Proto Labs, Inc.

Greetings, and welcome to the Proto Lab's fourth quarter 2022 earnings 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Jason Franklin, Vice President and Corporate Controller. Thank you. You may begin.

Thank you, Daryl, and welcome, everyone, to Protolab's fourth quarter and full year 2022 earnings conference call. I'm joined today by Rob Bedore, Protolab's president and chief executive officer, and Dan Schumacher, chief financial officer. This morning, Protolab issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 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'll turn the call over to Rob Bedore.

Thanks, Jason. Good morning, everyone, and thank you for joining our fourth quarter earnings call. I will provide commentary on the overall state of our business, and then Dan will cover our financial performance in depth later in the call. As we begin 2023, the Protolabs team is focused on accelerating our growth through the execution of our strategy. We are narrowing our focus and investments to drive growth in two priority areas, our two largest services, injection molding and our new integrated comprehensive CMC offer that combines the speed and automation of our digital factory with the broad capabilities of our digital network powered by hubs. I am confident that a sharper focus on fewer priorities will allow our organization to succeed in 2023 and ultimately drive greater value for our shareholders. Reflecting on 2022, we are not satisfied with our financial results. Our performance was impacted by an uncertain macroeconomic environment and internal challenges we faced at Protolax. Looking ahead, I'm optimistic because our investments and priorities for 2023 are focused and designed to address these issues, and we are already seeing positive momentum. In addition to focusing on fewer priority areas, we're also accelerating our innovation pipeline, launching more new offerings at a faster pace. And lastly, for the current year, we have a financial strategy in place through which we will expand our operating margin, focus our investments on areas with the highest potential return, and return capital to shareholders at an accelerated rate. A narrower focus on fewer priorities and an enhanced financial strategy will drive Protolab's success and increase shareholder value in 2023. The two main areas of underperformance in 2022 were injection molding and a decline in our margins. Although last year's performance did not meet our expectations, there are many positives in our business that we will build on in 2023. Our CNC machining and 3D printing services both grew double digits year over year. Our hubs business grew over 50% in constant currencies. We also made great progress on the integrated Protolabs and Hubs offer last year, and our customers began to realize the benefits of the unique integrated offer. We established a very important platform that is proving out the value of our comprehensive offer strategy. In 2022, the number of customers that ordered from both the digital factory and the digital network increased over 2021. Furthermore, revenue from these customers increased even faster, reflecting strong growth in spend per customer. I want to share a few customer examples to illustrate the value that our combined factory and network model has already created for customers. Because our digital factory can deliver value that is not available in any competing digital network, we can deliver value that customers cannot get elsewhere. In our first example, a prominent medical company was looking to accelerate the development of a new product with multiple components. They were looking to procure 12 injection molding tools from a single manufacturing supplier was a requirement for the customer. We manufactured nine of the 12 molds in the digital factory and the remaining three higher requirement molds we manufactured outside of our internal capabilities and sourced those through our digital network partners. Not only did our combined model create the comprehensive offering that enabled us to win this entire large injection molding order, More importantly, it enabled Protolabs to reduce the supply chain complexity for this customer by being a seamless, single supplier for their entire project. A true one-stop shop. Next, a global technology company needed help on a fuel cell project with high requirements and tight deadlines. This customer leveraged Protolabs' digital factory capabilities for quick-turn 3D printing and CNC machine parts, and ordered high-requirement production CNC machine parts with tight tolerances and plating that were fulfilled by the digital network. We were able to meet stringent deadlines and manufacture high-quality finished parts, saving the customer eight weeks in their product development process over any competing alternatives. As these examples highlight, the unique combination of Protolab's speed and reliability with the expanded capabilities of HUB's digital network is already driving tangible value for customers. Value in the form of speed, supply chain simplification, breadth of manufacturing capabilities available helps accelerate the journey from prototyping to production and more. Customers are seeing the value and adopting our combined capabilities. Our long-term strategy is gaining traction as the integrated offer drives additional demand and increased share of wallet with both existing and new customers. and we are just getting started. Looking ahead to 2023, as I mentioned, we have narrowed our focus and investments to two primary growth areas. Injection molding, our largest service, was negatively impacted by macroeconomic factors in 2022. We are still very confident in the competitive advantage of our injection molding service, and we continue to invest to make it even more competitive. There are several initiatives in place to drive growth in 2023. In prototyping, we're making our standard lead times even faster. Already this year, we launched an industry-leading seven-day standard lead time for molds, in effect cutting in half our lead times for many of the parts that we produce in injection mold. We're also offering expanded capabilities through our digital network. In production, we're expanding our offerings through multiple investments. First, a broader array of digital quality offers, And second, lower part pricing for high-volume orders fulfilled through the hubs network. And across both prototyping and production, we're optimizing part and mold pricing through investments in enhanced pricing capabilities. And we're making it easier to use our injection molding service by improving the automated design for manufacturability feedback on our quotes and expanding our consultative design services. We expect these actions to drive injection molding growth in 2023. Our second priority growth area for 2023 is CMC. This is our second largest service and has been growing well. This year, we're committed to unlocking even greater growth potential via the most complete and comprehensive offer in the industry through our digital factories and our digital network. Yesterday, we announced that customers now have access to expanded capabilities offered through the digital network, on CNC quotes received from ProLabs.com. Customers can now benefit from the combined capabilities of the digital factory and network to leverage advanced machining capabilities designed to lower part costs at longer lead times, improve tolerances, provide broader finishing options, and make possible larger and more complex part design. In the fourth quarter, our longer lead time CNC offer, fulfilled by both the digital factory and the digital network, grew over 48% year over year, again providing evidence that our comprehensive offer strategy is gaining traction. We've also accelerated our rate of innovation, as evidenced by the number of new offering launches in recent months. And we've strengthened our leadership team with a focus on growth and innovation. Oleg Raboy, our Chief Technology Officer, has been driving positive change and accelerated velocity since he started in September. In January, we welcomed Luca Macei as Strategic Growth Officer. Luca has more than 20 years of experience driving business growth, recently as Chief Growth Officer for several industrial companies. The additions of Oleg and Luca highlight our intense focus on strategic growth, and accelerated innovation moving forward. And as I look ahead, we have several more capabilities in the development pipeline that I'm excited to share with you in the future. I am confident that a narrow focus on our priority areas for growth will drive shareholder value. And we must also improve our earnings. We're committed to driving operating margin expansion in 2023 by reducing and redirecting investments in lower priority areas and aggressively managing spending. Early this year, we took several actions to better align resources to our two priority areas for growth and ensure those areas receive adequate investment. Through our annual planning process, we identified opportunities to shift investments away from lower priority areas of our business. Probolab's profitable business model generates more operating cash than any public company on our industry, and we have a very nimble capital structure. On February 7th of 2023, our board approved an additional $50 million to our stock repurchase authorization. This year, we will return capital to shareholders at an accelerated rate through repurchases, reflecting confidence in the long-term outlook realized through the execution of our strategy and focus on creating value for our shareholders. Lastly, as part of managing our business, we will continue to evaluate segments or services that are underperforming or non-core to our long-term strategy. This sort of evaluation ultimately led to the closure of our Japan business last year. Going forward, we will focus on areas with the highest potential return on investment. I remain very optimistic about the future of ProtoLabs and confident that we will deliver great value for our customers and our shareholders over the long term. The past three years were filled with disruption and transition in the broader economy that impacted ProBalance. But we cannot rest on the past, and we will not be guided by factors outside of our control. Our 2023 plan is very focused. We're committed on accelerating growth in our two priority areas, accelerating our innovation pipeline, driving earnings expansion, and returning capital to shareholders at an accelerated rate. With that, Dan will now cover the financial results and our outlook for the first quarter of 2023.