IPG Photonics Corporation (IPGP) Earnings Call Transcript & Summary

Good morning and welcome. My name is Jed Dorsheimer, Global Head of Sustainability Research at Canaccord Genuity. For those that are -- have been following us along from yesterday and this morning, welcome back. For those just joining us, welcome. We have a really interesting company, IPG Photonics. My history with IPG actually goes back more than a decade. I remember a young private company that was -- saw how these mainframe-based CO2 lasers were going to go the way of the dinosaur and be able to develop this cool new thing called the fiber laser. And at the time, most of the market believed that there is no way that was going to disrupt the incumbents. And now today, I think IPG sits with well over 80% market share and opening up new applications, some of which we're going to talk about today. So I'm quite fortunate to have Tim Mammen, CFO; and also Eugene Fedotoff, Director of Investor Relations. And Tim and I are going to have a talk this morning and kind of go through the business. So both of you guys, welcome. And Tim, thanks so much. I always appreciate our discussions, which I find interesting because they're not simply on financials, not to say that those aren't important. But talking about sort of maybe some of the higher level things and what's going on in the business. So to both of you, welcome.

Thank you, Jed, and thank you for inviting us, and good morning to everybody out there. Hopefully, I can be relatively articulate this morning.

I'm sure you will. I mean I want to start high then kind of dig in. And so I've been asking a lot of the companies only because I just finished reading this book by Simon Sinek called The Infinite Game, and I love how he frames sort of the finite versus infinite mindset. In the finite game, like football, either the U.S. version or international soccer-based version, any game where you have a defined time, one victor that's going to clearly come out of that with rules of engagement would be considered finite, and infinite would be one that doesn't have an endpoint. And he says that business is very -- is infinite. But one of the problems that leads to the late Clayton Christensen's The Innovator's Dilemma is when you have leadership that takes a finite mindset to an infinite problem. So with that in mind, I'd like to just sort of start and as a leader of your organization, how do you think about your customer and who and what are you serving? Kind of getting to that why statement of IPG, if you will, Tim?

Yes. So that's an interesting question. I agree. I think the business is an infinite game. And I think particularly within a technology company, if you think about it in a finite sense, that you've developed a product and it's going to be the be-all and end-all to everybody without continuing to innovate and change around it, I think technology companies have a history of dying around that. So we really believe, first of all, internally, that we're the technology leader in the industry with a great focus on innovation and constantly trying to stay ahead of the game and understand that certain parts of the market will change and perhaps become commoditized and less value-adding to the company, and we're always looking for new applications and opportunities. And in that regard, we believe that lasers have a huge number of opportunities to improve many legacy processes across many diverse applications that, historically, we're very well-known for doing a couple of -- 3 or 4 core applications within industrial markets, but the opportunity set is fundamentally more diverse than that as you can develop product to address those areas. We use a phrase "the power to transform at IPG". And I think that captures it well, both in terms of -- a lot of times, if you think about that in the power of the lasers that we produce. So we've been able to always scale the output power of our lasers up and that's enabled us to address more and more applications across different industries, from cutting thicker materials faster and more productively to welding very, very thick metals together. We're getting into materials testing in some of the advanced applications. So we've been testing, for example, laser used to test ceramics that may be used on space vehicles and using them in terms of testing them so that when they reenter the earth's atmosphere, they're protecting the shield of the vehicle from burning up. So power is one way to think of it. But I also think that power is reflected in the strength, the inherent strength of our capabilities to change many of those legacy methods. And there are numerous examples about it. So we think about how we can help the customer change things from the way they're processing metals, whether it's separating metals, joining them, ablating the surface of materials, depositing material on them. And then -- so for example, you can see within the EV industry at the moment where our lasers are being used to cut very thin foils, displacing traditional mechanical processes and doing that much more precisely, productively. And then, for example, in the welding element of it, joining nonferrous thin materials together with very high-quality, very high-speed welds that are enabling the scaling of the output of battery manufacturing. Another example is outside of the industrial area where we're improving a process, for example, is in medical, within lithotripsy. So the dusting of kidney stones, our solution enables kidney stones to be dusted to much finer particulate much faster and enables a basically more painless procedure for the patient because they can expel those fine dust particles relatively painlessly as compared to some of the other technologies. So I mean, a numerous examples I can give there. So we think about our customer and how can we help them improve the way they're doing things or even enable new applications to become successful.

How has ESG changed or is it changing in the customer conversations? I and we define sustainability in a very literal sense, and the Latin root of the word means to hold or to cradle, to support. And so as we define that of supporting life, part of that is where energy needs to be whatever process you're doing, there has to be a greater return for what the input factor actually is. If I think of Photonics, whether it's communication, whether it's welding, whether it's cutting, you're ostensibly combining electrons in a collimated way that's much more efficient than a traditional heat-based approach. There's less radiative recombination associated with the process. So in that sense, I would think if I was looking at, say, for example, welding and the arc that is created in that weld and the heat that is displaced being able to move to a laser that is much more targeted and therefore uses less energy in that application, not to mention the benefits of higher strength, et cetera, I would think at some point, that's going to have an impact from the -- at least the E and the S in the ESG. Have those discussions started? Or are we just in sort of the first inning of this game?

So they certainly have started. I think they've been going on for several years. I mean, we introduced the core fiber laser technologies at higher power levels over 15 years ago. And one of the fundamental precepts that we have about it is that you're not only improving things like reliability, but you're providing greater electrical efficiencies to devices compared to legacy type systems. So certainly, that sustainability is evidenced in that regard. I don't think there are sort of not necessarily subtle ways to think about it as well. But even when you go back to some of the original applications that use lower-power lasers that have become much higher-volume devices now. But marking as an application enabled a lot of consumable inks, and if you're doing deeper engraving chemicals to be removed from the process because the laser, with its ablative characteristics, can perform that permanent marking or engraving process by eliminating those consumables. In some of the other areas, perhaps not just related to the productivity. So in the way that the laser improves productivity, that in itself is a driver of sustainability, right? If you can cut more metal and do so more precisely so that doesn't need to be machined afterwards or process subsequently, all of that is a driver of productivity and efficiency. On the welding side, not only is the quality and the strength of the welds are higher, but the welds themselves are a lot cleaner. So you don't have to, again, process them subsequently. They don't have to be machined or cleaned up. The sustainability side of it as well drives into what we're enabling. So I talked about the EV industry, which we think has got a decade-long growth prospect to it and multiple applications that we're driving in there. I mentioned the foil cutting and the welding but we're also doing cleaning applications there. So either pre-preparation of surfaces or cleaning some of the electrodes during the battery manufacturing. In renewable energy, we're actually improving the efficiency of solar cells. So it's not so much that the laser is used to produce the solar cell faster. There are 2 applications that we have that drive each application about 100 basis points improvement in solar cell efficiency, which is pretty fundamental. There are other examples we've got. So I know an example of a system that was designed for someone in the agricultural industry, a laser-based robotic system, where with the laser processing, they were able to simplify the design of harvesting process that enabled that to happen more productively and reduce the time that it takes to harvest different types of produce. So there's a lot of different ways that you can think about that E and S aspect to the benefit of lasers across many different applications and industries.

Yes. I mean the genesis and the heart of my question isn't whether or not it's having an impact, it's whether or not -- I mean I read through and get sent all of these sustainability reports, impact reports. Quite frankly, they all look pretty much the same. You, McKinsey and BCG do a great job on putting a lot of data with green trees and it looks pretty and talks about impact. But it doesn't -- what I haven't seen yet is that looking at a manufacturing process and how that's actually translating into the moving from economic gains to actually energetic games and the returns that can be made. And that's why I was asking in terms of the discussion points. And those -- it sounds like those are happening at a C-suite level, I just haven't seen that start to flow into how companies that are buying your products are leveraging that benefit that you are providing.