Proto Labs, Inc.

Second quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jason Frankman, Vice President and Corporate Controller. Thank you. Please go ahead.

Thank you, Donna, and welcome, everyone, to ProtoLabs' second quarter 2022 earnings conference call. I'm joined today by Rob Bedore, ProtoLabs' president and chief executive officer, and Dan Schumacher, chief financial officer. This morning, ProtoLabs issued a press release announcing its financial results for the second quarter ended June 30, 2022. 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. Our discussion today 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 of the investor relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Now, I'll turn the call over to Rob Bedore.

Rob? Thanks, Jason. Good morning, everyone, and thank you for joining our second quarter earnings call. I'm happy to report another strong quarter with revenue and EPS within or above our guidance ranges. Despite ongoing supply chain challenges in the broader manufacturing industry and macroeconomic growth concerns, PortalApp's comprehensive digital manufacturing offer continues to delight our customers. Highlights of our second quarter performance include strong growth in our CNC machining, 3D printing, and sheet metal services, as well as another quarter of strong growth at Hubs. Both the Portal Labs and Hubs offers continue to resonate in the marketplace, and we're now more excited than ever to bring the two offers together by the end of this year. In addition, pricing optimization and cost controls drove sequential improvements in both gross and operating margins. While we're very pleased with the performance in our CNC machining, 3D printing, and sheet metal services, revenue in our injection molding service did not meet our expectations in the second quarter. As was the case in the first quarter, our injection molding growth rate was negatively impacted by the absence of several large COVID-related medical orders that occurred in the first half of 2021. In addition, we experienced many customers placing unusually large orders in 2021 in order to stockpile inventory during that time of high uncertainty. In 2022, that behavior has significantly reduced among our customers in line with macro inventory trends in the industries we serve. Furthermore, the unprecedented surge of orders in 2021 led to record high backlogs for us. These extended lead times, coupled with system inefficiencies we described in prior quarters, impacted our customers. We have addressed this operationally, and our fastest lead times are fully available today. We're focusing on go-to-market teams, on targeted campaigns to inform and re-engage impacted customers with our world-class offerings. We're still very confident in the competitive advantages of our injection molding service and are focused on providing great customer experience going forward as we return to growth. Before I provide an update on our 2022 strategic priorities, I would like to take a few moments to address important actions that occurred during the second quarter of 2022. First, I'm excited to announce that in early June, after an extensive search process, Dan Schumacher was named ProtoLabs Chief Financial Officer. Dan has been with ProtoLabs for five years and most recently served as interim CFO for six months. Dan brings a strong pedigree of leadership experience and operational excellence to the ProtoLabs leadership team. He's a great asset to the business and a great partner to me. I'm very excited to work alongside him and all of our great employees as we continue to revolutionize manufacturing and delight our customers. Secondly, I want to discuss our strategy for managing our portfolio of businesses and initiatives. We're actively working to focus our investments in areas that promise the greatest return and ultimately the greatest shareholder value. Protolabs has the greatest opportunity for profitable growth through the integration of our manufacturing partner network and our internal digital manufacturing. Our resources and investments are focused on opportunities with the highest potential return, which means making decisions to reallocate resources away from those areas that are no longer aligned with our long-term objectives. Consistent with that philosophy, in May, our board of directors approved a plan to cease operations in Japan and close our manufacturing facility in the region. Protolabs entered Japan in 2009 but our Japanese business only grew to 3% of our total revenue over that period and did not meet our profitability expectations. Our low-touch e-commerce digital manufacturing business model did not resonate especially well in a region where customers place enormous value in long-term personal relationships. This was a difficult decision that I did not take lightly and I truly want to thank all our employees in Japan for their hard work and loyalty to ProtoLabs over the years. Affected employees in Japan will receive severance and other transition assistance. We will ship final parts to customers through September. Dan will provide details on the financial impact later in the call. Next, during the second quarter, ProtoLabs received another impressive piece of external recognition. In June, Protolabs was awarded Manufacturer of the Year from the Manufacturing Leadership Council, or MLC, a division of the National Association of Manufacturers. Protolabs has won numerous leadership awards from the MLC over the years, and this is the first time we've taken home the top prize. The award recognizes our all-around excellence as a small to medium-sized manufacturer. Protolabs joins an esteemed alumni group of recent Manufacturer of the Year award winners that includes Universal Robotics, InBev, IBM, and Merck. ProtoLabs continues to be recognized externally on a regular basis for our best-in-class digital manufacturing capabilities. This is a testament to the great work that our employees do and the value we provide to our customers. Now, let me remind you of our 2022 strategic priorities that continue to guide us as we deliver on our mission to empower companies to bring new ideas to market by offering the fastest and most comprehensive digital manufacturing service in the world. Our first priority is accelerating our revenue growth through expanded offerings, pricing optimization, and integrating the Hubs network into our e-commerce experience. As I mentioned earlier, we saw very strong growth in our CNC machining and 3D printing services. Sheet metal growth was also solid in the quarter. Going forward, we're focused on accelerating growth in our injection molding service. Regarding the integration of the ProtoLabs and Hubs offers into one e-commerce platform, We continue to make good progress with a dedicated focus on the customer experience. We're on track and we'll have the initial integrated CNC machining released by the end of the year. We are very excited to provide a unified digital experience combining our digital manufacturing with our digital network. Bringing together the strengths of Protolabs and Hubs will provide a customer offering that no one else in the market can replicate with unrivaled breadth of manufacturing capabilities, lead times, and prices furthering our industry leadership and profitable growth. Our next priority in 2022 is to delight our customers, and we continue to deliver on our strong on-time delivery and quality rates while offering the fastest lead times in the industry. Our best-in-class speed and reliability allows Portal Labs to partner with customers as they innovate and create new and improved products, products like electric vehicles to reduce carbon emissions, medical devices to help people live fuller, more active lives, habitats to help astronauts live and explore the lunar surface, and advanced prosthetic limbs that help athletes compete. Many of our customers are working to change the world for the better, and we're proud to collaborate alongside them toward that objective. Our third priority is to be the digital leader at scale by increasing our levels of automation in the factory and back office. We are pleased with sequential improvements in both gross and operating margins in the second quarter and will continue to optimize price and drive diligent operating efficiencies to continue this trend. We will continue to drive the organization to deliver on our target gross margins of 50% in internal digital manufacturing and 25 to 30% through the Hubs Manufacturing Partner Network. Our next priority for 2022 is to be a great place to work. Protolabs employees drive the success of our company, and we will continue to invest to recruit and retain the best talent. I am very encouraged by the energy and passion our employees have demonstrated by collaborating to make a positive impact on all of us at Protolabs and the communities that we live in. During the quarter, several employee-led groups organized cross-functional team-building activities and initiatives to raise donations for various charities. Thank you to the Green Team, the Diversity, Equity, and Inclusion Leadership Council, ProtoGivers, and many others for your continued efforts. They're truly inspirational. With these clear priorities in place, I am confident in our ability to execute on both our short-term and long-term objectives. The combination of ProtoLab's best-in-class rapid digital manufacturing services and HUB's outsourced manufacturing partner network is a unique and winning model in a rapidly growing market. While we may face near-term disruption on macroeconomic uncertainty, we remain confident in our long-term strategy and are focused on execution. With that, Dan will now take you through our second quarter financial results and our outlook for the third quarter.