Proto Labs, Inc.

Greetings and welcome to the ProtoLabs third quarter 2022 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, Jason Frankman. Vice President and Corporate Controller. Mr. Frankman, you may begin.

Thank you, Renan, and welcome, everyone, to Protolabs' third 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 third quarter ended September 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 at the investor relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Now, I will turn the call over to Rob Bedore. Rob.

Thanks, Jason. Good morning, everyone, and thank you for joining our third quarter earnings call. This morning, we reported revenue and non-GAAP earnings per share within our guidance ranges. Revenue came in near the bottom end of our guidance as strong growth in several areas of our business is being largely overshadowed by a decline in our injection molding revenue, predominantly due to the challenging macroeconomic climate. The primary headwind in injection molding is a lower level of follow-on parts orders. These are orders for parts made from a previously purchased mold. Following significant growth in the third quarter of 2021, Parts revenue decreased 17% this quarter in constant currencies and excluding Japan. As was the case in the first half of 2022, our third quarter injection molding growth rate was negatively impacted by the absence of several large parts orders that occurred last year. Additionally, we saw fewer production parts orders in in the most recent quarter due to excess inventory buildup in the market at a time when many of our customers are experiencing softening demand and elevated inflation. These macroeconomic and inflationary headwinds impact injection molding parts orders more than our other manufacturing services because injection molding has the highest relative proportion of low volume production compared to prototyping and the highest average number of parts per order. I'm pleased to say that by contrast, our business outside of injection molding has continued to grow double digits throughout 2022. As I've said before and still firmly believe as much as ever today, we are very confident in the competitive advantages of our injection molding service and are committed to improving our performance. Last quarter I mentioned we were focusing our go-to-market efforts with targeted campaigns to inform and re-engage customers. Other planned actions will materially expand our offering in injection molding to drive growth. Besides additional go-to-market enhancements and e-commerce user interface improvements, we're expanding our lead time and pricing options available through our digital factories. We will also leverage our manufacturing partner network to provide a more holistic injection molding service, offering parts outside of our digital manufacturing capabilities, as well as additional pricing and lead time options. In contrast to follow on parts revenue, third quarter mold revenue was up slightly year over year in constant currencies and excluding Japan. We've planned actions in place to continue to drive this growth, but recognize that we face some near-term headwinds, including macro uncertainty. Though we are disappointed with our recent injection molding parts performance, there are many areas of our business that are performing very well in a challenging operating environment. We reported yet another quarter of double-digit growth in CNC machining and 3D printing. In particular, we are very pleased with the performance in the longer lead time portion of our CNC machining offer, where revenues fulfilled by both the digital factory and the digital network grew over 40% year over year. This is a great example of Protolabs responding to the market and expanding our customer offering by launching a new service Now I'd like to shift away from our third-core performance and take a few moments to reflect on the impact our business has on society. Portalabs has many stakeholders, including shareholders, employees, customers, the communities in which we operate, and others. We get to partner with 55,000 customers annually on very meaningful projects. Our mission is to empower companies to bring new products to market by offering the fastest and most comprehensive digital manufacturing service in the world. We empower companies to change the world for the better on a regular basis. In general, if there's an industry in which fast innovation and speed to market are vital, ProtoLabs is likely heavily involved. Let me provide a few examples. First, medical devices are a great example of the impact we have on society. During the COVID-19 pandemic, we provided prototyping and low-volume production for COVID-19 test kits, lifesaving medical devices, personal protective equipment, and more. The world-class speed and reliability of our digital manufacturing service allowed customers to choose us to help combat one of the most severe public health and economic crises we've seen. And we produced over 20 million parts in response. Space exploration is another example. Protolabs is helping NASA make a return to the moon and a voyage to Mars a reality. We teamed with a trio of universities in a national competition to develop technology that could someday extract water on these surfaces. Next up, electric vehicle development. Many companies are working to develop the next generation of EVs and charging infrastructure. reducing global reliance on fossil fuels. In many cases, we're along for the ride as a quick-turn supplier, delighting our customers and helping to fight climate change simultaneously. My last example is sustainable energy sources. We worked with a customer during the Department of Energy's American Made Challenge, in which entrants were tasked with finding a sustainable geothermal energy solution using U.S.-based suppliers. Our customer won that competition. Sustainability is another area in which there is a definite urgency in innovation and development, which is why many customers choose Protolabs as a supplier. Clearly, the work we do and the parts we manufacture matter to our customers and to the world. Fighting the COVID-19 pandemic, accelerating space exploration, furthering electric vehicle development, and enhancing sustainability are just a small sample of the areas in which we contribute. Protolabs partners with customers to accelerate the advancement and betterment of the communities we live in and society as a whole. Before I provide an update on our strategic priorities, I'd like to address important third quarter business updates. First, I'm excited to announce that in September, after an extensive search process, Oleg Raboy was hired as Protolabs Chief Technology Officer. Oleg was previously CTO at Digital River, a global e-commerce platform, and software as a service company that provides online storefronts. Oleg brings a wealth of knowledge and experience as he takes on the leadership of our technology teams around the world. We're very excited to have Oleg on board, and he has already had a positive impact on our business. Also in September, we launched the first iteration of our integrated offer in Europe. We now offer CNC manufacturing for eligible parts through the combination of our internal digital manufacturing and our digital network of manufacturing partners. We began the rollout in Europe and will continue to test and iterate. In the coming months, we will offer customers more expanded capabilities through the digital network and we plan to expand the integrated offer to the Americas in early 2023. And finally, Protolab's U.S. injection molding facility was named the 2022 Best Plant by Industry Week, edging out finalists such as GE Appliances, Flex, and others. According to Industry Week, our injection molding facility was awarded Best Plant as it is on the leading edge of efforts to increase competitiveness, enhance customer satisfaction, and create stimulating and rewarding work environments. Now, let me provide an update on our strategic priorities for 2022. Our first priority is accelerating revenue growth. Our primary focus areas for investment in the near term are driving injection molding growth and continuing to expand our integrated offer. In other areas of our business, we're making great progress on accelerating growth. CNC machining and 3D printing have grown double digits year to date, and hubs continues to grow rapidly. To accelerate growth, we must delight our customers, our second priority. During the third quarter, we delivered strong on-time delivery and quality rates while maintaining the industry's fastest lead times. New in 2022, our cross-functional customer experience council has made great progress throughout the year gathering customer and employee feedback and are working to continually improve the experience across the entire customer journey. These efforts have led to a substantial increase in our NPS score so far in 2022. Our next priority is to be the global leader at scale. We continue to launch enhancements to our digital manufacturing technology that enable us to produce more complex parts and increase automation. We expanded our automation in the quarter. However, we measure success in this priority with gross and operating margins. In the most recent quarter, the decline in injection molding created a significant headwind to our margins. Injection molding is one of our higher margin services and with lower volume, it becomes challenging to absorb fixed costs and overhead. As we plan for the end of 2022 and on to 2023, we will control spending based on volume levels and demonstrate discipline as we focus our investments. We're working to drive efficiency by realigning resources to invest in our biggest growth opportunities. Our fourth priority is to be a great place to work. quarter we rolled out expanded development resources including a mentorship program and expanded leadership training to ensure our employees had the support, skills, and environment they need to achieve their goals and ours. Protolabs employees globally are aligned around our strategic priorities and are working to focus our investments while accelerating our growth. Despite near-term disruptions and macroeconomic uncertainty, we are confident in our long-term strategy and and are focused on executing these four priorities. As we enter 2023, we will continue to invest responsibly for the long term in a way that is adaptive to the current economic environment. The combination of Protolab's best-in-class digital manufacturing services and HUB's digital manufacturing partner network is a unique model that will win in the long run. With that, Dan will cover our third quarter financial results and our outlook for the fourth quarter. Dan?