Proto Labs, Inc.

Greetings. Welcome to ProtoLab's second quarter 2024 earnings call. At this time, all participants are being in listen-only mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Jason Trankman, Vice President and Corporate Controller. Jason, you may now begin your presentations.

Thank you and welcome everyone to Protolab's second quarter 2024 earnings conference call. I'm joined today by Rob Bedore, 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, 2024. 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 Fedora. Rob?

Thanks, Jason. Good morning, everyone, and thank you for joining our second quarter earnings call. Despite operating in a challenging macro environment, on a year-over-year basis, Protolab's first half, 2024 revenue, grew 2%, and non-GAAP earnings per share grew 25%. In an environment in which manufacturing activity has contracted in the U.S. and Europe, we continue to take share and improve our industry-leading profitability. We've improved the efficiency of our AI-enabled pricing algorithms, increased the automation in our digital factories, and managed our costs with volume. No business is immune from the manufacturing headwinds currently at play in the market, but our resilient model has produced growth and improved profitability. In the second quarter of 2024, we made good progress against our two strategic initiatives. increasing the number of customers using our comprehensive offer and driving higher revenue per customer through larger orders. Our customers continue to recognize, adopt, and benefit from our comprehensive offer fulfilled through both factory and network. As we've previously discussed, our comprehensive offer enables customers to use Protolabs as a single-source manufacturer throughout the product lifecycle, from prototype to production to end-of-life. We are still in the early stages of customers fully utilizing our combined offer, which presents an incredible long-term growth opportunity, and we're focused on driving adoption. In fact, in the last 12 months, the number of customers using the combined offer is up over 50% year over year. We're also focused on driving higher revenue per customer through larger orders across services. While large one-time orders decreased slightly compared to the first quarter, Second quarter revenue per customer contact increased 7% year over year. There will be fluctuations in larger order quantities quarter to quarter as we continue to shift toward more production work, but we strive to increase revenue per customer contact over the long term, and I'm pleased with this result. Let me now share an example of the value we bring to customers with our unique capabilities. was working to launch a new water treatment product for dental offices. Time to market was critical for this product, and it was also important that the learnings captured in the prototype phase were transferred to the production of these critical components. Solmedics was looking for one supplier to partner with on prototyping through production. With our combined factory and network fulfillment model, Protolabs was the perfect fit. We manufactured prototypes through both 3D printing and injection molding in our digital factories, enabling Solmedics' innovation through our world-class lead times. We then fulfilled injection molding production quantities via the network. So prototyping the factory production through the network. Solmedics is fully utilizing Protolab's combined offer to add value to their customers and their own business, which aligns with our first strategic initiative. As for our second strategic initiative, our relationship with Solmedics has also increased our revenue per customer contact because of the production work. So this is really a wonderful example of how our combined factory and network offer enables a customer to gain value by using Protolabs as a single source manufacturer throughout the product lifecycle. While we are seeing a growing number of customers use Protolabs for both prototyping and production, there's still many cases in which customers order prototypes from Protolabs, and eventually go elsewhere to procure their production volumes. Capturing additional production work from existing prototype customers is a massive growth opportunity for Protolabs. However, we're currently operating in an environment that is challenging, and customers have been impacted by macro factors, including higher interest rates, reduced demand for manufactured goods, broad-based cost-cutting efforts, and moderating capital expenditures. As I mentioned earlier, we grew in the first half of 2024 while US and Europe manufacturing activity contracted. In fact, manufacturing indices have indicated contraction consistently for the last two years in the US and the Eurozone. In the US, we have seen continued slowing growth in orders for core capital goods, industrial machinery, and other durable goods since the post-COVID surge in 2021. And just yesterday, we learned that the U.S. manufacturing PMI in July hit an eight-month low as manufacturing activity enters deeper into contraction. Despite these persistent challenges, we continue to focus on what we can control and are taking action in order to accelerate our growth. While we showed growth in the first half of the year amidst the constrained broader manufacturing environment, I am not satisfied. and believe Protolabs can grow much faster. Faster than we have in the past few years, in fact. We operate in a large, addressable market, and Protolabs' capabilities are unique. So, in order to unlock accelerated growth, we're making changes to our internal structure. I'd like to take a few minutes to walk you through these changes that we believe will better position the business for improved financial performance in the long term. Going forward, we're separating revenue generation from the operational and fulfillment work. Our regional organizations will now be entirely focused on revenue and ensuring the best possible customer engagement and experience. And we will have a global operations organization with the sole responsibility of seamlessly fulfilling customer part orders as a single unified offering encompassing both factory and network. This change enables the regional revenue teams to focus on executing our strategy of serving more customer needs across the product lifecycle and accelerating revenue growth. The new org structure also ensures complete integration between factory and network. The global operations organization will also allow us to more efficiently serve customers' production needs.