Greetings and welcome to the 3D Systems’ Q2 2020 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host Jessica Stanfill of Investor Relations. Thank you. You may begin

Good afternoon. And welcome to 3D Systems’ conference call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Wayne Pensky, Interim Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer. Please note that given the current situation with COVID-19, we are not all at the same location. 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 access to streaming portion of the webcast, please be aware that there may be a few second delay and that you will not be able to post questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today'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 2019. Now I'm pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Thanks, Jessica. And good afternoon, everyone. I hope that all that have joined us today on our call are staying safe and healthy through these unprecedented times. Let me start by reminding everyone that our top priority is the wellbeing of our employees and their families, our communities, and our customers. We've incorporated measures to safeguard all of these groups to the best of our ability in response to the COVID-19 pandemic with clear protocols being implemented across the company. I'm very proud of the stamina and teamwork shown by our employees in helping one another, or meeting our customer commitments to the maximum extent possible over this difficult period. While there've been many challenges, we've maintained all of our key operations worldwide and expect to do so moving forward. Over the last two months, since joining 3D Systems, as CEO, I've talked extensively with our employees, our customers, and our business partners, as well as several of our analysts and long-term shareholders. In short through these discussions, you will reaffirm for me, why I joined 3D systems, namely that we have a tremendous and somewhat unique opportunity as a leader in this industry. And I'm tremendously excited by the passion of our employees and the breadth of our technology and capabilities within our company. We have incredible strengths upon which to build our future. I've also learned that there's a wide consensus that we need to change if we're going to be successful. To be blunt, while we have made significant progress in key technology areas and today can boast of one of the strongest portfolios of 3D printing hardware, software, and materials in the industry, in recent years, we've not translated these elements into consistent growth and profitability. My singular goal is to make this happen. In short,…

Thanks, Jeff. Good afternoon, everyone. For the second quarter, we reported revenue of $112 million, a decrease of 29% compared to the second quarter of 2019 and a decrease of 17% compared to the first quarter of this year. The lower demand was across all products and services due to COVID-19 as many customers were shutdown or on a significantly reduced level of activity. We reported a loss of $0.33 per share in the second quarter, compared to a loss of $0.21 in the second quarter of 2019. We reported a non-GAAP loss of $0.13 per share in the second quarter, compared to zero cents per share in the second quarter of 2019. During the quarter, we recorded a charge of $10.9 million to cost of sales. A certain product lines reached their end of life. We are no longer producing these items. This charge is the only significant non-recurring difference between GAAP and non-GAAP numbers this quarter. Our operating expenses decreased 25% to $69 million. Consistent with our new strategic focus, we will start discussing revenue by our two key markets, healthcare and industrial. Healthcare revenues are the same as we've previously disclosed in the past. Industrial revenues comprise all those sales. We are not yet capturing any meaningful sub-market detailed information. So next level of details below these two markets is a work in process. Revenue from healthcare decreased 11% year-over-year to $50 million driven by the decrease in the dental market related to COVID-19. For the first half of 2020 healthcare revenue decreased 9% as compared to the same period last year. Industrial revenues decrease 38% year-over-year to $62 million with decreases in all products, materials and services across the all geographies due primarily to COVID-19. For the first half of 2020, industrial revenues decreased 26% as…

Thanks Wayne. So in summary, there are three main things we’re just – themes that we've discussed today. First defining our strategic focus and stating our purpose. Second reorganizing the company around two market verticals; healthcare and industrial; and third, doing the necessary restructuring to return the company to profitability and positioning it for sustainable growth and margin expansion. This restructuring involves eliminating $100 million of cost over the next 18 months, while investing for growth in key application areas. With a clear statement of purpose and a return to the ideals we were founded on, I believe 3D systems will be a leader in additive manufacturing and will be central to the value creation that it will enable. And with that, we'll now open the floor for questions. Diego?

Thank you. [Operator Instructions] Our first question comes from Greg Palm with Craig-Hallum Capital Group. Please state your question. Hi guys,

Hi, guys this is actually Danny Eggerichs on for Greg, today. I guess just going over the overall restructuring new strategy, any detail on maybe, are you looking at walking away from possibly certain end markets or maybe technologies as part of this overall restructuring?

Oh, I wouldn't view it as walking away from markets. It's rather a focusing on key markets that we've actually been in for some time, but the key difference here is, it's a very strong application focus within those markets and what we care about are bringing the key technology almost together in those markets to deliver value. So no longer what we will focus in and celebrate the selling of an individual printer somewhere in the world. Where we're going to celebrate the application progress we make in our key markets that [indiscernible] really going to drive sustainable growth and profitability. Not that we won't opportunistically sell the technology elements to customers who perhaps have an installed base that can benefit from them, that's fine, but the real growth that we'll feel will come from expanding the application applications within our key markets. So that's really what we're going to focus on and grow. So I wouldn't look at it as a walking away. I would look at it. I would look at it more as a focusing on what's going to drive the highest value?

Got it. That's helpful. And then I guess, as we look at the end of this year, obviously, reducing operating costs by $100 million per year by the end of next year, how do you want to look at Q3 and Q4 for operating costs?

In terms of – by the end of the year, we expect to have on a run rate basis about 60% of those savings in effect. And so, if you want to measure us in terms of how we're doing on that, you know, the ultimate measures are we profitable? And we expect on a run rate basis at the end of the year to be at a breakeven levels, but we entered 2021 to be hoping to be with a small profitable going forward.

Okay, great. And then, I guess maybe just last one here, any update on capital allocation priorities?

Well we'll certainly fund as the highest priority getting through our restructuring activities. Obviously we need to serve us [indiscernible] our debt. We have some minimum capital requirements to upgrade, upgrade existing equipment and things, but the majority of our capital deployment will be spent against our restructuring activity right now.

Thank you. Our next question comes from Sarkis Sherbetchyan with B. Riley Financial. Please state your question.

Hey, good afternoon. Thanks for taking my question here.

Sure.

So regarding the reduction of operating costs and getting to that 60% of savings by the end of the year, what's the cadence between the cost of goods line relative to SG&A and R&D?

Sure. I think of it roughly the split of sort of 40% cost of sales, 40% SG&A, and 20% R&D, and round numbers.

Got it. And as a follow on to that you mentioned a small profit going forward in FY 2021, is that kind of assuming a revenue run rate of what we saw this quarter or are we to assume you kind of grow in with the market growth rates?

No. If you look at the revenue from the first half of the year, if you use that as a run rate, because there was clearly a lot of volatility in the first half of the year on the up and down side, if you – if you look at that in the second half of the year and our pace of cost elimination through the second half of the year. On a run rate basis, we would expect in that model to be profitable by the end of the year. Is the fair way to look at it, maybe if you follow that?

And when we’re talking about profits, is that net income?

Correct. Correct.

Okay. Thank you.

Okay, thank you.

Thank you. Your next question comes from Paul Coster with JP Morgan. Please state your question.

Yes, thanks for taking the question. First off, the current trends, Jeff, what are we seeing, is it stabilizing or is it just completely uncertain with end market demand?

Paul, there's just a tremendous amount of noise. So there's a tremendous amount of noise. I would tell you, there's a few things that encourage me. Number one, in most of the world into different degrees, you see sites reopening. So from a service standpoint and getting production running again you could start seeing people operating machines which demand should follow that. So you see factories reopening and machines starting to run against. So that's a good thing. Areas that were viewed as nonessential, like dental treatments and orthopedic surgeries, things like that are now allowed again to at least some extent. So those fundamental demand drivers to be a very good thing for us. Now, what is not clear because there's just so much noise still out is pace of improvement. But directionally, we should with that opening start seeing increased demand around the world. And then we would expect capital spending to follow that demand.

Got you. I'm a little sort of unclear on how to interpret the [indiscernible] and the market equitation. So on the one hand you've got a pretty decent balance sheet, and you're obviously taking bold action here to look after the equity investor and yet that sort of looks like it's moving in the opposite direction. What's the explanation under what circumstances would you withdraw it?

Well, the withdrawal in the pace of it will be highly dependent on the revenue rebound, the pandemic is subsiding. But I would tell you, Paul, we want to make sure with great [indiscernible], we can get through our restructuring. There's tremendous value to be unlocked in this restructuring activity and the refocusing of the company. So we've got investments to make there to not only severance related investments site closures, but there's some efficiency investments in IT and others that we need to make with very short term paybacks that are essential to that. And so we want to make sure we can clear that. And we want to make sure that should the pandemic go the other direction that we're safe, we've got some cushion and all of that. So that's the motivation for putting it out there. The pace of it we just want to make sure that we can execute our actions in the shortest possible time period, because we truly believe on the other side of this when as a pandemic recedes, that this new structure we're adopting is going to drive some pretty exciting growth and profitability expansion, and we want to be ready for it as quickly as we can.

Thank you. [Operator Instructions] Our next question comes from Brian Drab with William Blair. Please state your question.

Hi, thanks for taking my questions. And I'm wondering just to build off that last line of questioning on the ATM, in your model, – it's a $150 million potential offering. How much would you use in this year, in the current model, which sounds like maybe the aspirational target is to get second half revenue in line with first half and get these $60 million run rate costs out. I guess you must have some idea how many shares would have to be issued or that would strategically make sense to issue?

Yes, we're not going to disclose. If you think of this as sort of a stock buyback, we'll report how much we've issued at the end of each quarter. But we want to do as little as possible, but we also want to do enough to make sure that we're comfortable getting through this period.

You know what it's a little bit easier to describe what would drive it up and down. I mean, clearly if the pandemic extends and gets worse, and places reclose, and all of that, the restructuring is essential. We'll get through that and look at further efficiency moves which all costs them cash. If revenue lifts quickly and the world recovers nicely, we would certainly rein it back in. So it's probably easier to talk about directly what would drive it to one extreme or the other. But we want to have it in place and ready to go to make sure we can get through this period. Because again, I think, it's a great looking company out the other side of it.

Okay, thanks. And then just one more question for now the support in the channel is what I'm wondering about in terms of the cost cutting. And I know that a lot of sales have been brought in directs now, but can you talk at all about what percent of sales of printers and other equipment is going through the channel and how you will continue to support the channel or if some of these cost cuts are going to maybe be in that area of channel support?

Well, I would – I don't have – frankly speaking, I don't have the detail to share with you, but I would tell you in terms of a business model going forward, certainly the healthcare industry, it benefits greatly from direct sales. There are some channel partners that can help with that, but there is a great deal of it that does benefit from direct sales. So we will have a direct salesforce servicing a great deal of that market. In industrial we'll have a mixed model, some direct sales, some channel sales, and then for geographic coverage, we'll certainly have a network of channel partners as we do today. So I think we’ll drive some efficiency now, as we look at organizing by these market verticals, because in the past we've had basically separate sales organizations and channels to market for software versus hardware platforms. So we'll be able to collapse some of that and then take some of that efficiency and build out our direct sales model with these market verticals. So I don't have specific numbers to share with you, but directionally that's where we're headed.

Okay, thanks very much.

Sure.

Thank you. There are no further questions at this time. I'll turn the floor back to Jessica Stanfill for closing remarks.

Thank you for joining us today and for your continued support of 3D Systems. A replay of this webcast will be available after the call on the Investor Relations section of our website. Thank you.

Thank you. This concludes today's teleconference. All parties may disconnect. Have a great day.