Here today, and I'll just pass. I'm Sherif El-Sabbahy . I work on the U.S. Machinery Engineering Construction team out of New York, and I'll pass it just to Mark to briefly introduce himself.
Hi, so Mark Gitin. I've been with IPG now since June. Prior to IPG, I've been in the laser industry for more than 30 years. I did my PhD in lasers. I spent 25 years at Coherent, another big player in the marketplace. At Coherent, I had roles from the technical to sales, business development, marketing, ran strategic and corporate development, and then had roles in general management in a couple of businesses there. I went to a company called MKS Instruments, who had acquired a company called Newport, and I came to MKS to integrate Newport and drive the profitability of that business. I spent about seven years there and then came here to IPG.
IPG is a technology company that serves industrial markets. You're the founder and leading provider of fiber lasers for industrial applications. Could you maybe just give us an overview of the solutions you provide to your customers, who your customers typically are, and what end markets they tend to serve?
Yeah, absolutely. IPG, as you said, is the founder and leader in fiber lasers, and we lead the market in industrial applications. About 90% of our business is in the industrial area, and that's in areas like metal cutting, welding, cleaning, additive manufacturing, 3D printing, those core areas. That's really the key areas, and we're serving markets across industrial as well as automotive are the key areas. We provide solutions at the lasers as well as being able to provide full solutions. Lasers are subsystems that provide solutions to full systems in areas like welding and cleaning.
What typically drives demand for IPG's products? Maybe what's a good environment typically for IPG, and is there any rule of thumb for investors to think about as they think about GDP, industrial production, some of these indicators that people might be looking at in terms of growth?
Yeah, so a good way to look at it is we're an industrial company, excuse me, is around PMI. PMI is a good one. Also, some of the other indicators like machine tool are areas to watch. If you look at our business, it's about a $3 billion market in laser sources. Again, you can look at that driven by those indicators, but we actually have the opportunity to grow it faster than those markets because we're driving adoption. If you look at areas like laser welding, like laser cleaning, additive manufacturing, we're part of driving adoption, and you can grow the markets even faster than the market rate, and you could be multiple times the GDP in some of these markets.
As a new CEO, you've come from outside the company, which is rare for IPG. Maybe what attracted you to IPG as you were considering the move, and what do you see as the long-term opportunities?
Like I said, I've been in the laser industry for more than 30 years, and IPG is not a new company to me. In fact, I met the founder, Valentin Gapontsev, in 1995 and was invited to the first site in Germany in 1996 where there were 14 employees. I followed the technology and I followed the company across all of these years, had stayed in touch. Even in the mid-teens, when I was at Coherent, we had a stint to actually compete with IPG and develop high-power fiber lasers for metal cutting. We were not very successful in that area trying to compete with IPG with the core technology and the ability to drive the price value of the products.
Now coming to the company, I had spent quite a lot of time doing due diligence, recent due diligence on the technologies and the markets before coming as CEO. I can tell you, having come in and now really looked under the hood over the last months, I can tell you that the technology breadth and depth is even well beyond what I had seen from the outside, and that's very exciting. The markets that can be addressed from industrial to areas like medical, micromachining, and areas in what we call advanced markets, these are the broad capability to address those markets has been very exciting coming to IPG.
You have touched on sort of the markets that you are able to address. When we think about the typical industrial application for fiber laser, what is the size of that market? Looking at some of the other areas you have mentioned, medical, what is the size of those markets and what do you think about the overall growth potential of those?
Yeah, sure. If you look at the industrial applications that I mentioned, that's cutting, welding, as well as areas like cleaning and additive manufacturing, marking, that's for sources is about a $3 billion market. As I mentioned before, our ability to grow beyond that market is there with our ability to provide solutions and systems. That was sources only. We can grow beyond that with our solutions. Medical is a market that has a significant TAM. We focus in the area of urology, and that's about a $2 billion TAM.
If you look at some of the areas that we're working to grow beyond the core pieces that I talked about in medical, micromachining, and the advanced markets, we look at that as about a $5 billion TAM, and we have programs and product roadmaps to grow that to hundreds of millions of dollars over the next several years.
When we think about welding, traditional products, what are the levers to drive growth for laser, and is it the same addressable market as traditional welding, or are there certain areas that are more focused for laser?
Yeah, so laser welding has some key advantages. It has advantages in speed. It has advantages in efficiency of welding. When I talk about efficiency, it's being able to weld things with less pre-processing or post-processing, also abilities to weld dissimilar metals. There are metals that you can really only do well with lasers. The speed, depending on the process, can be several times faster, and in some cases can be 10 times more efficient if you consider the post-processing and pre-processing. Those are interesting areas. If you look at specifically around hand welding, that's an area that we've been driving. That particular part of welding, welding is about a $20 billion market.
In TAM, the hand welding market is about a $2 billion TAM, and that has, we believe, from a hand welding lasers, we've been enabling that business with our LightWELD system. That has built into it capability and processes that the user can simply dial in the metals that they're working with, the thicknesses that they're working with, and they can literally start to weld much easier than they could with a traditional weld technique. In terms of that driving adoption, we have a path to market for hand welding through Miller Electric in North America. There's a preeminent supplier of welders, welding systems there. If you look at that, they see the market for laser welding is really enhancing their markets. Why?
Because the area of hand welding is one that has a shortage of laser welders, sorry, a shortage of people that can do welding. It takes a long time to apprentice and become competent at welding. With our tool, with the built-in processes, people can be trained much faster. As I mentioned before, you can have processes that are four times faster, 10 times more efficient, and then at a lower cost of labor because you do not have to have highly trained apprenticed welders to do the work. The issue around shortage of welders. Really good opportunities to drive areas like welding into the market.
You have spoken to some of the benefits: simply the use, lower labor costs. What do you see as the levers to maybe drive accelerated adoption of laser welding, or what in your mind could be the factors that kind of see it take off more exponentially?
Yeah, so in a number of areas. First of all, automation. Okay, so laser welding fits very well into automation. It's non-contact. It can be done at a distance. It integrates well with manufacturing lines. If you think about even some of the drivers, we see any offshoring from tariffs and those pieces, we would expect that to happen in these, if it's in Europe or if it's in the U.S. with higher labor rates, you'd expect that to be driven to automation. That's an area that would play well for us. We're very involved on the automation side. As I said, in the areas where you're really trying to continue to expand, then being able to utilize people that are less trained is another area that we would see to drive growth.
You touched on tariffs, a bit of that offshoring. I guess as you look at your last call, you mentioned demand is sort of bouncing along the bottom. Since that call, combining with those tariff headlines, we've seen some weaker data points. How should we expect book to remain around that one times until those headwinds disappear, or how do you see that maybe developing in light of some of those?
You know what I can say is today, visibility is tough. It's really tough to have visibility beyond the quarter. We have visibility through our customers, and our customers are having trouble seeing beyond the quarter. From forward looking, that's the issue. If you look backwards over the last three quarters, the way that we talk about it is we've been seeing stability. Our book to bill has been about one for the last three quarters. The revenue has been stable at that level over the last three quarters. That's been good. I'd also point out just here that we have a very strong business model, financial model, and we have very good cash generation even at the revenue levels that we've been seeing.
When it happens, let's say when we see some resurgence in the industrial markets, and we've seen some indications, we've seen PMIs turn a little bit in Europe and in stability in China, some uptick in Japan, some uptick in North America. When we see that happen, then it flows through our financials very, very, very richly.
Earlier you touched on some of your end markets, EV battery being one. Where exactly does IPG play in the EV battery manufacturing process, and maybe how big is that business, and where do you see it going over the longer term?
In EV batteries, we play an important role in welding. There are many welds in every battery and every battery cell. Those are with dissimilar metals on thin ribbons of metal. That is a place that lasers really went directly to play in those welding applications. It was not without issues. When people tried to initially start to weld with lasers, these dissimilar metals and these battery contacts, you would get spatter. The metals would spatter, and those spatters would cause reliability issues, and reliability issues in batteries can be safety issues. IPG developed a very specialized laser, what we call our AMB or Adjustable Mode Beam laser, that solved that problem and eliminated spatter. Another piece there is that if you overweld or underweld a battery, meaning you weld too deep or too shallow, you can have reliability issues and reliability safety issues. We brought to bear a technology called optical coherence tomography. It's a system that we call our LDD, our Laser Depth Dynamics.
If you look at 2022, 2023, EV was about 20% or a little bit more of our business with kind of reductions that we've all read about around the world in EVs over 2024. That dropped to something below 20%. As far as the future, as I said, we're very well embedded in the technology. We're very well embedded in the manufacturing process for EV. We're starting to see, and we've seen some discussions of uptick in China as some of these companies are cresting over their capacity limits. We're seeing that. We've seen some indications in Europe and others. Let's say some little pieces of green. If that, when that happens, then we'll absolutely see benefit. It's not just EV when you talk about batteries.
Stationary storage is actually a key part of the production of a number of these companies and can be more than 20% of their capacity. Stationary storage batteries have grown 100% year on year. It is another key area of growth. We still feel very good about batteries and EV and electrification. As that moves forward, we'll have good benefit.
You touched on China. It's one of your largest operating regions. You've been diversifying your mix within China and also kind of growing your regional mix outside of China. Could you speak to maybe how the firm's managed your exposure there in China and how that product mix has changed?
Yeah, I can say that historically we had a significant business in China in flatbed metal sheet cutting serving China. That's an area that we had significant competition. Really the key area that we've seen competition over the last several years has been in that area. That's now less than 5% of our business. We have been diversifying away into areas where we have significant differentiation in welding, where we hold key process understanding, process knowledge, additive manufacturing areas where we're seeing growth and have seen growth in China. Areas of cleaning and micromachining have been areas that we've diversified into. That's really driven a balance of the business. We have gone away from the areas of cutting and grown in these other areas. Now also China is a more balanced region compared now to the other regions in the world.
You have touched on this moat that IPG has, this understanding of knowledge that separates you from the competition within some of these markets like in China. As we think about medical and some of these other adjacencies you have moved into, how has that moat maybe contributed to it? Maybe what your competitive set looks like in some of those other markets?
Yeah, so what I would say is IPG has key knowledge, and I spoke about the depth and breadth of the technology within the company. I should also say that it's not just in the lasers and the optics and the surrounding pieces and even the systemization, but also in the process, the laser material interaction process, the applications is a very key part of the knowledge within the company that I'm excited about because that allows you then to drive adoption in these markets and allows you to grow. An area like medical, really having that understanding of the laser material interaction allowed us to develop sources for urology to turn kidney stones into dust and let them pass naturally.
We have a great roadmap for growth in urology areas in micromachining where our lasers are able to go to short pulses and very short wavelengths and address areas like areas of renewable energy, solar cells, areas of microelectronics where we have very good roadmaps for growth. It also allows us to address areas in advanced applications, which can include areas like instrumentation and also semiconductor capital equipment and directed energy. Those are key areas that drive growth for us. These are areas that are highly differentiated, areas that we have key programs and roadmaps and we're investing in for growth. That, again, we're well connected to customers for growth. As I mentioned before, these areas are about a $5 billion TAM and areas that we see growth of hundreds of millions of dollars over the next several years.
As we think about your expansion in these areas, you've also been doing some talking and some bolt-ons to expand into adjacency. You have a large net cash position. You recently acquired Clean Laser that brings Clean to IPG. You may discuss what technology that brought over and how you see that market evolving.
Absolutely. Clean Laser has been a great tuck-in acquisition for us. We completed that just in December. Clean Laser has really been the expert in the area of the application of cleaning and also the systemization of laser cleaning. That acquisition brings that expertise and continues to expand our capabilities in the application space. Cleaning specifically, industrial cleaning is a tens of billions of dollar TAM. This is areas that today use chemical products and abrasive products where using laser cleaning means that you can just literally evaporate things off of the surface. That is important. I can give you an example like in a welding application.
When you go to weld, if you have oil and grease on the parts that can compromise the performance of the weld, using laser cleaning, you can literally take the beam across the part, evaporate the impurities off the surface, and then move to a weld. While not having caustic chemicals used, people not having to wear PPE, the cost of disposal, the greenness of disposal, those are pieces that we can eliminate with laser cleaning in areas where you might be using sandblasting, abrasives. Again, you can use laser cleaning. We see this as a great area for growth.
Clean Laser specifically has had a footprint in Europe and now taking that and moving that capability to other areas across the world where we have capability of systems and then also bringing systems capability to now a kernel in Europe that the systems company Clean Laser brings allows us expansion. We are very excited about cleaning and Clean Laser and the team and the integration, I'll just say, is going very, very smoothly, very, very well.
You touched on laser cleaning being a lot more green, a lot less disposal cost. Could you maybe give an example of the traditional process versus a laser?
Yeah. I talked about the example in welding where you would use caustic chemicals to remove oil and grease and replace that with a laser. Another area would be, for example, taking paint off the side of an aircraft using sandblasting and chemistry, being able to do that simply by vaporizing that off the surface. It crosses also into areas like the food industry where you need to clean molds before impressions. That can be done with lasers and is done with lasers as well. It really cuts through a lot of areas of cleaning and can replace a number of these chemical or abrasive processes.
Understood. Kind of bringing it back to that balance sheet, that large net cash position, should we expect further M&A in 2025? When you look at your M&A strategy, is it more to consolidate your markets that you're already in, or are you looking to kind of expand verticals primarily?
Yeah, what I would say is Clean Laser is a great example of a tuck-in. We're really looking to continue to drive our strategy and use tuck-in acquisitions that, like Clean Laser, can bring us to market faster, can bring additional technology and adjacencies, markets. I'm not looking to do a roll-up or do anything transformational in the industry. It's really about key areas, key tuck-ins, and we see those.
Bringing it back to regions, we've touched on China a bit. How much of the portfolio do you think would be an ideal mixture in terms of China? And then just within that cutting and welding business, are you seeing any signs of improvement there?
A couple of things. In terms of region, as I mentioned, we've really diversified in application and in region. We've been shifting business and growing in North America, in Europe. China has become a smaller part of the business than it has in the past. I would say we're in a much more balanced position than we were in years past. I'm happy with that. I didn't quite remember the second part of that question.
Oh, have there been any signs of improvement, or maybe what are you keeping your eye on or monitoring?
Yeah. We have seen, again, we're watching PMI. We've seen some improvement. January, February has gotten a little better. We saw some uptick in the area of cutting in Japan. We saw some uptick in Europe and in Germany. We've seen stability in China. Some nice things to see. Let's see what happens over the next months, but at least excited to see some positive signs.
When we think about the U.S. and Europe, how does the competitive environment maybe differ from that in China? Are there higher barriers to entry?
Yeah. As I talked about a little bit when I was talking about cutting, that's really been the biggest area of competition. That's been limited largely to China. That China cutting market, as I mentioned, is less than 5% of the business today. Cutting in total is about 15% of our business. That's really mostly outside of China. They're in key OEMs in Japan, in Europe, as well as in North America. These are customers that we've worked with for many years. They're quite conservative. They really value what we provide, which is more than just the specifications on the laser. It's also the reliability. It's the service and support infrastructure we provide.
We have been working with them on a new class of lasers that are higher power, smaller form factor, lower cost lasers that really are something that they see as being able to improve their position. Overall, as I talked about, driving to differentiated positions in areas like welding, additive manufacturing, these micromachining cleaning areas, the landscape is different. We do not see quite the competitive issues there.
Within this landscape, adoption rates in the U.S. and Europe have been much lower than that, say, in China. What's maybe limiting that?
Yeah. I'd say in China, China really had some quite fast adoption rates. You saw a strong industrialization that was happening. China, in general, was willing to utilize new technologies faster. You saw quite fast adoption. What's driving and what will drive the adoption in the future in other regions? Again, it's around the process and being able to provide a full solution as a way to drive adoption and move things faster in these markets. As we work with companies in the U.S. and we work with companies in Europe, having that deep process knowledge and being able to work with them on the solution and demonstrate the solution being lower cost and faster time to market for them are things that will drive adoption. We're in a good position to do that in cleaning and welding and additive manufacturing.
You're very much a product-driven company. You've touched on a bit of driving higher power, smaller form factor, new solutions. When we think about innovation at IPGP, what's sort of your focus and what products do you see as gaining traction maybe more than others?
Yeah. As you said, very innovative company. Areas that we're driving traction, I talked about some of these, that medical, that micromachining, the areas of the advanced markets where, again, we're bringing very key solutions, very differentiated solutions to the marketplace. That's on the application side. It's tailoring and optimizing lasers and the surrounding parts to really optimize the application, whether that's cleaning, whether that's improving the performance of a display in a phone, whether that's improving the outcome of a patient in medical. We have innovative forces in all those areas that I see driving the growth of the company.
When we think about some of these advanced markets or micromachining, how should we think about the end verticals that they serve?
In each of these, if you think about the vertical, medical, that's an area where, again, we're focused in urology. That's a $2 billion TAM to address where we see the ability to drive hundreds of millions of dollars of growth. If you add in the micromachining and these advanced markets, then you're talking about a $5 billion TAM and really being able to affect the verticals there. The verticals in the space of micromachining areas like the display on your phone, areas of flex circuits and circuits that need holes drilled to interconnect layers as you improve and increase the density of phones. That's a vertical area where that's going to continue to grow. There's a continued driver there towards miniaturization and density. We play very well into that with lasers and applications in micromachining in areas.
Again, if you think about semiconductors and smaller and smaller features and the needs for metrology applications, we play very well into metrology and lithography type applications with some of our advanced tools.
Would you see perhaps onshoring of semiconductor facilities maybe a driver of adoption as well?
Overall, I see having onshoring in semiconductor would be more sockets, so to speak. Just onshoring in general, not only semiconductor, but other areas where automation plays. Again, we play well into automation. In semiconductor, specifically in microelectronics, our lasers in micromachining and areas like the semiconductor inspection, metrology should play well if you expand and have more facilities by onshoring.
As we think about gross margin, can you help us understand your target range on gross margin, maybe in the context of where you are today and maybe how you get back to that range? Maybe what levers you see as being able to maybe surprise to the upside there?
Yeah. If you look at the gross margin that we've printed over the last several quarters, we've been in the 38%-39% gross margin. We've also talked about what's driving the reductions in gross margin. That's areas primarily in underabsorption. We've talked about 600-700 basis points of underabsorption. Also areas like inventory provisions where we've had as much as a couple hundred basis points of headwind in the gross margin. If you think about adding those back in, our product gross margins have really held up well in those kind of mid-40% range. It's really about driving volume through the system. If you bring, as you have industrial markets coming back and driving more revenue through the financial model, it comes through very, very, very richly.
As we think about IPG more broadly, you've touched on PMIs, machine tool orders as being drivers of the demand, but the company's also very technology and product-driven. When investors think about IPG, who should they think about, maybe peers or your competition in context?
Yeah. It's interesting because we don't have very direct peers because of the markets that we're covering. Not only the industrial space, we're about 90% in the industrial space, but also areas of the areas that I talked about outside with medical, micromachining, and some of the advanced markets. Companies that are maybe near peers would be companies like Coherent, Lumentum, or nLIGHT. If you think about Coherent and Lumentum, they have large pieces that are telecom for AI and that don't overlap with us. If you look at nLIGHT, it's more in the defense area with just a small component of industrial. No real direct peers, but those are some companies that come up.
Just given some of the differences in these mixes, when you think about benchmarking IPG, is that sort of the group that you would select in your mind?
Again, it's hard to find to have a key benchmark. From a company standpoint, we benchmark ourselves against the indexes. We certainly look at things like PMI. We look at other industrial customers as we look at our industrial business. We look at other indicators like the machine tool indexes. We track other markets that track the non-industrial pieces as well. It's a little bit complex to benchmark.
This is an industrial conference. I would still love to touch on some of the products you have outside of industrial applications. We've talked about urology a little bit. How do you think about those end markets and maybe how big do you think you can grow that portfolio over time?
Yeah. That specific area of urology, as I mentioned, we have the ability to turn kidney stones into dust. There are other areas of urology. It is an interesting business for us because it is not just the capital equipment. There is also a disposables business associated with urology. These are the fibers that are used through catheters to deliver the light. There is opportunity for growth on the capital side with new applications that are adjacent to the kidney stones in urology. There is also this recurring revenue stream from fibers and potentially other areas as well. I think about that as key areas of growth. Urology itself, $2 billion TAM. In the micromachining space, talked some about areas around cell phones. If you delve deep into that, it is areas of display where the micromachining can really improve the performance of a display.
It's areas in circuits where you can have interconnections that were not possible before. That is a large market as you see increasing miniaturization areas of advance. Those total about $5 billion of TAM. We see being able to access hundreds of millions of dollars of growth over the next several years, specifically targeted in those areas.
Thank you. With that, I think we're just about out of time. Thank you so much, Mark, for joining us today.
Thank you.