3D Systems Corporation

Good morning and welcome to 3D Systems conference call and audio webcast to discuss the results of the third quarter 2022. My name is Kevin and I'll facilitate the audio portion of today's interactive broadcast. If anyone should require operator assistance, please press star zero on your telephone keypad. At this time, I'd like to turn the call over to Russell Johnson, Vice President, Treasury and Investor Relations. Please go ahead.

Good morning and welcome to 3D Systems third quarter 2022 conference call. With me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer, Michael Turner, Executive Vice President and 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 discussions and responses to your questions reflect management 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 our 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.

Thanks, Russell, and good morning, everyone. I'll open this morning with a few comments on the current business climate, our position in the markets, and a summary of our Q3 performance. After that, I'll turn the call over to our new CFO, Michael Turner, for a more detailed review of our third quarter results. I know that many of you are looking forward to hearing from Michael for the first time. Having joined the company in September, Michael's already proven to be an excellent leader of our finance organization and a valuable addition to our executive team. So welcome aboard, Michael. Reflecting on the year to date, the global economic and geopolitical backdrop has compounded existing supply chain disruptions created by the COVID pandemic. While these macro headwinds are negatively impacting many companies, The good news for our industry is that customers are increasingly adopting additive manufacturing in their production operations in order to reduce supply chain risks, enhance product design flexibility, and reduce manufacturing costs. This gives us an opportunity for growth, even in a more cautious capital investment environment. For 3D Systems specifically, we've benefited this year from our prior efforts to focus and streamline the company while significantly strengthening our balance sheet. This has allowed us to make important investments in new technology platforms and in operational efficiency initiatives, which are already showing results. Our customers are confident that once recession fears subside, we will emerge from this period stronger than ever, with a completely refreshed product lineup, an efficient operational footprint, and the scale needed to support their growth. In the meantime, we're focusing intently on execution, profitability, and cash performance. which is what our customers and our shareholders expect from an industry leader. On behalf of my nearly 2,000 dedicated 3D Systems colleagues around the world, as we finished out the year and look ahead to 2023, I can tell you that we're proud of our leadership role in the additive industry and very confident about the future. Turning then to slide five, reflecting on our third quarter, we delivered results that were basically in line with our internal expectations and in some areas exceeded them. From an operating standpoint, high inflation is impacting both purchase components and labor costs. We're taking pricing actions where possible to offset these pressures, but there's typically a lag effect that can put a drag on quarterly performance. In addition, the strength of the US dollars clearly impacted our financial performance. Michael will shed more light on these factors in a few moments. On the positive side, supply chains are showing signs of initial stabilization. And if no further disruptions occur, we expect this trend to continue. Our engineers have worked hard to increase our component supply base and to design our new products with more sourcing options in mind. With regard to our insourcing of manufacturing, I'm very pleased with the progress we've made in our Rock Hill, South Carolina production facility, which we took over mid-quarter from a contract manufacturer. This plant will soon produce over 40% of our polymer printing systems. We expect that percentage to grow rapidly as our investments in people and technology gain momentum. In the third quarter, we were pleased to see our production rates increase, our productivity improve, and our gross margins begin to expand as the workforce transition to 3D systems management. I want to give a sincere shout out to our new manufacturing colleagues in South Carolina. Your efforts are noticed and greatly appreciated. From a broader standpoint, Inflation is taking a significant toll on global markets that are dependent upon discretionary consumer spending. As consumers spend more on daily necessities like food and gasoline, they have less to spend on optional items. For us, this impacts our dental markets and particularly our orthodontic products. While this is still a great business that we're fully committed to, key customers have slowed their spending, which, while largely anticipated in our previous guidance, can clearly be seen in our financials. Fortunately, we expect this business to strengthen once the economy normalizes, but this may take some time. More to come on our market dynamics in a few moments, but for now, I want to give you a clear understanding of our position in the industry and how our business model works in this volatile climate. As additive manufacturing and production environments becomes widespread, we're very well positioned to enable rapid adoption across virtually all market verticals. The reasons are twofold. First, we have the greatest experience base to draw on. With over 20,000 production printers active in the field, consuming almost 5,000 tons of our proprietary materials each year, our customers produce over a million parts every day using our technology. This output is greater than the entire rest of the industry combined, giving us unparalleled experience in the management of large fleets of printers and in the integration of complex workflows in our customers' factories around the world. Second, over the last two and a half years, we've reorganized and restructured our company into two market-facing business units, Industrial Solutions and Healthcare Solutions. This enables us to focus on market-specific applications, developing with our customers the most effective manufacturing workflows, and then supporting the transfer of these technologies into their factories. Once complete, additional workflows are then added and manufacturing capacity expanded to support their growth plans. This approach has proven highly effective and we believe it will drive exciting growth for our company in the years ahead. This operational model is one that we increasingly see mimicked by others around our industry, but the key to success is having a full complement of metal and polymer printing technologies supported by software expertise and a wide range of production materials. It is the combination of these elements to address specific high-value applications that our customers are looking for in a partner. That is what sets our company apart from the competition, and this gap continues to grow. Today at 3D Systems, our core technologies span not only the broadest range of metal and polymer systems in the industry, but now also include the unique materials and printing systems that I broadly refer to as biologics. These truly groundbreaking materials and printing technologies are essential in addressing biological applications within the human body and in the development of new methodologies for drug development. When viewed in total, this unique combination of technologies and application expertise in a company with global scale allows us to assume a leadership position in the additive industry as we now enter true production environments. With that introduction, I'll now turn to slide six for a brief overview of the quarter. For the consolidated company, after adjusting for businesses that we divested during 2021, revenue for the third quarter decreased 3.2% year over year, However, adjusting for the impact of foreign currency fluctuations, consolidated revenue increased 2.7%, showing the significant negative impact of the strong U.S. dollar. While this growth rate is much lower than we would like, we fully expect to meet our long-term expectations of double-digit organic growth in the years ahead as consumer spending rebounds and additive manufacturing takes hold in production environments across virtually all market segments. Turning to our divestiture adjusted segment performance in the third quarter, revenue for our industrial solution segment was flat year over year, but increased nearly 9% in constant currency. Revenue for our healthcare solution segment decreased 6.6% per year and decreased 3.5% in constant currency, driven by a substantial slowing of our dental segment due to softer consumer spending. As we saw last quarter, the FX impact on our industrial solution segment was most pronounced due to that segment's exposure to manufacturers and service bureau customers in Europe and Asia Pacific. With that said, the currency impact on healthcare solution sales was also material. In our industrial solutions business, we saw regional variations in the third quarter. In Europe, the war in Ukraine, and then certainly regarding recession and energy supplies, continued to pressure our customers. This is impactful given our industrial solutions segment's historically strong market presence in Europe, and particularly in Germany. On the positive side, demand in the Americas remained robust during the third quarter, with strong SLA printer sales into the energy and commercial space verticals. We also saw solid demand for our recently acquired Titan printer platform among consumer goods and defense customers. In our healthcare solutions business, the third quarter performance varied sharply by market. In our medical devices business, we saw significant year-over-year growth in printer sales to customers who manufacture orthopedic and surgical instrumentation. And our industry-leading business of providing virtual surgical planning packages and other personalized healthcare solutions for doctors, surgeons, and hospitals had a strong quarter as well. The broader story here is the demand for non-elective surgical procedures is holding up well despite economic uncertainty. Within that strong market, 3D Systems stands out for best-in-class suite of products, strong regulatory infrastructure, and our years of experience using additive manufacturing solutions to improve patient outcomes. However, the biggest factor for our healthcare solutions business during the quarter was a significant year-over-year decline in dental market sales, particularly in the orthodontic area. As we communicated to our investors last quarter, we were aware that this decline was coming, and our dental results for the third quarter, while disappointing, were roughly in line with our expectations. It's difficult to gauge how long the softer demand might last because it's so dependent on how macroeconomic conditions evolve over the coming quarters. We expect this business to eventually recover and to be a strong contributor to our growth and profitability. So despite these ups and downs, we believe we now have good visibility into our broad business performance for the remainder of this year. This is why, as Michael will describe for you in a moment, we're updating our full year 2022 guidance to significantly tighten our revenue range. while improving the forecast for operating expenses to reflect strong execution and cost controls. Turning to slide seven, I'd like to highlight some advancements from the third quarter. These are not only interesting in isolation, but they also provide valuable insights into the type of core activities that will drive our company's growth in the next five years. As I described for you in our last quarter's call, we agreed during the third quarter 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. I'm pleased to report that we closed this acquisition in early October ahead of schedule, and integration efforts are well underway. I can't emphasize enough the importance of bringing this revolutionary printer technology into the 3D Systems portfolio. The machine's continuously rotating build platform can print jetted polymer parts up to five times faster than today's batch-processed systems. which represents a quantum leap toward true mass production of custom componentry using additive manufacturing. We plan to move forward with this technology as fast as possible with a critical mass of DP Polar machines moving into beta testing with key customers in 2023 and initial commercial sales targeted for 2024. If any of you are planning to be at the upcoming Formnext trade show in November, I strongly encourage you to visit the DP Polar booth and see this exciting new system for yourself. With our metal printing portfolio, we continue to leverage the unique capabilities of our applications innovation group, along with our strong lineup of metal printing technologies to drive solution sales to customers in both industrial and healthcare segments. Our technological advantage is primarily in our atmosphere control system, which is the industry's best for the manufacture of reactive metals such as titanium, nickel, and refractory metal alloys. We've been very successful recently with customers in commercial space and medical devices. both of which are extremely well-suited to our technology and the type of application-focused, customer-specific printing solutions in which 3D Systems has long specialized. During the third quarter, we also announced several significant additions to our materials portfolio. On the polymer side, we introduced two new production-grade materials, Tuff Clear for our Figure 4 projection-based printing platforms, and DuraForm PAX Black for our SLS printer line. Both of these materials address critical applications, with key customers across several market verticals. On the metals front, we introduced new copper nickel alloy CUNI-30, which is now certified for use on all of our DMP metal printing solutions. This copper nickel alloy was developed in close collaboration with Newport News Shipbuilding, which is a division of Huntington Ingalls Industries and is the largest shipbuilding company in the United States. Copper can be particularly challenging to 3D print due to its high reflectivity. However, it's an ideal material for extremely demanding applications in marine systems, chemical processing plants, oil and gas, and, of course, rocketry. Turning to slide eight, before I hand off to Michael, I want to highlight the tremendous progress we're making on one of my most important goals for 3D Systems, namely the creation of a world-class regenerative medicine business. As I've shared with you previously, our efforts in this area are currently proceeding along three primary lines. First, through a longstanding partnership with our biotechnology partner, United Therapeutics, we've achieved remarkable progress toward our goal of 3D printing functional human organs for transplantation, initially targeting lungs, but now with an expanded scope including livers and kidneys. Our partner announced publicly this summer that our goal is to have printed organs in human trials within five years. Second, building on the Oregon program's technological progress, we've expanded into the adjacent field of printing non-organ human tissue for transplantation and surgical reconstruction applications. More details regarding this exciting initiative will be announced in the months ahead. But today, I want to focus on the third initiative, which is summarized on chart 8. In this case, we're leveraging our expertise in creating vascularized human tissue and combining this capability with our polymer printing expertise to develop and manufacture highly differentiated organs on chips for use in drug discovery and development by the pharmaceutical industry. During the third quarter, we marked a major milestone in this initiative with our announcement of the formation of a new, wholly-owned biotech company called Systemic Bio. This subsidiary is being managed as an internal startup with its own dedicated management team and R&D staff. We've committed to support SystemicBio with an initial seed investment of $15 million, which should sustain the company until it reaches a material level of revenue and profitability. One point that I want to emphasize is that SystemicBio's go-to-market strategy will differ from 3D Systems' traditional business model. Due to the unique value of the printed products themselves and the sensitivity of this novel technology platform, SystemicBio will not sell printers and materials. Rather, it will work with customers to develop organ and disease-specific human models, or organs on chips, and then will market those chips directly to pharmaceutical and biotech companies engaged in drug discovery. To support this business model, Systemic Bio has invented a novel patent-pending organ-on-a-chip platform, which we call HBIOS. This stands for Human Vascularized Integrated Organ Systems. This platform is comprised of 3D-printed microfluidic components and bioprinted vascularized 3D scaffolds. Once printed, these custom-designed vascularized scaffolds are then seeded with any desired combination of healthy or diseased cell types for use in drug studies. We're producing HBio chips daily at our state-of-the-art laboratory in Houston, Texas, where they're being tested by our systemic bios team of scientists to validate their use for modeling specific organ and disease functions in collaboration with key pharma customers. As you can see in the images on slide eight, virtually any desired vasculature architecture can be printed and then mass produced to develop the statistical data needed for drug studies. Turning to slide nine, let me emphasize what differentiates SystemicBio's technological approach from those in the market today. and therefore why we're so excited about this new business. The 3D bioprinted fully integrated vasculature contained within 3D, within systemic bios, hBios chip, can closely mimic human organ structures, allowing for active perfusion of blood through the tissue sample as shown in the lower left image, where you can see blood flow through the printed structure. This vasculature is critical for cell survival, as the blood flow is needed to bring nutrients to the implanted cells and then remove waste products, just as the process works within your body. You can see the success of this approach in the lower right-hand image on slide 9, with the green regions being human cells that have thrived in this printed tissue sample for over 28 days. This is unique, and it's the true magic of the HVIO system. The cell types comprising these tissues can be of any type, For example, on one end of the chip can be human liver cells, and on the other end can be cancer cells, with the printed blood vessels connecting them together in a continuous circuit. Developmental drugs can then be introduced to evaluate the interaction with both the healthy cells and the cancer cells in a continuous blood flow environment. With an ability to create virtually any combination of tissues at high volumes for evaluation using this technology, we believe that the drug development cycle can be shortened success rates enhanced, and the use of animal testing ultimately eliminated over time. From a financial standpoint, our goal is to establish key contracts with the pharmaceutical industry companies over the next year to affirm the technology and incorporate it into drug development protocols. Needless to say, I'm tremendously excited about the potential of this new business, and I'm driving to see early customer validation of our technology. Investors in our company should note that we believe systemic bio given its highly advanced bioprinting and biomaterial capabilities, and its business model of selling proprietary HVIOs chips rather than printing technology, has the potential to achieve profit margins more like a biotech company than a manufacturing technology supplier. Based upon early customer feedback, I believe SystemicBio could be a $100 million revenue company within five years. I'm confident that we'll announce the first agreement with a major pharmaceutical company in the near future, and we'll look forward to sharing the progress with you. Before I turn the call over to Michael, I'd like to close my remarks by turning to slide 10 to highlight our software business. 3D Systems has long been an innovator in 3D printing software, offering specialized applications such as GeoMagic, 3D Sprint, and 3D Expert. We advanced that position significantly in late 2021 by acquiring Okten, a leading provider of software solutions that utilize AI, and machine learning to help manufacturers intelligently automate their entire digital production workflows. Since the acquisition of Octon, we've transformed our entire software go-to-market strategy. All software operations are now under a single management structure, that being Octon, and we're integrating 3D Systems' legacy standalone applications into the Octon manufacturing OS. The end-to-end result will be complete cloud-based digital manufacturing solution that is hardware agnostic, and technology neutral. It will be able to seamlessly integrate the entire factory floor across multiple sites with a digital thread that provides complete control and traceability of every action in the manufacturing workflow, from order to delivery. The combined suite of Octen and 3D system software provides by far the most complete and feature-rich software offering in the additive industry today, as shown in the comparison table on slide 10. While customers themselves can put together point solutions for each feature, an approach commonly called do-it-yourself or DIY, they're hesitant to do so given the cost and complexity of the approach. The only alternatives to this approach are the leading CAD suppliers shown in the middle column or other 3D equipment manufacturers who at best have only a fraction of the capability spectrum that Octen offers. And we will continue to refine and add to the Octen offering over time through both R&D investments and through commercial partnerships with leading players in the field of industrial automation. As just one example of our development roadmap, Octon is in partnership discussions with major manufacturing partners that would include joint development of new software functionality and part identification, e-commerce, and cataloging. Most importantly, the new integrated Octon suite of applications not only leads the industry, It has the potential to become a key enabler of true serial scale additive manufacturing that can make an impact on our entire industry. For this reason, we have opened Octon's availability to the entire additive manufacturing industry. This includes all elements of the new Octon platform, including the historical 3D systems printing software, as we believe it will have a tremendous impact on the acceptance of additive manufacturing broadly. To facilitate industry-wide adoption, The Octon business is run as a standalone operation with a high priority on protection of user-sensitive data, including externally audited firewalls to ensure security and confidentiality. With this approach, Octon's gaining traction every day and now has customer wins in the automotive, aerospace, contract manufacturing, healthcare, and dental markets. With growth potential ranging from double to triple digits, we're very excited about the future of this software platform. And with that, I'd like to turn the call over to Michael to review our third quarter financial results. Michael?