certainly since then the European market is being very weak. To China market is really more new developments and selling to launch product there. And you're starting to see some recovery in the European end markets as well. I think at its peak it was driving back at that time, 4% or 5% of revenue, $50 million to $60 million annually.

Jim Ricchiuti

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

Tim Mammen

I think there's some recovery coming in the market and more players in the market. It's still got a ways to go to be like a really fundamental driver in terms of like improving the speed of processes and that kind of thing but there's certainly some recovery coming back. I think recovery in the aerospace market as well will help that because that's an area where quite a lot of additive processes were used.

Eugene Scherbakov

Excuse me. For this 3D applications, they are now using much more sophisticated machine. Before, as usual, they used for 1 machine, 1 laser. Now up to 12 lasers they used for 1 machine to produce big enough components from metals or from other materials. This is [Indiscernible].

Jim Ricchiuti

Got it. And the other area that we do get questions on a lot just because there's seems to be a fair amount of activity, is in directed energy. Sir, are there any updates 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?

Tim Mammen

There's no really particular updates at the moment. I think really, that tipping point of people are looking for some commercialization of these different technologies. There are a couple of things that have been launched by people, not seeing material ramping in volume yet. There's a lot of ongoing R&D projects and we continue to ship lasers in those. The business is pretty stale at the moment, it's still pre -commercialization. On the competitive side, I will 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 and certain broad sets of those applications there. So we're not -- our customers are the ones who do the beam tracking and delivery capability. We're not so much on that competitive end there.

Eugene Scherbakov

Just up to now that exist not be competition, for example, for our policy in the modern lasers. Reproduced and regulate themselves at 10 kilowatts on [Indiscernible] lasers, more than 10 years ago. Up to now nobody can produce such lasers.

Jim Ricchiuti

Thank you. Thanks very much.

Operator

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

Michael Feniger

Yes. Thanks for squeezing me back in. Tim, the gross margin up a 100 bps year-over-year to 49%, apologies, I think you might have already broke some of this out, but what were the main drivers there? I think there's inventory provision, fixed cost absorption, can you just [Indiscernible] that for us again?

Tim Mammen

Yeah, inventory provisions and basically your unabsorbed manufacturing costs as a percentage of sales were down. Relative to a year ago, your core at gross margin was relatively stable. Those were the main areas.

Michael Feniger

Okay. And Tim, I think at a conference in August, you felt that the China market was not as dire -- in a dire situation as it was in. obviously, we have 2019. Is that still the case given some of the other tailwinds 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,-- if it does go down, you're not willing to match and follow there because you guys are diversifying a little bit away from some of that low-end cutting?

Tim Mammen

So the first part of question, I think for us the China market, like elsewhere is becoming more diversified and is benefiting from certain tailwinds that are driven by the EV investment cycles. We talked about additive, we talked about some of the companies coming back to us on the market and [Indiscernible]. Now undoubtedly though the cutting market is weak at the moment and the supply chain is used as the power outage is used. They've got a bit of ever grand cram and none of these things are things we can control, right? What we can do is compete very strongly in that market. In terms of opportunities there, even on the cutting, Dr. Scherbakov reference 2 or 3.

The ECO lasers, the move towards even higher power on cutting, and then the ultra-compact laser, which gives us an opportunity to compete at the lower cost part of the market. On pricing, the competitive dynamics have taken many steps down on pricing and we have now been much more disciplined in our strategy around pricing and standing by in the value proposition of the technology that we delivered for well over a year now. So we've been -- we're really pleased with the way that's transitioned into our business model as evidence by performance in this quarter.

Eugene Scherbakov

And also important that for high-power laser as well, is keeping is not only source, I mean, lasers, we are also shipping in many cases, our UltiProcrats. and some other components. And in this case, we can compete much more successfully.

Operator

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

Nik Todorov

Yeah, thanks for the follow-up on follow-up questions. I have a -- 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 that divergence in cutting versus marking and traded Pam printing given the backdrop of supply chains, are outages and things of that nature that you highlighted?

Tim Mammen

It is 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 a -- in an automated environment, the downtime on a production line, even for 1 hour or 2 hours, forget about 1 day, it far exceeds the cost of the laser. Whereas if you go into like some of the job shop applications. A job shop can be down for a day and wait for a replacement laser to be supplied by our competitor and it doesn't impact them from a cost perspective in that way. And because they are paying so much less for the laser, they're prepared to put up with that and it's really -- I don't know how you describe it. It's the opportunity costs versus -- of automation versus very low-end type applications where people maybe processing metal for example, of, I don't know, furniture or light fixtures that kind of thing. That's really, in my mind, that's the real nob of the issue.

Eugene Scherbakov

I would like to present you some examples. For example, for some automotive our customer reach, Rick had some experience. The reaction time, if your laser installed in the production lines. They have some time obviously, less than 20 minutes. Can I mention what kind of laser has come up and installed? And what kind of training to supply? What kind of support system to supply to our customer? The problem is not to supply laser but elaborate lasers, of course it's very important. But to organize a service and support the customer, it's also very, very important. And in many cases, because we are using the -- our experience to work with all automotive customers in the world. We have enough experience also to support our customer in other applications.

Mark Miller

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 some of the other areas? I understand from your perspective, you know why there's the bifurcation between the high-end and low-end. And you explain that perfectly. But just from a macro perspective, why is cutting demands softer versus 3D printing and marking being stronger, given the backdrop of supply chain and power outages and everything?

Tim Mammen

I think additive is an emerging business there, and it's starting to support that more nascent aerospace industry, so that's a driver and it's really at the beginning of that, not just in aerospace, but the additive is being rolled out at a really a relatively early stage. On the marking 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 where the total marking engraving market is, because it's also a very large market. There's tens of thousands of pulse lasers sold into that. But we're one of the reasons and expect -- one of the reasons for pulse laser performance that would be gaining share back for the automated processes. And then on EV, that's a well understood macro tailwind, right?

Nik Todorov

Yeah. Okay. That's all I was looking for. Thanks. Appreciate it.

Operator

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 Fedotoff. Thank you.

Eugene Fedotoff

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 will be participating in a number of virtual investor events this quarter. Have a great day everyone. Bye.

Operator

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