Analysis of LaserBond - Part I

BUSINESS OVERVIEW

LaserBond (“the Company”) is a specialised surface engineering company, founded in 1992 by Gregory Hooper and later joined by the current CEO, Wayne Hooper, in 1994. Their expertise lies in providing advanced surface engineering products and technology designed to reclaim worn parts and enhance new components, resulting in remarkable improvements in wear resistance and overall performance in capital-intensive industries, delivering wear life that often exceeds the original by up to tenfold. This translates into higher productivity, reduced maintenance costs, enhanced energy efficiency, and a significant decrease in the disposal of worn-out parts.

The scope of LaserBond's influence is vast, as their technology finds applications across multiple sectors. These industries include resources and energy, agriculture, fluid handling, steel and aluminum production, heavy transport, advanced manufacturing, defense, and infrastructure construction.

LaserBond's approach to environmental responsibility is commendable. They excel in remanufacturing and enhancing machine parts that would typically be discarded and replaced with new components. By doing so, they achieve a remarkable reduction in carbon footprint, with remanufactured parts typically accounting for less than 1% of the environmental impact of new parts. This environmentally conscious approach is paired with life improvements ranging from 2 to 20 times that of standard parts.

LaserBond operates under a differentiated business model, distinguishing itself from both local and international industry players. Rather than offering off-the-shelf products that may not fully meet customer needs, the Company takes a customer-centric approach. They craft solutions that can be tailored, developed, and scaled to address common yet unresolved industry challenges. Their strategy hinges on understanding and responding to underlying demand rather than merely focusing on supply. This approach has fuelled their continuous growth, with an unwavering commitment to research and development leading new innovative applications, solutions, and products that cater directly to market needs.

There are four main divisions in LaserBond’s operating structure:

Service Division

LaserBond's Service division specialises in the comprehensive reclamation of worn industrial components, employing cutting-edge technologies such as LaserBond cladding, thermal spraying, high-capacity welding, machining, and heat treatment.

This division offers a complete suite of services aimed at substantially extending the surface life of plant and equipment, often achieving impressive improvements ranging from 5 to 10 times the component's original lifespan. What sets LaserBond apart is not only the ability to prolong the life of these components through surface engineering but also the utilisation of the same advanced technology in their construction.

Product Division

The Product division at LaserBond focuses on the manufacturing of various products that incorporate LaserBond cladding applications. These products, ranging from steel mill rolls to rotary feeders and a diverse range of OEM consumables, find application across a breadth of industries.

Despite the considerable initial investment required, customers and end-users recognise the substantial value proposition offered by LaserBond's products. The extended lifespan of these components translates into reduced downtime, lower replacement costs, and increased equipment efficiency, making it a cost-effective choice. Notably, the Service division complements the Product division by identifying worn parts in need of enhancement, which then fuels the development of new and improved products in line with LaserBond's commitment to innovation and customer satisfaction.

Research and Development (R&D) Division

LaserBond's R&D plays a pivotal role within the company, even though it is primarily cost-centered rather than revenue-driven. This division is the backbone that supports and enhances all other facets of LaserBond's operations, developing innovative products and technologies that anticipate market direction and demand, as well as building collaborative relationships with tertiary institutions to leverage its R&D investment and achieve third-party validation of work.

To strengthen its R&D capabilities, the company has invested in a metal-graphical laboratory equipped with advanced tools such as a scanning electron microscope and sample preparation equipment. These resources are instrumental in gaining a deep understanding of the intricate milli-graphic structure generated during thermal spray processes.

Experts in the lab then examine these surface engineering coatings under the microscope and conduct thorough characterisation testing. This in-depth analysis serves as the foundation for fine-tuning the parameters of both laser and thermal spray processes. The ultimate goal is to achieve the highest quality coatings, ensuring that LaserBond's solutions consistently outperform industry standards.

Technology Division

Technology Division offers customers the opportunity to integrate LaserBond’s cladding technology within their own operations through long-term licensing agreements. These comprehensive agreements encompass equipment supply, technology usage rights, and the provision of associated consumables. Essentially, LaserBond acts as a partner in enabling other businesses to harness the power of laser cladding.

Under these licensing arrangements, LaserBond not only provides the technology but also manufactures laser cladding equipment, which is supplied under license to overseas partners. This comprehensive approach extends to offering technical assistance and the supply of essential materials in the form of consumables. In return for these resources and support, LaserBond receives long-term licensing fees, allowing its partners to develop and expand their businesses.

By providing these licensing opportunities and facilitating the adoption of their technology, LaserBond enhances its global reach and impact while solidifying its position as a leader in the surface engineering industry. This division not only generates revenue but also fosters collaboration and the growth of laser cladding technology on a global scale.

STRATEGIES – COMPETITIVE LANDSCAPE

To gain a comprehensive understanding of LaserBond's strategy and competitive landscape, a crucial question must be addressed: If you could choose one and only one ratio (profit per x or cash flow per x) to systematically increase over time, what x would have the greatest and the most sustainable impact on your economic engine?

For Wayne, this “x” would associate with the energy usage and waste, implying the number of hours of reduced downtime – increased efficiency and at the same time, encompass an essential ESG element. To some extent, it looks beyond the conventional financial metric and delves into the positive environmental impact that LaserBond focuses on – the number of worn parts that are scrapped.

This is shown in LaserBond's long-term vision and commitment. Instead of pursuing short-lived results, the company prioritises providing exceptional services paired with high-quality products that have extended durability. Their aim is to offer solutions that outlast alternatives by many months or even years. By reducing downtime and the need for frequent replacements of worn parts, LaserBond not only helps customers save money but also enhances operational efficiency.

Via discussion with the management team, I learned that engaging with potential customers who have not yet encountered LaserBond's technology can present a challenge. Often, they find themselves in a recurring cycle of part replacement every few months, a process deeply ingrained in their operations. Typically, individuals with an engineering mindset tend to be cautious when considering new approaches. Maintenance engineers, in particular, may express skepticism, wondering if trying something new will genuinely result in cost savings and prolonged component life.

In this initial phase of engagement, LaserBond addresses this challenge by sharing success stories with other customers across various industries, including those closely related to theirs. Through these experiences, LaserBond can illustrate the tangible benefits of its technology and delve into the underlying mechanics of how it performs.

This educational process may take some time as the Company builds relationship with its customers. However, once they witness the outstanding results their enthusiasm grows. Depending on the durability of the parts, they often return with requests for additional projects and inquire about the applicability of the technology to other components and applications. This progression highlights the incremental nature of customer relationships, which evolve from skepticism to trust and ultimately lead to long-term collaborations across a wide range of industries.

This customer-centric approach builds trust and fosters enduring relationships between LaserBond and its clients. Customers who experience the benefits of LaserBond's solutions are more likely to return for additional business. This translates into the stickiness of the business - 95% rate of repeat business from a customer base that understands the value of the expertise and the superiority of technologies and products the Company has to offer.

As a result of this strategic focus on long-term value, additionally, LaserBond also maintains the ability to allocate more capital and resources to R&D. This ongoing investment in innovation, in return, enables LaserBond to stay at the forefront of technological advancements, ensuring the sustainability and growth of the company.

It's essential to point out that wear-related challenges exist across various industries. While historically, mining has accounted for a significant portion of LaserBond's revenue, there are abundant opportunities in numerous sectors, including power, rail, timber, agriculture, and defense. It's crucial not to pigeonhole LaserBond's capabilities solely within the context of mining and mineral processing.

Another important consideration is about the company's economic cycle.

LaserBond primarily operates within the maintenance cycle, with the exception of its Product Division, which aligns with the capital expenditure (capex) cycle. This means that LaserBond's activities revolve around either replacing components or reclaiming worn ones. Remarkably, the company has consistently performed well throughout its history, irrespective of economic cycles.

Customers across industries must continue to maintain their equipment to keep it operational. This is where LaserBond shines as it provides solutions that not only extend the lifespan of components but also result in significant cost savings for customers. Ultimately, the company's strength lies in its ability to offer value by reducing downtime and expenses, a compelling proposition that transcends economic cycles and underpins its ongoing success.

LaserBond's competitive advantage is further amplified by its extensive network of strategically located facilities across Australia, including prominent states such as New South Wales, Victoria, Queensland, and South Australia.

Having multiple sites across Australia places LaserBond in close proximity to its diverse customer base, specifically beneficial to Service division’s customers. This geographical advantage translates into reduced travel time and logistical costs when it comes to servicing clients and fulfilling their needs promptly. By being closer to its customers, LaserBond can respond rapidly to their maintenance and component improvement requirements, thereby minimising downtime and enhancing operational efficiency for its clientele.

LaserBond's strength in knowledge and know-how capabilities places it at the forefront of the industry, positioning the company as a pioneer and leader in its field. This leadership stems from being an early adopter of advanced technology, which has cultivated an extensive reservoir of knowledge in operating machinery and dealing with diverse base materials.

A distinctive aspect of LaserBond's approach is its collaboration with industries and customers to identify and solve problems. The company excels in creating innovative solutions that can be applied to a wide range of materials, making it a sought-after partner for addressing wear-related challenges.

On the business development front, LaserBond's strategic research and development (R&D) approaches place it ahead of competitors, providing the company with a sustainable and inimitable competitive advantage.

“An example of LaserBond’s innovation product leadership is its ability to provide crack-free coatings of extremely wear resistant layers, despite there being a common view in the marketplace that they are not possible, based on failures with other suppliers. LaserBond has experienced great success with its crack-free wear coastings and continually delights its customers with its results.” – Company’s Annual Report 2023

To further reinforce this ethos, LaserBond has recruited a Technical Product Development Manager with a mission to identify industry wear problems. This manager works closely with the R&D team and university partners to develop and validate innovative solutions. The collaboration with reputable universities enhances LaserBond's research and development capabilities, lending credibility to its work and facilitating and developing new solutions.

This approach further strengthens the leading position of the Company in the industry. It’s believed that most (domestic) competitors are typically small family-run business that are just happy to be where they are hence no investments made in R&D, sales and marketing team simply because they “don’t want to grow too big”.

Additionally, a dedicated Business Development Manager works with customers to implement these solutions and expand the company's sales to a broader customer base. This holistic approach, grounded in technical expertise and supported by research, enables LaserBond to maintain its position as a leader in knowledge and innovation within the industry.

When it comes to pricing, LaserBond exhibits a unique approach, influenced by the nature of its services and products.

The Service Division, primarily focused on component reclamation, adopts a flexible pricing strategy. Given that each worn part is unique and may vary in wear and tear, LaserBond provides customised quotes for every service request. This approach allows the company to adapt to fluctuations in material and labour costs. When material prices or wages increase, these adjustments are naturally reflected in the quotes provided to customers. Conversely, if material prices decrease, customers benefit from reduced costs on subsequent orders. For work that isn't quoted in advance, LaserBond employs a dual charge system, where customers are billed based on the actual cost incurred, plus a margin.

On the other hand, the Product Division typically operates on fixed prices for its products. To remain competitive in this segment, LaserBond emphasises efficiency and effectiveness in its production processes. The company strives to optimise its operations and increase volume production to manage costs efficiently. However, in times of inflationary pressure, such as the current economic environment, LaserBond may need to pass some cost increases on to its customers to maintain profitability.

LaserBond has implemented strategies to mitigate pricing risks. One notable practice is providing annual wage increases to its employees. This ensures that the company can, historically speaking, maintain a healthy 50% gross margin, even in the face of economic fluctuations. LaserBond also invests in automation and efficiency improvements, exemplified by the development of a new laser cladding cell at its New South Wales facility. This automation reduces labour costs and enhances precision, contributing to the company's long-term cost-effectiveness. As LaserBond continues to invest in such technologies, its efficiency and competitiveness are expected to improve over time so are its margins and profitability.

With its Technology Division, LaserBond follows a model that includes equipment sales, consumables, and ongoing licensing fees.

The Company first provides specialised equipment to its licensees, typically at a margin, which is upfront and paid for by the licensee. Other than the equipment, LaserBond also supplies consumables to customers, which are typically the materials used in the laser cladding process. To remain competitive and foster long-term relationships, LaserBond maintains competitive pricing for consumables, marking them up by around 15%. This approach ensures that licensees have access to essential materials while keeping costs manageable.

On top of that, LaserBond aims to generate another revenue stream comes from ongoing license fees. These fees, characterised by high margins, modelled on a dollar-per-hour rate of laser operation. Therefore, it is in both parties best interest to keep the laser running at its full capacity.

Overall, each licensing agreement begins with an upfront equipment sale fee ranging from approximately 1.2 million to 1.4 million per sale. Over the course of the seven-year-plus agreement, each licensee is expected to contribute several thousand dollars in license fees annually, in addition to annual consumable purchases valued between $500,000 and $700,000.