IPG Photonics - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, and welcome to IPG Photonics Third Quarter twenty twenty Conference Call. Today's call is being recorded and webcast. At this time, I would like to turn the call over to Angelo Lapresti, IPG's Senior Vice President and General General Counsel for introductions. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. With us today is IPG Photonics Chairman and CEO, Doctor. Valentin Gopontsov Chief Operating Officer, Doctor. Eugene Sherbakov and Senior Vice President and CFO, Tim Momin. Statements made during the course of this call that discuss management's or the company's intentions, expectations or predictions of the future are forward looking statements.

These forward looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward looking statements. These risks and uncertainties include the impact of the COVID-nineteen pandemic on our business and those detailed in IPG Photonics' Form 10 ks for the period ended December 3139, 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, 10/30/2020.

The company assumes no obligation to publicly release any updates or revisions to such statements. For additional details on our reported results, please refer to the earnings press release and the Excel based financial data workbook posted to our Investor Relations website. We will post these prepared remarks on our Investor Relations website following the completion of the call. With that, I'll now turn the call over to Valentin.

Speaker 2

Good morning, everyone. We demonstrated excellent execution in the third quarter and delivered the result above our guidance range despite continued challenges from the COVID nineteen pandemic and general economic slowdown. Our outperformance was driven by two factors. First, strong revenue from in China, which improved slightly from a strong second quarter and increased meaningfully from the third quarter of twenty nineteen. And second, a sequential improvement in Europe which recovered from the low point in the second quarter twenty twenty.

Economic indicators show improvement from the significant contraction in activity in the second quarter and this help to drive improved performance in the third quarter. Cell cell high power lasers above six kilowatt increased more than 15% compared to the third quarter of twenty nineteen. Revenue from other application increased by 24% primarily from higher revenue from advanced applications, which was driving by revenue from high power single mode fiber lasers and medical procedures. We're demonstrating good progress in our core markets thanks to our technology differentiation and low cost production capabilities. In the cutting market, we delivered strong year over year growth in both our RIC mounted one to four kilowatt lasers for the high volume market and the our ultra high power lasers for leading edge cutting systems.

Ultra high power lasers made up more than 58% of total high power sales. Our customers are working on integrating the new ultra compactor mounted U series of lasers into the low cost cutting systems, and we expect to receive the first volume orders in the coming months. The new series has extended optical performance with the smallest size, the lowest weight in the industry, and the record power to volume ratio. For the first time, this range of devices provides full protection against humidity penetration, which is extremely important in the field to use. As a high end to market, we are benefiting from an increase in order volume for our twenty and thirty kilowatt ultra high power lasers and optical crafts.

These lasers not only enable 50 to 100% faster cutting speeds than 15 kilowatt device, but are capable of processing materials with 20 to 50 millimeters of thickness or greater. This improvement in both productivity and flexibility is is driving the replacement of plasma cutting machines and low power laser solutions. This particularly true in machine shop and construction equipment manufacturing. Moreover, this laser provides superior beam parameters, a record of battery efficiency, and unique high reliability that are the hallmark of IPG brand. They also drive superior return of investment for our customers.

Our adjustable mode of BMO lasers continue to gain traction in the welding industry, most notably in the electric vehicle battery welding. Our AMD products offer superior speed and weld quality our computing solutions thanks to

Speaker 3

the

Speaker 2

broadest range of beam tunability. This enables spotless welding. In addition, we continue to expect strong growth in our high power nanosecond pulse lasers used for foil cutting and cleaning in electrical vehicle battery processing, as well as for ablation and cleaning in other industries. Product innovation remains core to During the first quarter, emerging product and application sales were 21% of total revenue, increasing 5% year over year despite softer demand trends due to COVID-nineteen in several new product categories including systems.

Sales of medical lasers increased more than 30% year over year as we continue to sell our gold standard thorium laser solution and consumable fibers for urology and other soft tissue applications. Advanced applications revenue increased 50% year over year in Q3, driven by strength in government and semiconductor application. Despite the impact of COVID-nineteen, sales of green ultraviolet and ultrabust pulsed lasers into emerging microprocessing applications show strong growth year over year. In addition, we have a very strong back and forth of green lasers and improved back and forth for UV and ultrafast pulsed lasers as a result of orders received in the last quarter. Our green pulsed lasers are enabling significant improvement in slower cell efficiency.

We continue to target more than 50 new projects for these lasers across a wide range of applications. This includes processing of homo mats, thick, waxing special, ceramics, composite materials, numerous crystals, circuit boards, OLED film, batteries, and solar cells. We are investing in a number of next generation solution with significant disruptive potential. This we plan to launch over the next six to twelve months. Customer evaluation of our handheld laser welder, newest, has been very positive and they have cited improvement in weld quality of materials that can be joined and programmed welding parameters for different types and thickness materials as advantages.

The multi channel PCVM lasers for high speed spot welding application have the potential to be disruptive when displacing very inefficient neodymium yak lasers. This is due to the significant cost saving they can bring due to the increase in welding productivity and decrease in electrical consumption. Our kilowatt scale pulse laser for ablation and cleaning application are also continuing to gain acceptance. Beyond material processing, we continue to develop new soft tissue medical treatments, mid infrared lasers for molecular level resolution on line spectroscopy inspection, sensing, and biomedical research application, and new high speed transceivers for telecom and datacom market. I want to conclude by thanking our employees for their strong execution during one of the most challenging period in our company's history.

The diligence of our employees to keep each other safe has enabled us to return our operation back to normal within safety guidelines. Of course, the well-being of our employees, their families, our customers, our partners, and our community remains our highest priority. With that, I will turn the call over to Eugene Scherbato.

Speaker 3

Thank you, Valentina, good morning, everyone.

Speaker 4

I will begin by discussing the effects of COVID nineteen on our production. All three of our major production facility in Germany, The US, and Russia remain open and operating normally, and we have haven't seen any disruption of our manufacturing or our service capability in the regions where we operate. Our global facility operating on a largely normalized basis, albeit with social distancing and enhanced cleaning and filtration measures in place. In addition, we we were back to normal operation promptly after we reported the ransom attack in September. The incident didn't have any material impact on our business, operations, financial conditions, or on our ability to report financial results.

As we disclosed earlier, we carry cyber insurance to cover this type of risk. Nonetheless, IPG is conducting an analysis to improve the security and resiliency of our systems. We continue to benefit from our vertical integrated production model which enables key technologies technological and cost advantages over competition while minimizing the supply chain disruption. The current constraints on our business primarily relate to restrictions on travel that affect our sales team and customer visits related to applications development. Logistics were less impact in the third quarter, and we did not encounter any meaningful disruption of our ability to ship components and finish product around the world.

As a percent of sales, shipping costs were slightly lower than they were in the second quarter. We continue to benefit from reductions in cost of devices and from expense reduction initiated we undertook in the second half of twenty nineteen. Gross margin improved to 48% this quarter. The total C, G, and A and R and D expenses increased by $2,800,000 to $78,000,000 in the third quarter compared to the $75,300,000 in the second quarter, while sales revenue increased by $22,000,000 Operating expenses continue to track well below the peak level of $84,000,000 incurred in the second quarter in twenty nineteen. Examining our performance by region, revenue in China increased 22% year over year, representing approximately 47% of total sales.

New orders booked in China were slow at the beginning of the quarter, but picked up in September. However, China continued to have significant backlog given the exceptional level of orders booked in the first half of the year. While we face aggressive competition in the region for lasers at six kilowatt and below, we continue to maintain share at key accounts while anticipating a strong mix of laser at 10 kW or greater in the future. In Europe, revenue decreased 10% year over year due to the effect of COVID-nineteen on many countries in the region. Similarly, revenue in North America decreased 26% year over year with strong growth in the medical and advanced applications not being sufficient to offset declines in lasers and system sales for material processing.

While North America revenue was weak in the third quarter, it was notable that order bookings were exceptional and benefited from several large orders from advanced applications and for our unique green lasers used in renewable energy. Sales in Japan decreased 41% year over year, while COVID-nineteen infections the region are below other countries. The recurring stop and restart of economic activity has delayed many significant projects within our welding and cutting businesses in Japan. Sales to the rest of Asia increased six percent year over year, and we account from the second quarter through the Pulse and also benefited from shipment of high power lasers for advanced applications. Sales in Turkey increased 15% year over year and by more than 100% as compared to the second quarter.

Global demand trends remain uncertain, and we have seen continued delay of projects globally, which makes the execution of the third quarter all the more notable. We continue to believe that our large and diverse advanced materials and components technology platform, our efficient R and D model, and our strong balance sheet and free cash flow provide us ample flexibility to respond to business disruption and image from pandemic and stronger competitive position. With that, I will turn the call over to Tim to discuss financial highlights in the quarter.

Speaker 3

Thank you, Eugene, and good morning, everyone. Revenue in the third quarter was $318,000,000 which declined 3% year over year, but increased 7% quarter over quarter. Revenue from materials processing applications decreased 5% year over year and revenue from other applications increased 24%. Sales of high power CW lasers were flat year over year and represented approximately 58% of total revenue. Sales of ultra high power lasers at six kilowatts or greater represented 58% of total high power CW laser sales.

Pulse laser sales increased 3% year over year with strong growth in green pulsed lasers used in solar cell manufacturing as well as higher sales of our new UV and ultrafast pulsed lasers, which were partially offset by lower sales of lower power pulsed lasers for marking applications. Systems sales decreased 37% year over year as growth in systems for medical device manufacturing was offset by lower sales of other IPG laser systems and Genesis non laser systems. Medium power laser sales decreased 1% on continued softness in additive manufacturing and the transition to kilowatt scale lasers in cutting. QCW laser sales increased 21% year over year from sequential improvement in consumer electronics applications. Other product sales increased 8% year over year, driven by growth in Medical Laser sales.

Q3 gross margin was 48%, which increased 160 basis points year over year. Compared with the year ago period, the increase in gross margin was driven primarily by lower cost of products, which was offset by an increase in inventory provisions as compared to the year ago period. Period. Third quarter GAAP operating income was $41,000,000 and operating margin was 13%. Goodwill impairment charges related to Genesis Systems Group reduced operating income by 45,000,000 and reduced operating margin by 14 percentage points.

The results of this business were impacted by lower capital investments from industries impacted greatly by the COVID-nineteen pandemic such as aerospace and transportation as projects have been delayed. We continue to be focused on numerous opportunities for Genesis, including transitioning to a higher percentage of laser based systems as well as expanding the international systems opportunities. We are hopeful that it will ultimately enable progress to be made on broader based laser welding applications across many different industries. During the quarter, we recognized a foreign exchange gain of $11,000,000 primarily related to revaluation of U. S.

Dollar cash and other assets held in Russia given the depreciation of the ruble versus the US dollar and to the appreciation of the Chinese yuan. The foreign exchange gain increased Q3 operating margin by three fifty basis points. Q3 net income was $36,000,000 or $0.66 per diluted share. The goodwill impairment charge reduced EPS by $0.63 while foreign exchange gains benefited EPS by $0.15 The effective tax rate in the quarter was 16%. If exchange rates relative to the U.

S. Dollar had been the same as one year ago, we would have expected revenue to be $4,000,000 lower and gross profit to be $3,000,000 lower. We ended the quarter with cash, cash equivalents and short term investments of 1,300,000,000 and total debt of $39,000,000 Strong operational execution resulted in cash provided by operations of $70,000,000 during the quarter. As a result of COVID-nineteen, we have reduced our planned capital expenditures for the year. Capital expenditures were $25,000,000 in the third quarter, and we now expect capital expenditures will be in the range of 80,000,000 to $100,000,000 for the full year.

During the quarter, we repurchased 61,000 shares for $10,000,000 Bookings growth in North America and Europe was strong compared to the second quarter, while total orders in China were lower. In North America, we had record bookings aided by several orders for advanced applications and emerging products. While total orders in China for the third quarter were lower, China continues to have a significant backlog given the exceptional level of orders booked in the first half of the year. In total, third quarter book to bill was slightly below one. Overall, it was also notable that order bookings improved markedly during September.

It is difficult to predict whether the improvement in some macroeconomic indicators will be sustained given the resurgence of COVID-nineteen in Europe and North America and its potential impact on economic activity. These uncertainties continue to make forecasting our business challenging in the near to medium term. That said, we continue to benefit from near term growth opportunities in ultra high power cutting, electric vehicle battery processing, medical procedures and advanced applications. We believe the strides we are making in higher power products within our core Materials Processing business and new solutions will enable us to emerge from the current downturn in a stronger competitive position. For the fourth quarter of twenty twenty, IPG expects revenue of $290,000,000 to $320,000,000 The company expects the fourth quarter tax rate to be approximately 25%.

IPG anticipates delivering earnings per diluted share in the range of $0.75 to $1.05 with 53,100,000.0 basic common shares outstanding and 53,700,000.0 diluted common shares outstanding. Financial guidance provided this quarter is subject to greater risk and uncertainty given the COVID-nineteen pandemic and its associated impacts to the global business environment, public health requirements and government mandates. As discussed in the Safe Harbor passage of today's earnings release, actual results may differ from our guidance due to factors including, but not limited to, goodwill and other impairment charges, product demand, order cancellations and delays, competition, tariffs, trade policies, health epidemics and general economic conditions. Our guidance is based upon current market conditions and expectations, assumes exchange rates referenced in our press release and is subject to risks outlined in the company's reports with the SEC. With that, Valentin, Eugene and I will be happy to take your questions.

Speaker 0

Thank you. At this time, we'll now be conducting a question and answer session. Due to the number of analysts joining us today, we ask you limit yourself to one primary question and one follow-up If you'd like to ask a question today, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press 2 if you'd like to remove your question from the queue. For participants using speaker equipment, Thank you.

Our first question is coming from the line of Jim Ricchiuti with Needham and Company. Please proceed with your questions.

Speaker 5

Hi, thank you. Good morning. Wanted to follow-up on the comments you made about the bookings picking up in September. Can you elaborate on where where you're seeing the activity and to what extent that, maybe may have been sustained thus far, you know, in October?

Speaker 3

Jim, good morning.

Speaker 6

Yes,

Speaker 3

the phasing of orders and the tone of orders in the quarter was a bit weaker in July and August and was really exceptionally strong in September. That strength was driven, in particular by improvements in North America and China. Overall, the order flow in Europe was a bit more even. It was actually stronger than it had been in the second quarter. The North American bookings, as we referenced, benefited from significant orders for advanced applications, some of which are scheduled to ship in Q4 and some of which are probably going to be Q1.

We may be able to get some of them into the fourth quarter as well. Very strong orders for some of the emerging products, particularly green lasers and even better orders during the quarter for slightly better orders for UV and ultrafast. In October the first week in October, China was actually on holiday, so there was no activity in China. But since then, particularly in the last week and a half, the overall tone of order flow has actually picked up in China. It's been quite strong in Europe since the October, which is interesting.

And in North America in the last four or five days, it's also improved meaningfully. We've had another order for green lasers from Southeast Asia as well. So we're actually quite pleased with the general tone of order flow in the business, given the disruptions that you're seeing in the market.

Speaker 5

Got it. And just on curious. We're hearing more and more of that a pickup in the automotive market. You are you seeing any signs of that in the business, including, you know, potentially in in in the Genesis business?

Speaker 3

Not so much in Genesis. I think automotive, there is certainly a little bit more strength to it. It's difficult to bifurcate it between traditional EV. There's a lot of investment going on in EV, and that's not just happening in China. There's significant orders we're waiting for in North America as well for this.

There's an order we just took this week for EV. I'd say that the order flow in Europe around automotive is still a little bit weaker. So there's a lot of there's certainly a significant pipeline of automotive activity. It's a little difficult to bifurcate it between traditional applications and the emerging EV applications.

Speaker 2

Got it. Thank you.

Speaker 0

Our next question comes from the line of John Marchetti with Stifel. Please proceed with your question.

Speaker 7

Thanks very much. I'd like to go back just a little bit to the order commentary again. You know, the the North American and European, I think, is understood to be a little bit more tied to those regions recovering a bit. But I'm curious from the China perspective, having those orders get off to a little bit of a slower start and now coming back a little bit, if you can discuss maybe some of the dynamics that are going on there in that market. And then as we look out into 2021, and I know you're not specifically giving guidance there, but should we expect that the China business may be back more towards the 2019 type of levels?

Or do you think something has changed there as we're looking out into '21?

Speaker 3

So there's a lot of different aspects to that question. The order flow in China has been a bit, I call it, anomalous this year, right? We've had this very, very strong order flow in the first half of the year. And we reiterate, we have very strong backlog in China. What's been good to see is that even with that, order flow in China and the general tone of the business has been quite positive in September and October.

So you can't really call it normal just because the backlog is strong, but also the tone generally tends to be a bit more positive at the moment. The feedback we've got from our China business is that Q4, the tone for business remains relatively good. Recent presentations from them for opportunities in 2021 are significant and meaningful. They're driven by things like EV, the transition to higher power ultra high power cutting applications. Within EV, it's battery welding, it's cleaning applications, it's foil cutting.

So that helps us because of the higher power pulse lasers. There's actually some interesting demand that may come out even of some additive applications in China. So there seems to be a broader base potential for the application sets in China, and there are a very significant number of opportunities that they're working on. They're even working on looking at displacements of CO2 lasers within traditional automotive industry, where they've identified 1,000 odd CO2 lasers that still potentially could be reduced. So if the economic underlying economics stay relatively strong in China, I think you see that investment cycle continue there.

I will reiterate on the order flow. North America was an extraordinarily strong quarter for us. And the good thing about that was just the diversity of applications. It wasn't materials processing on its own. It was also some of the advanced applications.

It was some of the micro materials applications. We actually got another order for Medical in October, so that wasn't quite Q3. We called out the strength during the quarter from revenue and bookings on some of the semiconductors applications as well. So North America was really it was an exceptional quarter for us. And I think it was even a record booking level if you exclude some of the systems businesses.

Speaker 8

Thank you.

Speaker 0

Our next question is from the line of Nick Todorov with Longbow Research.

Speaker 6

Please proceed with your question.

Speaker 9

Yes. Good morning, everyone. I just want to understand again going to bookings. You mentioned that China backlog remains very strong several times. Can you help us understand how should we think about seasonality?

Obviously, this is not a typical period of the time. But as we go into the December and March quarters, typically, you know, the business in China goes down a little bit. But how should we think about that relative to the backlog comments and the comments of order pickup in September and October?

Speaker 3

We're not going to give any commentary around Q1. It's too early to do that. Think the seasonality in China that's backed into our guidance is fairly in line, even though it is a different difficult time to pick that. Revenue in China would be slightly lower, offset by strength in some other regions. China has been giving us good forecasts that they've been intending to get towards the top end of their range.

And I think it just depends how the tone of the business holds up there. I think we've given a beyond that, I think there's an lot of commentary I've already given around orders and and the tone of the business in these different regions.

Speaker 9

Okay. Then the follow-up

Speaker 2

you were saying, but here

Speaker 3

Sir, doctor Gavonta is gonna add

Speaker 2

But now we introduce this quarter new some new, very exciting product, and, you know, we also think that they will have a very good new chance in China also, not only worldwide. This is a product that's very exciting and now we're we're probably testing in China in a best serious order, volume orders start to grow only in this quarter. So we will very beginning next year for us would be a serious test to regular product in sales revenue in China and not only China worldwide.

Speaker 6

Okay.

Speaker 9

Thanks. Just as a follow-up, I think, Tim, can you comment a little bit about the implied fourth quarter gross margin? If my math is correct, it implies about mid-forty five percentage as where if I look at the revenue, that is the revenue is about 15,000,000 to $20,000,000 higher than the June where you guys had a 46% margin. And obviously, September was very strong, aided by FX. Can you help us understand the implied gross margin and the puts and takes for December?

Speaker 3

The implied gross margin is very similar actually to Q3. It's 45% to sort of 48% at the top end of the range. So as you tend towards the top end of the range, you're getting into the upper half of 45% to 50%. I'm assuming for operating expenses, pretty similar at the top end of the range and slightly lower. So I'm not sure whether you're saying 45%.

We can, you know, come back to that in a bit more detail later. But so I'm assuming 45% to 48% operating expenses at the top end of the range, similar to Q3 at the bottom end of the range, slightly lower and then a tax rate of 25%, which would exclude any discrete items that we can't really predict, what they would be during the quarter. Got it. Thanks.

Speaker 0

Thank you. The next question is coming from the line of Michael Feiner with Bank of America.

Speaker 6

Please proceed with your question.

Speaker 8

Hi, guys. Thanks for taking my questions. My first question just on the high power lasers, it was flat year over year. This was the first quarter that it wasn't down on a year over year basis in nine quarters. So I'm just hoping, Tim, you could kind of help me understand this impact.

If we assume based on your guide for Q4 that high power lasers are going to potentially accelerate on a year over year basis, like how do we think about what that does for your mix since it's been really down for the last nine quarters? And now it seems like it's flat and moving in the right direction.

Speaker 3

Mike, I think that's great comment. Think, yes, High Power was basically flat year over year. And given the circumstances, I think that's a pretty interesting observation and a great performance. We benefited from clearly the shift towards ultra high power that we've called out, where we have significant advantages in terms of just the quality, reliability, electrical efficiency capability of producing that product. Interestingly, the YLR lasers also performed quite well.

We called out that they actually grew year over year as well. So I think that's continuing to demonstrate, again, the overall quality and reliability of the product that we have versus competition, it shows we're not losing share there. We referenced that we also sold some single mode lasers for advanced applications. That helped a bit with total high power laser sales in the mix there. We've got this very strong backlog for single mode lasers.

We actually took two of the orders taken in The U. S. For 100 kilowatt lasers. So that's for applications outside of materials processing. Yes, I think the performance of that high power lasers was driven by those factors.

I also call out that that's actually we've got the new ultra compact U series in the hands of customers and they're evaluating it. The performance at the less than four kilowatt range was before significant orders being received for that product. So there's potential improvement in 2021 as that product ramps up at the low end of the market.

Speaker 8

Makes sense. And, Tim, I want to ask about your inventories. If you look on a year on year basis, your inventories were down year over year much more than your revenues. We haven't seen this since 2017. You talked a lot about last year, you know, some of these inventory charges that were taken.

And and you look now, I mean, your inventories are kind of flattish while your sales were accelerating quarter over quarter. So can you just give me a frame of reference, how do you feel about your inventories right now? Do you need to increase production to maybe match demand where your inventories are now and where you think demand might be heading into 2021? Thank you.

Speaker 3

I think that's a good operational question. Eugene, what's your view on inventory and the investments and the overall control and execution around that at the moment?

Speaker 4

We already mentioned that in 02/2019. We start to control much more precisely our inventory in different facility, I mean, in Germany, United States, especially in Russia. And during this control, can improve our our position of this area, I mean, more control. And from this point of view, I think we will continue to check, to control, and to keep our inventory at the exceptional level.

Speaker 2

If this inventory, our policy in inventory help us to pass this year over a critical year when this all the sources, basically, will components and parts supply outside sources. Where they see this problem and the the way and the average delivery time of new components, it's all increased in sometimes. So without inventory, it creates enormous problem in the manufacturing of our product. But we have now inventory to pass without any problem this very tough time.

Speaker 0

Thank you. Our next question is from the line of Mark Miller with Benchmark Company.

Speaker 6

Please proceed with your question.

Speaker 10

Thank you for your question. Considering a possible change in administration of The United States and possible impact on tariffs, thoughts about that in terms of how it might impact IPG if such a thing would occur?

Speaker 3

Think we Mark, we I'll get into discussing the outcome of the election. We'll have to

Speaker 7

see what happens on that.

Speaker 3

We're a global and international company that operates in multiple end markets. I think for us at the moment, it's more the underlying economic growth that's expected next year globally. So GDP is forecast to rebound quite strongly on a global basis. The most interesting and important thing for us would be whether that is actually sustained or whether the pandemic has an impact on that. I think the outcome of the U.

S. Election is more muted relative to those expectations. I think the other area that we're absolutely focused on is this diversification of the business, the new products at different wavelengths, different pulse durations, addressing different applications and how we execute around those. And that again is on a global basis. So, I don't want to get too hung up on the election results.

And I think there's other more, in the near term at least, pertinent things that could impact whether global GDP growth is robust or not next year.

Speaker 10

And just as a follow-up, could you estimate what percent of sales are coming from products introduced in the last two years?

Speaker 3

The number we gave on emerging products, which is not quite the last two years, does include some higher power pulse lasers, but getting to higher powers on that was 21%. We gave that number in the in the script.

Speaker 6

Thank you.

Speaker 0

Thank you. Our next question is coming from the line of Tim Diffely with D. A. Davidson. Please proceed with your question.

Speaker 11

Yes. Good morning. So Tim, you mentioned the gross margins of 160 basis point improvement year over year driven mainly by cost. Does that infer that pricing has been relatively stable for you over that period of time?

Speaker 3

On a year over year basis, pricing actually still came down. It was more in the 10% to 15% range. It's more but some of that is also changes in sorry, 10% to 15% on an average kilowatt basis. In fact, if you look at the high power, average selling prices were down significantly less because of the transition to higher power levels. So you've still got competitive dynamics and pricing issues there.

If you look at or interestingly, if you look at order flow and ASP, some of the ASP analysis around orders taken in Q3, they were actually slight improvements on that because of some of these ultra high power lasers and single mode lasers that we booked. But also, the exchange rates have moved a little bit in our favor at the moment. So the renminbi is a bit stronger, the euro is a bit stronger, and that helps with the ASP trends a bit. So the other side of the equation is just it continues to reinforce the ability of the company to reduce costs on product. And this is, as I said, even before the new compact YLR user introduced, there's certainly some benefit coming from the U the YLS use.

But there's also the product mix benefits as you go to ultra high power lasers, stronger sales of things like green lasers, stronger sales of ultra high power or higher power nanosecond pulse lasers. These are all areas where we have a competitive advantage and where the value proposition delivered to the customer is exceptionally strong.

Speaker 11

Okay. Sounds good. And then, on the, the booking strength, especially in North America, how much of that do you think reflects, just some pent up demand from a couple of quarters of COVID versus, you know, matching the true underlying demand level today?

Speaker 3

The bookings rate in North America was we referenced that it really came from newer products and newer applications in advance. So it wasn't necessarily driven by a rebound processing applications. We started to see some more recovery of that, I think, probably in September and more recently in October, where we started to see some of the cutting OEMs place some orders. There's a significant order on automotive we're waiting on at the moment. There was an order taken in automotive.

So the real trend on Q3 was from these advanced applications and strength on some of the emerging products in green and UV and ultrafast.

Speaker 11

Okay. Thanks for your time.

Speaker 0

Thank you. The next question is a follow-up from the line of Michael Fainter from Bank of America.

Speaker 6

Please proceed with your question.

Speaker 8

Hey, guys. Yes. Thanks for squeezing me back in. I'm just curious, Tim, I mean, with your cash position where it is, I'm curious. Like, you know, you took this impairment in Genesys.

You know, what have you really learned from Genesys? And and and with this cash position, do you think IPG could be moving more aggressively in terms of acquisition to help drive that penetration on welding? You know, how are you guys thinking about that that cash position as you head into 2021?

Speaker 3

So I mean, cash position and the strength of our balance sheet has been a a very significant advantage to the company during the last year, particularly given the volatility in the macroeconomic environment. It leaves us with a tremendous amount of firepower to look at potential acquisitions and investments in new technologies. And the learning points on Genesis, Genesis has unfortunately been very impacted by COVID-nineteen, right? So there was a lot of growth opportunities in things like aerospace that we were looking at, particularly on the laser based and the aerospace industry as a I mean, everybody knows it's just a complete mess at the moment. So it's not that we don't think Genesis is going to be successful.

I think that it has just been impacted and it's going to take a bit of time to get that business to recover. On the overall acquisition strategy, we continue the successful acquisitions we've done have been around looking at technologies that really fit with our lasers. So the acquisition of LDD in Canada is driving significant revenue opportunities given the real time world monitoring capability. The acquisition of Optigrate in Florida really enhances the capability around ultrafast lasers and also even in in helping with some of the diode specifications. So, we're well positioned to look at at, you know, strong technology acquisitions that benefit the business.

Speaker 8

Thank you.

Speaker 0

Thank you. At this time, we've reached the end of our question and answer session, and I'll turn the floor back to management for closing remarks.

Speaker 1

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 conferences this quarter. Have a great day, everyone.

Speaker 2

Thank you. Thank you. Thank you.

Speaker 0

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