Proto Labs Inc at William Blair Growth Stock Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Brian Drab - William Blair & Company - Analyst : Well, you're going to take my questions, Rob. And unfortunately for you, you're stuck with me for 25 minutes. But I will mention, everyone listening in, please feel free to use the chat feature and I'll monitor those questions and try to answer as many as I can -- or ask as many as I can, and ask them to answer. So, Rob, maybe just starting with the -- you had the Analyst Day recently and you talked about the new strategy. And I just want to maybe take a second and -- and you've been at the Company a long time -- and just reflect on where the Company was and where we are going now.

Question: Brian Drab - William Blair & Company - Analyst : I've followed it for a long time as well. And initially, this was really a one-of-a-kind injection molding service, best in the world and fastest in the world. Really, really nothing else like it. And the margins were very high: 60% gross margin. And over time, it's evolved, right? There are more services. You've tried to -- or you have, very successfully, brought in the service offering. But at the same time, margins have come down. And then in the Analyst Day presentation, I think it became pretty clear that profitability is going to be on the back burner for -- well, to some extent, in the near term. And then in year four or five of this new five-year plan, really go after profitability again. I'm just wondering, can you maybe push back on that assessment? Or is that about right, that the Company's really evolved from the one-of-a-kind service now -- a really broad, lower-margin business at this point?

Question: Brian Drab - William Blair & Company - Analyst : Right. And is it just inherent in the evolved model, though, that when you're offering all of these services and you have -- just -- is it such a broader offering? You're doing much higher volume work in a lot of cases. Is it just inherently almost impossible to have the margins that you had in the old days, and that we should just move on from there, right? This is a new business and it's a great business, but it's very different.

Question: Brian Drab - William Blair & Company - Analyst : Right.

Question: Brian Drab - William Blair & Company - Analyst : Yes, great. Well, let's maybe jump into the Hubs acquisition for a moment here, and part of this transformation, a huge part of the transformation. Can you talk, first of all, about what your expectation is for -- and I just can't remember at the moment, but can you remind us if you told it -- for REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 01, 2021 / 3:00PM, PRLB.N - Proto Labs Inc at William Blair Growth Stock Conference (Virtual) revenue for that business this year, 2021, or the expected growth at that business? And also -- well, then I'll ask a question about the margins in a moment.

Question: Brian Drab - William Blair & Company - Analyst : Can I get you to even say maybe -- the 12% growth that was projected -- the CAGR that was projected in the long-term guidance, Hubs is, I would think, obviously expected to grow above that average. Is that a fair --?

Question: Brian Drab - William Blair & Company - Analyst : And there's been a lot of questions about the margins around Hubs, so I just want to give you a chance to address this and maybe clarify this for people. Initially, at the acquisition presentation, you said 25% gross margin, and then the guidance for the first quarter implied something much lower than that. I was calculating 5%, and then you did 10% in the first quarter. What happened there? And how long does it take to get back to 25%? Or was that not the right number to begin with, and can you clarify?

Question: Brian Drab - William Blair & Company - Analyst : So let me just ask one more follow-up on that. If you go back to when you made the presentation, you said 25%. How much would the -- just moving things between SG&A and COGS have impacted 25%? Because now you're -- there's some other temporary things, I need to try to separate those.

Question: Brian Drab - William Blair & Company - Analyst : Got it, okay. So moving past the temporary issues, this should be a 20% -- and probably you'd say expanding gross margin business as well, as it gets more volume through it.

Question: Brian Drab - William Blair & Company - Analyst : And how had Hubs's gross margin trended leading up to the acquisition? Can you give us any sense of the history relative to that 20% level? Where was it a year before that? Has it always consistently been around 20%?

Question: Brian Drab - William Blair & Company - Analyst : Okay, got it.

Question: Brian Drab - William Blair & Company - Analyst : Okay, great. One thing that's put a lot of pressure on your gross -- or some pressure on your gross margin for the legacy business in recent years -- like the last, I think, three or so, four years -- is offering new services, like finishing services, that didn't ramp up. Or at least the last time we spoke about it in depth, hadn't ramped up enough to really get the gross margin that you're hoping for. So I'm talking about, like, of course, just for people listening in, like painting, etching, marking, things like that. And even the quality control, maybe. I'm just wondering now that you have Hubs and you have hundreds of suppliers that could potentially offer those services, do you still do that, going forward, in-house? Or do you route those orders through the Hubs channel?

Question: Brian Drab - William Blair & Company - Analyst : Great, okay. I'm going to rewind for a second because a good question just came in in the chat. Has to do with return on invested capital. And I'm looking at my model, too, and ROIC in my model for many of the years in the -- the 2012 to 2015 time frame, was 30%, 40%-plus. And it's lower now. In my model, I'm calculating about 14% for last year and maybe even dipping down below that this year. But the question is, basically, what is your hope for ROIC? What are you hoping to achieve? This question -- has anything changed in the marketplace -- parenthesis: customer demand -- where your longer-term pricing has shifted lower, and what's driving that? Is that affecting ROIC? There's a lot there, but it's basically around ROIC.

Question: Brian Drab - William Blair & Company - Analyst : Okay, great. Can we shift to talking about competition, and then, also related to that, pricing? And a question that came in from the chat, also around marketing spend, also relative to the competition. So maybe just starting with the question from the chat: how has pricing and AdWords spending trended year to date? And have you seen people becoming more aggressive there (multiple speakers) competitors becoming more aggressive in spending? And I know sometimes, I Google Protolabs and the name of a competitor will pop up, and I know you hate that. So what -- can you just --?

Question: Brian Drab - William Blair & Company - Analyst : Yes. I'd like -- well, first, the first question in the category of competition was just AdWords. So just sticking on that for a second, is that materially different? Has that shifted, like, extraordinarily from a couple years ago now where it's much more intense, and that's putting upward pressure on your marketing spend going forward?

Question: Brian Drab - William Blair & Company - Analyst : Okay. And then also, just sticking with competition -- and John, you and I spoke about this when I published this note ahead of the first-quarter report, and I'm always submitting these CAD models, watching the pricing. And my assessment was injection molding pricing, not really changing too much. But CNC, the price came down on some of the parts substantially. I'm just wondering if you could comment on what your strategy is with pricing lately in those two major services, and if there's pressure? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 01, 2021 / 3:00PM, PRLB.N - Proto Labs Inc at William Blair Growth Stock Conference (Virtual)

Question: Brian Drab - William Blair & Company - Analyst : Okay.

Question: Brian Drab - William Blair & Company - Analyst : Please.

Question: Brian Drab - William Blair & Company - Analyst : (laughter) That's not in our budget. We've spent too much on this conference. Yes.

Question: Brian Drab - William Blair & Company - Analyst : In CNC specifically? In CNC, you would say it hasn't moved? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 01, 2021 / 3:00PM, PRLB.N - Proto Labs Inc at William Blair Growth Stock Conference (Virtual)

Question: Brian Drab - William Blair & Company - Analyst : Okay.

Question: Brian Drab - William Blair & Company - Analyst : So some parts, the price -- if I would have submitted 1,000 parts, the price went up on some, too?

Question: Brian Drab - William Blair & Company - Analyst : Yes, sure.

Question: Brian Drab - William Blair & Company - Analyst : Okay. But just to be clear, you would say overall, in the first quarter, you're saying CNC price, on average, did not come down? Or it came down slightly? Or -- I thought that we had established that probably overall, it came down somewhat.

Question: Brian Drab - William Blair & Company - Analyst : Right. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 01, 2021 / 3:00PM, PRLB.N - Proto Labs Inc at William Blair Growth Stock Conference (Virtual)

Question: Brian Drab - William Blair & Company - Analyst : I see, all right.

Question: Brian Drab - William Blair & Company - Analyst : Right.

Question: Brian Drab - William Blair & Company - Analyst : So just to try and squeeze in -- any comment on -- you said you had good momentum through March and into April. Any comment on April and into May or in the overall business?

Question: Brian Drab - William Blair & Company - Analyst : And someone asking, did you take a look at all of these assets that 3D Systems sold?

Question: Brian Drab - William Blair & Company - Analyst : Got it. All right. Well, you are free to go. Thank you very much for your time. We have to wrap up. Rob, John, it's been great speaking with you today. Thanks for attending the conference, and thanks, everyone, for dialing in. And sorry for the questions that we didn't get to here. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 01, 2021 / 3:00PM, PRLB.N - Proto Labs Inc at William Blair Growth Stock Conference (Virtual)