3D Systems Corporation

Hello, and welcome to the 3D Systems fourth quarter and full year 2022 conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Russell Johnson, Vice President, Treasury and Investor Relations. Please go ahead.

Good morning and welcome to 3D Systems' fourth 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 discussion 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 gap 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'll begin this morning with some comments on 3D Systems' performance and achievements during 2022. and then I'll share my thoughts on the company's outlook for 2023 and what we'll be focusing on in the year ahead. After that, I'll hand the call over to our CFO, Michael Turner, for a more detailed discussion of fourth quarter and full year 22 financial results, as well as our guidance for 2023. So with that, let me turn to slide five and start with a quick recap of last year. I'll say up front that while we came in short of our original financial goals set at the beginning of the year, I'm very proud of what our company ultimately achieved, particularly given the headwinds that we encountered during the year, a few of which were common to many companies and one of which was unique to ours. It's important that we be as clear as possible about these factors as they directly relate to our view of the year ahead and actions we're taking in response to them. First, while COVID-driven supply chain issues were nagging problems throughout the year, they were no worse than what we had anticipated and they continued to improve throughout the year as expected. Much more impactful, however, was the rapid rise in inflation, which reduced consumer demand for a variety of elective medical procedures. At 3D Systems, we felt this most acutely as a significant slowdown in our dental orthodontic business, which declined significantly as consumers shifted their spending to more basic necessities, such as groceries, clothing, and energy for their homes and cars. This inflation also manifested itself in higher labor and material costs in our products, which created challenges in gross profit margins as our pricing opportunities at times lagged the cost trends. Second, economic uncertainty and recession fears led some of our customers, particularly in the industrial manufacturing space, to become more cautious and defer new investments in equipment and inventory. Third, while the COVID situation improved in the United States, economic activity in parts of Asia continued to be disrupted by factory shutdowns and restrictions on daily life. And finally, the tragic war in Ukraine not only led us to halt sales into Russia, but also dampened demand for key European markets in general. Facing into these factors, we updated our external financial guidance and took a number of concrete steps to control costs and drive near-term operational efficiencies. I want to commend our entire global 3D Systems team for staying nimble and working hard to manage through what proved to be a very challenging year. Thanks to their efforts, We had a solid second half of 2022 delivering well on our key customer commitments. One of the most important things to emphasize with regard to 2022 was that it proved to be an extraordinarily productive and strategic year for our company when you consider the foundation we've put in place for our company's future. Last year, we made it clear that 2022 would be an investment year for 3D Systems. And indeed, we invested during the year in a number of key areas, refreshing our product portfolio, continuing to build a world-class regenerative medicine business, and improving our corporate and regulatory infrastructure such that it can be leveraged to support future growth. I'm pleased to say that we're already harvesting the benefits of some of these investments in the form of important new technologies, new customers, and new sources of revenue. Capitalizing on these early wins will be a key focus for us in 2023, and I'll speak more about that in a moment. It's also important to note that we invested heavily during 2022 in the highly attractive emerging businesses such as regenerative medicine. While these efforts are largely pre-commercial today, their future impact will become increasingly apparent over the next two years. And while this investment spending impacted our 2022 results, I'm committed to stay the course in 2023 and beyond, prudently balancing these expenses, with efficiency initiatives that are needed in order to assure customers of our ability to support their growth needs over the long term. These investments are absolutely the right strategic decision for 3D Systems, given the continued acceleration of additive manufacturing and production environments and the opening of entirely new markets as the costs of adoption continue to fall. We're at the forefront of this dynamic and well positioned to deliver the value it promises for all of our stakeholders. Moving to slide six, during 2022, a crucially important investment focus for us was updating and expanding our industry-leading product portfolio, including hardware, materials, and software. In particular, our hardware teams undertook a comprehensive effort to refresh our most critical printer platforms, and they've already achieved several important milestones on this front. Last year, we launched the SLA750 and SLA750 Dual. our fastest-ever stereolithography printer that's ideal for large-format, high-volume polymer applications. This all-new platform is the largest, fastest, and most precise SLA printer on the market and has enjoyed an enthusiastic reception from our industrial, aerospace, and automotive customers. Just last week, we announced the BWT Alpine F1 team has purchased four of our new SLA 750 printing systems after having extensively tested the product during its beta phase. The Alpine F1 team is currently producing 25,000 additively manufactured parts per year using 3D Systems equipment and materials. The team will use our SLA 750 to accelerate their builds of complex aerodynamic parts for wind tunnel testing, as well as small composite tools and high temperature bonding jigs. The SLA 750's evolution is a perfect illustration of the strategic capability we're building at 3D Systems. The ability to drive growth through rapid innovation by accelerating new products from the design lab to the customer market. And two weeks ago, we introduced a major upgrade to our industry-leading jetting printer, the MJP2500W+, which is ideally suited for jewelry and other small precision casting applications. This upgraded platform is specifically designed to produce complex, high-quality, pure wax, 3D-printed jewelry patterns with new levels of speed and precision. It was developed in close collaboration with end users and responded directly to the needs of our customers operating in mass customization production environments. As I noted earlier, a key focus for 2023 will be to harvest the near-term benefits of these technology investments. The SLA 750 and refreshed MJP 2500 are two early examples of the investments we're making in rapid customer-focused innovation. We'll accelerate the cycle of of performance upgrades during 2023 with a number of new platforms scheduled for launch throughout the year. Now moving to slide seven. In addition to these organic investments in our legacy printing platforms, in 2022 we further accelerated expansion of our hardware offerings by acquiring three early stage production printing platforms, Titan, Camovus, and DPPolar, each of which offer unique advantages in specific markets. We're very optimistic about the potential for each of these new systems. While still in the early stages of launch, we're already seeing exciting signs of what these revolutionary technologies can accomplish. Let me take a minute to share one example with you. Just last week, we witnessed the achievement of a major milestone for our healthcare solutions group when a surgical team at Austria's University Hospital in Salzburg executed the first clinical implantation of a 3D printed cranial plate manufactured from medical grade peak polymeric materials using a Camovus printer. This printer was specifically developed for precision printing of medical grade high performance polymers such as polyether, ether ketone, or peak. Using a Camovus printer installed at the point of care inside the hospital, the surgical team customized and printed a cranial implant to precisely match the patient's specific anatomical profile and related physiological needs. In this instance, it was critically important to not only create a suitable skull plate for protection of the brain, but given the size of the replacement section needed, to also lightweight the unusually large cranial plate by 3D printing it with a porous honeycomb internal structure, an outcome that would have been impossible using traditional manufacturing techniques. This type of personalized, patient-specific, point of care implant application that takes advantage of the performance and biocompatible properties of peak material is exactly why we acquired Comovus and are integrating their platform into our overall portfolio. As this technology now comes online, we're uniquely positioned to provide surgeons a full spectrum of printed solution options ranging from titanium and cobalt chrome for joint and bone replacement to advanced medical grade polymerics for spinal, cranial, and other targeted orthopedic applications. each of which is customized to precisely match the patient needs using the digital tools and processes that we've pioneered over the last decade in our healthcare business. These solutions provide better, faster, and lower cost outcomes to patients in a rapidly growing range of orthopedic applications, which will drive sustained, long-term growth in our existing healthcare business. When combined with our opt-in software platform, which is now in process, The ability to standardize and automate orthopedic workflows will further accelerate the application of this technology for patients around the world. I'm proud to say we're the leader in this market, and we're making the key investments required to remain so. As we move forward with these and other investments in our product portfolio, our goal is clear. 3D Systems will continue to offer the most complete, innovative lineup of 3D printing solutions in the industry. and will remain the partner of choice for customers wishing to unlock the vast potential of true serial scale additive manufacturing. Moving now to slide eight. Another strategically important area of investment focused during 2022 was regenerative medicine. As I've shared with you previously, I believe that regenerative medicine is the next frontier for additive manufacturing. Moreover, I'm convinced that 3D Systems is uniquely positioned to lead this emerging growth industry. We combine a set of attributes that no other company can claim, including a 30-year plus track record of developing high-resolution 3D printing applications, deep proficiency in material science, a strong foundation of quality and regulatory expertise to draw upon, and hands-on experience in human tissue engineering gained through both strategic acquisitions and through our multi-year organ partnership with United Therapeutics. Over the last 12 months, our regenerative medicine program has achieved remarkable milestones that offer a preview into the extraordinary growth potential of this emerging business. In 2022, 3D Systems and our longtime biotech development partner, United Therapeutics, publicly unveiled a 3D printed lung scaffold that represents the most complex 3D printed object ever manufactured. This extraordinary engineering achievement has already demonstrated functional gas exchange in animal models. Based upon progress made last year, we believe that our 3D-printed lungs could enter human transplantation trials within five years, a significantly accelerated timeframe to what we just envisioned back in 21. Also in 22, we announced the formation of Systemic Bio, a wholly-owned startup company that's leveraging our expertise in vascularized tissue printing to develop and manufacture a unique organ-on-a-chip technology called HViOS. for use in drug discovery and development by the pharmaceutical industry. I want to remind everyone that SystemicBio will not be a traditional vendor of 3D printers and materials. Instead, SystemicBio will partner directly with major pharmaceutical companies to jointly develop hBio chips tailored to specific organ and disease functions and market those chips directly to pharmaceutical and biotech companies engaged in drug discovery. I'm sure you can all appreciate the substantial increase to our company's baseline profitability that we would drive by becoming a major supplier of customized high-value biotech products to the pharmaceutical industry, as well as the re-rating of our company's valuation multiple that could result from this change. As we speak, our systemic bio team is actively engaged in commercial discussions with potential partners and customers. I look forward to having more news to share with you on this front in the near future. And just two weeks ago, we announced yet another milestone, a new regenerative tissue program that's a direct outcome of the success we've achieved in 3D printing human organs, scaffolds. This internal research and development effort is combining bioprinting technology, biocompatible 3D printing materials, and patient-derived cells to manufacture vascularized hydrogel scaffolds that mimic a patient's anatomy, and physiology and can deliver improved outcomes in a variety of surgical applications. The first 3D printed product that we have under development is regenerative breast tissue. This breakthrough application could offer dramatically improved implant-based reconstruction option for millions of women diagnosed with cancer each year. It could also open up a significant new market opportunity that 3D Systems is uniquely positioned to address. A key point regarding our ongoing investment initiatives is we're only pursuing R&D programs and new additions to our product portfolio that we believe offer attractive returns and are consistent with our company's mission to provide application-focused solutions to high-value, high-growth industrial and healthcare markets. Given its strategic importance, we maintained our heavy investment focus during 2022 despite macroeconomic and geopolitical headwinds. as well as greater than expected softness in our key orthodontic market. Doing so required us to target our investment spending very carefully, control our operating costs, and utilize our strong balance sheet. I remain convinced that the programs we supported during 2022 and will continue to fund in 2023 are building a solid foundation for future growth and profitability that we'll be able to leverage for many years to come. Moving now to slide nine. I'd like to highlight several recent internal activities that have already provided us with important performance benefits and will continue to do so as we move through 2023. Last year, we achieved meaningful success in better aligning our manufacturing and supply chain operations with our company's operating profile and emerging product portfolio. During the second half of 2022, we completed a major step in this process by insourcing a significant amount of our polymer printing platforms into our South Carolina manufacturing operations. This transition required us to incur some one-time cost, as well as take inventory onto our books ahead of need, which in part explains our elevated inventory levels at the end of the year. But the change has already improved our gross margins and positively impacted delivery reliability and product quality for our customers. In 2023, as we accelerate the pace of new product releases and track to our financial performance targets, you have my commitment that we will be laser-focused on driving operational excellence and cost efficiency. Yesterday, we announced an important step in this process, a restructuring initiative that will improve our 2023 profit profile by better aligning our European engineering and manufacturing operations for our three metals platforms, streamlining our software organization, which is now consolidated under Optin, and focusing our product portfolio on platforms that bring the highest long-term value to the market. These actions, which are the culmination of integration activities and optimization planning conducted throughout 2022, will allow us to achieve significant cost synergies in 2023 and beyond, as Michael will detail later for you. Beyond these discrete measures to maximize efficiency, during the fourth quarter of 2022, we laid groundwork for further operational improvements by undertaking a major reorganization of our operations and engineering functions. who now aligned all of 3D Systems engineering design, product management, procurement, manufacturing, and logistics under a single member of my executive team, Dr. Joe Zeicher, who recently joined the company to take on this new role. Under Joe's leadership, our operations engineering teams will work together to drive an organization-wide focus on operational excellence. Their primary mission will be to ensure a seamless progression from product design to full-scale manufacturing for every element in our portfolio. Before handling the call over to Michael, I'd like to provide my broad perspective on our outlook for 2023. In our new four-year guidance, which Michael will present to you shortly, we're prudently assuming that the dental market slowdown that we experienced in the second half of 22 will persist throughout 23. Outside of dental, we see considerable strength in virtually all other markets across our healthcare and industrial solution segments. Putting this all together, we expect to achieve consolidated revenue growth for 2023 in the mid-single digits, supported by growth rates in the mid-teens for our non-dental markets. This growth profile, plus the operational and cost efficiencies that will drive throughout 2023, should allow us to generate positive adjusted EBITDA and free cash flow for the full year, excluding any one-time restructuring costs that we may incur. I want to emphasize that our 2023 guidance fully reflects continued investments in growth areas of our business, including new product developments, R&D, and creating a world-class regenerative medicine business, all of which are critically important activities designed to support future growth. As we enter the new year, I've never been more excited and confident in our company's leadership position in the 3D printing industry, particularly given the technology, application expertise, and operational foundation we've worked so hard to put in place over these last few years. In 2023, we're committed to drive financial results in line with our leadership position. Finally, before concluding my remarks, I'd like to note one additional topic. Earlier this week, the U.S. Departments of State, Justice and Commerce announced that these agencies have settled their open investigation with 3D Systems into alleged export control violations by 3D Systems that previously took place between 2012 and 2019. We've disclosed this matter in our FCC filings for some time now. Under this settlement, 3D Systems will be subject to civil and monetary penalties as well as certain remedial compliance measures as part of our three-year consent agreement. The company is pleased to have reached a settlement with the agencies and remains committed to continuing to enhance its export control program. Looking forward, I'm very proud of the compliance culture, processes, and infrastructure that we've now established at 3D Systems and that we'll continue building upon. We are fully committed to not only meeting all required standards, but being a true leader in what is an essential element of all complex global businesses today. With that, I'd like to turn the call over to Michael Turner, our CFO. Michael?