Proto Labs, Inc.

Welcome to the ProtoLabs Q1 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to your host, Dan Schumacher. Mr. Schumacher, you may begin.

Thank you, Alex, and good morning, everyone. With me today are Rob Fedor, ProtoLabs President and Chief Executive Officer, and John Way, our Chief Financial Officer. This morning, ProtoLabs issued a press release announcing its financial results for the first quarter ended March 31st, 2021. The release is available on the company's website. 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 at the investor section of our company website for a complete reconciliation of non-GAAP to GAAP results. Now, I'd like to turn the call over to Rob Vador, who has held the role of ProtoLabs President and Chief Executive Officer since March 1st of this year. Rob.

Thanks, Dan, and good morning, everyone. Thank you for joining us today for our first quarter 2021 earnings call. I'm excited to take you through our operating and financial results, as well as our top priorities in my first year as CEO. We have a few very important topics for you today, including an update on our Cotolabs 2.0 system launch and performance, our first quarter together with 3DHubs, and an invitation to our virtual investor day later this month. John will provide details on our first quarter financial results and our outlook for the second quarter later in the call. Turning to first quarter financial performance, I'm pleased to report a strong start to 2021 with revenue and earnings within our expectations. First quarter revenue of $116 million was near the top end of our guidance range, representing a year-over-year increase of 1% and a sequential increase of 10%. 3D Hubs contributed $5.8 million of revenue between close on January 22nd and the end of the first quarter, and delivered strong growth of 35% over their prior year results. As with our normal seasonality patterns, revenue started relatively soft in January and picked up as we progressed through the quarter. This was particularly true in our injection molding business. We saw increased demand as global manufacturing activity continued its recovery from the low point in the second quarter of 2020, and we benefited from global supply chain challenges as our customers pursued alternatives to their traditional suppliers. This led to strong order volume of injection molded production parts, not only benefiting the first quarter, but creating a backlog into the second quarter as well. As a result, our first quarter injection molding revenue grew 3% year-over-year and 8% sequentially. We break down revenue by service on slide 6. Our 3D printing revenue increased 8% over the prior year quarter and 8% over the fourth quarter of 2020. Our CNC machining and sheet metal services were both down mid-single digits year over year, but were up over 15% sequentially, reflecting continued increase in global demand. As we look at revenue by region, the Americas produced organic sequential revenue growth of 6.5% while converting to our new ProLabs 2.0 platform mid-quarter. Our European region was impacted by disruptions from logistics changes associated with Brexit and continued COVID-19 restrictions, resulting in organic sequential revenue growth of 3%. Japan revenue decreased 17% year-over-year in constant currencies and was relatively flat sequentially. Moving to earnings, we reported first quarter non-GAAP diluted earnings per share of 40 cents, also in line with our expectations for the quarter provided in February. Our earnings in the first quarter included the operations of 3D Hubs and costs associated with our Portalabs 2.0 systems launch, including a full quarter of depreciation and increased research and development spend. As a reminder, 3D Hubs is a very strategic, long-term investment for our business. We're currently investing to build out the platform and infrastructure to support the significant future growth that we will drive through the platform. Overall, I'm very pleased with our financial performance in the quarter in which we launched our redesigned systems to support our customers and future growth, and completed a transformative acquisition. I've been with Protolabs for over eight years in a variety of capacities, and after two months in my new role, I am more confident than ever in the future prospects of this company. The launch of Protolabs 2.0 and the acquisition of 3D Hubs position Protolabs for strong growth, financial performance, and shareholder value long into the future. I'm excited to work with my colleagues to execute on our strategic objectives, delight our customers, and capture more of our market opportunity. As we continue to emerge from the headwinds of the global pandemic, Protolabs is well positioned, given our market leadership and the bold strategic moves we have made to better serve our customers by improving our e-commerce experience and expanding our offer. Our three priorities for 2021 are, first, to create a world-class customer experience for digital manufacturing, second, to expand our portfolio of customer offerings to meet the broadest set of customer needs, and third, to further invest in our employees. In the first four months of 2021, we made substantial progress on all three. First, and most importantly, Protolabs 2.0 is now live in Europe and the Americas. we've processed over 54,000 orders through the new systems. With this new e-commerce platform, our customers now have access to improved order management, more secondary operations, enhanced quality documentation, streamlined production features, and the ability to manage multiple services in a single project. As with any system launch of this magnitude, we have had our challenges. Our incredible employees have answered the call they arose and deployed software updates with system improvements to resolve them permanently. In March, amid global shortages of resins and capital equipment, driven in part by electronics supply shortages, we saw significant sequential increase in orders. As orders ramped, our facilities were operating below their full run rate efficiency as they adapted to the new systems leading to some on-time delivery challenges near the end of the first quarter. Due to the outstanding efforts of our teams, on-time delivery has improved dramatically in most services and is back to the market-leading Protolab standard that customers have come to expect. In injection molding, the significant increase in production parts orders I mentioned earlier has created a backlog at our US injection molding facility. With respect to our second priority, Continuing to expand our offer to meet the broadest set of customer needs, our transformative acquisition of 3D hubs in January is a significant step toward achieving that objective. This acquisition provides two great benefits to ProLabs customers. First, a complementary network of manufacturing partners to fulfill a breadth of capabilities outside of our current envelope. And second, a broader selection of pricing and lead time options. We are currently working with the talented 3Dhubs team on assessing near-term revenue synergies and planning long-term integration. As we work to unify the customer experience and incorporate 3Dhubs capabilities with Protolabs in one seamless customer-facing platform, we will continue to invest in R&D to provide the best customer experience. In the near term, both organizations will continue to operate semi-independently, while collaborating to develop a robust plan that will allow us to best serve our customers and generate significant shareholder value. Our third priority in 2021, a long-term focus for Protolabs, is to continue to invest in our employees. Our employees drive the success of this company. We're delighted that the three Hubs employees joined our team in the first quarter, and our relationships and productivity will only increase as our interactions and collaborations continue. Throughout 2020 and into 2021, we've demonstrated our commitment to the development of our employees and offer many opportunities for additional training. In 2020, we implemented a customized learning management system and now offer hundreds of online courses across a range of job-specific disciplines that provide our employees with greater access to development resources. Employees are assigned courses to help them expand their expertise in their current position and can also register for courses to help them advance their positions in the organization. We have also launched customized leadership development programs for new managers that focus on how to effectively coach and develop their employees. Furthermore, the safety, mental health, and physical wellness of our employees has always been a top priority for this company. To help them overcome the unique physical and mental challenges brought on by the pandemic, we developed and deployed specialized health and wellness training throughout the year. Aside from our primary 2021 priorities, in recent years we've also prioritized our sustainability and societal impact. We are working to continuously improve our environment, social, and governance practices, and I'd like to take a moment to highlight some of the work we're doing today. ProLabs was recently recognized in the U.S. with the 2021 Sustainability Award from the National Association of Manufacturers for our continued effort to reduce our environmental footprint. These efforts include implementing solar power at our Plymouth, Minnesota injection molding facility, reducing material waste through recycling programs, establishing an internal green team, and making other energy-efficient changes across all of our facilities. We are also tracking our utility, energy, and natural gas consumption so that we can better understand our impact and identify areas for further improvement. There are also several social initiatives in the works that I'm quite proud of. First, we've implemented a Diversity, Equity, and Inclusion Leadership Council to oversee diversity and inclusion efforts at Protolabs. We've also conducted anti-bias training for our employees and are creating employee resource groups as we continue to engage employees on matters that are important to them. In addition, Proto-Givers, an employee-led philanthropic group, organized a fundraiser in the first quarter to raise money for the Minnesota Assistance Council for Veterans to help veterans and their families who are homeless or at risk of becoming homeless by providing housing, employment, and legal services. This is just one example of the great work all of our global locations are doing in their communities. We're in the early stages of our EST journey, and we'll continue to look for ways to build on our strong foundational practices throughout 2021 and beyond. On Thursday, May 20th, 2021, at 10 a.m. Eastern Time, we will host a Virtual Investor Day. During this session, we'll go into greater depth and provide further insight into our long-term strategy and our execution plan to achieve that strategy. I will be joined by several members of our executive leadership team to offer further information on our strategic initiatives for the next five years. We last held an Investor Day event in 2017, and I am truly looking forward to hosting you again later this month. There will also be a chance for current and prospective investor participation in the form of a live question and answer session after our prepared remarks. Please register today at the link provided in the press release we issued this morning. Now, John will provide a detailed summary of our first quarter financial performance as well as our outlook for the second quarter. John?