3D Systems Corporation

Hello, and welcome to the 3D Systems first half 2024 conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Nick McCluskey, Vice President, Investor Relations. Please go ahead, Nick.

Hello, and welcome to 3D Systems' first half 2024 conference call. With me on today's call are Dr. Jeffrey Graves, President and CEO, and Jeff Creech, EVP and CFO. 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. 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 our latest 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 matters. In our press release and slides accompanying this webcast, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable periods of 2023. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thanks, Mick, and good evening, everyone. With our 2023 10-K filing and our 2024 earnings releases for Q1 and Q2 now complete, we're hosting today's call to discuss our results for the first half and our outlook for the rest of the year. Following my opening comments, I'll turn the call over to our CFO, Jeff Creech, to take a deeper dive into the first half financials. We'll then wrap up our prepared remarks and open the call for questions. As a backdrop to our discussion today, I'll comment briefly on our delayed 2023 annual report filing. On December 4th of last year, we announced that following a comprehensive, months-long proposal and evaluation process, that our audit committee had ultimately decided to dismiss the company's independent auditor following the 2023 year-end audits and move to a Big Four audit firm beginning in 2024. This decision was made based upon many factors, including an assessment of each firm's capabilities in the context of our growing size and complexity as a company. Having informed all parties of our decision last December, the 2023 audit ultimately took much longer than anticipated and with significantly higher costs incurred. These costs, which we view as transitory, had a significant impact on our OPEX costs in the first half, trailing into Q3. However, they're expected to return to historically normal levels in Q4. Moving forward, we anticipate realizing greater efficiencies in the years ahead. With that, let's turn to slide five. When we last spoke in February, we mentioned the weakness we were seeing in our end markets with respect to customer CapEx spending. We believed then and now that this was driven largely by a high level of uncertainty on the part of our customers in forecasting consumer demand in the face of high inflation and rising interest rates, combined with a tense geopolitical environment in Europe, Asia, and the Middle East. These uncertainties translated the softer sales of printer hardware across virtually all of our major end markets, with sales reaching their nadir for our company in the first quarter. While indices that track consumer sentiment remain relatively weak in August, with inflation rates now trending downward and interest rates poised to follow, Our opportunity pipeline has consistently strengthened since it bottomed down in Q1. This translated to meaningful sales growth in the second quarter, with revenues up 10% on a sequential basis. Provided this environment and capex spending trends continue, we expect continued sales growth in Q3 and Q4. While we won't fully make up for the weakness of Q1, the trends are clearly moving in our favor. From an industry perspective, given the scale of our company across multiple end markets and the breadth of our polymer and metal technology offerings, I believe we have a unique perspective on the trends in the adoption of production scale additive manufacturing. These trends can best be seen through the backlog of new application development requests we're receiving from our customers. This backlog has never been higher. driven by both existing customers and new customers who see increasing benefits from the adoption of 3D printing on an industrial scale. I believe this rise in customer interest can be explained very simply. The versatility, quality, and cost of producing components with additive technology, including both metal and engineered polymers, has become economically compelling. This is true for our entire industry and across all markets. What does vary is the rate at which adoption occurs. Each market has a unique balance of needs. Markets that derive the greatest benefit from an ability to produce novel component designs, often only available with additive techniques, are the first and fastest to adopt this new manufacturing technology. This is certainly the case for healthcare as we see in both our dental and orthopedic markets. as well as semiconductor equipment manufacturing, aerospace and defense, and our industrial markets, just to name a few. But even industries that manufacture billions of parts a day, such as electrical and automotive markets, often have a significant number of SKUs that are lower volume and higher complexity, increasing the value they derive from additive manufacturing. These higher complexity component volumes can in some case rise into the tens or even hundreds of millions in total demand, dwarfing even the largest current production levels for the entire industry combined. In addition, a little-recognized but significant trend is to use additive manufacturing to replace key process steps within an existing manufacturing process. For example, a terrific but little-recognized market for our company is the application of polymer printing methods to produce cores for metal castings. For decades, cores have been a difficult, high-value element of the casting process. With our newest production printers and materials, we're able to produce complex cores for casting at a very attractive cost on demand to match the casting production rates. If we counted this in the metals technology category, the volumes would dwarf even the largest direct metal printing applications today. Given that it serves a multi-billion dollar market, highly distributed around the world. This method, first demonstrated by the aircraft engine industry, and more recently in large-scale commercial rocketry, has now become a standard element in the factory workflow for these systems. With advancements in technology that reduce cost, it's now being adopted in even higher volume production applications, such as automobiles and heavy construction equipment. So with the continued march of additive adoption, What's been missing in recent quarters is simply the confidence of our customers that they need to have in their in-market demand to warrant new capex investments in their plants. It's really that simple. As we now enter a period of lower inflation and lower interest rates, and as the world becomes increasingly risky for extended supply chains, we would anticipate a rapid rise in printer demand, and along with it, a strong pull on consumables and services. This is why we've been consistent in our R&D initiatives and customer application support over this difficult period. With our global scale and an exceptional new product pipeline, we're well positioned to benefit from this acceleration when it occurs. While overall printer demand was weak in the first half, consumables were resilient and services strengthened. Particularly in the healthcare space, materials and services grew significantly over the prior year. This helped offset weakness in printer hardware sales to some extent. Specific to the dental market, with the completion of our new long-term supply agreement in the clear aligner market, we expect year-over-year comparisons will turn positive beginning in Q3. Another bright spot in the first half of the year was our growth in services, which was up 6% year-over-year for the first half. Services are critical to our customers in two capacities. One is taking care of our installed base of production printers, which is the largest in the world today. But a key second services element is the development of new component applications for their customers. This not only provides immediate revenue, but also supports a growing pipeline of printer and consumable sales for the future. Finally, it's worth mentioning our continued success in the medical device area, which is primarily focused on orthopedic applications. For many years, we've been a leader in supporting surgeons in their planning and execution of cranial maxillofacial procedures. Over the years, we've supported thousands of surgeries by participating not only in the planning of restorative and reconstructive procedures, but also providing surgical guides and critical implants that are used to help sustain and restore a patient's quality of life. Over the last few years as our technology has evolved, We've extended this expertise to not only other parts of the human skeleton, but also into trauma environments, a new element of the market where both quality and response time are extremely important to patient outcomes. These are the areas we commonly refer to as personalized healthcare, as the solution we provide is custom-tailored to a patient's specific needs. First half revenues for personalized healthcare were up over 12% from prior year, and over 54% from the first half of 2021. This marks the 10th consecutive quarter of annual growth for this business. With multi-billion dollar markets opening up before us in orthopedics, we're extremely excited about the future. Given all these factors from a timing standpoint, we would expect full company revenues to grow at mid-single digit rates on a consecutive quarter basis in Q3 and once again in Q4. bringing our revenue to roughly $450 to $460 million for the full year 2024. Gross margins for the first two quarters continue their trends of improvement, even in the face of volume weakness. This is primarily attributable to an improving mix of consumables and services and benefits of our manufacturing and sourcing. Looking ahead, we see continued room for gross margin expansion as printer volumes begin to recover, and would expect margins to strengthen from the low 40% range. Moving to our OPEX expenses, in the first half, as I mentioned earlier, our GNA was significantly impacted by the extended close of our 2023 audit. Setting this aside, we executed well on our restructuring efforts that were announced in Q4 of last year. As a part of this effort, we closed and consolidated over 15 sites around the world and reduced our non-finance-related workforce costs significantly while maintaining our most critical investments in R&D and sales. These savings will become apparent when the costs associated with the 2023 close abate in Q4. We expect to deliver operating expense under $60 million for that quarter. With the transient costs in G&A receding in the second half, we would now expect to approach adjusted EBITDA break-even levels for Q4. Finally, over the last several months, we've taken decisive action to de-risk our balance sheet. We've reduced our long-term debt by over 50%, opportunistically buying back our convertible notes at a substantial discount. We continue to have one of the strongest cash reserves in our industry, enabling us to face uncertain economic times with the confidence of continuity in our most critical investment areas. This strength coupled with the widest range of additive solutions across the industry and our global sales and service infrastructure inspires confidence in our customers that will be there to support their long-term growth needs. From this position, we're now intensely focused on enhancing profitability without any compromise to mission-critical growth R&D and services investments in order to maximize shareholder value. Let's now shift to some of our key announcements from the first half. that are important drivers to continuing our positive and low momentum in the quarters ahead. I'm now on slide six. Within our healthcare markets, 3D Systems leverages a culture of innovation that was born when our Chief Technology Officer, Chuck Hall, invented 3D printing and founded the company over four decades ago. This pioneering work, which was recognized last year by President Biden when he presented Mr. Hall the National Medal of Innovation in Technology, would later spawn the entire additive manufacturing industry. From these roots, our health care business has emerged with two strong cornerstones today, dental and medical devices. For the dental side of our health care business, 2024 has already been an exciting year. In June, we unveiled a significant expansion of our market leading technology portfolio, which will now target all four major facets of dentistry, including alignment, protection, repair, and replacement of teeth. In conjunction with this strategy update, we were proud to announce the award of the largest contract in our company's history, with an estimated value approaching a quarter billion dollars. This five year agreement positions us as a key supplier for the indirect manufacturing of clear aligners for years to come. Building upon this 20 year heritage in the aligner market, for the last several years we've been pursuing the next wave of innovation in orthodontics, That is the direct printing of clear aligners. We believe this technology will expand the market for clear polymeric aligners, allowing full customization of the product to enhance effectiveness and positioning of teeth, while opening new options for the delivery of the product to the patient. We've made significant progress in this area and are targeting commercial introduction in late 2025. From a teeth protection standpoint, we're in the final stages of developing an advanced direct printed night guard solution to be launched through our expanding partnership with Glidewell, a recognized global leader in the supply of advanced dental technologies. For teeth repair, we're building upon the outstanding materials portfolio of our next-gen products, which are increasingly being adopted by customers utilizing a broadening range of printing techniques. And lastly, we're extremely excited about our first-to-market solution for single-teeth multi-material jetted dentures, for which we anticipate regulatory clearance later this year. Our denture technology, which will be the first introduced to the market with our launch partner, Glidewell, offers a unique combination of great aesthetics with outstanding performance, including the critical characteristic of durability, which we believe sets a new standard for the dental industry. This comprehensive approach to the dental market, which builds upon the technologies we've pioneered over the last 20 years, positions the company for significant growth and value creation in a global dental 3D printing market estimated at over $15 billion by 2032. On the medical device side of our healthcare business, our primary focus is orthopedic applications, as I described previously. Our ability to offer the full orthopedic treatment workflow to surgeons in the U.S. and Europe, spanning from the digital image to the supply of custom-finished hardware for the patient, combined with our quality-focused regulatory expertise, is unique in our industry. It enables us to thrive in the complex healthcare environment of today, offering products and services that support improved patient outcomes while complying fully with the ever-changing regulatory requirements of individual countries around the world. In an exciting development, last April we announced FDA clearance for the world's first 3D printed PEAK cranial implants. PEAK, more formally known as polyether ether ketone, is an engineered medical polymer that has performance characteristics very similar in many ways to human bone, while being transparent to x-rays and having excellent biocompatibility. These characteristics make it ideal for cranio maxillofacial reconstruction applications, a market that's anticipated to exceed $2 billion by the end of 2030. While PEAK itself has been in the market for some time, the ability to 3D print custom PEAK implants using our self-contained clean room environment EXT220 printing technology is unique. By directly printing custom 3D PEAK implants, Lead times for the product are reduced, and there's a cost savings of up to 85% versus traditional manufacturing methods. Additionally, with a clean room-based printer architecture and simplified post-processing operations, it's now even possible to execute this entire workflow within the hospital itself, further reducing response time for the implant and opening the application with It's been used successfully in 50 cranioplasties throughout Europe. And now with FDA clearance secured earlier this year in the US, we're excited to now bring this exceptional orthopedic technology to the United States. Turning to slide seven, our industrial solutions cater to a wide breadth of markets with tremendous potential to adopt additive manufacturing into their production workflow. Our team of over 80 application-focused engineers are partnering with customers in key industries such as aerospace, transportation, semiconductor, energy, jewelry, academics, and service bureaus to deliver value-added innovations to the manufacturing floor. Just last month, we were very pleased to announce a strategic partnership with Precision Resource to advance metal additive manufacturing initiatives. Precision Resources is a leader in the production of critical components for the automotive, heavy-duty, aerospace, and medical device industries, a perfect match for our broad portfolio catering to both industrial and healthcare applications. With Precision's purchase of two of our metal BMP Flex 350 dual laser systems, they're receiving best-in-class environmental control and delivering exceptionally high-quality parts with unmatched accuracy. Also in July, the Metal DMP Factory 500 and the DMP Flex 350 dual printing systems, along with our polymer SLS380 solution, were purchased by the National Additive Manufacturing Innovation Company, also referred to as NAMI, in Saudi Arabia. NAMI's mission is to bring additive manufacturing technology to the Saudi kingdom, localizing the manufacture of critical components for a broad range of industrial markets. As an example, NAMI will use 3D printing systems to produce critical components for the Saudi Electric Company, with the overall objective of building an increasingly resilient supply chain architecture for this critical infrastructure. Not only does this example speak to Additive's increased role in the energy sector, which is expected to grow to 17 billion by 2032, it also demonstrates the positive effects of localization and accessibility for Additive to continue catalyzing innovation. The announcement also lends credence to our joint venture with the Saudi Arabian Industrial Investments Company and its pivotal role in realizing Saudi Arabia's Vision 2030, which aims in part to bring additive manufacturing production capability to key industries throughout the kingdom. With that, I'll turn things over to our CFO, Jeff Creech, to step through the financials in more detail. Jeff?