Proto Labs, Inc.

Greetings and welcome to the ProtoLabs Q2 Fiscal Year 2023 Earnings Call. At this time, all participants are in 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, Mr. Jason Frankman, VP and Corporate Controller. Thank you, Mr. Frankman. You may begin.

Thank you, Camilla, and welcome, everyone, to Proto Lab's second quarter 2023 earnings conference call. I'm joined today by Rob Bedore, Proto Lab's President and Chief Executive Officer, and Dan Schumacher, Chief Financial Officer. This morning, Proto Lab issued a press release announcing its financial results for the second quarter ended June 30, 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 second quarter earnings call. This morning, we reported revenue and earnings within our guidance ranges. While economic conditions are challenging, amplified by the continued contraction of global manufacturing, our uniquely broad customer offering, fulfilled through the combination of our internal digital factories and network manufacturing partners, allow us to offer customers a differentiated value proposition and serve their various needs despite the economic pressures our customers are facing. Our lower-priced, longer lead time offers through the factory and network see particularly high demand in the current softer economic conditions. Our quick-turn offers tend to be in highest demand in strong growth economies alongside continued demand for longer lead time offers to meet our customers' production needs. As we discussed in the prior quarter, we are operating in a challenging and uncertain manufacturing environment, with both U.S. and Eurozone manufacturing indices reporting three-year lows in June. Similar to what we saw in the first quarter, driven by the macroclimate, demand for longer lead time, lower-priced offerings has continued to outpace demand for our quick-turn offerings. Notably, our network revenue grew 80% year-over-year in the quarter. The network offer has significantly expanded our addressable market with a wider envelope of manufacturing capabilities and a broad range of lead time and pricing options. As a result, it continues to gain traction with customers and share in the market. While our quick-turn offers saw contained slower demand in the quarter, we anticipated this overall demand mix, and despite this headwind, improved our consolidated gross and operating margins sequentially. We also continue to generate positive cash flows that are best in class in our sector. As global manufacturing conditions improve, we expect growth in both network and factory offers. In order to continue to drive growth and maintain or improve our profitability in this challenging environment, we are focusing on items we control. First, we will continue to drive growth in our longer lead time, lower priced offerings through both the Hubs network and the factory. Network revenue again surpassed our expectations in the quarter, and in the first half of 2023 grew 75% over the first half of 2022. Our network offer continues to thrive as customers gravitate toward expanded manufacturing capabilities and more economic options for custom prototype and low-volume production parts. Next, we continue to invest to innovate and expand our customer offer through research and development initiatives. Our industry-leading profitability and positive cash flow generation enable us to invest for future growth. Most recently, we launched accelerated anodizing and chromate plating in our digital factory CNC machining service. This is a very commonly requested secondary offer for machine parts. Our new offer combines Protolab's unmatched speed at scale with traditional finishing processes, a first for the industry. A ProLabs customer can now have fully anodized or plated CNC machine parts on their desk within a few days of placing an order. Previously, we only offered finishing through the network, but as part of building out the most comprehensive custom CNC offer, we now offer finishing through the factory at lead times that no other manufacturer can match. Aside from expanding our offers, we are also ensuring that our costs continue to flex with sales volumes. We are controlling factory costs while maintaining the world's fastest lead times. At the end of the second quarter, our factory manufacturing headcount was down 9% year over year, commensurate with our volumes. We will continue to align staffing levels with volumes in our manufacturing facilities while continuing to invest in growth, including our high growth network offer. As economic conditions and manufacturing demand recover, we anticipate our factory performance will improve as customer preferences and needs shift and more customers take advantage of our world-class lead times, consistent car quality, and high on-time reliability. In addition, as the factory longer lead time business becomes material to our overall factory offer, it will provide an offset to any pressure to the quick-turn business. We also expect strong network growth to continue in any macro climate driven by its wide range of capabilities and lead time options. The combination of factory and network is what allows Protolabs to serve all customer use cases in any economic climate. Because we acquired hubs in 2021 and now offer the combination of both fulfillment avenues, our current business performance is stronger than if we had only provided quick turn offers to customers. The network offer continues to gain traction with customers with the expanded envelope of capabilities and broader range of lead time and pricing options. The number of customers utilizing both factory and network services continues to grow well. We are realizing the value of the hub's acquisition and our expanded customer offer, and we are still in the early stages of capturing the total opportunity in the market that our strategy unlocks. Protolabs has the broadest fulfillment capabilities in our industry, allowing us to serve our customers and grow profitably in any economic conditions. Now, for a quick update on our 2023 priorities halfway through the year. As a reminder, our priorities are, first, to drive revenue growth, particularly in our largest services, injection molding and CNC machines. And second, to increase shareholder value through expanding profitability in the factory and the network. One investment we are making in revenue growth is an investment in sales leadership talent. We recently hired a new vice president of sales to lead the Americas and also strengthened our sales management in Europe. Injection molding revenue in the second quarter was down sequentially. As we have discussed in prior calls, injection molding is highly impacted by macro conditions due to its higher proportion of production use cases. We continue to pursue various go-to-market strategies and other service line improvements to drive growth. We have seen solid performance in injection molding orders fulfilled through the combination of our internal factories and manufacturing partners. We are winning more orders that leverage our combined factory and network injection molding offer as evidenced by a recent project we completed for an automotive lighting solutions provider. Working with one supplier was important for this automotive customer. This customer came to Protolabs in search of a custom manufacturing partner that could support a program from prototyping to production. The customer benefited from the speed of our digital factory service to rapidly prototype their designs and then moved into production with our network, evidence of Protolabs serving multiple use cases across the product lifecycle for a customer. The customer required large and complex injection molded parts, which are outside of our digital factory capabilities, and in the past we would not have won this program. But because of our digital network offers expanded injection molding capabilities, Protolabs won the business and we manufactured all molds and parts for this customer through both fulfillment avenues. The combined factory and network offer unlocks significant value for this customer, allowing them to get to production quickly with validated and tested designs, all from a single manufacturer. Our next priority growth area, CNC machining, is performing well. with growth in the second quarter largely driven by our network offer. We continue to innovate on our digital factory capabilities and expand our customer offer, most recently launching accelerated anodizing in play. Protolabs offers unmatched breadth in CNC machining, and as a customer preferences shift and expand, we are well positioned to be the single source supplier for all our customers' CNC machining needs. We have tangible evidence that customers value one single partner for their custom CNC part needs. One specific customer, Airbus, recently turned to Protolabs for help with a new transportation project in development. Airbus needed a manufacturing partner that could move very quickly from prototyping to production, and the Protolabs combined offer made us the perfect candidate. We delivered quick-turn prototype parts through the factory, and Airbus then transitioned to our digital network to manufacture higher production volumes. Our factory and network combination eliminated the need for Airbus to request multiple quotes from multiple manufacturers, simplifying and accelerating their supply chain. Another example of the power of ProLab's combined factory and network. The next priority for 2023 is to increase shareholder value through expanding profitability in the factory and in the network. We surpassed our expectations for earnings in the second quarter. We achieved this despite the shift in the mix of our business toward longer lead time, lower priced offerings, and the accompanying pressure on margins. We accomplished this through improved automation and productivity that enabled us to reduce overall headcount, reduce overtime, and reduced reliance on contract labor. Given customer preferences for lower priced offerings in this economic cycle, we expect continued pressure on operating margin improvements throughout 2023. and will continue to focus on operating efficiencies as we have throughout this year. Our focus on operating efficiencies and our customers secured us two pieces of external recognition in the quarter, highlighting our leadership in digital manufacturing. First, Protolabs was awarded Company of the Year for Digital Manufacturing by Frost and Sullivan, who commended our visionary innovation, performance, and customer impact. In addition, Protolabs was honored with the Manufacturing Leadership Council's Manufacturing Leadership Award in the digital supply chain category. The MLC highlighted our combined factory and network offering. We will continue to focus on serving our customers with the most comprehensive digital manufacturing offer in the world, and receiving external awards like this is a strong endorsement of our continued industry leadership. In summary, We have little control over macro conditions and end market demand, but these short-term challenges should not cloud the advantages of our business model. The combination of our factory and network offers has allowed us to perform better than peers in the current environment, and we believe it will allow us to outgrow the market longer term, particularly as our factory offer becomes less reliant on the quick-term business that is sensitive to economic conditions. Let me once again highlight that our network offer continues to take market share with 80% growth in the quarter. We are well positioned to weather economic volatility due to Protolabs' best-in-class profitability and strong cash flow generation. This also enables us to continue to invest in innovation to expand our customer offer and expand additional share of wallet. Through any economic climate, we are a great long-term strategic partner for our customers and believe we will deliver value for shareholders over the long term. I'd like to thank every Protolabs employee for their contributions in the first half of 2023. Although we are operating in a difficult environment, the efforts and commitment of our employees enable us to continue to perform and grow profitably. Dan will now cover our second quarter financials in depth and provide our outlook for the third quarter of 2023.

Thanks, Rob, and good morning, everyone. Our financial results begin on page nine of the slide presentation. Second quarter revenue of $122.3 million was in our guidance range and down 1% year-over-year in constant currencies and excluding Japan. Hubs had another record quarter, generating $20.2 million of revenue in the second quarter, representing year-over-year growth of 79.7% in constant currencies. Our Hubs network offer continues to resonate with customers, driven by its broad range of capabilities and lead time options. Changes in foreign currencies represented a 500,000 unfavorable impact to revenue in the second quarter in line with our expectations. Second quarter revenue by region is summarized on slide 13. In the Americas, our largest region, revenue declined 4.3% year over year as strong network growth was offset by a decline in the factory business. In Europe, second quarter revenue grew 13.1% year-over-year in constant currencies, driven by strong network offer growth. Transitioning to revenue by service. Second quarter injection molding revenue declined approximately 6% year-over-year in constant currencies and excluding Japan. We saw weaker demand for our factory offers sequentially, especially in our medical, computer electronics, and manufacturing end markets. Europe saw a larger sequential decline than the Americas. CNC machining revenue grew 3.5% year-over-year in constant currencies and excluding Japan, driven by very strong network growth. Second quarter 3D printing revenue grew 6% year-over-year in constant currencies, driven by growth in the network and in all geographies, both in the factory and the network. Sheet metal revenue declined 24% year-over-year in constant currencies in the quarter. As a reminder, we furloughed 25% of our sheet metal workforce in the second quarter in an effort to align cost levels with current demand. We served 23,377 unique product developers in the second quarter, a decrease of 2.8% year-over-year. Turning to slide 17 and our detailed income statement. Overall, second quarter non-GAAP gross margin increased 70 basis points sequentially to 44.1%. Consolidated margin expansion was driven by a higher network business gross margin slightly offset by the impact of the mixed shift to lower margin offers. Even with the lower volume, we are able to maintain similar factory gross margins quarter over quarter due to cost reduction initiatives. Network gross margin in the second quarter increased to 31.2% from 22.2% in the first quarter of 2023. Our long-term target for network gross margin is still between 25% and 30%. In the second quarter, we benefited from improvements to our sourcing algorithm and pricing efficiencies. Total non-GAAP operating expenses were $43.1 million in the quarter, or 35.2% of revenue, compared to $45.5 million, or 36.2% of revenue in the first quarter of 2023. We gained operating efficiency sequentially due to focused efforts to control costs, as well as lower incentive compensation. As we continue to work through the exit of our Japan operations, We incurred non-operating expenses of $4 million in the second quarter, primarily due to the release of a $3.9 million of cumulative foreign currency translation adjustment from other comprehensive income on the balance sheet. This adjustment is included in our non-GAAP financial adjustments. Moving to taxes. Our non-GAAP effective tax rate in the second quarter was 25.2% compared to 23.2% in the first quarter. The sequential increase in the non-GAAP effective tax rate was primarily due to a slightly lower R&D credit in the quarter. Second quarter non-GAAP diluted net income per share was 33 cents compared to 30 cents in the first quarter of 2023. The sequential earnings per share improvement was driven primarily by network growth and gross margin expansion, as well as operating expense efficiencies. These sequential improvements were partially offset by the continued mix shift toward longer lead time, lower priced offerings. Turning to cash flow and balance sheet highlights on slide 18. We generated $9.3 million of cash from operations in the quarter. Our business exhibits very strong cash flow generation, enabling us to weather challenging economic climates better than peers and continue to invest in future growth. We repurchased 8.9 million of common shares during the second quarter. We will continue to purchase opportunistically going forward. Our balance sheet is still very strong. On June 30th, 2023, we had 102.8 million of cash and investments on our balance sheet and zero debt. Turning to third quarter guidance as outlined on slide 20, we expect to generate revenue between 118 and 126 million in the third quarter. At the midpoint, this implies flat revenue year over year in constant currencies and excluding Japan. The closure of our Japan operations is expected to have a 1.3 million negative year-over-year impact on our revenue growth. We expect foreign currency to have between a 1.5 and 2 million favorable impact on revenue compared to the third quarter of 2022. Moving to earnings guidance, we anticipate non-GAAP add-backs in the third quarter to include stock-based compensation expense of approximately $4.6 million, and amortization expense of $1.5 million. We currently estimate our third quarter non-GAAP effective tax rate will be 24% plus or minus 50 basis points. Considering this, we expect third quarter non-GAAP earnings per share between 26 and 34 cents. Now back to Rob for closing comments.

Thank you. ProLabs is the most profitable and cash flow positive digital manufacturing company, allowing us to withstand challenging environments while investing in the future. Our best-in-class unique combined offer is gaining significant traction in the market. In the second half of the year, we will continue to improve on the things we can control and make progress on our focus 2023 priorities, which will enable long-term profitable growth and shareholder value creation. Thank you for your time today. That concludes our prepared remarks. Dan and I will now take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tool will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. And our first question comes from the line of Jim Ricciuti with Needham & Company. Please proceed with your question.

Thank you. Good morning. First question is... On the quarter, the current quarter, yes, seasonally Q3 weaker just due to the summer months, obviously. But I'm wondering if you have any kind of read-through in either the U.S. or Europe that just may inform you of just any changes in demand trends as you exited Q2.

Yeah, what I would tell you, Jim, is what we've found as we've gone through COVID and post-COVID in terms of the supply chain disruption that abnormal seasonality ends up being normal seasonality. It's hard to predict in this environment kind of seasonally how things are coming in. This comes from a couple of factors, right? We've seen in past periods around COVID where normal months in which people were taking a lot of vacation, they ended up not, and you ended up seeing some different type of seasonality pattern than you normally did. We set the guide as we normally do. We looked at what our current demand was in July. and we looked at what our upload rates are and so forth, and then did our best to project out from there what the guidance is. I don't have any better information than that, Jim.

Well, fair enough. You guys showed some nice improvement in the network gross margins in the current quarter. I'm just wondering... how we should be looking at that, just relative to the goal you have out there, and maybe more broadly, just in general, how you're thinking about gross margins in the current quarter.

Yeah, thanks, Jim, for recognizing that. We're quite happy with that improvement in our network gross margins, and it comes from improvements that we made. We have a machine learning-based pricing algorithm, And we've continued to test and validate different pricing paradigms within that, and we've seen some nice improvement, which we're happy with. And then also we improved kind of how we're sourcing our opportunities to our manufacturing partners to make sure that we're really providing them with the best fit, and that's also helping us expand our margins there. You asked about the target. We've communicated a target of 25% to 30% gross margin for the network, and we're still holding to that at this point because we want to continue to test and learn as we continue to go forward. But, yeah, very pleased with the performance in the quarter.

And just broadly on gross margins in this current environment across the services, are you seeing any – pricing pressure or things like that that we need to at least consider for the current quarter gross margins.

Yeah, I think we expect things to be fairly consistent going into the next quarter. For sure, there is probably more pressure within the factory business on volume, but we've been successful in managing our variable cost as it relates to the plants in our overall head count in our plants is down 9%, so we're adjusting as we go and as we see how this economy plays out.

Got it. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Morning, Dan. Good morning, Rob. This is Blake on for Brian.

Just wanted to quickly ask, what drove the decline in product developers? I know it was just a slight decline, but was it broad-based across all your markets, or was it anything specific? Any additional color there would be great.

Yeah. It was, in general, consistent with revenue, but I would say one caveat to that is Part of our growth in our network business is not just the growth in customers, which is very, very healthy. But our sales team within our hubs business is very focused on larger and larger projects. And you can see from the 80% growth rate, they're very successful at that. And so that's the only difference, I think, in terms of when you look at product developer decline versus our decline in revenue in constant currencies, excluding Japan.

Got it. And then you guys mentioned as longer lead time offerings grow, it should help offset any slowness and quick turn as longer lead time gets to the size of the quick turn business in the factory. How close are you guys to that milestone? I feel like that was an important comment.

Yeah, so we've expanded our, as we talk about our comprehensive offering, we've expanded our lead time options both by offering the network options, which tend to longer lead times, and also by introducing longer lead time options that are fulfilled through the factory. We've done that in our CNC business and our 3D printing business. and the injection molding as well. And in CMC, at one point, we talked about it as flexible lead times. That was kind of the name we talked about when we launched it. So those are in place, and they're continuing to gain traction.

Understood. And then just lastly, for me, on your capital allocation strategy, I know you guys mentioned you keep perfect six shares. But how does your M&A pipeline look? Have you seen anything there where you could add on to either Hubs or your introductory offerings?

Yeah, what I would say is we're first primarily focused on the acquisition of hubs and making it successful. You can kind of see that in the results of hubs. We've been very focused on cross-selling and on improving the e-com experience that integrates both the factory and the network. That is our primary focus right now.

Understood. I'll pass it along. Thank you. Thank you.

Thank you. And our next question comes from the line of Greg Palm with Craig Hallam Capital Group. Please proceed with your question.

Hey, thanks. Good morning. Thanks for taking the questions. I wanted to start with a question just about the demand environment, but maybe I'm going to ask it in a little bit different way. I'm just kind of curious if you're seeing any change in, you know, customer, you know, behavior, whether it's, you know, customers ordering, you know, more parts or whether they're, you know, doing more expedited, any change in behavior that gives you some indication of any underlying change in the macro. You seen any of that or is it pretty steady relative to what you've been kind of seeing year to date?

You know, I think year to date there hasn't been that much change quarter on quarter, but I would say overall we're seeing, and we talked about this a little bit in the script, right, that we're seeing customers have a tendency to be less in a hurry and so utilizing our longer lead time options more.

I think the other thing, Greg, that we saw, maybe this is specifically for our factory business in Europe, is we did see larger projects that we talked about in the first quarter earnings call. We're not seeing as many of those in the second quarter. And on some of those larger projects, we're having customers upload that are being indecisive and longer in terms of making decisions on those. And I think we called it out a bit, Greg, in my commentary on injection molding. I think we're seeing particular softness in medical and consumer electronics.

Okay, that's helpful. On gross margin, just to follow up, was there anything sort of non-recurring? Or one time, I know we've been talking about 25% to 30% hubs who were a little bit below that in Q1, but really nicely outperformed in Q2. But I think you reiterated you still expect 25% to 30%. So just kind of curious whether there was anything unusual that drove the upside specifically in the quarter.

So two things. We talked about this, Greg, I don't remember us talking about this maybe last year or the year prior. For the hubs business in terms of where the MPs are sourced, Chinese New Year does have an impact in Q1 and ends up being pressure on our margin. So, you know, I would say Q1 was well kind of below the average, right? So part of the pickup was there. I would say the second thing is we did make changes to our model. that were quite successful. And some of those changes are on the demand sourcing side, and some of those changes are optimizing the pricing for different types of geometries and materials. So we did implement changes we had been working on in the quarter as well. Those were the two primary drivers.

And just to be clear, those were not just one-quarter type changes. That's something that will affect the go-forward changes?

Correct. And so if that's the case... But we will see how successful those things are. You know, I'm not letting three months kind of dictate where that's going to be, Greg, before adjusting the longer-term model of the 25% to 30%. Yeah, okay.

No, that's fair. And then just, I guess, my last question... Operating expenses took another sort of tick down in Q2, so you're clearly managing costs pretty well. What's the expectation going forward? Is this kind of a good sort of level, a good run rate, or are you going to continue to sort of manage that pretty tightly?

I think as you can see from our guide, you know, we're expecting to be flattish at the midpoint quarter over quarter. So, you know, we would hold where they are now, but this is a dynamic environment. So depending on if the revenue goes up or down, we're going to need to be flexible, right, and continue to find ways to be more efficient.

Got it. Okay. I will leave it there. Thanks.

Thank you. And our next question comes from the line of Ben Rose with Battle Road Research. Please proceed with your question.

Thank you and good morning. You know, in the customer examples that you've cited, it does seem like there's a growing number of customers that are taking advantage of both the factory and the network services. Can you comment either quantitatively or qualitatively, you know, the percent of either customers or developers that are at this point drawing upon both services?

Yeah, certainly. Good morning, Ben. Thank you. I think as you look at the growth that we've had in the network, 70% last quarter, 80% in the first quarter, 80% in the second quarter, you can see that I think we've been quite successful with our sales team. in exposing our broader offerings and both the combination of the network and the factory to our customers and driving them to those solutions as well as the ones that they're finding on their own through using our website. And so we're definitely seeing a nice, healthy uptick in customers who are using us in this much more holistic way and have been quite satisfied with that.

Okay. And how critical is it for some of these larger customers that some of the network partners, particularly as it pertains to volume production, that these partners are located outside the U.S.?

So that varies depending upon the customer and what their needs are. And we've got network partners that are in region, both in the U.S. and in Europe, and then we've got them globally as well. And so we make the match depending upon what the needs are for the customer, obviously, if they need it to be a domestic MP, then we will partner accordingly.

Okay. You know, a question on sourcing of materials. I'm wondering if Some of the improvement, for example, in HUB's gross margin might be traceable to your ability to obtain lower-priced commodities in this market as prices have adjusted post-COVID.

Yeah, you had mentioned HUB. Just as a reminder, Ben, in the network business, we're not procuring the material for the MPs. The MPs are procuring that material. You know, in terms of, you know, we're kind of outside the – we feel we're outside of the supply chain constraint, right? We're able to procure materials now, and, you know, that's not an issue in terms of our on-time delivery or gross margins now.

okay i i guess what i really meant to say excuse me meant to ask in terms of the price that the manufacturing partner is accepting at this point is that do you think that they're more um you know likely to uh accept a quote from you when you know knowing that knowing that commodity prices have stabilized

Yeah, I think that in general we've seen the worst of the supply chain price impacts normalized. So that's benefited us, as Dan said. It also benefits our manufacturing partners. And that factors into the prices that they require in order to take the business. Okay.

And then finally, in terms of end markets, I know you mentioned some softness in medical and consumer electronics. The first question is, you know, looking out over the next few months, do you think that that business has the ability to come back? And then also, can you comment a little bit on what's happening in terms of EV prototyping and potentially low volume production there.

Yeah, in terms of the softness we're seeing in medical and consumer electronics, I think part of what we're seeing is we're seeing people uploading And then us having, you know, talk with the customers and them, you know, pushing off in terms of projects. So we think the value, we believe the volume is there, right, to be had once we are past whatever economic cycle we're in. So, you know, just a reminder, I mean, an injection molding, we offer a service nobody else can, right, in terms of the speed that we can get injection mold parts to. So, yeah, we believe in the second half if we see improvement from a macro perspective that, yeah, that demand will pick up. Rob, you want to take the EV question?

Yeah, absolutely. So, yeah, thank you for that. Automotive, first of all, was strong for us in the quarter, and electric vehicles is definitely a very strong subsegment for us within automotive. In fact, generally, within industries, the subsectors that do best for us are those that are new and where there's a lot of innovation going on, and certainly EV is at the very forefront of that for automotive, and so that's absolutely a strong business for us. Okay, thanks a lot. Thank you.

Thank you. We have reached the end of our question and answer session. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you. Thank you. © transcript Emily Beynon Music Thank you. Bye.

Thank you.

Greetings and welcome to the ProtoLabs Q2 fiscal year 2023 earnings call. At this time, all participants are in 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, Mr. Jason Frankman, VP and Corporate Controller. Thank you, Mr. Frankman. You may begin.

Thank you, Camilla, and welcome, everyone, to Protolab's second 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 second quarter ended June 30, 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 second quarter earnings call. This morning, we reported revenue and earnings within our guidance ranges. While economic conditions are challenging, amplified by the continued contraction of global manufacturing, our uniquely broad customer offering fulfilled through the combination of our internal digital factories and network manufacturing partners allow us to offer customers a differentiated value proposition and serve their various needs, despite the economic pressures our customers are facing. Our lower-priced, longer lead time offers through the factory and network see particularly high demand in the current softer economic conditions. Our quick-turn offers tend to be in highest demand in strong growth economies, alongside continued demand for longer lead time offers to meet our customers' production needs. As we discussed in the prior quarter, we are operating in a challenging and uncertain manufacturing environment, with both U.S. and Eurozone manufacturing indices reporting three-year lows in June. Similar to what we saw in the first quarter, driven by the macro climate, demand for longer lead time, lower-priced offerings has continued to outpace demand for our quick-turn offerings. Notably, our network revenue grew 80% year-over-year in the quarter. The network offer has significantly expanded our addressable market with a wider envelope of manufacturing capabilities and a broad range of lead time and pricing options. As a result, it continues to gain traction with customers and share in the market. While our quick-turn offers saw contained slower demand in the quarter, we anticipated this overall demand mix, and despite this headwind, improved our consolidated gross and operating margins sequentially. We also continue to generate positive cash flows that are best in class in our sector. As global manufacturing conditions improve, we expect growth in both network and factory offers. In order to continue to drive growth and maintain or improve our profitability in this challenging environment, we are focusing on items we control. First, we will continue to drive growth in our longer lead time, lower priced offerings through both the Hubs network and the factory. Network revenue again surpassed our expectations in the quarter, and in the first half of 2023, grew 75% over the first half of 2022. Our network offer continues to thrive as customers gravitate toward expanded manufacturing capabilities and more economic options for custom prototype and low-volume production parts. Next, we continue to invest to innovate and expand our customer offer through research and development initiatives. Our industry-leading profitability and positive cash flow generation enable us to invest for future growth. Most recently, we launched accelerated anodizing and chromate plating in our digital factory CNC machining service. This is a very commonly requested secondary offer for machine parts. Our new offer combines Protolab's unmatched speed at scale with traditional finishing processes, a first for the industry. A ProLabs customer can now have fully anodized or plated CNC machine parts on their desk within a few days of placing an order. Previously, we only offered finishing through the network, but as part of building out the most comprehensive custom CNC offer, we now offer finishing through the factory at lead times that no other manufacturer can match. Aside from expanding our offers, we are also ensuring that our costs continue to flex with sales volumes. We are controlling factory costs while maintaining the world's fastest lead times. At the end of the second quarter, our factory manufacturing headcount was down 9% year over year, commensurate with our volumes. We will continue to align staffing levels with volumes in our manufacturing facilities while continuing to invest in growth, including our high growth network offer. As economic conditions and manufacturing demand recover, we anticipate our factory performance will improve as customer preferences and needs shift, and more customers take advantage of our world-class lead times, consistent part quality, and high on-time reliability. In addition, as the factory longer lead time business becomes material to our overall factory offer, it will provide an offset to any pressure to the quick-turn business. We also expect strong network growth to continue in any macro climate driven by its wide range of capabilities and lead time options. The combination of factory and network is what allows Protolabs to serve all customer use cases in any economic climate. Because we acquired hubs in 2021 and now offer the combination of both fulfillment avenues, our current business performance is stronger than if we had only provided quick turn offers to customers. The network offer continues to gain traction with customers with the expanded envelope of capabilities and broader range of lead time and pricing options. The number of customers utilizing both factory and network services continues to grow well. We are realizing the value of the hub's acquisition and our expanded customer offer, and we are still in the early stages of capturing the total opportunity in the market that our strategy unlocks. Protolabs has the broadest fulfillment capabilities in our industry, allowing us to serve our customers and grow profitably in any economic conditions. Now, for a quick update on our 2023 priorities halfway through the year. As a reminder, our priorities are, first, to drive revenue growth, particularly in our largest services, injection molding and CNC machines. and second, to increase shareholder value through expanding profitability in the factory and the network. One investment we are making in revenue growth is an investment in sales leadership talent. We recently hired a new vice president of sales to lead the Americas and also strengthened our sales management in Europe. Injection molding revenue in the second quarter was down sequentially. As we have discussed in prior calls, injection molding is highly impacted by macro conditions due to its higher proportion of production use cases. We continue to pursue various go-to-market strategies and other service line improvements to drive growth. We have seen solid performance in injection molding orders fulfilled through the combination of our internal factories and manufacturing partners. We are winning more orders that leverage our combined factory and network injection molding offer, as evidenced by a recent project we completed for an automotive lighting solutions provider. Working with one supplier was important for this automotive customer. This customer came to ProLabs in search of a custom manufacturing partner that could support a program from prototyping to production. The customer benefited from the speed of our digital factory service to rapidly prototype their designs, and then moved into production with our network, evidence of ProtoLabs serving multiple use cases across the product lifecycle for a customer. The customer required large and complex injection molded parts, which are outside of our digital factory capabilities, and in the past we would not have won this program. But because of our digital network offers expanded injection molding capabilities, Protolabs won the business and we manufactured all molds and parts for this customer through both fulfillment avenues. The combined factory and network offer unlocks significant value for this customer, allowing them to get to production quickly with validated and tested designs, all from a single manufacturer. Our next priority growth area, CNC machining, is performing well. with growth in the second quarter largely driven by our network offer. We continue to innovate on our digital factory capabilities and expand our customer offer, most recently launching accelerated anodizing in place. Protolabs offers unmatched breadth in CNC machining, and as a customer preferences shift and expand, we are well positioned to be the single source supplier for all our customers' CNC machining needs. We have tangible evidence that customers value one single partner for their custom CNC part needs. One specific customer, Airbus, recently turned to Protolabs for help with a new transportation project in development. Airbus needed a manufacturing partner that could move very quickly from prototyping to production, and the Protolabs combined offer made us the perfect candidate. We delivered quick-turn prototype parts through the factory, and Airbus then transitioned to our digital network to manufacture higher production volumes. Our factory and network combination eliminated the need for Airbus to request multiple quotes from multiple manufacturers, simplifying and accelerating their supply chain. Another example of the power of ProLabs combined factory and network. The next priority for 2023 is to increase shareholder value through expanding profitability in the factory and in the network. We surpassed our expectations for earnings in the second quarter. We achieved this despite the shift in the mix of our business toward longer lead time, lower priced offerings, and the accompanying pressure on margins. We accomplished this through improved automation and productivity that enabled us to reduce overall headcount, reduce overtime, and reduced reliance on contract labor. Given customer preferences for lower priced offerings in this economic cycle, we expect continued pressure on operating margin improvements throughout 2023. and will continue to focus on operating efficiencies as we have throughout this year. Our focus on operating efficiencies and our customers secured us two pieces of external recognition in the quarter, highlighting our leadership in digital manufacturing. First, Protolabs was awarded Company of the Year for Digital Manufacturing by Frost and Sullivan, who commended our visionary innovation, performance, and customer impact. In addition, Protolabs was honored with the Manufacturing Leadership Council's Manufacturing Leadership Award in the digital supply chain category. The MLC highlighted our combined factory and network offering. We will continue to focus on serving our customers with the most comprehensive digital manufacturing offer in the world, and receiving external awards like this is a strong endorsement of our continued industry leadership. In summary, We have little control over macro conditions and end market demand, but these short-term challenges should not cloud the advantages of our business model. The combination of our factory and network offers has allowed us to perform better than peers in the current environment, and we believe it will allow us to outgrow the market longer term, particularly as our factory offer becomes less reliant on the quick-term business that is sensitive to economic conditions. Let me once again highlight that our network offer continues to take market share with 80% growth in the quarter. We are well positioned to weather economic volatility due to Protolabs' best-in-class profitability and strong cash flow generation. This also enables us to continue to invest in innovation to expand our customer offer and expand additional share of wallet. Through any economic climate, we are a great long-term strategic partner for our customers and believe we will deliver value for shareholders over the long term. I'd like to thank every Protolabs employee for their contributions in the first half of 2023. Although we are operating in a difficult environment, the efforts and commitment of our employees enable us to continue to perform and grow profitably. Dan will now cover our second quarter financials in depth and provide our outlook for the third quarter of 2023.

Thanks, Rob, and good morning, everyone. Our financial results begin on page nine of the slide presentation. Second quarter revenue of $122.3 million was in our guidance range and down 1% year-over-year in constant currencies and excluding Japan. Hubs had another record quarter, generating $20.2 million of revenue in the second quarter, representing year-over-year growth of 79.7% in constant currencies. Our Hubs network offer continues to resonate with customers, driven by its broad range of capabilities and lead time options. Changes in foreign currencies represented a 500,000 unfavorable impact to revenue in the second quarter in line with our expectations. Second quarter revenue by region is summarized on slide 13. In the Americas, our largest region, revenue declined 4.3% year over year as strong network growth was offset by a decline in the factory business. In Europe, second quarter revenue grew 13.1% year-over-year in constant currencies, driven by strong network offer growth. Transitioning to revenue by service. Second quarter injection molding revenue declined approximately 6% year-over-year in constant currencies and excluding Japan. We saw weaker demand for our factory offers sequentially, especially in our medical, computer electronics, and manufacturing end markets. Europe saw a larger sequential decline than the Americas. CNC machining revenue grew 3.5% year-over-year in constant currencies and excluding Japan, driven by very strong network growth. Second quarter 3D printing revenue grew 6% year-over-year in constant currencies, driven by growth in the network and in all geographies, both in the factory and the network. Sheet metal revenue declined 24% year-over-year in constant currencies in the quarter. As a reminder, we furloughed 25% of our sheet metal workforce in the second quarter in an effort to align cost levels with current demand. We served 23,377 unique product developers in the second quarter, a decrease of 2.8% year-over-year. Turning to slide 17 and our detailed income statement. Overall, second quarter non-GAAP gross margin increased 70 basis points sequentially to 44.1%. Consolidated margin expansion was driven by a higher network business gross margin slightly offset by the impact of the mixed shift to lower margin offers. Even with the lower volume, we are able to maintain similar factory gross margins quarter over quarter due to cost reduction initiatives. Network gross margin in the second quarter increased to 31.2% from 22.2% in the first quarter of 2023. Our long-term target for network gross margin is still between 25% and 30%. In the second quarter, we benefited from improvements to our sourcing algorithm and pricing efficiencies. Total non-GAAP operating expenses were $43.1 million in the quarter, or 35.2% of revenue, compared to $45.5 million, or 36.2% of revenue in the first quarter of 2023. We gained operating efficiencies sequentially due to focused efforts to control costs, as well as lower incentive compensation. As we continue to work through the exit of our Japan operations, We incurred non-operating expenses of $4 million in the second quarter, primarily due to the release of a $3.9 million of cumulative foreign currency translation adjustment from other comprehensive income on the balance sheet. This adjustment is included in our non-GAAP financial adjustments. Moving to taxes. Our non-GAAP effective tax rate in the second quarter was 25.2% compared to 23.2% in the first quarter. The sequential increase in the non-GAAP effective tax rate was primarily due to a slightly lower R&D credit in the quarter. Second quarter non-GAAP diluted net income per share was 33 cents compared to 30 cents in the first quarter of 2023. The sequential earnings per share improvement was driven primarily by network growth and gross margin expansion, as well as operating expense efficiencies. These sequential improvements were partially offset by the continued mix shift toward longer lead time, lower priced offerings. Turning to cash flow and balance sheet highlights on slide 18. We generated $9.3 million of cash from operations in the quarter. Our business exhibits very strong cash flow generation, enabling us to weather challenging economic climates better than peers and continue to invest in future growth. We repurchased 8.9 million of common shares during the second quarter. We will continue to purchase opportunistically going forward. Our balance sheet is still very strong. On June 30th, 2023, we had 102.8 million of cash and investments on our balance sheet and zero debt. Turning to third quarter guidance as outlined on slide 20, we expect to generate revenue between 118 and 126 million in the third quarter. At the midpoint, this implies flat revenue year over year in constant currencies and excluding Japan. The closure of our Japan operations is expected to have a 1.3 million negative year-over-year impact on our revenue growth. We expect foreign currency to have between a 1.5 and 2 million favorable impact on revenue compared to the third quarter of 2022. Moving to earnings guidance, we anticipate non-GAAP add-backs in the third quarter to include stock-based compensation expense of approximately $4.6 million and amortization expense of $1.5 million. We currently estimate our third quarter non-GAAP effective tax rate will be 24% plus or minus 50 basis points. Considering this, we expect third quarter non-GAAP earnings per share between 26 and 34 cents. Now back to Rob for closing comments.

Thank you. ProLabs is the most profitable and cash flow positive digital manufacturing company, allowing us to withstand challenging environments while investing in the future. Our best-in-class unique combined offer is gaining significant traction in the market. In the second half of the year, we will continue to improve on the things we can control and make progress on our focus 2023 priorities, which will enable long-term profitable growth and shareholder value creation. Thank you for your time today. That concludes our prepared remarks. Dan and I will now take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tool will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. And our first question comes from the line of Jim Ricciuti with Needham & Company. Please proceed with your question.

Thank you. Good morning. First question is, On the quarter, the current quarter, yes, seasonally Q3 weaker just due to the summer months, obviously. But I'm wondering if you have any kind of read through in either the U.S. or Europe, you know, that just may inform you of just any changes in demand trends, you know, as you exited Q2.

Yeah, what I would tell you, Jim, is what we've found as we've gone through COVID and post-COVID in terms of the supply chain disruption that abnormal seasonality ends up being normal seasonality. It's hard to predict in this environment kind of seasonally how things are coming in. This comes from a couple of factors, right? We've seen in past periods around COVID where normal months in which people were taking a lot of vacation, they ended up not, and you ended up seeing some different type of seasonality pattern than you normally did. We set the guide as we normally do. We looked at what our current demand was in July. and we looked at what our upload rates are and so forth, and then did our best to project out from there what the guidance is. I don't have any better information than that, Jim.

Well, fair enough. You guys showed some nice improvement in the network gross margins in the current quarter. I'm just wondering – how we should be looking at that, just relative to the goal you have out there, and maybe more broadly, just in general, how you're thinking about gross margins in the current quarter.

Yeah, thanks, Jim, for recognizing that. We're quite happy with that improvement in our network gross margins, and it comes from improvements that we made. We have a machine learning-based pricing algorithm And we've continued to test and validate different pricing paradigms within that, and we've seen some nice improvement, which we're happy with. And then also we improved kind of how we're sourcing our opportunities to our manufacturing partners to make sure that we're really providing them with the best fit, and that's also helping us expand our margins there. You asked about the target. We've communicated a target of 25% to 30% gross margin for the network, and we're still holding to that at this point because we want to continue to test and learn as we continue to go forward. But, yeah, very pleased with the performance in the quarter.

And just broadly on gross margins in this current environment across the services, are you seeing any – pricing pressure or things like that that we need to at least consider for the current quarter gross margins.

Yeah, I think we expect things to be fairly consistent going into the next quarter. For sure, there is probably more pressure within the factory business on volume, but we've been successful in managing our variable cost as it relates to the plants in our overall head count in our plants is down 9%, so we're adjusting as we go and as we see how this economy plays out.

Got it. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Morning, Dan. Good morning, Rob. This is Blake on for Brian.

Just wanted to quickly ask, what drove the decline in product developers? I know it was just a slight decline, but was it broad-based across all your markets, or was it anything specific? Any additional color there would be great.

Yeah. It was, in general, consistent with revenue, but I would say one caveat to that is Part of our growth in our network business is not just the growth in customers, which is very, very healthy. But our sales team within our hubs business is very focused on larger and larger projects. And you can see from the 80% growth rate, they're very successful at that. And so that's the only difference, I think, in terms of when you look at product developer decline versus our decline in revenue in constant currencies, excluding Japan.

Got it. And then you guys mentioned as longer lead time offerings grow, it should help offset any slowness and quick turn as longer lead time gets to the size of the quick turn business in the factory. How close are you guys to that milestone? I feel like that was an important comment.

Yeah, so we've expanded our, you know, as we talk about our comprehensive offering, we've expanded our lead time options both by offering the network options, which tend to longer lead times, and also by introducing longer lead time options that are fulfilled through the factory, right? We've done that in our CNC business and our 3D printing business and the injection molding as well. In CMC, at one point, we talked about it as flexible lead times. That's kind of the name we talked about when we launched it. So those are in place, and they're continuing to gain traction.

Understood. And then just lastly, for me, on your capital allocation strategy, I know you guys mentioned you keep producing shares. But how does your M&A pipeline look? Have you seen anything there where you could add on to either hubs or your in-factory offerings?

Yeah, what I would say is we're first primarily focused on the acquisition of hubs and making it successful. You can kind of see that in the results of hubs. We've been very focused on cross-selling and on improving the e-com experience that integrates both the factory and the network. That is our primary focus right now.

Understood. I'll pass it along. Thank you. Thank you.

Thank you. And our next question comes from the line of Greg Palm with Craig Hallam Capital Group. Please proceed with your question.

Hey, thanks, Scott. Good morning. Thanks for taking the questions. I wanted to start with a question just about the demand environment, but maybe I'm going to ask it in a little bit different way. I'm just kind of curious if you're seeing any change in, you know, customer, you know, behavior, whether it's, you know, customers ordering, you know, more parts or whether they're, you know, doing more expedited, any change in behavior that gives you some indication of any underlying change in the macro. You seen any of that or is it pretty steady relative to what you've been kind of seeing year to date?

You know, I think year to date there hasn't been that much change quarter on quarter, but I would say overall we're seeing, and we talked about this a little bit in the script, right, that we're seeing customers have a tendency to be less in a hurry and so utilizing our longer lead time options more.

I think the other thing, Greg, that we saw, maybe this is specifically for our factory business in Europe, is we did see larger projects that we talked about in the first quarter earnings call. We're not seeing as many of those in the second quarter. And on some of those larger projects, you know, we're having customers upload that are being indecisive and longer in terms of making decisions on those. And I think we called it out a bit, Greg, in my commentary on injection molding. I think we're seeing particular softness in medical and consumer electronics.

Okay, that's helpful. On gross margin, just to follow up, was there anything sort of non-recurring? Or one time, I know we've been talking about 25% to 30% hubs who were A little bit below that in Q1, but really nicely outperformed in Q2. But I think you reiterated you still expect 25% to 30%. So just kind of curious whether there was anything unusual that drove the upside specifically in the quarter.

So two things. We talked about this, Greg, I don't remember us talking about this maybe last year or the year prior. For the hubs business in terms of where the MPs are sourced, Chinese New Year does have an impact in Q1 and ends up being pressure on our margin. So, you know, I would say Q1 was well kind of below the average, right? So part of the pickup was there. I would say the second thing is we did make changes to our model. that were quite successful. And some of those changes are on the demand sourcing side, and some of those changes are optimizing the pricing for different types of geometries and materials. So we did implement changes we had been working on in the quarter as well. Those were the two primary drivers.

And just to be clear, those were not just one-quarter type changes. That's something that will affect the go-forward?

Correct. And so if that's the case... But we will see how successful those things are. You know, I'm not letting three months kind of dictate where that's going to be, Greg, before adjusting the longer-term model of the 25% to 30%.

Yeah, okay. That's fair. And then just, I guess, my last question... Operating expenses took another sort of tick down in Q2, so you're clearly managing costs pretty well. What's the expectation going forward? Is this kind of a good sort of level, a good run rate, or are you going to continue to sort of manage that pretty tightly?

I think as you can see from our guide, you know, we're expecting to be flattish at the midpoint quarter over quarter. So, you know, we would hold where they are now, but this is a dynamic environment. So, depending on if the revenue goes up or down, we're going to need to be flexible, right, and continue to find ways to be more efficient.

Got it. Okay. I will leave it there. Thanks.

Thank you. And our next question comes from the line of Ben Rose with Battle Road Research. Please proceed with your question.

Thank you and good morning. You know, in the customer examples that you've cited, it does seem like there's a growing number of customers that are taking advantage of both the factory and the network services. Can you comment either quantitatively or qualitatively, you know, the percent of either customers or developers that are at this point drawing upon both services?

Yeah, certainly. Good morning, Ben. Thank you. I think as you look at the growth that we've had in the network, 70% last quarter, 80% in the first quarter, 80% in the second quarter, you can see that I think we've been quite successful with our sales team. in exposing our broader offerings and both the combination of the network and the factory to our customers and driving them to those solutions as well as the ones that they're finding on their own through using our website. And so we're definitely seeing a nice, healthy uptick in customers who are using us in this much more holistic way and have been quite satisfied with that.

Okay. And how critical is it for some of these larger customers that some of the network partners, particularly as it pertains to volume production, that these partners are located outside the U.S.?

So that varies depending upon the customer and what their needs are. And we've got network partners that are in region, both in the U.S. and in Europe, and then we've got them globally as well. And so we make the match depending upon what the needs are for the customer, obviously, if they need it to be a domestic. And he and I, we will partner accordingly.

Okay. You know, a question on sourcing of materials. I'm wondering if Some of the improvement, for example, in HUB's gross margin might be traceable to your ability to obtain lower-priced commodities in this market as prices have adjusted post-COVID.

Yeah, you had mentioned HUB. Just as a reminder, Ben, in the network business, we're not procuring the material for the MPs. The EIPs are procuring that material. You know, in terms of, you know, we're kind of outside the – we feel we're outside of the supply chain constraint, right? We're able to procure materials now, and, you know, that's not an issue in terms of our on-time delivery or gross margins now.

okay i i guess what i really meant to say excuse me meant to ask in terms of the price um that the manufacturing partner is accepting at this point is that do you think that they're more um you know likely to uh accept a quote from you when you know knowing that knowing that commodity prices have stabilized

Yeah, I think that in general we've seen the worst of the supply chain price impacts normalized. So that's benefited us, as Dan said. It also benefits our manufacturing partners. And that factors into the prices that they require in order to take the business. Okay.

And then finally, in terms of end markets, I know you mentioned some softness in medical and consumer electronics. The first question is, you know, looking out over the next few months, do you think that that business has the ability to come back? And then also, can you comment a little bit on what's happening in terms of EV prototyping and potentially low volume production there.

Yeah, in terms of the softness we're seeing in medical and consumer electronics, I think part of what we're seeing is we're seeing people uploading And then us having, you know, talk with the customers and them, you know, pushing off in terms of projects. So we think the volume, we believe the volume is there, right, to be had once we are past whatever economic cycle we're in. So, you know, just a reminder, I mean, an injection molding, we offer a service nobody else can, right, in terms of the speed that we can get injection mold parts to. So, yeah, we believe in the second half if we see improvement from a macro perspective that, yeah, that demand will pick up. Rob, you want to take the EV question?

Yeah, absolutely. So, yeah, thank you for that. Automotive, first of all, was strong for us in the quarter, and electric vehicles is definitely a very strong subsegment for us within automotive. In fact, generally, within industries, the subsectors that do best for us are those that are new and where there's a lot of innovation going on, and certainly EV is at the very forefront of that for automotive, and so that's absolutely a strong business for us. Okay, thanks a lot. Thank you.

Thank you. We have reached the end of our question and answer session. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.