M&A Announcement

Jan 19, 2021

Slides

Greetings. Welcome to the Proto Labs Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll turn the conference over to Daniel Schumacher, Head of Investor Relations for Proto Labs. You may now begin. Good morning, This is Dan Schumacher, Head of Investor Relations for Proto Labs. Earlier today, Proto Labs announced the signing of a definitive agreement to acquire 3DHoats. Joining me today to discuss this announcement are Proto Labs' President and Chief Executive Officer, Vicki Holt Vice President and General Manager of The Americas and incoming President and Chief Executive Officer, Rob Bedore and Chief Financial Officer, John Wei. We are very excited to also have Bram Deshort, three d Hub's Co Founder and Chief Executive Officer with us today. After our prepared remarks regarding the transaction and our strategic rationale, we welcome your questions. Before we begin, I would like to remind everyone that our discussion will include statements relating to future performance and expectations that are or may be considered forward looking statements and subject to risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our press release and recent SEC filings, including our annual report on Form 10 ks for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward looking statements made today. Now I'd like to turn the call over to Vicki. Thanks, Dan, and good morning, everyone. Thank you for joining us today and a special thank you to Brahm from three d Hubs for being with us. Earlier this morning, we announced that we have signed an agreement to acquire three d Hubs, an online manufacturing platform that provides engineers with on demand access to a global network of manufacturing partners. This is a transformative acquisition for Proto Labs that will allow us to provide more value to our customers by enabling us to serve them more holistically than we do today. In three d Hubs, we are acquiring a platform to provide outsourced manufacturing capabilities through a global network of premier manufacturing partners, which will augment Proto Labs' in house technology enabled manufacturing, creating the most comprehensive digital manufacturing offering in the world. Consideration for the transaction includes $280,000,000 at closing plus contingent consideration of up to $50,000,000 subject to the achievement of certain financial performance targets. This is a very exciting day for all of us. Today marks the beginning of a new chapter in the Proto Labs story and with this new chapter comes new leadership. This is the perfect time for Rock Dorr to transition into the role of President and Chief Executive Officer as the business continues to evolve. Rod has been a member of our executive leadership team for the past eight years and was an integral part of creating the strategy that led us to pursue three d Hub as a partner and candidate for acquisition. Rob, who will transition into the role of President and CEO on March 1, led the diligence process and execution of this transaction. I will now turn the call over to Rob for a brief overview of three d Hub and a deeper dive into our strategic rationale for the acquisition. Rob? Thank you, Vicki. I'd like to reiterate our enthusiasm about this next chapter and the evolution of our strategy this acquisition represents for Proto Labs and our ability to serve customers more holistically. We published slides supporting this transaction in the Investor Relations section of our website. Slide six lays out an overview of our strategic rationale, which I will cover in more detail. Three d Hubs brings to ProLabs a best in class team, platform, manufacturing partner network and a strong growing business, which allows us to enhance our customer value proposition across prototyping and global production. Even more exciting, the combination of the two businesses will expand our total addressable market enabling further growth for years to come. Turning to Slide seven, you can see that ProLabs has consistently innovated to transform the customer offer over the last two decades. From our inception in 1999 with a single manufacturing service injection molding to the leader in digital custom parts manufacturing offering four services today, much of our growth is due to the improvement and expansion of our offerings. Because we've automated the back end manufacturing process, ProGlaz is known for unprecedented turnaround times for low volumes. This has served us very well and provided our customers with an offering that they could not get elsewhere. As we continue to work to serve the needs of our customers further, we want to continue to expand our offerings to create a more holistic offer focused on more complete parts and improved user experience and more price and lead time options. To that end, we're teaming up with three d Hubs to create the world's most comprehensive digital manufacturing offer. The acquisition gives ProLabs a platform to evolve our service model to provide unprecedented manufacturing flexibility to our customers, which is top of mind for many as we reflect on the global COVID-nineteen pandemic and the other events of 2020. Now for a brief overview of three d Hubs on Slides nine through 11. Three d Hubs is an online manufacturing platform that provides companies with on demand access to a network of two forty manufacturing partners across 20 countries. Founded in 2013, the company has facilitated the production of over 6,000,000 custom parts and products through its platform, which incorporates machine learning to continuously advance. Three d Hubs offers CNC machining, injection molding, three d printing and sheet metal fabrication services. Customers receive instant pricing and design feedback and the company has shown explosive growth in recent years. We admire the platform three d Hubs has built and are extremely excited to welcome them to the Proto Labs family. As Vicki mentioned, the acquisition of three d Hubs is a key inflection point for our company's evolution to better serve customers. As we outlined on Slide 14, Proto Labs and three d Hub's respective offerings are truly complementary. Three d Hub's manufacturing partner network offers an extensive range of manufacturing capabilities and price and lead time options. Three d Hubs brings two great benefits to Proto Labs customers. First, a complementary network of manufacturing partners to fulfill a breadth of capabilities outside of our current envelope and second, a broader selection of pricing and lead time options. So as we continue to Slide 15, you'll see how adding three d Hub's capabilities will enable Proto Labs to bolster our customer offer and serve more of the global custom contract manufacturing market. Together, we will serve up a broader selection of materials, tighter tolerances, more complete parts, more finishing options as well as more lead time options and competitive pricing at higher volumes to existing and new customers. Proto Labs and three d Hubs will be able to fulfill nearly every custom manufacturing need across the product life cycle from ideas to prototype to full end use part production. Together, our value proposition becomes even stronger, allowing us to increase our customer share of wallet, customer retention and addressable market. RoboLabs' proven growth strategy has been composed of the same three growth factors since we went public in 2012. Those are displayed on Slide 16. In order to drive continuous growth, we look to expand our customer base, broaden our part envelope and offer new manufacturing services, including additional processes and secondary operations. Three d Hubs provides a platform to augment our current offering and will be accretive to our long term growth rate through the acceleration of all three growth vectors. With the world's most comprehensive digital manufacturing offer, we will expand our addressable market and continue to accelerate these growth vectors allowing us to achieve $1,000,000,000 in revenue even faster. We are excited to start this journey with Brahm and the immensely talented three d Hubs team. Let me now turn it over to Brahm for his perspective on how this combination will accelerate three d Hub's achievement of its strategy. Ram? Yes. Thank you, Ross, and good morning, everyone. The entire three d Hub's team, including my co founders, Brian and Philhavan, is thrilled to join ProLabs and continue to revolutionize the manufacturing industry through innovation. We've admired them for a long time. They are the leader in the industry. We are proud of what we've built at three d Hubs, and we share ProLabs' desire to better serve both our customers. As Rob explained, 3DHop's offering is very complementary to ProLabs, and we are excited to bring our offer to the hundreds of thousands of customers that they have already served as well as attract new customers with the combined offering. As you may know, we founded 3DOps in 2013 as a peer to peer three d printing platform. In recent years, we have transitioned to become fully B2B focused, adding additional manufacturing services and partners. Our goal is to empower companies to create revolutionary products. This is very well aligned with ProLab's mission of helping companies accelerate product development and optimize supply chains by providing quality on demand manufacturing services. Looking at this transaction from the 3Dapps perspective, the strategic combination with ProLabs will help accelerate our mission and our growth, allowing us to empower more companies to create more revolutionary products and bring them to the world. I also want to take a moment to thank the three Hubs employees who work hard every day to revolutionize the manufacturing industry. They have built three d Hubs into what it is today and will continue to play a key part in our success as part of Pro Labs. As we partner throughout this process, we found that our cultures are very similar. Both organizations are very entrepreneurial minded and promotes transparency. We look forward to working closely with the Prolapse team and starting the new chapter that Vicki referenced at the beginning of this call as we bring our companies together to capitalize on the massive opportunities ahead. Now John will walk through the financials of the transaction. Thank you, Brahm. Turning now to the transaction summary on Slide 20. Under the terms of the agreement, closing consideration of two eighty million dollars will be funded with $130,000,000 in cash and $150,000,000 in Proto Labs common stock. An additional $50,000,000 of contingent consideration is payable subject to financial performance based targets over two years after the close of the transaction funded with 50% cash and 50% stock. We have also established an employee incentive fund payable to 3DHub's employees based on the achievement of both financial performance and employee retention. The transaction is expected to close before the January 2021 subject to customary closing conditions. We have cash in excess of $200,000,000 no debt on the balance sheet. After funding the $130,000,000 cash portion of the closing consideration, we will still maintain our strong financial position. Three hubs generated approximately $25,000,000 of revenue in 2020 and has grown revenue at a compounded annual growth rate of approximately 200% since 2017. We expect this acquisition will be accretive to our revenue growth, but dilutive to our non GAAP earnings per share in 2021. Earnings solution will occur as we continue to invest in the combined Proto Labs and three d Hubs platform to support and expand the manufacturing partner network, scale the operations and realize eventual synergies. We anticipate the acquisition will be accretive to non GAAP earnings per share in 2023. The acquisition is focused on serving our customers more holistically. A broader service offering will allow us to serve more of our customers' custom part needs resulting in an increased share of wallet. By continuing to focus on our customers, we expect an acceleration in our revenue growth that will in turn lead to increased profit over the long term. I will now turn the call back to Rob for closing comments. Rob? Thanks, John. In summary, we are extremely enthusiastic about the transformational acquisition of three d Hubs and how it will expand our service offering as well as the value it will create for our shareholders. I want to thank the members of our team, the three d Hub team and both organizations' advisers who worked diligently to make this happen in a very unique diligence environment. We're eager to get to work and capture the large opportunities ahead of us. We look forward to providing you information on our fourth quarter and full year 2020 performance as well as our 2021 priorities on our earnings call in February. Additionally, we will be hosting a virtual investor and analyst conference this spring to go into further detail on the continued evolution of Proto Labs and our long term strategy. Thanks again for joining us today, and we will now take your questions. Thank you. At this time, we'll now be conducting a question and answer session. Session. Our first question is from the line of Brian Drab with William Blair. Please proceed with your question. Hi, good morning everyone and congratulations on the acquisition. Thanks Brian. Good morning Brian. Rob looking forward to working with you in the new role and congratulations on the move to CEO. Thanks very much, We'll miss you. So I have a lot of questions. Just I'll ask a few now and save some for later. But the three d Hub's breakdown in revenue, I don't know if I saw that in the slides in terms of breakdown between three d printing and injection molding and the other services. Can you give us any sense there? Yes. We disclosed that in '20 revenue will be about $25,000,000 in that range. CNC is the largest portion, just over 50%. Three d printing is about a third and the remainder is in injection molding and sheet metal. So CNC is the biggest portion. Okay. And can I press you for any more granularity in terms I'm just curious how much injection molding revenue, first of all? So obviously, it's less than a third. Not a lot of overlap there in terms of injection molding, right? Yes. I think injection molding and sheet metal are areas of the platform that will continue to build out in order to serve the customers over the long term. Revenue base today, like I said, is first CNC and then three d printing. Right. Okay. And the manufacturing partners are looks to me my understanding is that they're in China, India and Mexico. Is that the case? Is that where all the manufacturing happens? Brian, you're right about those countries, but there are also partners in Europe and The U. S. So it's a really global, truly global manufacturing network. Got it. Okay. Then the 200% plus revenue growth, very impressive, but it's a little early here, but if I think I'm doing the math correctly, that would mean that revenue was about 1,000,000 in 2017. Do I have that correct? Yes. I think you're looking at it and seeing that with the existing revenue base, look large. But I think we are looking at those the potential and combining an offer related to serve our customers more holistically. Okay. I'd be interested to know just a little bit about the history of the company between 2013 and 2017. I know some, but as long as I've got all of you on the call, I'd love to get some detail around what happened between how did the company evolve from 2013 to 2017? Then also I'm wondering, was 2020 an outlier in terms of a lot of e commerce companies obviously did very, very well in the midst of the pandemic? Or was the pandemic more of a headwind? I'm just wondering like did revenue end up quadrupling in 2020 because of pandemic or vice versa? Yes, Brian. I'm not sure if you're looking for financial details related to the company or Just the revenue kind of trajectory. And did the business model change in 2017? Because based on the I'm just looking at the revenue growing 200% over the last few years and then from 2013 to 2017 maybe it just finding its footing and then things just took off in 2017? Or did the business model change? Yes. I think, Brahm referenced it a little in the call that the business model did shift from a consumer based business model to a business to business model. So there has been a transition there as they work through it, specifically related to 2020. The business was impacted just like most businesses around the world. But they did experience growth in 2020, roughly 40%. So, not where their targets were, but still strong growth in the environment they were operating. Okay, got it. Thanks very much. The next question comes from the line of Greg Palm with Craig Hallum. Please proceed with your question. All right. Thanks. I guess maybe just starting out, I get the call it the defensive nature of the acquisition, but I also want to focus on some of the potential growth drivers. I mean, is there a meaningful cross selling opportunity here? I mean what is the combination of these two companies bring that maybe either can't do alone? Would be helpful to just get a little bit more color on sort of the TAM expansion that you alluded to? Yes, sure. So we're actually really excited about this because of the combination of the two companies. What they bring is very complementary to Proto Labs in terms of offering. So it's really on two dimensions and I referenced it in the call, right, much broader envelope of manufacturing capabilities as well as longer lead times and a broader range of prices. And so it really allows us to serve of opportunities market. So market. We're a lot seeing opportunities And And 's certainly opportunities for the cross selling. And we know that at any point in time, some of our customers might not need Proto Labs' speed and they might have more options for some different kind of fulfillment models. And this really allows us to be able to serve them across all of those use cases and needs. And you mentioned the mix of between services, you know, CNC, three d printing. What about the mix of, low volume prototyping versus higher volume production? Does it skew sort of one way or the other relative to the Proto Labs business? Greg, I think it's fairly comparable to our businesses as it operates today. I think you get when production can have a greater impact in shorter periods of time just because of the size of some of the orders. But in general, I'd say the portfolio looks similar to ours. Okay. And then just in the broader landscape of these, I don't know, I think Vicki you called them digital brokers, but these sort of manufacturing platforms that have evolved over recent years. I'm curious, what is three d Hub's add that maybe is differentiated relative to the some of the others that we've seen pop up over recent years? Yeah. As we've been looking to pursue this strategy to really accelerate the roadmap and our capabilities to serve customers more holistically, we took a look at internally building versus what was available out there for us to partner with, and we really felt that three d Hubs had a combination of a very, very strong architecture of their manufacturing partners, premium manufacturing partners, how they're well vetted for quality and ability to serve, as well as how their technology works to match a customer part need with the right manufacturing partner. But more importantly, we also felt that three d Hub had a strong talented team that we felt would really fit into the culture we have here at Proto Labs. So the combination of technology, manufacturing partner, the skills of the leadership team, as well as the culture of three d Hubs, we felt was absolutely the best fit for Proto Labs. Got it. Okay. Helpful color. I'll hop back in queue. Thanks. Thank you. Our next question comes from the line of Kenneth Wallace with Berenberg Capital. Please proceed with your questions. Good morning, everyone. Congratulations on the deal. The first question from me, I'm wondering on kind of gross margins of three d hubs, if you could give any color there, I think that'd be very interesting. Yes. I think as we look at it, the gross margins today are in the mid-20s. And I think we're looking at opportunities related to that, but today they currently sit in the mid-20s. Cool. Then the next one, today Proto Labs' revenue breakdown is definitely skewed more towards The U. S. Just wondering if three d Hub is kind of has greater exposure to Europe or Asia, if maybe that was a kind of a part of the opportunity here in terms of kind of growing your revenue base abroad? Yes, that's right. So the split of three d Hub's revenue is kind of fifty-fifty between The U. S. And Europe. So that's another reason for the synergy and where we think it's complementary helps us to grow our business in Europe. Awesome. And then last one for me. In terms of integrating three d Hubs, what are kind of the plans there? Is it are you going to have two kind of different e commerce platforms? Or will the websites be kind of combined in any capacity? Can you just talk through how that is all going to work out? Yes, absolutely. And we touched on this in the opening remarks as well, right? So we see a vision for a combined offering that's very exciting. And we're now in the midst of the integration plans. Certainly, our immediate priority in The Americas is to complete the launch of two point zero in the first quarter, as you're probably aware of. And so the two companies will continue to operate independently for some time as we get two point zero launched and then continue our work and the road map for how we will do that joint integration to realize that vision. Great. Thank you. I'll hop back in the queue. Thank you. The next question comes from the line of Tom Hayes with Northcoast Research. Please proceed with your questions. Good morning. Thanks for taking my questions. Rob, I think you mentioned that I just want to make sure that the initial plan is not to include three d hubs on the two point zero rollout and just add them on subsequent to that? That's right. Okay. And then just I guess just one last follow-up, maybe for John. What's the expected share count that you guys will be adding? Share count? Yes. It will turn out to be about 900,000. All right. Thank you very much. Our next question is from the line of Ben Rose with Battle Road Research. Please proceed with your question. Yes, good morning. Thank you for taking my question. I confess at the outset that I joined the call a bit late, but I have a few questions. Firstly, how long have the two companies been speaking to one another? You know, I think since the summer, I think is when some of the conversations initial conversations took place. Okay. And if I may, why now? So are there specific reasons that the deal makes sense for Proto Labs at this stage? Yeah, I'll take that question. I think the timing is perfect right now because as we look at what's happening in the world, first, the b to b e commerce acceleration that I think is going be taking place post COVID is real. And we really felt we want to be in the strongest position to maintain our leadership in the e com B2B supply of custom parts to the industrial customer. And so our normal approach of accelerating our roadmap and bringing things into our digital platform just was not fast enough for the pace of change happening in e comm today. So we felt it was really important to augment our current offering with an opportunity for outsourcing. And again, that's where we said, let's look at what's out there with some of these platforms that are already being built and look to combine that with our e comm solution so we can provide our customers with the most holistic complete offering from various lead times to full parts and complete offers. I think the timing is perfect with what's happening in the B2B e comm environment today. Okay. And then, if I may, just a question on the, I guess the partner ecosystem, that the company has developed. I'm intrigued by the quality assessment that's probably required to vet these partners. Can you maybe just speak to a little bit, about the, how the company monitors the quality of the parts being produced by these partners? Are there actual site visits that are involved in the vetting process? And just maybe a little bit about their kind of quality control over the parts that are manufactured? Yes, certainly. So that's obviously a very important aspect of this. And so the partners are vetted to make sure that they really have built a premium network of partners that includes upfront audits and evaluations that are quite comprehensive as well as ongoing and continued auditing of the performance that's done through the platform in a highly automated way as well as with human oversight tracking performance against all the key metrics, customer complaint levels being low, on time delivery being high, high reliability and also understanding the expertise of each partner so that they can ensure that we're routing the right parts to the partner that will best fulfill it. So it's quite comprehensive. Great. That's extremely helpful. Thank you. Thank you. Our next question comes from the line of Brian Drum with William Blair. Please proceed with your question. Hi. I just have one more thought here that I wanted to ask you about. So CNC is a little more than half of revenue. So let's say maybe that's around $15,000,000 and three d printing's 6,000,000 to $8,000,000 in revenue. Today, you're doing around, let's call it, $150,000,000 in CNC and about $60 some million in three d printing. So they're about 10% of the size of Proto Labs in those businesses. I'm just wondering like what percentage maybe I know you won't give a specific percentage, but like what portion of the jobs that come into three d Hubs can you do already at Proto Labs? The reason for the question is just why would someone order CNC parts from three d hubs or why would you use that service that's that infrastructure that's set up at three d Hubs today if CNC order or a three d printing order comes into Proto Labs and you might have to route it to, you know, another country instead of being able to ship it same day like you can do already. And for either one of those services, you already have an incredible presence and ability in the biggest market in the world for those parts. I'm just wondering, as you can see, like, is there some three d Hubs business that of that $25,000,000 that gets cannibalized? Sure, Brian. Thank you. So absolutely, today, we can serve our customers with the fastest lead times and very high reliability with our legacy service. However, there are times when customers aren't don't need the part that fast. They're willing to wait longer. They can be more planful. And they would they're interested in an offer that is at a different lead time and at a competitive price for that lead time. So this allows us to fulfill those kinds of parts for our existing customers and for new customers in a very effective way. Furthermore, as we've talked in the past, we've automated everything in our back end and sometimes there are very complex parts that a customer needs that we can't fully manufacture ourselves. And oftentimes customers will order that part even with some of that material leftover or whatever that constraint might be. But now we're able to, through the network, offer those parts complete, offer them with the full secondary operation that they might have and fulfill those needs as well. So as we talked about it being highly complementary, it offers us broader set of capabilities and additional use cases and lead times that customers might need, right? And so, that's the benefit, right, that we can now serve the customer across a much broader range of their needs. Right. Right. Now it makes sense. Okay. Thanks, Rob. Thanks, everyone. Yes. Thank you. Our next question is from the line of Greg Palm with Craig Hallum. Please proceed with your question. Thanks. Just a couple of quick follow ups. Just going back to the revenue profile of three d hubs. I mean, so to be clear, do you think that 2020 was impacted by COVID where maybe you could see a revenue growth acceleration coming out of this? Or is that not the right way to think about it? Yes. I think we're looking at the overall economic conditions. And ultimately, we believe 'twenty one will be better than '20. I think the question is what pace with the uncertainty that's still there. And I think we'll provide greater detail on our earnings call in a few weeks. Okay. Sorry, I just want to be clear. I'm talking specific to three d Hubs and the 40 revenue growth that you alluded to for 2020. So are you saying that the growth rate in 2021 should be better than that? Or was that not what you were saying? I think the overall we're expecting 2021 economic conditions to be better than 2020. I don't know that I'll comment on the overall growth rate. I think we'll get into that on our earnings call in a few weeks. Okay. Fair enough. And then I guess just on the earn outs, assume those are based on revenue performance alone or is it something else? Revenue and earnings. Okay, great. All right. Thanks so much. Thank you. At this time, I'd to turn the floor back to management for any further remarks. Thank you very much for joining us today. And I really want to thank the Prolapse team, the three d Hub team and everybody who made this transaction happen. We are incredibly excited for the next chapter of the company's evolution and excited to have Rob here with us as CEO leading it. Thank you so much. Thank you all. Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.