Hello and welcome to the 3D Systems' Q3 2023 Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mick McCloskey, Vice President, Investor Relations. Please go ahead, Mick.

Good morning and welcome to 3D Systems' third quarter 2023 conference call. With me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer; and Andrew Johnson, Executive Vice President and Interim Chief Financial 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. 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 this morning's press release and our recent 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, you will 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 period of 2022. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thanks, Mick, and good morning, everyone. We appreciate you joining us today. Before I begin, I'd like to first acknowledge the unimaginable and tragic events that have happened in Israel over the last several weeks. Our company and in fact our entire additive manufacturing industry has deep ties to Israel where engineering breakthroughs have been made that have benefited people worldwide over many years. To our Israeli colleagues and to all of those impacted by the atrocities that were committed and by the ongoing turmoil in the region, please know that you're in our thoughts and prayers for a rapid return to peace and security for all. May God bless you in these troubled times. Today we take this call from Frankfurt, Germany, where we're showcasing our current and future technologies at Formnext, which for those of you who may be unfamiliar, is the largest global additive manufacturing conference that brings together a community of minds that will actively shape the next generation of intelligent industrial production. Later in the call, I'll offer a few insights that we're sharing this week as we preview our exciting new technologies that will enter production in 2024. But let me start this morning by providing an overview of our third quarter 2023 results and some insights into the operating climate we anticipate over the next few quarters. I'll then cover our recently announced restructuring initiative, which we expect to result in improved profitability and cash performance, while preserving crucial investments for future growth. The net result of these cost actions and investments will be the delivery of tangible near-term benefits and shareholder value, while accelerating the adoption of additive manufacturing in industrial and healthcare markets in the years ahead. Given our scale as one of the largest pure-play additive manufacturing companies in the…

Thanks, Jeff, and good morning, everyone. I'm now moving to slide 12. Third quarter sales of $123.8 million decreased 6% from the prior year, primarily reflecting the previously discussed and expected impact in our dental orthodontics business. As Jeff mentioned earlier, a tighter capital spending environment also led to softer than expected revenue results more broadly across the company related to printer sales. Specific to our segments, industrial solutions delivered revenues of $71.4 million, growing nearly 5% from the prior year. While printers and software grew from the prior year, it was partially offset by a decline in materials and overall performance softer than anticipated from our last call. Healthcare Solutions revenues of $52. 4 million declined 18%. As mentioned, this was primarily driven by the decline in our dental orthodontics business of 39%, relatively in line with what we had assumed coming into this year. Additionally, software printer sales throughout the remainder of healthcare solution segment also declined from the prior year, although this was somewhat offset by the technical milestone progress in our regenerative medicine business, totaling approximately $4.5 million. Lastly, as Jeff mentioned, we continue to make solid progress in the personalized healthcare solutions business with growth of approximately 7% in the third quarter. As we look forward, we continue to expect many of these broader macro demand issues tied to capital investments to persist into 2024. And while the company has historically benefited from fourth quarter ramp in revenues, we are expecting a more modest revenue improvement in the upcoming quarter. And specific to our dental business, we are continuing to expect an annual full year decline in revenue of approximately 35%. Turning to our gross margin performance now on slide 13. Non-GAAP gross profit margin in the third quarter of 2023 was 44.8%, an improvement…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Greg Palm from Craig-Hallum Capital Group. Your line is now live.

Hey, this is Danny Eggerichs on for Greg today. Thanks for taking the questions, guys. I think just touching on profitability first here. Obviously some good progress in the quarter. Expect to approach break-even in Q4. How should we think about fiscal year '24, maybe your confidence in being able to sustain that profitability and maybe if there's a level that makes you more confident in being able to achieve and sustain that.

Yeah, thanks again, and good morning, Danny. Good to hear your voice. Well, there's two. Number one, we're not going to give '24 guidance today. And quite frankly, the world's just too volatile out there. The difficulty really is predicting top line performance. As I see it right now, as you gaze through the fog, there's no reason that we would change our assumption on headwinds in terms of revenue performance. And we're introducing a lot of new products, so how that adoption will be offset, or will be offsetting headwinds from the economy is yet to be determined. So we'll talk more about that when we talk about '24 after the next quarter. I can tell you, though, we are focused on controlling what we can control in terms of cost and that's why we launched this restructuring initiative. We're moving out under the assumption that we need to get more cost out of the organization. You know we've targeted $45 million to $55 million and we're moving out aggressively this quarter and as Andy ran through we'll execute a large portion of that by end of year and then certainly by end of Q1. So we're focused on controlling our business, running it well, getting costs down. We'll be in a position to begin driving inventories down with our insourcing initiative kind of reaching its peak. We've got more to do, but we've done a lot of the heavy lifting already in terms of bringing materials in that you do with insourcing. So we've got a good availability of inventory to generate cash. We've got a strong focus on operating costs, which will hit both our COGS and our OpEx. So we're looking to drive gross margin and EBITDA performance in '24. The top line performance will be largely dependent on just the overall economy and how it goes. You know, you've got economic concerns and geopolitical concerns, which right now just make it too hard to actually predict. So we'll focus on what we can control internally, drive costs down, drive inventories down to release more cash, and with the strength of our balance sheet, we're confident we'll make it through that uncertain period. We'll give you more input as we close out Q4 and look into 2024 in detail.

Got it. That's helpful. And then maybe just touching on maybe this new product cycle sounds like a lot of exciting stuff coming here in the upcoming year. Maybe just in terms of what you're releasing, is there any emphasis on targeting certain end markets applications? And then maybe how should we think about the rollout throughout the year and what kind of contribution be expecting. I guess a lot of that's macro dependent, but just maybe your thoughts there.

Yeah, and I will give you some idea on the time phasing too and the potential impact on revenue performance. But I am really excited. We're refreshing our entire product line. This was an initiative we started a year and a half to two years ago. And it takes about three years from start to finish to get new platforms in place. And we're going through, Danny, we're going through a refresh of our entire portfolio. So what you'll see next year is a tripling of our printing platforms releases versus 2023. Those span our photopolymers meaning SLA and DLP. There's a convergence in that technology, which is really exciting in terms of ramping up precision and speed to production scale for factories. So I'm really excited about SLA and DLP technologies and the convergence of those in the New Year. The extrusion technology with pellet extrusion is really starting to get legs. And we've got some new products on that front that we'll release. And of course, we have upgrades on our metal printing platforms. So it's clearly, as I described, very broad-based. We have a host of new materials, engineering materials that are being released with those platforms for customer use and those are engineering plastics, particularly high-temperature plastics, and flame retardant, you know, low-emissions plastics, if you will, that move us more heavily into both aerospace and automotive applications, both temperature and flame resistance are extremely important there. So we're actually pushing hard on UL certification, moving some of these materials through that have never been done before through UL certification. So many of those hit the market throughout 2024. And then of course continued evolution of our software platforms. So it's very broad based. It addresses virtually all of our industrial markets. We've got some very…

Yeah, that makes total sense. Looking forward to seeing all the new stuff this year. I'll look forward to it.

Thanks, Danny.

Thank you. Next question today is coming from Brian Drab from William Blair. Your line is now live.

Good morning, Brian.

Hey, this is Tyler on for Brian. Hey, sorry, this is Tyler on for Brian. I appreciate you taking my questions.

Sure, Tyler.

You mentioned new production printers coming up for your metal platform. Could you just elaborate on what makes 3D systems unique in metal solutions? How do you fit in within the competitive landscape? And are you more focused on building that out organically?

Sure. Let me comment on that. And I would say we've got an exciting organic growth program with significant investment as we look forward. And along those lines, we were honored and pleased to receive this contract from the US government for development of the next generation machine. So we have an intermediate-sized platform and a large platform today, our 350 and our 500. We will continue to add power to those systems with more lasers in place. But it's not just about the number of lasers you have in the system, Tyler. It's about thermal management of the platform and it's about fluid flow across the powder bed to make sure you can eliminate smoke, if you will, from the powder bed to make sure you have high integrity parts. Our focus historically has been on health care and very high end industrial automotive and other demanding industrial applications. That will remain our focus, although I have to tell you, some of the exciting new materials that are coming out are moving us rapidly into other industrial products like shipbuilding. We can do some unique things with metal printing of nickel-based, copper-based materials, copper-nickel alloys, others that are required for demanding either thermal or environmental conditions. And that's really where we're going to focus is on those markets that are most demanding of quality and performance. The parts we make are extremely high density. They're obviously suitable for human application and for demanding industrial application. That's really where we're going to focus. Once you're there and you have the materials, it's all about throughput. So, you know, some customers want single large parts, others want multiple small parts. We're designing systems that are application specific in that range of products. Healthcare is often a large number of smaller parts for embedding in the human body. And things like ship building and aerospace can often be single run large parts that you need extremely good environmental control. I would say environmental control is probably our number one attribute right now. We can produce the highest purity, highest density parts, I believe, in the industry. And we are scaling that with our organic investment. And Tyler, on the investment front, we've got so much runway. We've got a nice hole in both polymer and metal technology bases today. We're driving synergies across those. So we can get where we need to be organically through internal R&D investment. And obviously we're not oblivious to the external environment and other companies in the industry with interesting technologies. But we can get where we want to be with internal investment in both metals and polymers. And then anything on top of that is icing on the cake.

Thanks, Jeff. Yeah, that sounds great. And just a follow-up, a pretty short question. With the restructuring, will that create any new challenges for your new product introductions? Do you see that having any impact on like fuel installations or adoption? Can you just elaborate on how you're handling that?

Yeah, thanks for asking that, Tyler. I would tell you, we've protected certain areas of the company heavily to make sure we can drive efficiency in our back office operations. I would tell you just those efficiencies are very important so we preserve some of those, particularly around IT, things like that, cyber security, other areas that are just essential to running the business. We've also taken great pains to preserve the predominance of our R&D investments, because that's critical to the new product launch. And then obviously we have a very large sales and service team. The service team is essential to not only serving our install base, which is one of the largest, if not the largest in the industry, but also the installation of new products. So those areas of the company we've heavily protected. We've found efficiencies in other areas. And certainly by reducing our number of sites and the insourcing of manufacturing and ion supply chain operations, that gives us a really nice bump in terms of cost takeout that impacts COGS and even somewhat on OpEx. So we're very focused, we're very proud of our gross margin performance, quite frankly. Even if you take out the one-time benefits of regenerative medicine, we've stepped up from 39% and change to 42.7% in this quarter operationally. And that reflects really efficiencies in supply chains and driving some of that earlier restructuring that we did in the year, without slowing down our R&D execution, we're really proud of that. You know, on top of that, we're thrilled to have the technical progress on regenerative medicine that boosted gross margins even further. But to move from 39 to 42.7, we were, operationally, we were extremely proud of in the quarter, and we see, you know, further upside as we go forward. You have to be a little careful quarter by quarter, depending on revenue fluctuations, but we see continual improvements in our gross margin capability as we move through the New Year.

All right. Appreciate all that. I'll pass it on.

Thanks, Tyler.

Thank you. Next question is coming from Jacob Stephan from Lake Street Capital. Your line is now live.

Hey guys, thanks for taking my questions. Maybe just on the restructuring initiative, could you talk about kind of the breakdown on how you see these costs coming out of the model. I know the 45 million to 55 million range, but by Q1, does that mean 60% kind of the full value quarterly or 90%? Maybe you could help us think about that.

Yeah, I'm happy to do that, Jacob. This is Andy. So starting with kind of how you range it in terms of actual impact in '24, our plan is, as this last phase, this current phase, somewhere between 45 and 55 to actually be realized in '24, that's our goal. You'll start to see that execution this quarter, as Jeff mentioned and I mentioned in my comments. You will see, I think your estimation of somewhere north of 50% by the end of Q1'24 is accurate. We described it as significant majority, so I think that's right in that area. And obviously when you're talking about headcount reductions, those different geographies can be phased differently, but we'll start on that work this quarter. You also have OpEx benefits around prioritization and integration of geographic footprint, much of which will be actioned in the, call it the first five months of the phase. There's certain decisions around third-party spend that we can unilaterally decide and take benefit heading into the new year, others that require some negotiation and could be phased throughout the year. And you have a continued COGS improvement. We've already seen that. Our gross profit margin validates the work that was done earlier this year has started to take hold and we'll continue to see on an annualized basis even improved results from earlier phased COGS efforts. But there is continued supply chain optimization and work on the COGS side that will happen as early as this quarter and into early next year. So when you add that up, as I mentioned, it may have been sort of buried in my comments, but you've got somewhere around two-thirds of that total number benefiting OpEx with the remaining third in COGS. And definitely we believe you'll see over 50% of that is actually coming out on the next call it quarter and a half, two quarters max. So you'll see the benefit of that for most of '24. And that goes back to just comments and the first question that Danny raised about profitability next year. We're going to control what we can in the P&L and when you look at costs both on the COGS and OpEx side, those are areas we can control even in this revenue environment. So we're not going to wait around. This isn't a December '24 annualized takeout exercise. Jacob, this is action now, action over the next several months. You'll start to see real benefit, we believe, to the P&L in Q1 of '24.

Great. That was really helpful. Thanks. Maybe just touching on the milestone payments from United Therapeutics. Obviously, this is 100% gross margin revenue, but could you just remind us on kind of when these earn-outs or the milestone payments are set to take place?

Yeah, I'll take a shot at answering that, Jacob, and then Andy can supplement it as well. So, they're geared towards technical accomplishment, and obviously we drive to a schedule on those. But we are inventing, we're plowing a lot of new ground in that. The human lung is the most complicated object ever printed by mankind. And I don't say that lightly. We're driving to levels of precision and speed that have clearly never been done before with materials that are extremely new, biological materials that are very new. So it's impossible to predict the schedule exactly. We've got goals and we realize payments over time. So we're proud that we've achieved some of the milestones. We're driving hard on that schedule because we want to see United Therapeutics be able to bring that product to market as soon as possible, which will help millions of people around the world. But it's going by definition to be a bit lumpy over time, and we won't be able to give you a lot of warning. I will tell you, it's not going to be material, it's not going to be grossly material numbers as they flow through, but as they hit, there may be a certain bump. So Andy, do you want to comment on this?

Yeah, I'll just build off of that slightly. Jacob, so think of it this way. We've got a handful, call it up to 10 milestones related to long progress. If you go back a couple of years, you would note that we reflected in our revenue and at that margin level, I had 100% obtainment and achievement of a milestone and a portion of a second milestone. But the way these are recognized is via progress. So even if a milestone isn't even 100% achieved, once it becomes probable and it's deemed probable at a certain threshold, you start to account for it based on the progress. So if a milestone is, for example, 60% achieved and it's probable, you may not have the milestone paid out yet, because you're not at 100%, but you do have recognition of the milestone. And that's exactly what happened in this quarter, and it's why Jeff commented that you're not going to see this as material to any particular quarter is spot on, because these things get recognized as progress is made. So they're not binary where they're just hit in one quarter and they're gone the next, but as you deem progress, you begin to account for it. This particular quarter, we had contribution from three different milestones, huge validation of the technical progress in printing a human lung, and you'll continue to see progress on those milestones and others over the next several years. So not material to any particular quarter from a revenue or margin standpoint, but as Jeff said, periodic, perhaps lumpy, but at the end of the day, absolute validation that we're making progress in partnership with United Therapeutics.

And Jacob, one last comment, because it would not be obvious from what we're looking at from the outside is the technological synergies that we're finding between our biological work on human organs and even our industrial printers. The level of precision we're now able to attain and speed of printing, we can directly transfer with minor modifications now to some of our industrial printers. And that work is just underway, but it's really exciting because it will drive the next generation of printing technology on the industrial side as well. So we're not just dependent on these incredible, you know, implantable organs being approved by the FDA and getting it into production, there will be spinoff benefits to our other industrial and even healthcare printing systems and materials knowledge as we go through the next few years. So we feel very blessed and very excited about this entire body of work.

Yeah, awesome. Certainly excited to see what happens there. You know, best of luck going forward to you, guys. Thanks.

Thanks, Jacob.

Thank you. Next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.

Hey, gentlemen, thanks for taking my question and congrats on the nice margin performance here.

Thanks, Troy.

For you, Jeff, I just want to -- you're very welcome. I want to just drill down a little bit on healthcare accidental. You know, your European competitor had a very strong core there. They're up 13% year-over-year. You understand there are more parts and less printers, but can you just talk about the services business from Littleton versus the printer sales. I'm assuming this is like SLS and metal printers that are weak for you, but just more color would be helpful.

Yeah, Troy, you put your finger on it. It was really reflects a basically a build-up of inventory in our customer base with some of the implantable devices. So that degraded our printer sales in the quarter and it really was exclusively that. So both the production of implants and the sale of printers into that space was depressed. The personalized healthcare side was up very nicely. That was up 7%. And again, it's driven by specific applications within the orthopaedic space. So, you know, the specific 510Ks we have for different joints in the body, if you will, those kind of things. Demand's strong, personalized healthcare, we're very excited about it. It's delivering consistent year-over-year growth with very strong margins. So I'm very glad we're in that space. What hurt us in the quarter, Troy, outside of orthodontics, the dental, was the sale of printers and in part the sale of parts into the med device space where there was a build-up of inventory and I have to say their husband in cash as well and watching their CapEx spend, again, given that they've got some inventory available. So I expect it to be short-term, but it was a real headwind in the core.

And I'd also add, Troy, this is Andy, that you mentioned a competitor and their performance. If you actually do an apples-to-apples in terms of the same sort of business, we're right in line with their low double-digits growth. Our personalized healthcare includes some other things in there, but when you look at it comparatively, we're right in that same growth profile. The neat thing, Troy, and I know you follow this closely, that anything in that whole space is the cost of customizing implants or near custom implants for people is coming down so nicely that that marketplace has really continued to just normally expand. It's great. It brings a better solution to patients and faster and better delivery and lower cost implants for people. So it's opening up nice market space. I really expect that trend to continue for years to come.

All right. Love to hear that. And did I hear you guys say in the prepared remarks that your material business was weaker or down? And I'm guessing that might have to do with inventory levels at the bigger economics, but any thoughts?

Yeah, that's right, Troy. Yeah, that's exactly right. That's exactly right. It was predominantly driven by that market vertical.

Okay. All right, gentlemen, well, good luck going forward, and I'll see you in a few hours.

Thanks, Troy. It's good to hear your voice.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments.

So let me just close by wishing everybody well. Thank you for calling in today and we look forward to updating you again next quarter on the year and outlook for the New Year. Thanks and have a great day.

Thank you. This does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.