Proto Labs, Inc. (NYSE:PRLB) Q3 2024 Earnings Call Transcript

Proto Labs, Inc. (NYSE:PRLB) Q3 2024 Earnings Call Transcript November 1, 2024

Proto Labs, Inc. misses on earnings expectations. Reported EPS is $0.2832 EPS, expectations were $0.32.

Operator: Greetings. Welcome to Proto Labs Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jason Frankman, Corporate Controller. Thank you. You may begin.

Jason Frankman: Thank you, Sherry, and welcome everyone, to Proto Labs’ Third Quarter 2024 Earnings Conference Call. I’m joined today by Rob Bodor, President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the third quarter ended September 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 Bodor. Rob?

Rob Bodor: Thanks, Jason. Good morning everyone, and thank you for joining our third quarter 2024 earnings call. We had solid execution in the quarter with results coming in above expectations. Despite continued dynamic challenges in the manufacturing sector, our disciplined approach and resilient business model drove solid financial and operational results. Year-to-date, we’ve grown non-GAAP earnings per share over 10%. Additionally, in the third quarter, Proto Labs generated its highest quarterly operating cash flow since 2020 before the acquisition of 3D Hubs. This was driven in part by continued gross margin improvements in the Factory and the Network, and is a testament to the profitability of our business model against any macro backdrop, driven by our unique comprehensive fulfillment model.

However, our revenue growth is flat year-to-date, and I believe we can accelerate our growth by continuing to invest in our priorities and execute our strategy under the realigned organizational structure. As a reminder last quarter, we announced the realignment separating regional go-to-market teams from a new global fulfillment organization in order to focus our regional teams on our customers to drive growth and to enable global efficiencies in fulfillment. Before expanding on the progress made across our realigned structure, I’d like to first cover our strategic priorities. We have made substantial progress on our 2024 priorities to-date. As previously mentioned, increasing the number of customers using our comprehensive services across Factory and Network is critical to our growth strategy.

In the last 12 months, the number of customers using the combined offer grew 35% year-over-year. We are still in the early stages of exposing the full combined offer to customers, and is a huge growth opportunity for Proto Labs. Our other main priority for the year is to increase revenue per customer contact. We’ve made great strides here as well. Year-to-date, revenue per customer or contract is up 5%, demonstrating progress on our shift toward higher-value production orders. Let me now bring this progress to life, through the following recent examples of how customers in leading industries with high requirement needs are using Proto Labs for production. The first example comes from a world-class clean energy customer that went to market earlier this year with a fully integrated solar and battery system.

Proto Labs manufactured and assembled multiple parts in the Factory to assist the customer production. Our world-class manufacturing lead times and complete assembly helped the customer ramp more efficiently than ever. That’s just one way that we win in production. In another recent case, a high-profile medical instrumentation customer relied on Proto Labs to solve a key need in their supply chain low-to-mid volume Injection Molding production parts. In this customer’s case, we have had a strong relationship for many years supporting early prototypes through 3D Printing. Our recent expanded focus on quality and increased inspection capabilities allowed us to win production business with this customer, and they were able to benefit from our quality and speed to keep their new product launch time line intact.

These examples illustrate how our established brand and position in prototyping enable us to grow in production with our existing customers. I also want to highlight our recent collaboration with Harley-Davidson Factory Racing, which we detailed in a press release at the end of September. Harley’s engineering team utilizes Proto Labs’ digital manufacturing services to manufacture critical components for their racing motorcycles in a few days. After a Sunday race, the team has a week to prototype, test, learn, iterate, manufacture and replace critical parts using specialty materials, all before the next race the following weekend. This continuous improvement enabled by Proto Labs’ rapid manufacturing has resulted in significant year-over-year improvements in race times and podium finishes.

Harley-Davidson Factory Racing has not only leveraged Proto Labs’ for quick turn parts but also our global network of manufacturing partners for larger and more complex parts. These examples demonstrate the power of Proto Labs to enable our customers to drive innovation, accelerate time to market and improve performance throughout the prototype to production cycle. Now I’d like to provide an update on the realigned organizational structure. With regional go-to-market teams now solely focused on revenue generation, the newly created global operations organization is tasked with fulfilling customer part orders by a Factory and Network in the most efficient manner. We continue to refine our portfolio of fulfillment options to optimize consolidated gross margin.

At times, this means leveraging our own unique manufacturing capabilities through the factory and at others, it involves network partners. Since our announcement last quarter, the global ops organization has already begun to find ways to improve fulfillment of customer orders. Specifically, we will leverage our global operations to better fulfill customer orders for metal-added parts and some injection-molded parts in Europe. Accordingly, in October, we announced portfolio reshaping decisions to streamline our operational efficiency. We will close our prototype injection molding facility in Eschenlohe in Germany, and we will discontinue direct metal laser centering, or DMLS, manufacturing services through our factory operation in Europe. We remain fully committed to continue offering all our manufacturing services to customers across Europe, including Injection Molding and metal 3D Printing through other existing Factory and Network fulfillment options.

The only changes in how these services are fulfilled, consistent with the realignment to a new global fulfillment strategy. This decision was not taken lightly, and I want to take a moment to thank all impacted employees for their commitment to Proto Labs and to serving our customers. The closure and discontinuation are in no way a reflection of their efforts. We will provide transition services to those impacted and we truly wish them all the best. Looking ahead, we believe these decisions will improve operational and fulfillment efficiency, while bringing the full capabilities of our global operations footprint to our customers. We are acting with urgency to capitalize on our unique ability to meet customer needs, accelerate our growth and continue to drive industry-leading profitability and cash flows.

In summary, we posted solid third quarter results while continuing to manage through ongoing manufacturing sector challenges. We remain committed to accelerating our growth as highlighted by the actions we initiated at the end of the second quarter to reorganize our internal structure. We continue to win in production, as I illustrated two examples of customers using Proto Labs for high requirement end-use parts. That continued shift will better position the company for growth and value creation over the long-term. We are the clear profit and cash flow leader in the industry and are committed to executing on our priorities and increasing value for shareholders. I want to thank our entire Proto Labs team for the tireless efforts to best serve our customers and execute accordingly.

I’ll now hand it over to Dan to cover our financials in detail as well as our outlook for the fourth quarter. Dan?

Dan Schumacher: Thanks, Rob. Our financial results begin on Page 8 of the slide presentation. Third quarter revenue was $125.6 million, representing a 4% decline from the record revenue we achieved in the third quarter of last year. Revenue was flat sequentially and slightly above our guidance range as order rates picked up more than anticipated through August and September. Turning to revenue by service on Slide 9. Third quarter Injection Molding revenue declined 10% year-over-year in constant currencies, as we saw weakness in the industrial and consumer electronics verticals. To drive growth in molding, we continue to invest in production capabilities and our new regional go-to-market teams are making production business a priority.

CNC machining was flat year-over-year in constant currencies. We saw strong growth in our network CNC business. Third quarter 3D Printing revenue declined 1% year-over-year in constant currencies and sheet metal revenue declined 13% year-over-year. We served 22,511 customer contacts in the third quarter. Revenue per customer contact declined 1% year-over-year, largely due to the decline in Injection Molding revenue, our highest value per order service. As Rob discussed, growing revenue per customer is a long-term priority of ours, yet there may be bumpiness from quarter-to-quarter, as we shift to more production work. In that respect, year-to-date revenue per customer is up 5% over 2023. Third quarter consolidated non-GAAP gross margin increased 50 basis points sequentially to 46.2% with improvements in both the Factory and the Network.

Factory gross margin was 49% in the third quarter, up sequentially from 48.8% driven by continued automation improvements and excellent work by our plant management teams to align staffing with volumes. Proto Labs Network gross margin was 35%, up from 32.8% in the second quarter driven by our AI-powered pricing and sourcing algorithms. Year-to-date, non-GAAP gross margin is 45.8%, up 130 basis points compared to the first three quarters of 2023. We are very pleased with our gross margin improvement, a testament to both our hardworking employees and our resilient, profitable business model. No other company in the digital manufacturing services space can match the margin profile of our combined Factory and Network model. Third quarter non-GAAP operating expenses declined $1.8 million compared to the second quarter of 2024.

As a percent of revenue, non-GAAP operating expenses decreased to 35.3% from 36.8% in the prior quarter, driven primarily by lower incentive compensation. In summary, third quarter non-GAAP earnings per share were $0.47 up $0.09 sequentially on flat revenue growth. As Rob mentioned earlier, year-to-date adjusted EPS is up over 10% year-over-year on flat revenue. We will continue to invest our profits to drive future growth through our priority areas further enabled by the previously addressed realignment. Transitioning to cash flow and balance sheet highlights on Slide 11. Cash flow from operations was $24.8 million, our highest quarterly figure since 2020 prior to the acquisition of 3D Hubs. As I say on every earnings call, our business model generates industry-leading cash flows, allowing us to invest in organic growth and return capital to shareholders.

To that end, we repurchased 19 million of common shares in the third quarter. On September 30, 2024, we had $117.6 million of cash and investments on the balance sheet and 0 debt. Our outlook for the fourth quarter of 2024 is outlined on Slide 13. We expect to generate revenue between $115 million and $123 million. This guidance in corporate order and revenue trends through the first four weeks of the fourth quarter. Further, a sequential revenue decline in the fourth quarter is normal seasonality in our business due to fewer working days and lower orders during the holiday season. We expect foreign currency to add an approximately $1 million favorable impact on revenue compared to the fourth quarter of 2023. Moving to earnings guidance. We anticipate non-GAAP add-backs in the fourth quarter to include stock-based compensation expense of approximately $4.4 million, Germany closure expenses of $4 million and amortization expense of $900,000.

We currently estimate a non-GAAP effective tax rate of 20% plus or minus 50 basis points. In summary, we expect fourth quarter non-GAAP earnings per share between $0.28 and $0.36. That concludes our prepared remarks. Sherry, please open the line for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Brian Drab with William Blair. Please proceed.

Brian Drab: Hi, good morning.

Rob Bodor: Good morning.

Brian Drab: Hi, Dan. Hi Rob. I just wanted to start on gross margins. The gross margin is pretty solid and higher than it’s been in a while. Where do you expect to be able to sustain that? And how do you — like how do you see the fourth quarter in terms of gross margin? And then I’m also asking this question, looking at the Network, which is of course, somewhat lower gross margin, and it looks like growth there decelerated some. So I’m just wondering if you’re seeing maybe a convergence in the growth rate eventually here in the overall business between the Network and the Factory, and maybe you don’t have this headwind in terms of gross margin from the faster growth on the Network side?

Dan Schumacher: Yes. Let me — Brian, I think there’s two questions in there. I think one’s related to gross margin and one’s about the growth from the Network. I’ll take the gross margin one first. Yes, what I would tell you is the gross margin percent improved, as I said both in the Factory and the Network. And so in terms of the Network gross margins, as we’ve talked about before, we’re experiencing gross margins that are above the range that we’ve given. And we’re really happy with our sourcing algorithms and how we’re able to use that model to drive more profitability through that area. Now we’ve been in a state in which manufacturing continues to contract. We’re keeping our range at that 25% to 30% even though it is at 35%, but I don’t expect conditions to change much quarter-over-quarter.

I would expect that we’re going to be above the range on Network gross margins in the fourth quarter. As it relates to the Factory improvements, we continue to add automation to the Factory side of our business and we’re doing a better job in terms of managing labor costs as that goes through. So there’s improvement there as well. So I know you kind of alluded to, is there a mix in which the Network may be not growing as high as it was last year, there may be some aspect to that. But if you look at the core, both the Network gross margins and the Factory gross margins are improving. Now Rob, did you want to take the question on Network growth?

Rob Bodor: Yes, certainly. Thank you, Brian, for the question. So yes. Yes, I think look, so in Q3 of last year, we saw absolutely stupendous growth in the Network, right, north of 80%. On the year-over-year comparison, we grew the Network 11% in the third quarter of this year, building upon that. And we did that in the context of a difficult macro. I think I read the report, we’re now at 22 consecutive months of contraction in manufacturing. And so I’m pleased with it. I’m very confident that we can grow the Network even higher in the future and fully expected, the Network is going to continue to be a strong growth engine for our business. And we’re seeing customers adopting it, right? I mean we had 35% growth year-over-year in customers adopting our comprehensive offer, buying more the Network. So I’m pleased with that and do expect it would continue to be a strong growth engine for us.

Dan Schumacher: One more thing, Brian, that was in your question that did not cover on gross margin. We do expect gross margin to come down quarter-over-quarter. As we go into the holiday season, we’re a little more inefficient with our labor as we’re using contractors and such and the volume ends up being a little more uneven as you go through that holiday period. So we would expect the gross margin to come down just Q3 to Q4.

Brian Drab: Right. Okay. And that’s what I see. I mean, obviously, that’s typical in the fourth quarter for you.

Dan Schumacher: Yes, it’s typical.

Brian Drab: Right. Rob, on the blend of the idea that you’re getting more people using the blend of the services, where — what can you tell me about where that stands now in terms of like is still very early in that opportunity, right? Is it a low single-digit percentage of the customer contacts that are using both services?

Rob Bodor: Yes. We are still in early innings with this absolutely. So I see it as a really big continued growth opportunity for our business. But I’m quite pleased to see the rate of adoption that we’re getting in terms of customers buying the comprehensive offer and also more and more customers using us for production and bringing value to them, like in the examples that I shared in the prepared remarks. But yes, overall, we are still in the early innings. I would consider less than 5% of customers. So there’s a lot of opportunity for us to continue to penetrate and that’s what our go-to-market teams are focused on.

Brian Drab: Okay. Great. And then maybe I’ll just ask one more and then pass it on. You touched on it in the prepared remarks. I think that the increased inspection capabilities that I’ve talked to you guys a lot about and seeing the capabilities in the facility, and it’s impressive, it seems like that’s a key strategic initiative that you have, and it’s making a difference. Can you just talk a little bit more about the traction that you are getting from the high-volume work? Because — I mean, obviously, the — you’ve got a challenging environment that you are operating in. Revenue is down, but still the revenue per customer is up. And so this is like a key lever that you’re pulling in. Can you just talk about the traction you’re getting in higher volume orders through that?

Rob Bodor: Yes. So we’ve been going through this transformation, right, to really drive production and to serve our customers end to end across their entire product life cycle. And of course, given that we started with prototyping that means doing more and more production work for them. And so adding capabilities around comprehensive offerings, the ability to produce a much broader range of their parts needs and also being able to do the inspection and other documentation, process control documentation and the like that they expect in production have been important additions. And as we’ve brought that forward, our customers have been adopting it, and we’re seeing nice growth there. That drives our average revenue per customer to be, I think, the highest in our industry, and we’re seeing continued growth in that number as more and more customers are adopting production.

And we’re seeing that grow kind of 35% in terms of the customers buying the comprehensive offer year-over-year last quarter. So I’m pleased with it. I think it’s — again, we’re in the early stages. We’re really driving to grow it. and we’re seeing strong and positive customer response. So I think we’re on the right track and we’re going to keep focused.

Brian Drab: All right. Great. Thank you very much.

Operator: Our next question is from Jim Ricchiuti with Needham & Company. Please proceed.

Jim Ricchiuti: Hi, good morning. Thanks. Congrats on the quarter, by the way. If we go back to August, you talked about slowing activity, and it sounds like the pace picked up a little bit relative to your expectations. Any sense as to what drove that, that are showing in August, September? Was it just the overall market, some of the things that you’ve done? And I’m just wondering if you’ve seen some of that traditional pickup in the daily rates, how has that been trending thus far in October?

Dan Schumacher: Yes. Jim, the market that we are playing in is very uneven is what I would tell you. As I talked about in the prepared remarks, we saw in really June and into July, a lower order rate. And what we did see, to your point is we did see a higher pickup than normal seasonality on our order rate perspective in August and September. But that was starting from a data point of July that was really lower than historical, obviously because we reported that revenue was down. So we were — it was nice to see the pickup in August to September. I would say, there wasn’t anything in particular that I would point out. I would just say the general business responded better than what seasonality would say from a really low June and July. And as I’m creating the guide, again I’m looking at four-weeks of data that I have around shipments and orders and the guide is showing kind of a normal decline quarter-over-quarter, Q3 to Q4 that we normally see.

Rob Bodor: I would just say I’m pleased that the go-to-market teams were able to get better than expected traction, right, as we kind of ended the quarter.

Jim Ricchiuti: Got it. And a nice sequential stop up in operating margins in the quarter. And yes, I’m wondering if there’s a way for you to help us with the global operations, organization alignment. How much of that would you attribute to it? Or is this just mainly a function, the revenues came in at the upper end of the range? You saw some nice solid improvement in gross margins as well.

Dan Schumacher: Yes. What I would say is, again, kind of to repeat the two aspects to that gross margin, one being our Network gross margin, which is really about how we continue to improve our sourcing algorithms and improve the pricing within that model. And the second is really on a plant-by-plant perspective in terms of the automation that we’re putting in and the tools that we’re using to manage our costs in those areas in an environment in which the volume can be volatile. We just continue to improve in those respects, and that’s what drove it. In terms of the new organization I’ll let Rob talk to that.

Rob Bodor: Yes. So I think as we look at that longer-term again the strategy there was a few things. One, we want to be able to bring our global full capabilities, right? So wherever we’ve got manufacturing capabilities around the world, we want to be able to bring those full capabilities to every customer regardless of what region that they’re in to be able to serve them fully and to the best of our ability. Secondly, that structure now allows us to also reduce areas of redundancy or parts of the operation where maybe we are not operating at healthy margins, right? We can — we have some more degrees of freedom to really optimize that. And so you are seeing these recent announcements is one example of that. And I think, over time, you’ll see more and more opportunity for us to kind of optimize our operations from that standpoint to both drive healthy profitability for the business, but also make sure that we’re serving our customers as fully as possible.

Jim Ricchiuti : Thank you.

Operator: Thank you. Our next question is from Troy Jensen with Cantor Fitzgerald. Please proceed.

Troy Jensen: Congrats on the great margins and cost controls here.

Dan Schumacher: Thanks, Troy.

Troy Jensen: Hi, gentlemen, congrats on the great margins and cost controls here.

Rob Bodor: Thanks Troy, good morning.

Troy Jensen: So maybe I’ll first start off with the German facility update. Was this deal — was it the Alphacam acquisition, mainly additives out in Germany?

Rob Bodor: Yes, that’s right. So these were a couple of the components of the business that we acquired from Alphacam years ago.

Troy Jensen: Alphacam, okay. All right. Did you do much DMLS in Europe? Or is it all mostly polymers and you did metals in Raleigh?

Rob Bodor: Yes. So we have both polymers and metal additive manufacturing in Europe in Putzbrunn. And this announcement was specific to the metal — the DMLS. And so we’ll be phasing that out of fulfillment from Germany and fulfilling it instead through a combination of our capabilities in North Carolina and our network partners.

Dan Schumacher: But what I would tell you, Troy, similar to our Raleigh operation, DMLS is a good chunk of the business, but it is not the majority of the business in either location.

Troy Jensen: Okay. All right. I guess, well, two questions come to that then. Can you help me out with the OpEx savings? I know we probably won’t see it in Q4, but how much will this reduce OpEx in like the March or June quarters of next year?

Dan Schumacher: Listen, Troy. So this is more of a savings from a gross margin perspective than it is from an OpEx perspective. For instance, in Putzbrunn we’re still maintaining the facility. We are just fulfilling the DMLS differently, both through our manufacturing partners and also through Raleigh.

Troy Jensen: Yes. Understood. That’s shuttering the facility, but it’s just kind of relying –. I get it.

Dan Schumacher: So the action lower facility — so we do have another facility that is the precision injection molding facility and so that one we are closing.

Troy Jensen: Okay. Cool. And I get it, you are doing this because you can get better margins running through the network. Curious if there is other products kind of in your portfolio that makes sense. I guess I’m wondering primarily about Sheet Metal. I see that to me, that’s like a lower gross margin product segment that hasn’t grown for you guys and would it make sense to kind of run that through the Network business also.

Rob Bodor: Yes. So yes last quarter, I think we definitely saw headwinds in Sheet Metal. I’ll remind you that’s our smallest service and it’s got a lot of exposure to kind of the computer electronics segment, which did see slowing last quarter, and actually, we’ve seen headwinds for several quarters now. I will remind you that we’ve taken action there. We’ve rightsized that business. We’re monitoring it and operating it very closely. So I would say that the new global structure enables us to I think, have some degrees of freedom around this that we haven’t had before. And we’re considering all these things as we go forward.

Troy Jensen: Got it. Okay. Keep up the good work.

Rob Bodor : Thanks Troy.

Operator: Our next question is from Greg Palm with Craig-Hallum Capital Group. Please proceed.

Greg Palm: Hi, thanks for taking the question here. Maybe just kind of starting with the outperformance. I’m curious if you can attribute any of the outperformance to the sort of the realignment? Rob, it sounded like maybe hint to that, maybe that was a little bit of that. And then just to be clear, as it relates to the order trends, you said pick up August, September. Have those picked up in October? Have they stayed at similar rates? I’m just trying to gauge kind of the guide of where order rates are for the first four weeks versus kind of what normal seasonality is in the quarter.

Rob Bodor: Sure. Thanks for the question, Greg. Yes, I’m pleased with how we were able to end the quarter and beat our expectations. The work that our go-to-market team did in terms of driving demand in the second half of the quarter was great to see. I do believe that as we focused our teams through this reorganization, focusing our go-to-market teams on the customers within their region, allowing them to specialize and focus on that, I do believe helped and expect to see that continue to help provide benefits for growth as we continue to go forward with this model.

Dan Schumacher: On the order rate question no, they have not picked up. I would say it’s more that June and July were soft, and then we got to a more normal kind of seasonality in August and September. So there hasn’t been a pickup in October, and that’s reflected in the guide.

Greg Palm: Okay. And the margin performance was impressive. I’m curious on the Network side, have you changed the algorithm all the way you are sourcing stuff? Or do you attribute some of the outperformance, not just this quarter, but year-to-date, is that more of a byproduct of the environment we are in, the fact that a lot of suppliers just have more open capacity right now?

Rob Bodor: Yes. I think you are right. So I attribute it to two things. One is we launched this — our pricing algorithm about 1.5 years ago, which was a significant improvement, and then we continue to make incremental improvements in it over that period. And I think you are seeing that play out in terms of the margin. As we look at it externally, we believe that we are very competitive in terms of our pricing but we are able to get — and we’ve got very strong close rates, right? So we are seeing that be very competitive yet, we’re able to continue to increase the gross margin because of the way the algorithm is working. So quite pleased with that. At the same time, I would agree with you that we’re clearly seeing excess capacity in manufacturing and that is factoring in right, to the margins that we’re able to get right now in this macro environment.

Greg Palm: Yes. Okay. Makes sense. And I guess, just lastly, as it relates — I just want to make sure I’m clear on the P&L impact of sort of the recent news around the European facility. What is the expected P&L impact I guess? So it doesn’t sound like much of an OpEx, but it sounds like potentially some COGS savings. Are you able to quantify anything at all?

Dan Schumacher: Yes. Nothing that we are going to specifically come out with in terms of specific numbers, but there’s a precision molding part of the business that some of that business will be able to be fulfilled through the Network, and some of it will not. So there is some of that business that we looked at as wasn’t strategic for our prototype to production strategy. And so there is some revenue that won’t be there. But we should see some gross margin improvement overall. I would say, it’s not a huge amount because of the relative size of what those businesses are.

Greg Palm: And I assume the revenue impact, I mean, it’s more like in the hundreds of thousands of maybe business that got lost versus millions? Or –.

Dan Schumacher: Yes. Yes. It’s not a huge amount. And what I would say is what that business was doing much more complex molds, but it was very difficult the way they were doing that to take it to production. And so what we’re shifting is doing more of those complex molds through the network using steel tools and other type so that we can then take that customer from prototype to production as a part of our strategy. So what we feel is although there might be a short-term impact from that, from the longer term, it’s much better aligns with our strategy to move more to production over the long term.

Greg Palm: Okay, that make sense. All right, I will leave it there. Thanks.

Dan Schumacher : Thank you.

Operator: With no further questions, this will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.