Proto Labs, Inc.

Greetings and welcome to the Proto Labs second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Daniel Schumacher, Director of Investor Relations. Thank you. You may begin.

Thank you, Michelle, and good morning, everyone. With me today is Vicki Holt, our President and Chief Executive Officer, and John Way, our Chief Financial Officer. This morning before the market opened, Proto Labs issued a press release announcing its financial results for the second quarter ended June 30, 2020. The release is available on the company's website at protolabs.com. In addition, a prepared slide presentation is available online at the web address provided in our press release. Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation within the investor relations section of our company website for a complete reconciliation of non-gap-to-gap results. Now I'd like to turn the call over to Vicki Holt, President and Chief Executive Officer of ProtoLabs. Vicki?

Thanks, Dan. Good morning, everyone, and welcome to our second quarter 2020 earnings conference call. Thank you for joining us today. I would like to start by expressing how proud I am of the Proto Labs team and how we've handled the first half of 2020. Like all businesses, we've had to evolve considerably in the first six months of the year. Proto Labs has rapidly adapted to change guided by our core values of teamwork, trust, and achievement. As I mentioned on our first quarter call, our top priority is to keep our employees, communities, and customers safe. Our manufacturing and office teams worldwide have done an incredible job of ensuring employee safety while continuing to delight customers with our industry-leading digital manufacturing services. Every one of our manufacturing facilities have remained operational throughout the global pandemic. The safety of our employees is extremely important to me, and our essential manufacturing employees are my heroes. I would like to thank them all for what they do to make Proto Labs a great organization. We have had some confirmed cases of COVID-19, but we believe they occurred outside of our facilities and we have been able to greatly limit the impact to other employees. Our new cleaning and sanitizing standard operating procedures in all our manufacturing facilities have continued since the beginning of the COVID-19 pandemic. In addition to new procedures that minimize employee interaction, our digital manufacturing model offers an advantage in practicing social distancing compared to more manual traditional manufacturing operations. Upon entry into our manufacturing or office facilities, we are conducting rapid temperature screenings via infrared camera technology and have put in place a mandatory mask policy in all of our facilities. We are following local guidelines in each of our locations and the vast majority of our office employees continue to work remotely. While I'm not surprised, I am very impressed with the agility and creativity with which our employees have adapted to the changes thus far in 2020. A crisis like the COVID-19 pandemic provides an opportunity for ProtoLabs to demonstrate the value our digital business model can provide. Our purpose is to accelerate innovation from development through commercialization, and we've been able to deliver on that purpose during this crisis. The way we interact with customers has not changed as we are an e-commerce technology-enabled company. Through the second quarter, we continue to prioritize orders to equip the medical system to treat patients with COVID-19 and provide customers with additional consultative design assistance to get parts designed and manufactured rapidly. Our digital manufacturing model allows us to help our customers rapidly produce parts to respond to COVID-19, including testing, preventing the spread, or caring for patients that have contracted the virus. To date, we've manufactured and shipped over 8 million parts to be incorporated into products responding to COVID-19 and many different medical related customers, resulting in $12 million of revenue recognized in the second quarter. We are grateful and proud to continue to serve our customers and contribute to the fight against this novel virus. Now turning to our financial results in the quarter. Today, we reported second quarter revenue of $107 million, representing a decline of 8.1% over the second quarter of 2019 and a 7.4% sequential decrease. Our revenue decline is a result of the broad challenges impacting our customer base and also include the $12 million of COVID-19 related revenue. On a monthly basis, Our second quarter revenue trend played out as follows. As we noted in our Q1 call, April revenue was down approximately 4% year over year. Global industrial manufacturing activity was severely impacted by COVID-19 and stay-at-home orders in April. Our business was aided by $5 million in revenue from COVID-19 related orders in April. May was the softest month in the quarter, with activity picking up slightly in June. The COVID-related business continued through May and helped mitigate the softness we experienced in the rest of the business during the month. To gain additional insights in this uncertain market, we conducted a survey of over 500 customers across a variety of industries in order to learn how customers and supply chains have been impacted by COVID-19. 73% of respondents indicated they are working remotely. 43% have experienced a decrease in demand for their products. Regarding timing and development schedules, 58% of our customers surveyed have seen delayed development project timing and 33% have seen reductions in project funding. These changes are reflected in our revenue performance and the number of unique product developers served in the second quarter of 2020. I will now transition to second quarter 2020 revenue by geography highlighted on slide five of our earnings presentation. America's revenue declined 5% compared to the second quarter of 2019. Revenue declined significantly in our industrial and consumer end markets in the Americas. Our aerospace customer end market continued its strong performance in 2020 during the second quarter. Automotive also increased year over year. Europe's second quarter revenue declined 20% year over year or 18% in constant currency. Demand was off in all European customer end use markets. In Japan, revenue declined 21% or 23% in constant currency. Overall, our business declined 8% year-over-year in constant currency during the second quarter of 2020. Revenue by service for the second quarter is presented on slide six of our earnings presentation. Injection molding revenue grew 4% compared to the same period in 2019 due to strong demand for COVID-19 related components. Excluding COVID-19 revenue, year-over-year injection molding revenue declined 17%. 3D printing, CNC machining, and sheet metal were all down year-over-year as muted demand was not offset by demand for COVID-19 revenue in those services. Turning to earnings, we reported second quarter non-GAAP EPS of 59 cents per share down only 2 cents sequentially. Our earnings in the second quarter were down primarily due to lower volume and fixed cost absorption partially offset by lower variable compensation and discretionary spending. We continue to manage expenses as demand remains soft, including labor and variable manufacturing costs, leadership and board compensation reductions, and tightly controlling discretionary spend. John will dive deeper into our financial performance during the quarter a little later on the call. Despite the challenging economic environment, we are still focused on investing in and executing on key strategic initiatives to position our business for strong growth in the future. Our Protoland 2.0 systems project is the prime example of this commitment. To maintain our position as the leader in digital manufacturing We continue to push ahead on work related to Portal Labs 2.0, including development, documentation, validation, training, and testing. As a reminder, Portal Labs 2.0 is a systems project we've undertaken to enhance and evolve our systems and processes to support our customers and our strategy for the next decade and beyond. There are two main components of Portal Labs 2.0. One, to enhance our e-commerce platform and customer experience. to improve the functionality and interconnectivity of the backend systems which support our operations. ProtoLabs 2.0 will allow us to come out of this pandemic stronger than we entered. We continue to operate under a plan to go live with the new systems in Europe by the end of 2020, followed by the Americas in 2021. We recognize that there is both external and internal risk to that plan. Externally, travel restrictions and social distancing due to COVID-19 pandemic could present challenges and delays in assisting our operations in Europe with work necessary to go live. Internally, as we continue to test our new systems and prepare for the go live event, unforeseen issues could arise and push back our intended go live date. Our focus is on ensuring that the customer experience is favorable in the new system. Although we've been conducting user acceptance testing for months, we are happy to report that we completed our first round of live customer beta testing in early July with 212 customer participants from 15 countries across Europe. Feedback on the customer-facing component of ProtoLabs 2.0 was extremely positive. Beta participants described the new customer experience as streamlined, intuitive, modern, and easier to use than our current system. As expected, the first beta test of any new software system, our recent test also uncovered areas that need attention prior to launch. Our teams are working diligently to address these areas, complete development, validate, and test our systems as we approach our planned go-live date. We will continue to focus on user testing in the U.S., as well as testing the systems, the business processes, and our employees' training to ensure we're ready to serve our customers with the rapid and reliable service they expect from Proto Labs. I am so proud of our teams and their work on Proto Labs 2.0 to date. The level of teamwork across all functions and regions, all while transitioning to remote working environment is extremely impressive. Our teams are working hard every day to make Proto Labs a stronger, more successful company with highly differentiated leading edge technology. In summary, the first half of 2020 has presented a great deal of challenges to all businesses and ProtoLab is no exception. We have a solid financial foundation and a healthy balance sheet to weather the uncertain environment. In addition, the team has demonstrated the resiliency of our dynamic digital manufacturing business model. We will continue to flex costs where we can to match demand, but we will not sacrifice the long-term growth of the company. Our agile and creative employees will be there to help our customers succeed as they begin to come back to work and re-accelerate development projects to meet the needs of their customers as momentum builds in the recovery. With that, I'd like to turn the call over to John for an in-depth look at our financial performance in the second quarter, as well as our outlook for the third quarter.