3D Systems Corporation

Hello, good morning, and welcome to 3D Systems conference call and audio webcast to discuss the results of the second quarter 2022. My name is Kevin, and I'll facilitate the audio portion of today's interactive broadcast. All participants have been placed on a listen-only mode. A 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. At this time, I'd like to turn the call over to Russell Johnson, Vice President, Treasurer, and Investor Relations. Please go ahead.

Good morning and welcome to 3D Systems' second quarter 2022 conference call. With me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer, Wayne Penske, Interim Chief Financial Officer, and Andrew Johnson, Executive Vice President and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the investor relations section of our website. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to post questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact your financial results is included in last night's press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2021. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Russell, and good morning, everyone. I want to thank all of you for joining today's discussion of our second quarter results. As always, it's my pleasure to have this opportunity to speak with you and share my perspectives on our ongoing efforts to make 3D Systems the world's most innovative and successful provider of additive manufacturing solutions. As I look out on the environment in which 3D Systems is operating today, I see much to be optimistic about, but I also see a complex and volatile mix of business conditions that's challenging our ability to deliver consistent results during 2022. On one hand, it's clear to me that the underlying trends supporting the broad adoption of additive manufacturing solutions in production environments are both strong and resilient. Across our diversified economy, in applications ranging from the traditional manufacturing shop floor to the biotech laboratory where lifesaving medical treatments are created, additive manufacturing technologies are enabling new levels of efficiency, flexibility, and innovation. These macro trends give me tremendous confidence in this industry and in 3D Systems' role as a leader in it. It's this confidence that's guiding the strategic actions we're taking this year to consistently invest in new additive technologies and in our internal infrastructure to support future growth. On the other hand, the new normal of our post-pandemic world is proving anything but normal. As we highlighted in yesterday's earnings release, during the second quarter, 3D Systems like many other companies, encountered a more difficult global business environment than we had anticipated when we exited 2021. Our performance this quarter was impacted negatively by various macroeconomic and geopolitical factors, most notably stubborn supply chain issues, foreign exchange volatility, and our exit from the Russian market. While these factors such as these are often hard to predict or control, the reality is that they generated unexpected headwinds for our business during the second quarter, and led to revenue growth and profitability below our internal expectations and no doubt below the expectations of our investors as well. Looking ahead to the second half of the year, we now believe that these factors combined with an expectation of dampened consumer discretionary spending driven by the rapid rise in the price of food, gasoline, and other daily necessities will impact our results. As a result, we're taking a more conservative stance on our outlook for the balance of the year and reducing our 2022 guidance. While we hope that these effects will be short-lived, I feel it's important to be prudent to plan for them until the data suggests otherwise. Fortunately, we have the scale, the balance sheet, and an exceptional customer base, which allows us to weather these short-term headwinds and continue to prudently invest for the strong growth opportunities we see when, inevitably, these headwinds subside. We'll do so with the same financial discipline that I hope you now have come to associate with this leadership team. For today's call, we'll start with my summary comments on the quarter and the full year forecast, and then Wayne Penske will provide more details. For the consolidated company, after adjusting for the significant divestiture program that we completed in 2021, revenue for the second quarter grew 3.2% year over year and 7.8% in constant currency. As I mentioned, Several exogenous factors had an outsized impact on the second quarter top line. These include the rapid strengthening of the US dollar and the frustrating continuation of component shortages and other supply chain disruptions that we experienced during Q1. They also include the ongoing tragedy of the war in Ukraine, which led us to exit the Russian market and has since negatively impacted business confidence in the European countries, such as Germany, where 3D systems, and particularly our industrial segment, has traditionally had a strong presence. Were it not for these headwinds, our consolidated revenue for the second quarter would have grown by healthy double digits year over year as we had anticipated. So while we're by no means satisfied with our quarterly results, it's important to view them in the light of the very challenging and volatile macro environment we face during the quarter. To reinforce the message we have stated previously, with the increasing adoption of additive manufacturing and production environments across both our healthcare and industrial customer base, we anticipate delivering solid double-digit annual revenue growth once these shorter-term headwinds subside. Turning to our divestiture adjusted segment performance, in the second quarter, revenue for our industrial segment grew 3.8% year-over-year and 11.2% in constant currency, while revenue for our healthcare segment grew 2.9% and 4.7% in constant currency. The foreign exchange impact on our industrial segment was quite significant due to that segment's exposure to manufacturers and service bureau customers in Europe and Asia Pacific. Industrial also experienced the biggest revenue impact due to our exit from the Russian market. In healthcare, second quarter revenue came in softer than expected. The slower growth in healthcare was driven largely by a postponement of elective procedures due to both a resurgence of COVID, which once again limited patient access to hospitals, and to greatly heightened inflationary pressures on consumers, which forced them to prioritize their purchases and postpone optional care, particularly in the dental market. Fortunately, once the impact of COVID again subsides and inflation begins to cool, we expect these elective procedures to once again accelerate. However, to be clear in our updated guidance, we've modeled these conditions as now extending through the end of the year. So in short, we're reducing our revenue estimates for the full year, assuming that the challenges we saw as we exited the second quarter continue throughout the remainder of the year. These primarily include the impact of currency, inflation, and supply chain disruption. In addition to these objective factors, we're also receiving clear signals from selected customers that their visibility into near-term demand trends has diminished. In response, they're slowing their expansion plans and adjusting purchases, to more tightly control inventory levels until their visibility into demand improves. Major drivers of this uncertainty are the potential impact of recessionary pressures on consumer confidence and the stubborn high inflation environment, which is an important driver of reduced discretionary healthcare spending. Secondly, but not an insignificant factor driving us to be conservative in our forecast at this point, is the potential impact of energy supply constraints on our European customers stemming from increased EU government efforts to reduce their dependency on Russian oil and gas supplies. The net effect of any such effort, which looks increasingly probable, would be further dampening of demand on capital or capital investments, particularly in Germany. One obvious area that influences our second half forecast is our dental business, which had previously enjoyed very strong double digit growth in the US and internationally. Given the current geopolitical tensions, the resurgence of COVID in China, and the curtailing of consumer discretionary spending throughout Europe and the US, we're projecting slower growth in our dental segment in the second half. We once again view this as transitory, but still material in our full year forecast. As we exited the second quarter and evaluated all of these risk factors, we've updated our forecast and are now taking a more conservative view of our projected four-year performance, all of which is reflected in our updated four-year guidance that Wayne will discuss in a few moments. While we're disappointed in having to take this step, we're doing so out of an abundance of caution and in the spirit of transparency to our investors. I can assure you we don't take this decision lightly. and you have my commitment that we'll work hard through the balance of this year to regain momentum in our financial performance that we've built over the last two years. Actions we're taking include a variety of steps to optimize our cost structure, improve the efficiency of our operations, and refine our technology portfolio to assure exciting and profitable growth in the years ahead. Reflecting this focus on operational efficiencies, in July we took a major step forward by transitioning the sourcing and manufacturing activities for much of our polymer-based printers in-house and terminating our agreement with a major contract manufacturer. Insourcing these high-tech, high-mix, low-volume printer platforms took months of planning and required us to incur some upfront exit and inventory costs. But over time, we believe this approach gives us much better control of our critical supply chain elements, resulting in reduced manufacturing costs, improved inventory management, and improved customer-facing metrics such as quality and delivery performance. This step, in combination with our new product design efforts, is a key element in delivering higher gross margin performance, the goal of which is to exceed 50% in the years ahead. We have additional efficiency actions in flight, and we'll update you on our progress as we move through the year. Before I end my remarks and hand over to Wayne, I want to comment on important progress and collaborations between 3D Systems and what I believe are two of the world's most innovative technology partners. First, in June, our longtime biotechnology development partner, United Therapeutics, announced that in close partnership with 3D Systems, they have successfully printed the most complex object ever produced by mankind, a complete human lung scaffold. consisting of over 4,000 kilometers of pulmonary vasculature and airways with wall thicknesses measured in fractions of the diameter of a human hair. The complexity and precision that we've now demonstrated using biocompatible materials and our most advanced production printing platform technology is truly groundbreaking and represents a key milestone in our regenerative medicine efforts. In the first unveiling of this incredible capability, United Therapeutics President and CEO, Dr. Martine Rothblatt, and 3D Systems Founder and Chief Technology Officer for Regenerative Medicine, Chuck Hull, appeared at the CNN-sponsored Life Itself Conference hosted by Dr. Sanjay Gupta and Mark Hodosh. In her presentation, Dr. Rothblatt declared for the first time publicly her vision to have these personalized bioprinted lungs cleared for human trial within five years. With our team's increasing momentum, earlier this year we expanded the scope of our collaboration to include the manufacture of human livers and kidneys. All of these efforts are tied to the singular goal of producing an unlimited supply of fully biocompatible human organs for transplantation to people who need them around the world. While the goals are ambitious, I believe more than ever that we'll meet them. And I want to thank Dr. Rothblatt for her vision and unwavering support in leading us there. With the foundation of progress that we've made in materials, hardware, and control technologies for printing human organs, which I believe are quite unique in the world, one of my most important goals for 3D Systems has become the building of a world-class regenerative medicine business around the emerging science of photopolymer-based bioprinting. Building upon the incredible work our teams conducted with United Therapeutics, in 2021, we acquired two development companies, Alevi and Volumetric Biotechnologies, in order to bring additional technology and specialized technical skills to our regenerative programs at 3D Systems. Having now integrated these exceptionally talented scientists and engineers, I'm extremely pleased with our accelerating progress and committed to this groundbreaking technology, which offers the potential to improve countless lives of people who are suffering from chronic diseases or injuries around the world. With the progress that we've now made and the expanded capacity and capabilities we have in our program, two very exciting adjacent fields of applications have now opened up to us. One is the printing of non-organ human tissue for a wide range of applications within the body. We're actively working on a targeted subset of these high-value non-organ applications, and we'll be discussing progress publicly when appropriate. The second application field, and one that we believe offers exciting and potentially nearer-term opportunities, is the printing of vascularized tissue for use in drug discovery. With our ability to now print vascularized tissue that enables very precise, predetermined blood flow while accommodating an enormous range of human cells, including both healthy and diseased cells, the effectiveness of developmental drug therapies can rapidly be evaluated in the laboratory. is to reduce the development time for new drug therapies and over time reduce or even eliminate the need for animal testing. Given the ongoing exploratory efforts we have underway with leading pharmaceutical companies, we're excited about the potential of this technology and are now investing in both the people and the infrastructure we'll need in order to bring this to commercial operation. You can expect to hear more about these efforts later this year. In support of these developmental efforts, we're also now putting in place, for the first time in our company's history, a medical advisory board to provide input on each of our regenerative medicine programs. Under the leadership of Dr. Steven Klasko, a recognized visionary leader in the global healthcare community, in the second quarter we were pleased and honored to announce the appointment of the Honorable Dr. David Shulkin, former Secretary of Veterans Affairs, and more recently, the Honorable Alex Azar, former Secretary of Health and Human Services and a recognized leader in the pharmaceutical industry. This distinguished group of advisors, along with additional members soon to be named, will play an important role in our development and commercialization of these remarkable new products. In addition to the progress we're making in regenerative medicine, we were very excited to announce this week an agreement to acquire DP Polar, the Germany-based developer of the industry's first additive manufacturing system designed for true high-speed mass production of customized components. DP Polar's technology is truly path-breaking. It features multiple fixed printing heads and a rotating build platform that enables continuous high-speed 3D printing at industrial scale. Among its many unique features, it can embed objects such as sensors, electronics, or magnets, into printed parts by using inline robotic pick and place capability. With its ability to achieve production speeds up to five times higher than traditional batch process printing platforms, which represent the standard in the industry today, this novel technology opens up many new exciting high volume applications for the future. We're extremely excited to join forces with DP Polar at this pivotal time for additive manufacturing when interest in production scale applications is rising fast. While their machine is still in beta testing and therefore the acquisition will not benefit our near-term results, DP Polar's technology is an ideal fit with 3D Systems' broad portfolio of polymer materials and production-focused software systems. We believe that integrating this platform with our existing industry-leading solution set will drive its rapid adoption into a wide range of high-speed, automated production environments. In summary, I want to emphasize that despite near-term headwinds that are challenging our results this year, we remain confident in our long-term outlook, the targets we laid out at our investor day in May. With a strong balance sheet and a disciplined approach to running our business, we will continue to look for ways to invest strategically for long-term growth with a focus on key healthcare and industrial markets. With that, I'd like to turn the call over to Wayne. We'll describe our second quarter financial results, and our 2022 guidance revision in more detail. Wayne?