3D Systems Corporation

Chief Financial Officer, and Andrew Johnson, Executive Vice President, Chief Corporate Development Officer, 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 pose 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 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 2022. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Mick, and good morning, everyone. I'll begin this morning with some comments on the major drivers of our first quarter performance and how we anticipate the rest of the year unfolding at this point. I'll include progress we've made against some key strategic objectives, including partnerships and initiatives that we've previously announced. After that, I'll hand the call over to our CFO, Michael Turner, for a more detailed discussion of our first quarter financial results and our updated guidance for 2023. With that, let me turn to slide five and start with a quick recap of the quarter. In describing our current market dynamics, they can best be characterized as being strongly bifurcated, with one specific market being soft and the remainder being strong. I'll begin with the negative, and that being the dental orthodontics, or more specifically, the clear dental aligners business. As most of you know, we have a particularly strong position in this market. As we've said for the last few quarters, demand has been severely impacted by reduced consumer discretionary spending, as inflation has forced many consumers to focus on meeting life's necessities, such as food, gas, and rent. While we're pleased that this market seems to be stabilizing, it has yet to return to growth. Compounding the economic impact on the actual market demand has been our customers' desire to reduce inventory levels, which had grown significantly during the COVID period. We expect this pressure to continue through mid-year and then moderate as supply and demand come back into balance in the second half. This assumption is reflected in our guidance for the year. Looking ahead, provided a deep recession can be avoided as inflation now moderates, we would anticipate this market returning to growth in 2024. Turning then to the orthopedic half of our healthcare business, the story becomes very positive. This market continues to be robust, which in Q1 translated again into strong double-digit revenue growth. As many of you are aware, 3D Systems was a pioneer in this field, beginning with the creation of customized medical models in the early 2000s, and since that time expanding significantly into human musculoskeletal applications based on our rapidly growing orthopedic expertise. This transition from simple medical models into applications within the human body was a titanic undertaking for our company spanning many years, with success requiring not only the development of compelling technologies, but the establishment of world-class process disciplines and quality practices accompanied by the required regulatory approvals that are the price of entry for any company that wishes to participate in this market. Fast forward to today, we're a recognized leader in cranial, maxillofacial, and spinal orthopedic applications. And over the last few years, we've expanded our focus to include many additional indications in the human skeletal system. This expansion in our orthopedic business is a key element of our strategic growth plan for the future. Success in these new orthopedic indications requires first that we continue to advance our printing hardware and material systems, which now fully encompass both metal and polymer platforms, and to do so with increasing software integration that incorporates AI and machine learning to optimize the full medical workflow, from receipt of the patient's digital imaging data through the surgical planning process with the patient surgeon, and then to the printing and finishing operations which provide patient-specific medical implants. We can produce these implants within days of the initial request and do so while manufacturing custom surgical instrumentation and cutting guides to aid the surgeon in the OR. To date, we have used this process to bring life-changing orthopedic repairs to well over 150,000 individual patients, and the number grows daily. Often an example is helpful in fully conveying the nature of what we do. If you look at the left-hand side of slide number five, you'll see an actual digital image of a patient suffering from a cancerous tumor in their leg and pelvic region. Traditionally, this type of tumor would have been removed by amputation of much of the surrounding bone structure, which in this case would have cost the patient one of their limbs and part of their pelvis. Through the use of our DICOM2PRINT and Freeform software, Our engineers working with the patient's surgical team were able to design and print the needed high-precision cutting guides and surgical instrumentation that allowed the tumor to be carefully removed. Then in the same operation, install a custom patient-specific tri-flange titanium implant to reinforce the remaining bone structure, thereby avoiding amputation of the limb. This complex implant was manufactured using our Optum 3D Expert printing software in combination with our DMP350 metal printing system. This entire process from first interaction with the patient data to completed medical device was done in days, allowing the patient to receive the treatment they so badly needed shortly after the first diagnosis. While the technology itself is remarkable, the speed and economics of this entire orthopedic workflow has now improved to the point of large-scale adoption. Even with this progress, we continue to challenge ourselves to push even further on capability and cost efficiency. For example, this year we moved from a single laser metal printing platform to a dual laser system, which dramatically improves production throughput. And we've recently expanded from a focus on titanium materials, which are preferred for many applications in the human body, to a special cobalt chrome material that's needed for use in articulating joint repair and replacement, such as the human knee. We're the first to do this through 3D printing, which opens the door for a much greater degree of economic customization and joint replacement, which is becoming a common need in an active but aging population. Moving to our industrial solutions group, we're also seeing continued strong demand, driven largely by automotive, electronics, and military aviation and space markets. In the electronics market, I would specifically call out electrical connectors as a leading application for additive manufacturing. which can be attributed to a very high number of part types that are geometrically complex and produced at lower volumes or on a very irregular basis. These types of applications benefit greatly from the avoidance of hard tooling and dedicated injection molding capacity for their manufacturer. While our development efforts for connectors has been progressing behind the scenes for some time, in the first quarter we were pleased to announce publicly our collaboration with TE Connectivity, a world leader in connectors and sensors. Our joint program focuses on developing an additive manufacturing solution to produce electrical connectors that meet stringent UL regulatory requirements at scale for use within our partner's global factory network. The production solution illustrated on the right-hand side of slide five comprises a modified figure four modular printing platform, unique polymeric materials that have been the first known to pass the UL standards for flame retardancy, our 3D sprint software, and our global services capability. Instrumental to the success has been a newly developed photopolymer that we engineered specifically to meet TE Connectivity's requirements for performance and cost, and in parallel, the hardware performance to produce the precision and speeds at an industrial scale. This is a great example of how we're partnering with industry leaders in key markets to accelerate innovation and build competitive advantage through additive manufacturing solutions. We believe TE Connectivity has the potential to become a significant customer for us, and we're honored to be their partner. As 2022 was an investment year, I'm pleased to address the progress we're making on some of our recent acquisitions. Moving to slide six. Last quarter, we shared 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 material using a Camovus printer. This printer was specifically developed for precision printing of medical grade high performance polymers. It received early approval by the European regulators for this procedure, and a similar process is underway in the US with the FDA. 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. A few months after the procedure was performed, we're thrilled for Mr. Turner and the relief that this has brought to him. We are deeply indebted to the talented surgeons and staff at Salzburg University Hospital who brought together for the first time our unique software, hardware, and materials technologies in a point-of-care hospital setting to address his specific needs. We believe that this success provides a real-life demonstration of the potential for enhancing orthopedic outcomes through the use of comprehensive digital manufacturing technology within a hospital setting. Our focus on point of care implementation of these integrated technologies is a key priority for our company and one that we believe will bring significant benefits to patients around the world in the years ahead. Here's a picture of Mr. Trummer several weeks after the surgery where his recovery is on track and very apparent for all. Now turning to slide seven. The next area I want to update you on is the recent news regarding our software division, Octen, which we acquired in 2021. Octen's unique cloud-based AI-enabled manufacturing operating system accelerates deployment and automation of digital manufacturing in production environments to improve efficiencies and reduce cost. Octen recently announced the first comprehensive update on the adoption of this system in the dental market. To date, several hundred dental labs have now adopted Octen's manufacturing operating system worldwide in the first 18 months of its availability. With dental labs now migrating quickly to the Octen platform to manage their operations, customer feedback has been overwhelmingly positive, as demonstrated by churn rates ranging from negative 20 to negative 30% for the software meaning that customers are not only renewing their initial licenses, but are rapidly expanding the number of licenses they're using at each of their operational sites. Production efficiency gains exceeded 50% in the first year of implementation, and the ratio of lifetime value to customer acquisition cost of over five demonstrates the value creation through opt-in adoption. Now moving to slide eight, I'd like to provide some updates on some of our most recent exciting R&D efforts. Another strategically important area of investment focus last year was regenerative medicine, and we had 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 H-BIOS for use in drug discovery and development by the pharmaceutical industry. Systemic Bio will partner directly with major pharmaceutical industry partners to jointly develop HVOS chips that are tailored to specific organ and disease functions, and then market those chips directly to pharmaceutical and biotech companies engaged in drug discovery. I am very happy to announce today that we've signed our first contract with a major pharmaceutical company for application of our HVOS chip technology. While we do not yet have permission to disclose the company name, in this program we will establish a bioprinted vascularized tumor model to be used for drug discovery and development efforts in oncology. Given development timelines in the industry, our efforts will seek to accelerate the development of new patient-specific therapies using these tumor models. This will be a multi-year collaboration to test the response of a patient's tumor through a variety of anti-cancer therapies through the use of our H-BIOS technology. We're extremely excited about the potential for the widespread adoption of our H-BIOS chip technology and view this initial contract as early initial validation of our approach to reducing the development cycle for new drug therapies. Turning then to slide nine, as we've stated before, a key point regarding our ongoing investment initiatives is that we are only pursuing R&D programs and new additions to our product portfolio that we believe offer attractive returns and are consistent with our company mission to provide application focused, additive manufacturing solutions to high-value, high-growth industrial and healthcare end markets. As you saw in our announcement last week, we are very excited to enhance our Selective Laser Centering, or SLS, offering with the planned acquisition of WeMatter. With their Gravity Essential and Essential Plus and Enterprise line of SLS printers, WeMatter brings affordable, turnkey, closed-loop solutions that make SLS accessible for smaller production environments. enabling a broader population of potential customers whose manufacturing space is limited. In addition, their portfolio of over 20 SLS material types enables them to address a wide range of applications for industrial, medical device, and academic research markets. Importantly, WeMatter emphasizes a new standard for customer ease of installation and use, and a focus on environmental sustainability with its unique integrated powder handling and recycling system. While having a robust internal development program can meet most of our emerging customer needs, we view strategic bolt-on acquisitions such as WeMatter with their unique printing technology as having a smaller but important role to play in our continued expansion into new customer-specific applications across our two business units. We expect to close the WeMatter transaction in early July. Shifting to our internal development efforts, I'm pleased to share that our announcement late last year of the revolutionary SLA750 Dual, the world's first synchronous dual laser SLA printer, continues to garner excitement and remains on track for a summer release. As a reminder, the trailblazing SLA Dual delivers twice the speed and three times the throughput of competing platforms, dramatically improving productivity and cost efficiency. industrial printing system, as confirmed through our extensive beta testing with select customers, will be the industry leader in print size, speed, accuracy, and resolution, delivering parts with unmatched surface finish and mechanical performance. When leveraged with the Okta manufacturing platform, it unlocks the true power of seamless integration on the factory floor. We believe that this system will become a mainstay in industries such as transportation, motorsports, consumer technology, and durable goods, manufacturing services, aerospace, and health care for many years to follow. In addition to introducing our newest growth initiatives, I believe it's good discipline to provide an update on some of our previous announcements, particularly if there's a directional change to note. Along these lines, in February of 2021, we announced a collaboration with Jabil Corporation, a longtime customer and partner for the development product we called Roadrunner. Using extrusion technology, this product aimed to offer several benefits to industrial markets, including increased speed, high temperature material capability, a larger build area, and enhanced precision. The intent with Roadrunner was that customers would use a standard filament input material, much of which Jabil was capable of supplying. However, as this program got underway, we continued studying alternatives, including moving to a pellet extrusion technology, which offered the potential for a much lower material cost. As we dug further, we discovered a small company in Colorado called Titan Robotics that had developed such a printing platform. In short order, we elected to acquire Titan and integrate it into the 3D Systems family of printing platforms and operating systems. The net result was a quicker, surer path to market for a machine that from the outset had many of the attributes we were looking for in the Roadrunner system. Today, the Titan platform is in full production. and is rapidly gaining customer acceptance across several significant industrial markets. Since acquiring this talented group of engineers, we've continued to build on the Titan platform, reinforced with technology that we both developed ourselves and gleaned from our subsequent acquisition of Cumobus, which as I mentioned earlier, has a novel extrusion technology for high performance medical and aerospace grade polymers. Through both the Cumobus and Titan platforms are now being integrated and expanded upon through our internal investments, to continue our move into the broader extrusion market. Stay tuned for future developments in this area, as there very well may be a son of Roadrunner in the offing. The second initiative that we'd like to update you on is the partnership we announced in June of 2021, which focused on the bioprinted regenerative soft tissue matrix for use in breast reconstruction. While the initial exploratory efforts of our partners' results were promising, as the program progressed, Material scientists in our laboratories independently developed alternative materials which we believe were better suited for both breast reconstruction and other soft tissue applications. As such, earlier this year, we decided to pursue these applications by ourselves and have continued our own efforts in the printing of vascularized soft tissue using our unique materials and printing technology. We detailed this effort in a release we made in February of this year. This human tissue program has shown great promise in the large animal studies that we've completed to date, as we have subsequently announced. We remain excited about this effort and the rapidly increasing number of human applications that continue to emerge from this program. And finally, regarding our acquisition of the high-speed rotary printing platform, DP Polar, we're moving along quite well with the first beta phase units that will launch with select strategic customers in key industrial and healthcare growth markets. We expect the first of these units to be installed in late summer and more to follow in the fall. These units are specifically designed for high speed printing of high volume, high mix polymer components. We'll update you once again as we gain customer feedback from this initial trial launch. Now moving to slide 10. Before turning the call over to Michael, I'd like to update you on our outlook for 2023 and beyond. Let me make a very clear statement of our operating philosophy. As a leader in our industry, we believe it's important to demonstrate that we can deliver both exciting growth and profitability levels sufficient to support the ongoing investment requirements that are needed in order to meet rapidly expanding customer applications. As such, earlier this year, we announced a restructuring initiative to 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. We're progressing very well on this front, and as we announced last night, we've now expanded our restructuring efforts to reduce headcount by approximately 6% across all functions of the company. We feel it's necessary to prudently manage our cost structure and step with the uncertainties associated with the broader macroeconomic environment. And most importantly, our previous investments in productivity are now allowing us to harvest more cost efficiencies as the year progresses. As Michael will detail for you later, we have increased our guidance to deliver $2 million or more in adjusted EBITDA in 2023 with no change to our outlook for revenue, non-GAAP gross profit margin, and free cash flow. In closing, I'd like to address a question that's arisen from some of our analysts that follow the company regarding our historic core health care and industrial businesses and the additional investments that we're choosing to make in regenerative medicine, which is not generating material revenue for us today. Very specifically, we're being asked why. Particularly in these challenging times, are we choosing to make these investments? First, let me be as clear as possible about the magnitude of our investment. including within our full year 2023 guidance, is a plan to invest between $10 and $12 million in systemic bio and our other regenerative medicine initiatives related to human non-organ tissue development. In addition to this, we're also receiving significant external support for our human organ development efforts from our partner, United Therapeutics. To state the obvious, if we were not committed to this effort, our EBITDA performance would be much greater this year. The reason that we're making these investments is very simple. We have an incredibly unique and exciting opportunity to drive unprecedented change in the field of medicine and in tens of thousands of people's lives who can benefit from this technology. It's an opportunity we are uniquely positioned to unlock with a series of highly strategic investments that have the potential to drive significant change for the future of the company and, more importantly, a life-changing impact on society. and we're fortunate to be in the position to fund them with our strong balance sheet and profit-generating businesses inherent in our core portfolio. The benefit for all stakeholders, including our shareholders, our employees, and importantly, the people's lives that we will impact, will be exceptional. As to our timeframe, I'll remind you of the goal that our partner, United Therapeutics CEO, Martin Brozblad, stated at last summer's CNN-sponsored Life of Self event that within five years, we'll have a printed organ in human clinical trials. Today, we're a year closer to making this goal a reality. You can expect more announcements related to our human and pharmaceutical efforts in the future. Until then, our core businesses are thriving. We're making the progress needed in each key market to ensure that we retain our leadership position. And with that, Let me turn the discussion over to Michael for more detail on our financial performance and our outlook. Michael?

Thanks, Jeff. Before I start, I'd like to make a few comments regarding seasonality and year-over-year comparisons as an important backdrop to today's discussion on slide 12. As I commented during our last call, it has been typical for 3D systems to begin each year with a relatively lower first quarter, then go through somewhat higher second and third quarters and finish a year with a strong Q4, customers flush their annual budgets and stock up on inventories for the coming year. 2022 did not follow this same trend, primarily due to a shift in demand patterns in the dental market. Therefore, we would expect the distribution of quarterly revenue for 2023 to be more in line with the distribution of quarterly revenues in 2021, as opposed to what we saw in 2022. To set the stage a bit more, let's turn now to our first quarter revenue summary on slide 13. Our results in Q1 came in largely as expected, with dental softness impacting our growth on a year-over-year basis. Excluding the expected decline in sales to our dental customers, we experienced solid growth across our businesses, demonstrating consistent growth in demand for the recipe and market served by our industrial and healthcare solution segments, which I'll detail for you shortly. Q1 revenue of $121 million decreased 8.8% compared to the same period last year. Q1 revenue on a constant currency basis decreased 6.5%, reflecting the anticipated weakness in the dental orthodontics market. Q1 revenue from our non-dental markets increased 12% on a constant currency basis compared to the same period last year. Specific to our segments, healthcare solutions revenue decreased 24.3% to $48.7 million compared to the same period last year. Healthcare solutions revenue on a cost of currency basis decreased 23.4% versus the prior year due to continued softness in our dental orthodontic market as expected, which was down approximately 46% versus the same period in the prior year. Our dental orthodontic market had a particularly strong first half of 2022, followed by a significant decline in the second half of 2022, broadly due to adverse macroeconomic conditions. In our last earnings call, we mentioned that we expected this market to be down approximately 35% in 2023, and that view remains unchanged today. For the remainder of our healthcare solutions business, revenue from our non-dental markets was up by more than 22% on a constant currency basis versus the same period last year, and we continue to expect double-digit growth in this business, driven by strength in both the orthopedic market and the CMS space, on the basis of increased market adoption and technical advancements. Turning now to our industrial solutions segment, where revenues increased 5.6% at $72.5 million compared to the same period a year ago. As we noted in the past, our industrial solutions segment is more exposed to FX rate movements than our healthcare solutions business. Excluding the impacts of FX, industrial solutions revenue increased by over 9% versus the prior year driven by strong performances in consumer auto and OEM, academic and research, and electronics and connectors. Jewelry and service bureaus continue to be key markets for industrial solutions. Moving now to gross profit on slide 14. Gross profit margin in the first quarter of 2023 was 39% compared to 40% in the same period last year. Non-GAAP gross profit margin was 39% compared to 41% in the same period last year. The decrease is primarily due to lower overall sales volumes resulting in reduced fixed cost leverage, unfavorable sales mix, and input cost inflation. On a sequential basis, non-GAAP growth profit margins were down by approximately 200 basis points due to normal seasonal trends with the lower volumes driving lower fixed cost leverage. We maintain our view that full year growth profit margins will be between 40% and 42% for the year. I'll speak more on seasonal impacts to gross profit margin shortly. Moving now to slide 15, adjusted EBITDA decreased by $12 million to negative $10 million in the first quarter of 2023 compared to the same period in the prior year. The decrease in adjusted EBITDA primarily reflects lower sales volumes in our dental orthodontics market and inflationary impacts on our input costs, as well as spending in targeted areas that support future growth, including expenses from acquired businesses, research and development costs, as well as investments in regenerative medicine and corporate infrastructure. Net loss of $29.4 million resulted in a diluted loss per share of 23 cents and a diluted non-GAAP loss per share of 9 cents. The year-over-year EPS decline reflects all the factors that we previously discussed. Turning now to slide six for an update on our balance sheet. We ended the quarter with approximately $530 million of cash in short-term investments on hand, which is down $39 million from year-end levels. The decrease resulted primarily from normal seasonal use of cash from operations of $28 million, capital expenditures of $9 million, and taxes paid to net share settlement of equity awards of $2 million. We continue to have a strong balance sheet with sufficient cash to support organic growth in our investments in our pre-commercial businesses, and we maintain our view that we will achieve break-even or better free cash flow during 2023. I'll conclude my remarks on slide 17 with an update on our restructuring efforts and our updated full-year 2023 guidance. Last night, we announced the next phase of our restructuring initiative to improve operating efficiencies throughout the organization in order to drive long-term value creation. The next evolution of this restructuring initiative will target a reduction in headcount by approximately 6% of our workforce, which is being enabled by prior investments made to improve business processes, operational efficiencies gained, and continued integration of acquisitions completed over the last two years. We expect this initiative to reduce operating expenses by approximately $4 to $6 million in 2023 and provide annualized savings of $9 to $11 million beginning of 2024. This is in addition to the restructuring initiative that we announced earlier this year, which we continue to expect will deliver savings of $2.5 to $3.5 million in 2023 and $5.5 to $7 million in 2024 and beyond. We expect the combined impact of both initiatives to deliver $6.5 to $9.5 million of savings in 2023 and $14.5 to $18 million in 2024 and beyond. As a result of this most recent phase of our restructuring initiative, and our unchanged views on the fundamental drivers of demand growth. We are raising our full year 2023 adjusted EBITDA guidance to $2 million or better and reaffirming our guidance for revenues, which we continue to believe will be in the range of 545 to 575 million, non-GAAP gross profit margins, which we continue to expect to be in the range of 40% to 42%, and free cash flow, which we expect to be breakeven or better in 2023. I'd also like to note, as Jeff mentioned earlier, this guidance includes expected investments of 10 to 12 million in systemic bio and our regenerative tissue program this year. Before I conclude my prepared remarks, I'd like to talk briefly again about our expected pacing of revenues throughout the year, where I'll point you to my seasonality comments from earlier this morning, as well as from our last earnings call. The short message is that if you apply our four-year sales guidance to the distribution of 2021 actual sales by quarter, it should provide an indicative view of how we would expect 2023 to unfold. This will also have an impact on our quarterly gross profit margins due to volume impacts on fixed cost leverage resulting in lower margins in the first half of the year and higher margins in the second half of the year. We believe that the prudent actions we continue to take are necessary and demonstrate our ability to harvest productivity gains and efficiencies, drive organic growth, and deliver on our commitments to profitability and enhancing long-term value creation for our future. That concludes my remarks. Operator, we are now ready to open the line for questions.