Proto Labs, Inc.

Greetings. Welcome to the ProtoLabs Q1 2023 earnings call. At this time, all participants are on 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, Jason Frankman, Vice President of Corporate Controller. You may begin.

Thank you, Shamali, and welcome everyone to Protolab's first quarter 2023 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 first quarter ended March 31st, 2023. 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 first quarter earnings call. I am pleased to share that this morning we reported first quarter revenue and earnings above our guidance ranges. Amidst uncertain macroeconomic conditions, we performed above expectations. During the first quarter, we also continued to accelerate our innovation pipeline with multiple new launches to expand our customer offerings, capture additional share of wallet, and gain new customers. I am pleased with how our employees executed on our goals in the first few months of the year. On the top line, we outperformed our expectations in two main areas, a strong start of the year in our European operations and continued strength in demand through our hub's digital manufacturing partner network. Strong first quarter performance in Europe was driven by greater than anticipated demand in January and February, driven in part by large orders from key customers. Revenue through our digital manufacturing network grew very nicely in the first quarter, at over 70% growth in constant currencies, as we continue to realize value from our unique offering that combines the digital factory and the digital network. We are proving out our strategy and getting significant traction with customers and we are only scratching the surface of the demand of our combined offering. As more and more customers become aware of our network capabilities, we are seeing strong growth in the number of customers utilizing both factory and network services. The strong network growth is also a testament to the power of our customer-facing go-to-market teams now that they have the combined wider envelope of services to sell as customers are looking to purchase high-quality custom-manufactured parts from one single source vector. Several of our recently launched expanded offerings continue to resonate in the market, including longer lead times in CNC machining and 3D printing, as well as our network offer with its increased breadth and wider range of prices and lead time options. In the current economic cycle, longer lead time, lower priced offers are more attractive to a certain subset of our customer base, and growth in these areas has been even stronger than we expected. Now for a brief update on our two priorities for 2023. First, drive revenue growth in our two primary focus areas, and second, increase shareholder value through expanding profitability in the factory and the network. On revenue growth, Protolabs has narrowed its focus and investments to drive growth in two priority areas, injection molding and our new integrated comprehensive CMC offerings. Injection molding has had a good start to the year, with growth year over year in constant currencies and excluding Japan, and double-digit sequential growth over the fourth quarter. Strength in injection molding was largely driven by follow-on parts. We will continue to roll out go-to-market strategies and other offer improvements to drive growth in molds. As it relates to the combined offer, I'm very encouraged by the early performance in injection molding orders fulfilled through the combination of our internal factories and manufacturing partners. We are winning more orders due to the breadth of our combined injection molding offer. For example, Philips, domestic appliances division, has relied on ProtoLabs for high quality injection molded parts for over a decade. A recent project required both quick turn molded prototype parts and more complex, high requirement parts. Our internal factory delivers molded parts faster than anyone on the market, and we now offer additional complexity to the digital network. Prior to the Provolabs and Hubs combined offer, Philips would have gone elsewhere for these parts. Due to our combination of speed and complexity with almost limitless capacity, we can deliver for Philips and many other customers in similar situations. This is the value of the combined offer. As for the accelerated innovation pipeline within injection molding, we recently launched an industry-leading seven-day standard lead time for molds, cutting our lead times in half. We continue to improve our digital quality offering in injection molding, which will enable additional growth in our production follow-on parts service. In addition, our factory teams continue to improve efficiency in our manufacturing operations through innovations like automated mold polishing. our next priority growth area cmc machining is also performing very well with strong growth in the first quarter driven by cross-selling between the digital factory and the digital network as i've discussed in the past extended lead time and pricing options in cmc through both the factory and the network will allow us to drive growth through challenging macroeconomic conditions customer preferences shift with macro cycles And our unmatched breadth enables Protolabs to be a single-source supplier for all custom CNC machine parts. The next priority for 2023 is to increase shareholder value through expanding profitability in the factory and the network. We surpassed our expectations for revenue and earnings in the first quarter. However, our mix of business is different than anticipated. Macro conditions cost our longer lead time, lower priced offerings to grow faster than expected early in the year, and demand for our quick-term business was lower than expected, impacting profitability. Improving our profitability is dependent on increased volume and a higher mix of higher-priced quick-term business, which has proven difficult in the current environment. As a result, we expect continued pressure on operating margin improvement throughout 2023, and we will remain vigilant on operating efficiencies. We are taking direct actions to reduce costs in areas with lower demand, while continuing to invest in high growth areas. Due to the continued demand softness in our sheet metal service, we furloughed 25% of our sheet metal workforce in the second quarter. We have made thoughtful reductions in other areas of the business as well to align with sales volumes. We continue to evaluate the business and reprioritize investments in our focus areas to support growth. During the first quarter, we increased our share repurchase program, deploying $21 million through our share repurchase program. Going forward, we will continue to be opportunistic and our repurchase rate will be dependent on market price and other market conditions. Our ability to perform well and achieve financial expectations in this challenging climate is due to the efforts and commitment of our talented employees, who have enabled us to accelerate our innovation and adapt our business to meet customers' needs. Attracting and retaining talented employees has allowed us to maintain our competitive advantage and grow profitably. In early 2023, we continued to invest in leadership development initiatives and redesigned our incentive compensation programs. All programs have both revenue and earnings targets, and employees are now more directly incented based on the performance of their specific business units. We will continue to invest in our employees throughout 2023, and I want to thank every member of the Proto Labs and Hubs teams for their efforts. As we look ahead to the second quarter and the rest of 2023, macroeconomic uncertainty remains. In March, the ISM, U.S. Manufacturing Purchasing Managers Index, declined to its lowest level since May 2020 and has registered six straight months below 50, indicating contraction. Consistent with macro data and what several industrial companies have reported, after a very strong start to 2023, order rates have tapered slightly, and we ended the quarter on a slightly softer note. However, as I stated earlier, the global nature of our business and breadth of our offer enables us to capture additional share of wallet and new customers, even through macroeconomic volatility. In the near term, as macroeconomic weakness weighs on manufacturing, we expect our lower price, longer lead time offers to continue growing faster than our expedited quick-term business. This mixed shift will continue to influence margins throughout the second quarter and beyond. We will monitor order rates closely and continue to adjust variable expenses accordingly. We have reflected this mixed shift impact in our earnings guidance for the second quarter. I am pleased with our results in the first quarter and am confident that we will deliver great value for our customers and our shareholders over the long term. Our longer lead time lower priced offerings are growing very rapidly as that part of the market performs well during this macro cycle and we are still the industry leader in expedited quick turn digital manufacturing. We are well positioned to weather economic volatility due to our business model's best in class profitability and strong cash flow generation. This also enables us to continue to invest in innovation and expand our customer offer and capture additional customer share of wallet. Through any economic conditions, we are a great long-term strategic partner for our customers. With that, Dan will now cover our first quarter financials in depth and provide our outlook for the second quarter of 2023. Dan.