Good afternoon, everyone. I'm Michael Feniger, the Machinery Engineering and Construction Analyst at Bank of America. Thanks for joining us today. Anyone who's on the line, this is the second year in a row we've had IPG Photonics with us. We have Tim, the CFO, with us. I'm going to send it over to Tim just to introduce himself, give a little bit of his background. We're going to just jump into some Q&A and keep this an informal discussion on IPG and really the opportunities that present themselves going forward. Tim?
Yeah, hi, everybody. I'm Tim Mammen. I'm the CFO at IPG. I've been there for quite a long time, 25-odd years or so, so seeing the company through various growth phases and challenges. We're hoping to get the company back into consistent growth in the near term with a lot of the investments and strategic initiatives that we've laid out over the last two or three months under the new CEO Mark Gitin.
Perfect. Maybe just to bring everybody on the same page, IPG Photonics is really like a technology company, Tim, that services some industrial markets and other markets as well. The founder of IPG kind of is considered the godfather of the fiber laser market in some sense. Just maybe you can help everyone who's new to the story. What are the solutions that you guys provide to customers? Who are your customers? What are these end markets that you guys serve?
I probably best step back a little bit on that. The fundamental strategy that we have as a company is to take legacy applications that would be performed by non-laser processes. If you go back into even the marking and engraving and cutting arenas, you had inkjet marking as a by way of an example, or cutting your punches, presses, tools, dies, saws, mechanical processes, waterjet. Welding, obviously, is a very broad-based application with traditional areas in that. Cleaning, you use a lot of chemicals, media blasts, sand. We have got a new application in heating and drying. It is relatively small at the moment, but that has got an opportunity to displace traditional ovens, which are electrically inefficient. Medical are the same way. You are taking surgical processes and converting them to being used in lasers.
What you've got is a very, very large total available market that covers these different applications that runs to tens of billions of dollars. Strategically, if you can then convert those applications over time to lasers, you increase the SAM for lasers. That's happened very successfully in cutting historically and marking and engraving. It's started to happen a lot more. It's taken quite a long time to get there. On welding applications, we're starting to see it on cleaning. I mentioned things like additive manufacturing is another area where you're actually replacing machining and growing complex parts from powder. Basically, the objective is to grow the SAM from existing large TAMs. Probably a bit more unusually, you may have really completely new laser-based type of applications that come to the fore. More often than not, they may be in instrumentation or other areas.
Typically, our customers are either OEMs who buy the laser or a system and then distribute that, add technology around it sometimes, and then distribute it. Large companies that produce large-scale cutting systems, cleaning applications. There are cutting OEMs that produce cleaning systems. End users, like a lot of the welding market is more end user driven, into automotive and other areas. Your large, for the OEMs on the industrial side, their large end customers would be in automotive or heavy equipment manufacturing, agricultural equipment manufacturing, elevator manufacturing, furniture, light fixtures. Durable goods, consumer durable goods would be large users of lasers across a variety of those applications.
For investors, Tim, what typically drives the demand for these products? I mean, what's considered, in your view, a good environment for IPG? Is there any rule of thumb we should think about if GDP or industrial production is x, this might translate to y in terms of the growth that we can see from the company?
Yeah. Sometimes, at the moment, you've got a GDP growth that's been largely driven by services.
It's been different.
Typically, if your capital equipment and investment cycles are strong, you've historically grown at two to three times GDP, depending upon the application set that you're addressing. I'd say there's two phases to this. When you're really just a GDP growth, then you're getting into some cyclical applications because you've got the investment cycles that come and go. The other side that's very much a growth driver is the adoption and displacement story. In applications that are relatively new to penetrating an end market, you'll see that displacement, even in a weaker environment, will drive growth in that. For example, last year, the underlying welding market outside of electric vehicles, which was impacted by the underutilization of capacity, the remaining welding market, actually, it was very stable and maybe even grew a very little bit last year.
Medical has grown, even because you're going through an adoption phase. That's an area we're targeting for significant growth. Micro machining at the moment has started to go through better performance on a year-over-year basis. That's because we've introduced new technology into that end market that's going through an adoption phase on it, and demand has ramped up quite quickly. I'd say part of it is driven by the underlying industrial and economic demand level, which would be a GDP, would be an indicator there. PMI, perhaps on the capital equipment and manufacturing side, is another good indicator. With newer applications, you've got an adoption and displacement story. When those really get legs on them, that's what can drive really accretive growth rates.
That makes sense. What's interesting is you mentioned PMIs. And PMIs have been kind of stuck in the doldrums below 50 across most regions really the last year or so. You guys just reported results. Your book to bill was solidly above one time. Could you just discuss what you saw there in an environment that has been maybe more sluggish on the capital goods manufacturing side that you guys are seeing a book to bill above one times?
Yeah, sure. I think it has been a struggle, and it's been a mixed bag. I mean, the U.S. had actually started, had recovered to 53 and then dropped back to just below 51. So it's still expansionary. Japan had got above 50, then has fallen back to sort of 48. Europe's been down as low as 42 and come back up to 48. I think it's very much a mixed bag. Some of the positive momentum we saw in that was not necessarily also it didn't have to be tied specifically to the PMI and the other like. This comes back to you've still got probably an underlying industrial demand environment that is quite weak. The performance in Q1 with strong book to bill in that environment was positive.
We did see some of our customers on the cutting OEM say that their overall inventory levels had adjusted down to the levels they want to see them at. We got actually good order flow from a couple of customers there. Some of the other stuff was on a rebound on EV demand with utilization in battery manufacturing, both actually for EV and storage, picking up significantly. Some of that is demand in additive manufacturing in Europe and China, where we've got very specific capability. Perhaps that's not quite tied again to the underlying macro. Very strong order flow on medical, which again is new technology and more adoption. We had positive momentum on the micro machining and advanced applications.
I think the positive to take away from Q1 was that it was from a lot of the areas we said we're going to invest in. It wasn't just, well, it wasn't yet a recovery in any fundamental recovery in the underlying industrial demand environment, which was probably reflected in the European order flow still being a little bit weak relative to some of the other geographies in Europe, still kind of industrial end market focused with the cutting applications and automotive end markets there being in the doldrums.
Makes sense. You touched on this earlier, Tim. Last year, you announced a new CEO. He's an outsider. Usually, IPG has a very rich history. To see someone come from the outside, it's been kind of a year plus since he's been in the seat. Tim, what is he bringing to the table as someone from the outside? What is kind of changing from your sense for this company, having someone from the outside with a new perspective?
Yeah, I mean, Mark, I think it being a refreshing change, I think, to the organization and the company was, and he'll talk about this. He's got a tremendous depth of technology and capability and still has a tremendous amount of differentiation across many applications and laser capability. Mark has talked about the fact that it was almost still operated like a billion-dollar startup, where Valentin had built this fantastic company. Mark's trying to sort of break down some of the silos, improve the communication in the company by way of example, getting, for example, the sales function and the product line management and R&D to really talk and communicate closely so that they're understanding what the customer wants to see on the product solutions. Really getting, I think, the role that finance is playing within the organization, for example, has been elevated.
There is a lot more financial discipline, long word, wrong word to use about it. We are establishing more financial KPIs for departments and areas within the business to operate in. There is a bit more rigor around the financial analysis around the costing side of the business and new product introductions, a gating process within, and a proper R&D product development process with gating processes in that so that you are evaluating at different stages how well you are doing in developing the new product and are you achieving where you need to be on the cost side of that. Because sometimes you have to make the hard decisions of actually stopping R&D rather than, and in other instances, you want to actually commit more capital to that. The organizational cross-functional collaborative areas are one of the things he is working on.
I think the development and enhancement of what was an original strategic plan, he came in and he did not find anything fundamentally that we were missing or that he thought we should be doing. He has put a lot more structure around that. We presented that to the board and it was rolled out in Q1 to the investment community. Some of the investments that we are making are a result of that sort of cohesive strategic plan that has been put out there. I think Mark's really objective is to take the sort of the gem of a company and the technology that really continues to exist and ensure that it is successful going forward. Some of that is also in areas like focusing on things like ensuring your quality and customer service is world-class as well.
Makes sense. Maybe we could just put some numbers around these opportunities. I mean, you referenced before the cutting market, how you guys were able to really drive a penetration story where it was really displacing legacy solutions. What do you feel like is the addressable opportunity when we think of for IPGP in terms of the industrial side, but maybe outside of industrial applications? You guys have talked a little bit more about medical and some of these other markets. I'm just curious if you guys have any TAMs out there that you guys kind of try to target.
Yeah, I think the cutting business was well talked about. I mean, that's not my focus area at the moment. Even on welding applications, we tend to think about the whole welding market and the capital equipment spend on welding, excluding the wire. The consumable is over a $5 billion market. Lasers are still 15%+ penetrated into that. There's a lot of older type applications or areas where you have to have a lot of certification, like pressure vessel manufacturing or steel tank manufacturing, or even in shipbuilding where lasers are still relatively lightly used. The handheld laser has actually enabled us to get into the metal fabrication business a lot more. The other areas in things like the medical, the micro machining, the instrumentation, and scientific. The medical is about just the urology is about a $2 billion market.
We sell into the aesthetic market, but as an OEM, we're not doing our own aesthetic systems. That aesthetic market is very large as well. The laser part of it is a subset of it. Micro machining is another market, excluding lithography, which we don't play in. It's probably like a $700 million TAM. Instrumentation and other areas add up to make the total opportunity maybe as close to $5 billion. We're very early stages in some of that. Penetrating even 10% of that opportunity is a very significant runway for the company.
As CFO, what are the levers you think you could pull to kind of drive that penetration? Is it a different go-to-market strategy than maybe we saw in the past with cutting? Just kind of curious how we can kind of create that penetration that's displacement a little faster than maybe we've seen in the past.
Yeah, I think on the sales and marketing side, there have been significant investments made. Some of these applications continue to be a bit like the OEM market for materials processing. In medical, once you qualify with your partners and your OEMs, and we talked about qualifying with a new OEM in Q1 and starting distribution to them, there's a lot of leverage in that. It then becomes more of a technical support. You're not actually out banging on doors trying to sell another urology system. Your OEMs are doing that for you. On medical, there's quite a lot of value captured by that OEM. Maybe on some of the other applications, we would look at whether we want to do distribution internally ourselves on these.
That is difficult. You really have to have a proper decision made around that because the capability that other people have is very high. I think on the other side of it is on something on the welding side, it's not just the sales and marketing. It's actually the investment in the application capability. That application capability is really another differentiator, understanding the material science and actually helping customers solve the problems there. We have continued to invest in our application labs and areas. On the R&D side, it's really that discipline around the stage gating process and the project management and ensuring that you're either pulling back or adding capital.
I will say from my perspective as well, one of the things that I think we're continuing to do well at and work on is not so much just on the investments there, but really trying to get our gross margins even at lower revenue levels back up so that when we get revenue growth back in, we'll see that accretion come in. I've said that right now we're close to 40% on $228 million of revenue. That would mean that we've got 500 basis points still of underabsorption. As we get inventory further under control, you're seeing fewer provisions come through. I believe you'd be getting close to the mid-40s at revenue that's probably a bit below $300 million, where historically I said it's a $300 million target. That whole efficiency on the manufacturing side is also an important area for us to focus on.
Maybe, Tim, just we made it halfway without talking about tariffs, which is probably a record right now at the conference. Every fireside chat talks about it.
Couldn't have started with that.
We should have probably started with it, to be fair. But we want to talk more about the long-term opportunity. So now we have to talk just about right now in the near term. How are you guys coping with this tariff regime? Do you expect to shift incrementally production around to the U.S. or other areas because of the tariff policy?
Yeah, so I mean, you've seen escalation, de-escalation, 90-day pause. I mean, I'm not saying anything that probably nobody else has talked about here. For us, I think the developments over the last 24 or 48 hours certainly make the near term a bit easier to navigate. You potentially could ship some of the product out of the U.S. with only a 10% tariff plus the original tariffs in China. Sometimes a lot of the lasers had zero. There are some of the accessories that have a 3%-5%. Your inbound tariff in China now would be 15%. At least in the near term, you may want to use that to satisfy the customers who want the product.
You still got to, our intention is, because this is still a highly uncertain situation, is believe that you've got to optimize your manufacturing and capability to best serve regions from different areas geographically. We're not going to pull back on that optimization strategy and suddenly have in 8 or 12 weeks' time another ramping up of the tariffs and not be ready to supply product out of Europe or primarily out of Europe for China. The most important thing to understand is that 80% of our product that goes into China at the moment is already supplied primarily from Europe. Then on the cost side of this, you've got obviously with the lower inbound tariff, you've got the 20% fentanyl and the 10% reciprocal at the moment. That's 30%.
You still have actually the original tariffs on whatever the harmonized tariff code would have been for a specific product. So the total tariff still inbound is more than the 30%. And everyone's talking about the 30% rate. We're halfway through the quarter. We had open POs with our Chinese suppliers. We don't make stuff. So we've had to already pay those tariffs over April and the beginning of May. But we had also already started to move to other suppliers in Southeast Asia and elsewhere for a lot of that product. There's still going to be a hit in this quarter. We had already said that we can rebalance this in the second half of the year and substantially offset that impact. It's easier to substantially offset that impact at this point in time, given the developments over the last 24 hours or so.
It's good to hear. Tim, on the call, you guys discussed a shift in an order for a customer. I think it was like a $50 million you guys quantified. Can you just let us know what happened there? Is this a delay? Was this a cancellation? Just kind of help us understand as you're navigating the tariff regime and policies, what kind of happened there with that customer? Do we see that come back in the third quarter?
Yeah, no, it's not just one customer. There were two or three customers. It was different products. They were not cancellations. These are products that the customers want. The problem was there are two or three of these product lines that we only made in the U.S. They were developments of technology that had happened here. And we'd continue to make them here rather than quite a lot of our products we make both in Europe and in the U.S. It just happens that these two or three product lines were made exclusively in the U.S. The problem was that if you started to ship that product out of the U.S., you had 170%—it was actually not even 145%. It was 170% actually, now I'm getting confused. 170% is inbound to the U.S. It was 135% into China.
These are lasers that are anything from $20,000, $30,000, and accessories that are $12,000 or $15,000. That is a huge incremental cost. We basically talked and negotiated with the customers to delay delivery of those until we ramped up manufacturing in Europe. We did that. We have done that pretty quickly. I think we started shipping some of those units out at very low volumes in the last few days, even out of Europe. We are going to try and ship some more and ramp up that volume through the end of the quarter and then deliver the rest of it in Q3. Absolutely not cancellations. Product the customer wants, which is you cannot take a $20,000 laser and pay $25,000 of tariff on top of it.
Get a little pushback on that one.
Yeah.
With the tariff conversation, Tim, I am curious just when you think of the competitive dynamic, because I think when it comes to your guy, you have a business in China. You guys have diversified even outside of China. I know there's the high end of the laser, the low end. I am kind of curious when we think of the tariff policy, has that created any barriers to entry? Does it make it harder for low-cost suppliers to enter certain markets? Are you seeing that? Is that coming up in conversations with customers?
Yeah, I think it will. In certain geographies, like in the U.S., the penetration of the low-cost suppliers was relatively limited. People were averse to buying. Certainly, even with a 50% tariff, that's a significant increase in their cost, a lot of them running with margins that are ranging from 15%-20% per quarter gross and kind of break even. This cost increase is pretty significant, even with the revised tariffs, I should think. Certainly, at the higher level, it was a massive increase to them. In Europe, I think there's a lot of, in many of these areas, we're still very technologically differentiated. In Europe, there isn't a significant tariff on cutting systems, for example, coming from China. I think the other side of the equation is that there's just a lot of uncertainty around this.
The impact of it will be ultimately, you're probably going to have more localized manufacturing, reshoring in Europe, even though there's not a lot of, there's no tariff war per se. I think customers even may be looking at, not customers, but companies looking at, we've never made any stuff in China. I don't think we're going to make stuff in China. We use subcontract manufacturing in Asia as another lever that we could pull to help meet customer demand with less of a cost impact.
There is a high degree of laser cutting when it comes to the auto market. Yet also, you guys are positioned when it comes to the welding side for that EV penetration story as well. Maybe we could just talk broadly, where do you guys serve the auto market? Then we could kind of touch on that, on where the EV, e-mobility side, and the potential there comes to play.
I mean, the auto market is a pretty broad-based set of applications. There's a lot of cutting that the cutting OEMs sell into the automakers for cutting panels, tailor-welded blanks. On the welding side, we do a lot of seatback welding, for example, specialized welding of airbag detonators. Some welding on the body and wipe. There's still a lot of electrical welding done with the spot welding on that. On the EV side, you actually see an increase in welding, obviously related to the battery. It doesn't change of a seatback or an airbag detonator or the main body. There's no fundamental difference there. You see a big increase related to welding on EV related to battery and electric motors. The other area, actually, where on traditional automotive lasers have been adopted quite significantly was on welding of transmissions. Obviously, that is a decrease.
The increase relative to EV, if you eliminate transmissions, is a multiple higher. There is some marking and engraving done on the vehicle as well. That would basically be it. There is some cleaning actually, there are cleaning applications too. Whether they are using resins or sometimes resins are used in adjoining or used as a dampener for sound, there is often either coatings or resins that have to be removed. We are using lasers, or their customers are using lasers, with their coatings removal as well.
Tim, let me pull on this thread a little bit. I'm just curious with your position with the auto industry and then the opportunity EV. Do you feel like the transition is a positive for IPG Photonics as we kind of transition away from ICE to EV based on your penetration opportunity, the competitor set? How much actual work you're doing on the EV relative to what a traditional vehicle would look like?
Overall, because of the laser content on the battery and the motors, yes, it's definitely a net positive. It's important also on the battery to note that a large amount of battery demand is not even EV-driven now. It's storage, which is serving a whole host of different industries and end markets. Net EV transition has been a significant driver and benefit to us in terms of total automotive sales. I think it's interesting. Some of the data out there is actually showing even North American electric vehicle sales are forecast to grow at 15% this year. Europe's coming back with a bit of rebound. China's already half the vehicle sold are EV. I think there's a I read somewhere in the article that most people who buy an EV actually are not unhappy with it.
They kind of actually think that the solution is pretty positive, whatever the geopolitical debate is around it.
Maybe, Tim, just because you are a CFO, I'm sure you look at a lot of other companies and benchmark. The question we get sometimes is because you are a technology company that services industrial markets, it's a very unique company. What do you look like as when you think about peers? What are some companies that you look at in terms of what they're reporting, what trends they're discussing that maybe we on this side aren't paying attention to? I'm wondering if it's robotic companies, automation companies, just what other companies out there, subsectors do you kind of look at as the CFO to say, that's how we should benchmark or those trends are relevant to us based on our unique product servicing and our end market mix?
Yeah, I think that's a good question because a lot of the traditional laser companies, if you looked at a Coherent or a Lumentum and KSI, where Mark [was] have become like they're much more diversified. They've got very big telecom businesses that they're doing the data storage, data transmission. So we'll look at the subset of their welding business and what they're saying about that, but not the whole entity. We'll track sort of what Cognex's tone is about business because they're very they don't do lasers, but their end markets are industrial and other tech areas. I think, yeah, the robotic companies are interesting ones to follow. Some of the other industrial I mean, many of the other companies are so big compared to us. It's more sort of like looking at what they're stating about the end markets that are out there. Obviously, we work with Miller.
It's part of Illinois Tool Works. Yeah, it's difficult. The laser companies were a bit more laser specific, and they're less so at the moment. I think the industrial tech universe is what we kind of look at. A lot of them are a lot bigger than us. That's where Cognex perhaps fits in a bit more directly.
You have been in a process, Tim, of getting your costs down, working down your inventories, which we saw a lot of progress the last few quarters. It seems like you are kind of waiting for those volumes to come back to really give that absorption with the factories and with the company. What are some of the indicators you are keeping an eye on? I mean, in this conversation, you mentioned PMIs. I think you also mentioned maybe utilization rates when you look at some of the EV battery players. I am just kind of curious what data points you are following that would make us feel more comfortable as we kind of head into 2026.
Yeah, we look at, I mean, underlying macro trends and commentary, GDP. I mean, you mentioned them. PMI, machine tool data from different places around the world. The Japanese machine tool data is always good to look at. There is German machine tool data, although Eugene was reminding me there is like a three or four-month lag on that. Robotics sales. We look at a lot of the PMI data and the underlying tone that you are hearing from. Utilization, we will try and find battery utilization or just looking at where EV total sales are, trying to find data on battery storage applications. The medical is less, it is not a discretionary medical spend. If you have got a kidney stone, you generally want to have it removed fairly quickly.
Not looking at the PMIs on that one.
No, we're not.
Tim, as we wrap up, an interesting conversation that we have with investors is actually on your balance sheet. You guys have a large net cash position. You can kind of discuss that. You just recently acquired a business. It was last year, clean LASER. Just help us understand with such a large cash position, what, as a CFO, are you monitoring and how you're kind of thinking about using that cash going forward?
I mean, what we've said is that we want to have a more balanced approach to capital allocation than we've had over the last three years when we've returned a very significant amount of capital to shareholders. Last year, $350 million. In the last three years, over $1 billion. We want to maintain firepower to execute, I think, on a programmatic, strategically driven acquisition plan. We're going to continue doing opportunistic buybacks, but just probably in a more balanced way rather than at the level we were operating at before. I think cleanLASER is a really good example of an acquisition that fits very closely with IPG. They were sourcing lasers from us. They were utilizing some of their own lasers internally. They were a leader in terms of process and know-how for cleaning-based systems and the core technologies around that.
We're able to build upon that with our global distribution, for example. I think that was a very good example of a bolt-on that was very complementary to an area of growth that we were prioritizing. I think we're looking at similar types of acquisitions there. You probably want to do things with a little bit more scale on them so you get a bit more incremental revenue and hopefully margin out of it because we're looking at profitable companies.
Makes sense. All right, Tim, thank you. I just want to thank Tim and Eugene for coming to the conference today. Always great checking in with you guys and learning more about the company and the journey. Thanks, everyone.
Great, Michael. Thank you very much.