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RISK(S)
LaserBond faces several key risks.
Firstly, the company relies on sourcing consumables globally for its operations, including supply to licensees. While efforts are made to secure supply, the dependence on materials from various sources introduces supply chain risk. However, the management's effective inventory and stock level management mitigate this risk, ensuring consistent supply to both internal and external customers.
Secondly, staying at the forefront of technology is crucial for LaserBond's competitive edge. The company emphasises heavy investments in R&D to continually deliver superior results and maintain healthy profit margins. This approach, while setting LaserBond apart, also represents a financial risk, as substantial R&D expenditures are necessary to keep ahead of technological advancements.
Another significant risk is economic dependency on a select few customers, with a substantial proportion of revenue derived from two long-term clients. While strong relationships exist, the company recognises this concentration risk and is actively working to diversify its customer base. Expansion into new states domestically and internationally through the Technology Division, coupled with revenue diversification across industries and sectors, aims to reduce reliance on these key customers and enhance overall revenue stability.
When asked “If you could choose one and only one ratio, for example 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?”, Matthew (CFO) said that for him it would be profit per new customer orders from new industries “penetrated”.
Through the CFO’s answer, it is apparent that another key driver of the Company’s economic engine is the number of industries and sectors that its technology can be applied to in order to solve the issue of wear and tear.
This also shows the risk of being reliant on two major customers is on the mind of the people who are running the Company and only by diversifying its customer base will it enable LaserBond to reduce this risk and make it a stronger and more resilient company.
Lastly, human resources and recruitment present an ongoing challenge.
The labour market poses a risk there where it’s getting harder and harder to recruit people because senior staff members are approaching retirement age while the younger generations are not encouraged by parents and schools to pursue a career in engineering industry in general. The middle age group wants to move on to do higher rank jobs or be involved in senior or managerial roles.
The industry-wide struggle to find qualified personnel affects LaserBond's ability to maintain optimal workforce utilisation, particularly during afternoon shifts (5pm to 11pm) – at the moment the Company can only utilise 20% of afternoon shifts across all sites. Insufficient human resources can hinder the company's capacity to meet order quantities, potentially impacting operational efficiency and client satisfaction.
LaserBond is addressing this issue through initiatives such as apprenticeship programs and the recruitment of skilled migrants to ensure a steady workforce.
CULTURE AND ORGANISATIONAL STRUCTURE
I believe, after visiting the headquarter in NSW, at the heart of LaserBond's identity lies a unique culture, characterised by a focus on cost-efficiency and a pragmatic approach to business. This culture permeates throughout the organisation, shaping its ethos and day-to-day operations.
The company's offices and workspaces embody this frugal approach, favouring minimalistic and functional design over ostentation. The unassuming furnishings and pragmatic work environments mirror LaserBond's commitment to prioritising utility and functionality. It's a culture that thrives on simplicity, reflecting the core values of the company.
This cost-conscious mindset extends beyond aesthetics to the tools and equipment. Many of these resources are second-hand, yet fully functional, a testament to LaserBond's resourcefulness and its commitment to making the most of available resources.
A unique facet of LaserBond's culture is embodied in its CEO, Wayne, who humorously refers to himself as "T-rex" – a symbol of deep pockets and short hands. This playful analogy captures the essence of LaserBond's leadership style – financially robust but not extravagant.
On another note on culture, I brought up the question of how one would define and measure success. Through his answer, I learned that Wayne's vision of success is intricately tied to building a robust team and culture at LaserBond, one that can sustain itself over the long term. To this end, he has assembled a dynamic management team comprising heads of R&D, Operations, HR, Finance, and Marketing. This leadership collective drives the company's ongoing success, allowing Wayne to shift his focus from day-to-day operations to strategic planning and capital allocation. It's a testament to LaserBond's commitment to nurturing talent and fostering a self-sufficient organisational structure.
Regarding people management, LaserBond takes a proactive stance, ensuring its employees are well-compensated, often above industry standards, and providing clear career progression pathways. Although the company's employee turnover rate is slightly higher than the industry average (14% compared to 9%), this statistic doesn't paint the full picture. The industry figure is broad, and LaserBond's higher turnover is primarily driven by individual preferences rather than dissatisfaction.
A recent employee survey unveils a positive and engaged workforce, with 75% actively engaged at work, 91% dedicated to their roles, and 80% expressing their intention to continue working with LaserBond in the foreseeable future. These statistics affirm the organization's culture and its ability to motivate and retain talent, even as it navigates surging demand and strives to clear backlog while increasing productivity to drive revenue growth.
CAPITAL ALLOCATION
LaserBond’s management team has demonstrated a prudent approach to capital allocation, underlining its commitment to sustainable growth and financial stability.
LaserBond's balance sheet remains robust, characterised by low levels of net debt. Aside from equipment and facility leases, the company carries no concerning debt, providing it with a solid financial foundation. Strong cash flows from operations (has been in cash flow positive for the last ten years) bolster working capital, reinforcing LaserBond's ability to execute its growth plans.
A notable decision to prudently increase inventory levels in 2022 has proven effective. This strategic move enabled LaserBond to meet surging demand and address backlog orders efficiently. As a result, cash flow from operations in FY23 surged by an impressive 82%. Additionally, maintaining a sufficient level of cash at bank enables the Company to avoid the high cost of financing its debts.
On the capital expenditure front, LaserBond anticipates continued spending in the range of $1.5 million to $2 million. These investments are driven by specific needs and growth opportunities:
Victorian facility now has laser cladding capabilities. There’s certain type of work that they don’t have the machine capabilities. As a result, there will be investment in some larger machine equipment.
Upon acquiring the Queensland facility in February, it was evident that they possessed laser cladding capabilities. However, their equipment was not as versatile as LaserBond's, and they had limitations in terms of the components they could laser clad. Moreover, their operational efficiency did not match that of LaserBond's laser cutting cell. Consequently, the management team has outlined plans for investment and equipment upgrades, including future acquisition of new machinery tailored to meet the demand for diversified machining capabilities.
Furthermore, LaserBond anticipates allocating an additional $1.5 million to $2 million toward further acquisitions. These strategic investments are grounded in the company's commitment to geographic expansion and market diversification, with a focus on Western Australia and the United States.
In terms of expansion strategy, CFO Matthew has reiterated the company's focus on the right location and business that can support LaserBond's niche technology, on applications that are identified, and assured that the Company will not expand just for the sake of it.
This commitment is underpinned by a well-defined set of selection criteria:
LaserBond seeks profitable enterprises that align with its growth objectives.
Targeted companies should possess the necessary tools and equipment that complement LaserBond's technology.
Management and staff with expertise in operating relevant equipment are critical, given the challenge of finding skilled operators.
Prospective businesses must align with LaserBond's culture of innovation and commitment to delivering cutting-edge solutions.
The company's decision to maintain a conservative dividend payout ratio of 25% reflects its emphasis on retaining capital for reinvestment. Given the future business expansion and growth opportunities, this ensures that LaserBond has sufficient financial resources to fund ongoing operations and support the Company’s strategy. I think LaserBond’s future capital deployment will still be centered around investments, with a moderate amount of distrubtion to its long-term shareholders on the side (coupled with a in-place Dividend Reinvestmen Plan).