IPG Photonics Corporation (IPGP) Earnings Call Transcript & Summary

Good morning, and good afternoon, everyone. My name is [ Rio Croke ], relationship manager within our listings team at NASDAQ. I'm pleased to be here joined with the team at IPG Photonics, including Tim Mammen, Chief Financial Officer; Burgomaster, Vice President and Corporate Controller; and Eugene Fedotoff, Director of IR. If you have any questions, please submit them through the questions section on the right side of your screen, which will be directly e-mailed to me. We will have time at the end of the presentation to answer any questions that come in. So without further ado, here is Tim to share a background of the company as well as the latest news and insights with IPG Photonics. Tim, please take it away.

Thank you, Rio, and good morning, everybody. Just before I start, I want to draw your attention to the safe harbor statement at the beginning of our presentation. We will be making forward-looking statements during the course of this presentation and those statements do involve risks and uncertainties. We encourage you to refer to the risk factors described in the company's annual report on Form 10-K and our other periodic filings with the SEC as applicable. I won't read the whole of the safe harbor statement. With that, we'll start to go over the presentation that we've got here. So first of all, really at a very, very high level across many different applications, fiber lasers enable products to be made at a lower cost with better productivity and generally with improved quality across many different applications and many, many different industries. IPG is really the global market leader in fiber laser technology, addressing those different end markets and applications, and I'll talk about those during the course of this presentation. We are well-known for having pursued a deeply vertically integrated strategy that covers a lot of the manufacturing of very key components and technologies, and that enables us to protect the IP as well as benefit from economies of scale that drive very, very strong margins as output and unit volumes of products increase. The opportunity for fiber lasers is expanding, and it is a multibillion-dollar addressable market. Increasingly, fiber lasers are displacing non laser applications, both in materials, processing and in other areas. And that really represents the future growth opportunity of the company where historically, fiber lasers, initially, particularly in materials processing displaced existing lasers, for example, CO2 lasers in cutting or YAG lasers in welding applications. It really is a very, very diverse set of potential opportunities that we have. As I mentioned, our vertical integration enables us to drive and perform exceptionally well in terms of our earnings and profitability. Our margin profile is really -- continues to be the best-in-industry and the best-in-class. And we also have a consistent history of converting earnings into strong cash flow and free cash flow generation. Really fiber lasers over the last 15 years or so have revolutionized the laser industry. And now, as I mentioned, revolutionizing even non-laser-based converting non-laser-based applications. And we sell a full portfolio and suite of both fiber lasers and also took some of our systems and beam delivery capability later on in this presentation. We saw lasers that deliver the power in a continuous average level. You produce lasers where you can pulse the beam, we produce lasers where you can adjust the beam to improve the performance of different applications. And we also produce lasers at extremely short past durations. Fiber lasers really, in many instances, improve the productivity of processes. They, therefore, lower the cost and often perform the process to a higher quality. In many instances as well, they're environmentally enabling certain benefits by reducing the use of consumables that are environmentally sensitive, for example, in cleaning applications, you're eliminating the use of chemicals, [ insolvents ], more abrasives, plastic media blast. In welding applications, you're reducing the amount of a wire that is needed, you can also enable lightweighting of different vehicles and transportation mediums. So there's a lot of benefits outside of just the actual processing that fiber lasers bring to different applications. The lasers themselves are extremely compact and monolithics, so there are no moving parts of them. That makes them exceptionally reliable. They're very robust and well suited to be used in industrial applications were in the field, and they're also extremely electrically efficient. Sometimes we compare the efficiency of a fiber laser, really, if you compare it to the evolution of lighting, the fiber laser is akin to an LED light, older laser technologies are into filament light bulbs or gas, fluorescent lighting, which has a bit more electrical efficiency. So we're really in a pinnacle of laser-based electrical efficiency. In many instances, while I mentioned you're eliminating the use of consumables by processing the laser. We also have a very strong history to be able to scale the output power of our lasers to address many different types of applications. Within materials processing applications, there are a significant number of them, outside of materials processing applications, there are also significant growth areas. But on this slide, we can study some of the core materials processing applications, cutting of metal, really a separating technology has been a strong growth driver of the company, primarily displacing CO2 lasers, historically now displacing non-laser-based separating processes that include punches, presses, dyes, plasma cutting applications, mechanical source and to name it a few examples. Within welding applications, lasers kind weld to an equivalent and better quality in most instances. And with better speed than traditional welding technologies, so whether they be app-based processes make [indiscernible] spot welding applications, [ Evan ] welding applications. The laser-based welding processes are extremely high quality, faster speed and often also enable the welding of different types of materials. So laser -- fiber lasers are very good at welding, for example, reflective materials. So as you see more and more alloys and different types of materials like copper used, particularly in emerging industries like AV. Laser-based welding applications are starting to gain significant traction. Brazing is another joining technology that's similar to welding is really subsets of the joining applications. Other applications include high-speed drilling of holes, marking and engraving. Additive manufacturing is really a deposition technology. Deposition process is similar to cladding, where you're depositing a material over a substrate on additive manufacturing, you're actually building parts from metal based powder. And then you've got other surface treatment applications, the one that we are often talk about is cleaning. So that's where you may be removing coatings from materials prior to processing them or removing corrosion, removing paint from surfaces prior to a service being related. So those are examples of some of the cleaning application, cleaning molds within manufacturing or storage vessels within manufacturing processes. Really laser based systems are -- got a very strong opportunity to displace nonlaser-based machines. So laser-based systems are really about 10% to 12% of the total machine tool market and can displace a significant number of those process, not all of them, but a significant number of those different processes. In terms of the other areas that lasers are used in is a very, very diverse set here, the ranges from entertainment to medical applications to research, very specialized instruments, certain defense applications and then micro processing, which is a similar thing to materials processing, but outside of the metal-based market. These new applications and different markets are actually larger than the industrial applications and served by lasers that have shorter wavelengths, shorter pass durations, very specialized performance characteristics. So they're more specialized in terms of the laser content and these are areas where IPG has been developing technologies to address those markets. Really, the emerging growth opportunities are in these areas, some of the areas where we've had greater focus and where we've achieved some more significant traction particularly over the last 18 months or so are in medical, defense business and government. Aerospace and defense and government business continues to perform well. That's a very profitable business. We're still waiting for applications to be really commercialize there. So there's a lot of lasers that we supply into different types of projects, and that government and aerospace and defense area could expand rapidly on some of those different applications get commercialized. And then in microprocessing, microelectronics and microprocessing, we are selling both shorter pulse duration and shorter wavelength lasers addressing circuit board manufacturing, semiconductor processes and other more specialized areas in those industries. We also have an expanding portfolio of laser-based systems. So these are systems in which we incorporate our own light source. And the address -- again, they enable us to address a broader part of the market than we'd otherwise be able to do so. In general, we don't compete on -- in general we don't compete with primarily the other large OEM customers that we have here, so we are more specialized in the types of systems that we produce, either in microprocessing and machining. Welding is another area where the complete system, whether it be the large robotic systems or smaller multiple access workstations that are used in medical device manufacturing, so to make for example, welding of pacemakers or specialized cutting applications, we are cutting stent. So our systems-based business is really targeted to deliver technology where the processing is more unique. And these are areas that are not well served by the existing OEM supply chain. We talked about some of the advantages of fiber laser has been much time on this slide already, but just draw your attention back to the fact that we produce lasers with extremely high power levels, very high efficiency. The beam quality of our lasers is extremely high. So particularly in applications like welding or additive manufacturing, we continue to execute extremely well. The lasers are very, very reliable, well suited to being used in industrial applications. And also as in the field as well. Extremely easy to integrate with robots given the flexible fiber delivery. And often the same uses a valuable floor space because they're so compact and have the smallest footprint of different laser technologies out there. The other benefit of having extremely high electrical efficiency is it actually reduces the complexity of the cooling systems that are required to manage the cooling processes around the lasers and reduce water consumption because there's less dissipated from the laser. So the cooling processes are basically more efficient as well and environmentally friendly, not just from the electrical from reductions in water consumption. This slide is really more of an educational slide about laser-based technologies. We think about and trying to distill it down to be 3 different performance characteristics within which there are many different specifications. So first of all, we think about lasers in terms of their wavelength. In terms of metal processing, they're primarily use [indiscernible] lasers in the near infrared. We also produce lasers at shorter wavelengths. So you go down into the visible spectrum in the ultraviolet. And we also produce lasers at longer wavelengths. So for example, we have thulium lasers that are used in medical applications and telecommunications applications. And we also have capability in the medium for red area we're using specialized crystals to convert a seed laser to longer wavelengths. And in the future, these are areas where there could be significant, they're small markets at the moment, but potentially significantly expanding areas for different applications. The other way we think about the laser is the way that you deliver the power so you can either deliver the power of a continuous average level, a CW laser. So 100 watt laser or 1,000 watt laser will emit that energy at that average power level or you can start to pulse the technology by really capturing, releasing the energy, and you can get down to either relatively -- you can either produce that in relatively long pulse durations or very, very, very short pulse duration. So you go from a quasi-continuous wave laser down to [ effective ] second pulse laser, second is a [ quadrivalent ] of a second. So you're really talking about exceptionally short pulse durations. And really for a given average power, the shorter the pulse duration, the higher the peak energy can be achieved. And then the third area we really think about lasers from our perspective, what is the average output power of the laser and our capability is really very strong in delivering lasers with very high average power, whether it be for CW, QCW, even pulsed applications. So for example, in EV, our high-power pulse lasers are used in foil cutting, using cleaning applications and then in those sort of emerging ablative processes that require very high pulse. With high-power CW lasers were getting into either very high-power lasers used on cutting applications or you're welding very thick materials together, again, you can use very, very high power lasers. The highest power laser we saw is 120 kilowatts in output power. One of the emerging areas of growth for IPG that has driven growth this year, initial investment cycle supporting electric vehicle manufacturing started really back in 2017 and '18 is the EV area. And there are multiple different applications that we address here. So the largest area is in the making of factories for EV. And we've described some show some of the different types of processes here. So they really cover either welding applications or you're welding different parts of the battery. Foil cutting applications, so cutting very, very thin materials. It's a very different type of application from flat metal sheet cutting, and then cleaning applications where you're cleaning the electrodes or cleaning different areas of the services prior to processing. Within electric, another area is motor electric vehicle -- motor manufacturing, so starting to see orders for things like [indiscernible] welding, welding of the rotor and status stacks. So we're seeing this expansion in EV applications beyond battery processes, which are very large to motor manufacturing and also the main body applications within EV, particularly there's no real change between some standard automotive manufacturing, so whether it be the A pillars, the B pillars, things like C-packs, some of the structure where the batteries are held, for example. And EV is interesting because you see a move towards trying to lightweight the vehicle that is more aluminum, aluminum used in vehicles or alloys. So you see an increase in the opportunity for welding of those sort of reflective type materials as they try to achieve more light weight. I mentioned within EV that we deliver many different types of lasers and even laser-based systems for battery and other processes. So our adjustable [ moving ] lasers where you can shape the beam and improve the quality of welding, and gain considerable acceptance in this area. We deliver those with our beam delivery capabilities. So things like our scanners, welding heads, a real-time well monitoring capability, different types of welding heads where you can move the laser beam around again to improve the efficiency of the weld process. Our high-power pulse lasers are used in the foil cutting and the cleaning applications. And then we also have delivered complete systems for different EV processes in battery and other areas as well. So I think obviously the electric vehicle investment cycle is only just beginning and it's a decade-long driver of revenue and growth for the company. And we expect over time, as with other processes and application, the number of laser-based applications will increase as lasers gain acceptance in different areas. I mentioned the Adjustable Mode Beam and I won't spend much time on this. So really, Adjustable Mode Beam is a laser where you can change the shape of the beam and to simplify the time and distill it down. It basically improves the consistency and quality of the weld and reduces the amount of spatter that's about a material that is sprayed around during the welding process. It enables very, very high-speed welding as well and maximizes productivity by maximizing uptime. Interesting area we've invested in is our real-time weld monetary capabilities. So this is all part of the beam delivery capability that we have, where we add value around the laser. The real benefit of real-time weld monitoring is it again, improved productivity because you're able to determine the quality of the weld on the fly. So often, historically, it would have to move the path that was being welded from one fixture to another fixture and then have a process that often took quite a lot of time to assess the strength of the weld and the quality of the weld. And if the weld didn't meet the the parameters that were required, you then have to move the power back to the welding fixture and redo the weld. Given that we could actually evaluate the quality of the weld on a real-time basis. If the weld is determined to be of insufficient quality you actually redo the weld within the same fixture and almost simultaneously as the monitoring is done. We're having some success with our handheld laser-based welding system. So this opens up a tremendous opportunity for manual welding processes. The handheld welder was displayed FABTECH show in the U.S. a few weeks ago, and there was a really no room in the booth. We had a very, very strong attendance and really very strong acceptance of the capability of the device, which really enables high-quality welding with preprogrammed recipes, and the key advantages of the system are not only the quality and productivity of the welds, they improved the diversity of materials that can be welded is increased, that people could be trying to use the device -- the device very, very quickly. So it reduces the amount of training and the skillset that's required for different welding applications. And there is really globally a shortage of highly skilled welders -- welding with other processes really artful. You can spend years training to lay down metal with [ make-and-tick ] manual process. So in fact, this laser, the handheld laser welding process and system can get payback in less than a year, if you're saving $10 an 1 hour on what you're paying a welder. So it really opens up the opportunity for increased number of people to get qualified within welding applications and address some of the shortages that the welding industry experiences in that area. Some of the other newer products that we've developed that are introducing has started to gain traction are ultrafast fiber lasers. These are really the echo and femtosecond address micro materials process. We have about 50 different projects under evaluation. We expect traction for ultrafast lasers, which has been relatively slow so far to pick up considerably in 2022. Talked about our vertical integration. I won't spend much time on this. You know the company know that we have a semiconductor fab. We produced all of our diodes internally, produce our specialty optical glasses, many other optical components, including isolators and couplers, combiners, micro and macro lenses that are used in the packaged diodes as well as things like beam delivery capability, beam switches, optical welding heads. We produce obviously the complete laser source, the beam delivery and also the -- in many instances, the laser-based system. Bunch of the [indiscernible] integration has enabled us to take a huge amount of cost down the laser. That's enabled the laser to displace other lasers initially and now is really enabling the laser to displace nonlaser-based applications, which really is a significantly larger market opportunity than even the historic laser-based applications were. We very much have a global footprint, and our main manufacturing locations are in North America and Europe, and our lower cost manufacturing is done in Russia. The sales and distribution networks all around the world. Significant OEM relationships again on a global basis. The company has about 6,000 employees. A lot of whom are in manufacturing, but also in R&D. And then we continue to expand our sales given some of the diverse set of applications that we're starting to see growth from. We believe we can continue to target double-digit growth, particularly with the emerging opportunities that we have, targeting gross margins in the range of 45% to 50%. More recently, we've been reporting gross margins in the upper half of that range. So it's been very pleasing to see some of the leverage that we've been able to generate. And in the last quarter, we saw operating margins get back up into just the lower end of the 25% to 30% range. These are all on a GAAP basis. So the operating and gross margins really continue to be industry-leading margins that we report. We've seen, particularly in the last -- this year, in fact, the return on invested capital excludes cash has actually improved from 15% that we achieved last year to close to 20% this year. Also seeing a return on equity that's starting to improve as well. And with that, I will open the floor up to questions for the remaining kind of a couple of more minutes if there are any questions out there have come up.

Thank you very much, Tim. So we did have a few questions come in, and thank you to the audience for submitting your questions. So the first question that came in is -- how is the competitive situation in China in the EV area? Usually, the Chinese competition is cut throughout. Is this also the case in the EV area -- or are you still so far ahead that it is not a pricing competition?

We continue to be very significantly ahead. I mentioned some of the products that we have there that addressed EV applications. So for example, the AMB laser welding applications, single-mode lasers are also used in welding applications. The pulse lasers that we supply to the -- for cutting applications are being developed specifically for the customers in that end market. So in some instances, we're on our fourth or fifth iteration of those. And again, the cleaning lasers are much more specialized. So the competitive dynamics in China around EV applications are much more limited than they are around the cutting applications. Of course, the Chinese suppliers would like to get into those areas. But there's a significant degree of processing and technology capability that we have that means that our share in that area is extremely high. More often than not actually particularly around the welding much less so even on cleaning and foil cutting. We tend to compete with some of the foreign suppliers of lasers rather than the Chinese competitors for EV applications.

Thank you very much, Tim. And so I know there were a few more questions, which will be forwarded to the team at IPG. Apologies since we're at the top of the hour. So at this point in time, we'd like to thank the team from IPG Photonics for joining us today. And thank you, everyone, for joining the London Investor Conference with us as well. This will conclude this IPG Photonics presentation. Thank you all very much.

Thanks.

Thank you.