Proto Labs, Inc.

Greetings and welcome to the Proto Lab's third quarter 2021 earnings conference 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, Dan Schumacher, Vice President of Investor Relations. Thank you, Dan. You may begin.

Thank you, Paul, and good morning, everyone. With me today are Rob Bedore, 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 third quarter and its September 30th, 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 Relations section of our website for a complete reconciliation of non-GAAP to GAAP results. Now I'd like to turn the call over to Rob Bedore. Rob?

Thanks, Dan. And good morning, everyone. Thank you for joining us today for our third quarter 2021 earnings conference call. We are currently operating in an unprecedented environment. The effects of the COVID pandemic are resulting in labor, material, and equipment shortages worldwide. Furthermore, in Europe, we're managing changes in trade norms due to Brexit. These factors are impacting our financial results. Although our third quarter revenue was within our guidance range, earnings were below our expectations. Well documented labor and material shortages are driving inflationary pressures in our business, resulting in lower than expected gross margin performance. We're disappointed with our third quarter earnings performance, and I will outline the actions we are taking to address these headwinds. But first, I'll summarize our third quarter revenue performance. In the presence of these challenges I mentioned, we generated record quarterly revenue of $125 million, representing year-over-year growth of 17%. Hubs contributed $9 million of revenue in the third quarter, representing strong year-over-year growth of 35%. Hubs' third quarter revenue was relatively flat sequentially, primarily due to challenges in the European market and a short-term decrease in organic online search performance. In May, we transitioned the 3D Hubs brand to Simply Hubs, to more accurately reflect the broader nature of services provided beyond 3D printed. This brand change caused a temporary decline in customer acquisition and impacted our third quarter revenue. Although this branding shift impacted our near-term results, we believe it is the right move for the long-term success of the business. Continuing with our third quarter revenue performance by geography, outlined on slide eight, our largest region, the Americas, generated revenue of $100 million in the quarter, representing growth of 17% year over year, or 11% organic growth. This represents all-time record revenue for our legacy business in the Americas. This strong growth demonstrates the continued customer evolution of digital manufacturing and the large opportunity that is ahead of us. In Europe, third quarter revenue of $22 million represents growth of 17% year over year. Excluding hubs of Europe revenue and the impact of foreign currencies, our Europe revenue declined 7% year over year, reflecting continued supply chain constraints which are negatively impacting the European manufacturing environment. Lastly, our Japan region generated $3 million of revenue in the third quarter. As we move to earnings, we reported third quarter non-GAAP diluted earnings per share of $0.35. Earnings came in below our expectations, driven by lower than expected gross margins. The labor shortage resulted in greater than anticipated wage inflation, increased overtime, and increased recruiting costs for our manufacturing workforce. In addition, we continue to manage through internal inefficiencies resulting from the launch of our Protolabs 2.0 systems. The labor shortages and supply chain issues impacting our financial performance are likely to persist through the remainder of the year and into 2022. To address our near-term challenges, we're taking several measures, including thoughtful pricing changes to offset labor cost inflation, investing R&D resources to increase internal operating efficiency in the Protolabs 2.0 environment, and investing in robotics automation to reduce the need for additional labor to support growth. These near-term actions may not all have immediate impact on our financial results, and the benefits may be muted in the fourth quarter due to lower seasonal revenues, continued macro weakness in Europe, and additional costs incurred during the holiday season. While it may take some time to achieve the financial benefits, we are confident these are the right actions to improve the financial performance. In addition to improving our results in the short term, we also remain focused on long-term growth and capturing the opportunity that is in front of us. The contract manufacturing market is very large, and it is evolving and becoming ever more digital, and customers are seeking alternatives to address the supply chain challenges they are facing. We created the e-commerce model for custom manufacturing over 20 years ago, and we're still the only company to digitally manufacture parts across a range of services, both additive and traditional. Through our in-house digital manufacturing process, we've eliminated much of the upfront cost and labor through the automation of non-recurring engineering. Unlike others that have applied a digital face to traditional operations, Protolabs is the only company to have transformed the actual manufacturing processes, enabling us to be the fastest and most reliable custom parts manufacturer. Protolabs is the world's leading provider of digital manufacturing services. having manufactured approximately 400 million parts since our founding in 1999, making us the largest player in the space by far. Furthermore, we've served hundreds of thousands of customers, ranging from entrepreneurs to startups to mid-sized firms, and over 85% of the Fortune 500 companies in our target industries. As recognition of our best-in-class digital manufacturing capabilities and industry leadership, The World Economic Forum announced our induction into the World Economic Forum's global lighthouse network, recognizing our industry-leading efforts to implement fourth industrial revolution technologies. Protolabs joins this exclusive network as one of only 10 lighthouse manufacturing facilities in the United States, and we share the honor with Fortune 500 companies like Johnson & Johnson, Procter & Gamble, Unilever, Western Digital, and Schneider Electric. Our U.S. injection molding facility was inducted into the World Economic Forum's network because of our transformation from a prototype provider to a full production provider through technologies connecting our e-commerce experience to the manufacturing shop floor. As a technology-driven manufacturer, we provide injection molding production lead times in as fast as one day instead of the traditional two or three months. This recognition is a reflection of the innovation and capabilities throughout the entire digital thread that is intrinsic to our model. While our award-winning internal manufacturing capabilities offer unprecedented speed, we acquired Hubs in January to broaden our offerings and serve more customer use cases. Hubs' premium network of manufacturing partners will allow us to broaden our pricing and lead time options, as well as offer capabilities outside of our legacy part envelope including larger parts, tighter tolerances, increased finishing options, and much more. The combination of Protolab's internal manufacturing capabilities and HUB's network of premium manufacturing partners is the superior model, together providing the broadest set of manufacturing capabilities and lead times in the world. Looking forward, we will continue to make investments in the business focused on capturing the long-term opportunity guided by our three priorities. As a reminder, those priorities 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. We have made significant progress on all three priorities for the first nine months of this year, while continuing to set quarterly revenue records. As it relates to our goal of providing a world-class customer experience, we launched Portal Labs 2.0 to deliver a new e-commerce experience in the Americas in the first quarter. Customer response to the new platform continues to be positive, and recently, our revamped digital quoting platform was honored with a first-place finish in the software category of Design World's 2021 Leadership in Engineering Achievement Program Awards. This is a testament to the fantastic development work our teams have done over the past few years, designing a best-in-class digital coding and ordering user experience. However, as I referenced earlier, Protolabs 2.0 has impacted our internal operational efficiency. We are focusing our software teams on addressing our internal systems to improve their performance. Next, our customer offering has greatly expanded in 2021 through acquisition and organic innovation. Hub's manufacturing partner network allows us to serve more customer needs, and organically, we launched a flexible lead time offering in our internal CNC machining service, as well as an enhanced quality offering for injection molding production offers. These new offerings contributed to record revenue in the third quarter, and we will continue to invest in future offering expansions. Finally, Protolab's employees drive our success, and we continue to invest in our employees in several ways. We invest in training and developing employees to fuel innovation and challenge employees to continually enhance their skills. In 2021, we materially expanded our training content and resources with a focus on remote learning to support our flexible workforce. Our Diversity, Equity, and Inclusion Leadership Council partners with our leadership team to help us leverage the diversity of our workforce in a meaningful way and create a culture of inclusion for all employees. Now, John will provide an in-depth look at our third quarter financial performance and our outlook for the fourth quarter. John?