Hello, and welcome to the 3D Systems Fourth Quarter and Full Year 2022 Conference Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Russell Johnson, Vice President, Treasury and Investor Relations. Please, go ahead.

Good morning, and welcome to 3D Systems' fourth quarter 2022 conference call. With me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer; Michael Turner, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. For those who have access to streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to post questions via the web. The following discussions and responses to your questions reflect management views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in last night's press release and our filings with the SEC, including our most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2021. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Russell, and good morning, everyone. I'll begin this morning with some comments on 3D Systems' performance and achievements during 2022, and then I'll share my thoughts on the company's outlook for 2023 and what we'll be focusing on in the year ahead. After that, I'll hand the call over to our CFO, Michael Turner, for a more detailed discussion of fourth quarter and full year 2022 financial results as well as our guidance for 2023. So with that, let me turn to slide five and start with a quick recap of last year. I'll say upfront that while we came in short of our original financial goals set at the beginning of the year, I'm very proud of what our company ultimately achieved, particularly given the headwinds that we encountered during the year, a few of which were common to many companies and one of which was unique to ours. It's important that we be as clear as possible about these factors, as they directly relate to our view of the year ahead and actions we're taking in response to them. First, while COVID driven supply chain issues were nagging problems throughout the year, they were no worse than what we had anticipated and they continued to improve throughout the year as expected. Much more impactful, however, was the rapid rise in inflation, which reduced consumer demand for a variety of elective medical procedures. At 3D Systems, we felt this most acutely as a significant slowdown in our dental orthodontic business, which declined significantly as consumers shifted their spending to more basic necessities such as groceries, clothing and energy for their homes and cars. This inflation also manifested itself in higher labor and material costs in our products, which created challenges in gross profit margins as our pricing…

Thanks, Jeff. Before I start, I'd like to remind everyone that 3D Systems made three significant divestitures in 2021. The earnings release that we issued last night contained tables with non-GAAP measures relating to our full year 2021 results, from which we exclude the impacts of these divested businesses. Likewise, on today's call, any reference that I made to our full year 2021 results will be on the same ex-divestiture basis. The point of this adjustment is to make our 2022 results comparable to our 2021 results on an organic basis. However, it's important to note that we completed our divestiture program during the third quarter of 2021. Therefore, any tables contained in last night's earnings release relating to our fourth quarter 2021 results -- and likewise, any reference that I made to our fourth quarter 2021 results on today's call do not reflect any adjustments for divestitures. Turning now to slide 11. I'll start out with a discussion of full year 2022 results for our consolidated business. As Jeff mentioned, our business encountered a variety of external challenges during 2022 that caused our full year results to come in below what we expected at the beginning of the year. These challenges include FX headwinds, high inflation, recessionary fears and the war in Ukraine. And of course, the biggest headwind we faced during the year was that inflation and economic uncertainty reduced the demand for many elective medical procedures. As a result, we experienced an unexpected and significant decline in dental market revenue during the second half of 2022. This was particularly impactful for 3D Systems because dental sales represent a large percentage of our total business. However, after making a midyear adjustment to our 2022 revenue guidance to reflect the above factors, we were able to finish out the…

Thank you. We'll now be conducting a question-and-answer session. Our first question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.

Hey John, thanks for the time here. Congrats on results that I thought were better than feared for the most part. But quick -- just for you. To start, Michael, a point of clarification. In your prepared remarks, you right at the end, did you say that health care was down 35%, or are you expecting that to be down in '23 at that level?

We expect 2023 dental -- our dental markets to be down 35% year-over-year in '23.

Okay, cool. I got you. And then just thoughts on like share loss. Is that just customer adoption stall that much, or just share is obviously an important topic for this customer. So just your thoughts on that, please?

For that market, specifically, Troy,

Yes, yes, obviously, is what…

No, Troy, there's no share loss. It's strictly a correction in the supply chain at this point. But if you watch public company announcements, that the impact on that business has kind of moderated now. It's flattened out. They've just got to burn off some inventory. They had built inventory pretty aggressively as they expanded their production capability and they got hit with the consumer discretionary spending drop. So, they're just clearing inventory. So, we've tried to just be very realistic in the year to say, it's going to take -- this consumption rate is going to take a while for them to do well and return to normal levels, but no share loss.

Okay. Perfect. And then, Jeff, I mean, you've talked historically about just the importance of profitability in this industry, especially from the leaders like you guys and additive. I guess, I was hoping to get your thoughts on what the OpEx is for like bioprinting and regenerative that isn't generating revenues here. But as Michael pointed out, there's a lot more than just the regenerative stuff or some of the traditional additive stuff that you brought to that's kind of pre revenue. So -- just thoughts on -- I think, Michael, you're saying was a natural potential of the margin profile. I'd love to know what you think this business could be. Where is it right now if you didn't have all these aggressive investments?

Well, I'll -- and it's a discussion we have actively in , especially coming into the year to set the budget. It's -- for companies that are viewed themselves as growth-oriented companies, it takes no great brainpower to just broad-based cut costs. What we've tried to do in '23 is to really look at our markets and say, what's really going to drive meaningful shareholder value over the next few years to make sure we funded that. And then, let's be realistic on top line revenue. And then let’s aggressively take cost out where we can. So it's that balance of looking out for the next few years on the adoption rate of additive in key markets that are going to drive growth, really valuable growth and balancing that off -- those investments off against cutting costs and making sure that we're profitable. So, we just put a stake in the ground this year and said, look, we can strike a nice balance, we can have EBITDA profitability, so be profitable on adjusted EBITDA, and we can generate positive free cash flow. And remember, our balance sheet, we still have well over $0.5 billion of cash on the balance sheet. But I think customers, especially right now in uncertain times, they need to see you making money. They need to see it particularly generating cash to know that you're going to be around and be able to support them, especially we're selling now into relatively conservative large, older line industrial companies that are adopting additive, they're conservative in their supply chain design. So, they want to know that we're going to be around and making money. So, it's not enough to have cash on the balance sheet. We got to be adding to that cash. And yes, we still have…

No, I think you covered. But yes, Troy, so the -- that kind of covers it. Any questions because that's a really thoughtful question and it's a subjective answer. I just feel this year, it's important to show our customers and our shareholders that we're positive in EBITDA and that we're going to be positive with free cash flow. And even though we've got a great balance sheet, we want to make sure that stays really strong.

Perfect answer. One quick question. I'll just go out there and see the floor, but touch on Industrial, I thought the fact that your guidance for these guys to grow 15% this year, in what could be a recessionary year is to be pretty healthy, right? So, just a thought on that, Jeff, and then I'll leave in case--

Yes. Troy, it's reflective of true production applications starting to really grow. And I -- it's -- we were modeling it mid-teens this year. And I think that's going to be early days when you look over the next few years because there's so many folks moving it into factories and factory managers are very conservative people -- new companies are, but factory management particularly are promoted because they're conservative generally, and even they're adopting it and moving it into the floor. And be it at a moderate pace, but it's remarkable a number of new applications that are coming on the screen every day in both polymers and metals. And customers like dealing with us because we have both and we can support them in the world wherever their needs are. So, I'm really bullish. I looked at that number to and said, well, can we deliver that? And based on our customer back analysis, Troy, it's very doable, I believe.

Awesome. Awesome guys. Well, good luck this year and, yeah, thanks for all the time.

Thanks, Troy.

Thanks, Troy. Stay warm.

Thank you. Your next question is coming from Greg Palm from Craig-Hallum. Your line is now live.

Yeah. Thanks. This is Danny Eggerichs on for Greg today. Hoping to dig a little bit more into dental here right off of that. Obviously, big year-over-year decrease expected here. I mean, is there anything that could make you more bullish something that could go right in this upcoming year, whether it's on the systems side or the consumable side where maybe there's that 35% is kind of a base case and there's potential upside to that, or you just don't have really good visibility to that?

Yeah. It's a great question. It's great to hear from everybody in the cold climate, first thing in the morning. No, it's a great question. So we have a very intimate relationship with the leader in orthodontics today. And I think, if you look at what they state publicly in terms of their business now kind of bottoming, my interpretation, business bottoming and they're looking at – I think – my guess is, that's a culmination of many factors. You've got wars going on and inflation, but things seem to be kind of stabilizing. So I would agree. I mean, just as a consumer, I would agree that, that outlook is probably reasonable. And when you factor in the supply chain burn down of inventory that they want to accomplish with us that result's in our revenue stream. Is there upside on that? Certainly, I mean it's I hope everybody looks in the mirror and says their teeth need to be straightened, right, that would be great. If there was increased demand that it would flow through to us very nicely and particularly probably the second half of the year, as inventories are brought in line. But it is really that simple. How much money will people be willing to spend on straightening their teeth, doing that correction because that's really the driver in the market? And that I think we've been very reasonable in our projection right now. So there could always be a downturn in the economy again and things could soften. Inflation, I am hoping it comes under control and people have the money to spend on optional items like that. But it is really important in people's lives, and we're really well positioned, if there is some upside there in demand. But I think we've been prudent in our projections right now.

Got it. And then I guess industrial and non-dental health care, I think that mid-teens growth was better than a lot of us were expecting. Are those – you think growing at similar rates, or is one outgrowing the other? And how has that changed in recent months?

Yeah. Net debt is probably similar rates. I would tell you that, the non-dental half of our health care business, the orthopedics and point-of-care work, that's fabulous. And I think we've gotten the technology to a point now of a broad acceptance and the costs are coming down fairly rapidly, so that orthopedic repairs to the human body are becoming the – as I said in the prepared remarks, better faster and cheaper. So you can now have better patient outcomes, faster turnaround times, less hospital time and all the ancillary benefits from that, you can do it at a lower cost and provide a better technology solution. And I think it's – we're really hitting our stride in orthopedic acceptance. And we work closely with the FDA on approvals of each procedure, and you got to work through that. It takes a little time. But the economics and the outcomes are in our favor. And I'm very bullish on that. Orthopedics, I think it's transforming orthopedics, frankly. And there's ripple effects, less inventory in the supply chain, better patient matching of solutions, all of that you get. The example I gave, I'm just over the moon about with the skill repair. It brings all the benefits of additive manufacturing together in one example, and it's fabulous. And this is a change in this patient's life. So it's great. On the industrial side, again, broad acceptance. I mean when you look at everything from rocketry and satellites to new ground transportation with electric vehicles and even old line manufacturing. Now we're not going after a lot of high-volume standard components made out of steel and other lower-cost materials. We generally are in the higher-value markets of titanium and nickel and some of the other high-value materials and applications because that's the first adopters, if you will, of additive. But especially these younger -- I would tell you, these younger companies, where there are fewer design paradigms they love additive. And if you look at the percentage of additive parts in some of these really progressive industries that are moving fast, it's really high. I mean you're talking 70%, 75% of components in some modern vehicles that are not ground-based vehicles yet, but the modern flight vehicles for air and space that are made with additive manufacturing and either directly or indirectly through castings. And it is remarkable. So I think your -- all of the tides are going in the right direction for adoption. And the only thing that could really slow it down is a drop in capital spending by companies if they are worried about cash. But our customers generally are in good shape on cash. So they're willing to make investments to reduce supply chain risk and improve the turn time. So it's -- right now, it's greenfields ahead. There's enough to be nervous about in the papers. But unless things get worse, I'm pretty confident in those numbers we put out there.

Yes. That's all good stuff. Maybe just sneak in one more quick one on your inventory levels. I mean, a pretty big jump again both year-over-year and sequentially. Just update on your comfort levels there and how we should think about that going forward?

We're very comfortable. We're going to have enough inventory to make product. Yes. it's -- no. When you look at comfort is how much cash do we take on inventory, it is right now outrageous. I mean we in-source manufacturing, we had to take on to our books, and I think it hit us in Q3 and probably a little overlap in Q4. Our inventory levels jumped up a lot because the supplier we were using to make product had just an absurd amount of inventory. So we took on the good inventory. We've got it on the shelf now. We'll be working our way through that. It's certainly a source of cash in 2023 and it's an important one to us. So we're going to be working inventory levels down to a much more respectable level throughout the year. What I am really pleased about is by taking over that manufacturing, we immediately improve the quality and delivery metrics for our products. And it was critical to our customers and their growth. So we immediately did that. Now we'll work down inventories. And I just think our type of business is much better suited for many platforms for internal manufacturing. And that's a trend we'll probably continue not 100%. But in -- for our high – our low volume, high mix, complex products. We have a great manufacturing base here in South Carolina. And we're developing the same in Europe, and you'll see more of that to come.

Got it. All right. Thanks, everyone.

Thanks.

The next question is coming from Shannon Cross from Credit Suisse. Your line is now live.

Thank you very much for taking my question and good morning. I wanted to ask a bit on the COGS -- or actually cost side. Your restructuring program is really targeting OpEx. I'm curious about COGS. And -- then, I had a, I don't know, more of a meta-question, I guess, in terms of the biotech opportunity that you have. Could you maybe think about -- I mean, you mentioned the lung has the potential to be through -- I guess, into maybe human trials in five years. How should we think about the business model morphing over the next few years? I don't want specifics, but maybe if you can talk in generalities about what kind of revenue growth projections there might be or how to think about comparable margin profiles, just because you really have sort of few separate businesses, and I think it would be really helpful for people to frame what they're investing in. Thank you.

Yes. So let me -- it's -- on the latter question, there'll be a lot more that becomes public over the next two years in terms of our projections, because we have to be able to give some estimate on getting through the FDA and when -- what the uptick in volumes will be. I'll come back to that part of your question, Shannon, in just a second. But on the first one in terms of COGS and OpEx, obviously, we thought it was important this year that we really drive cost out of the business, so we drive efficiencies, there would be positive EBITDA performance and positive free cash flow. It's important. It's more than symbolic. It's -- because, obviously, we have a big balance sheet. So we're fine from a stability standpoint. But it's important that we show, you can make money in this business and yet still invest for long-term growth. So that was our objective. We -- because we've insourced part of manufacturing now, that's about 40% of our polymer platforms. We have a really nice opportunity on COGS and the supply chain is getting a little bit better. So -- and as we launch new products, we're targeting components that are more widely available, things that we can really get some better pricing on from a purchase standpoint. So we're working COGS really hard. We're also still working pricing very hard. So we -- I know, I wish gross margins were rising faster than they are, but there in upward trend. We're going to continue that, which is reflected in pricing and COGS. In terms of OpEx, honestly, Shannon, we could generate a lot higher EBITDA in the short term, if all we cared about was 2023, okay? We're spending money on refreshing our traditional…

That's very helpful. I guess the last thing, if I could just touch on it. I realize this was a prior administration. But just with regard to the settlement agreement, I think it was about a $15 million fine and then you have some more expenditures over the three years. Is there anything else that we should be aware of related to it or that could have any impact on your business just to sort of close the loop on it? Thanks.

No, Shannon. We're obviously happy to settle with the government. We've done that span in 2012 to -- late 2018, early 2019. Since that time, I would tell you, we've made tremendous progress in our compliance infrastructure. I've personally been involved with it since 2020, and it's first-class, and we'll make it even better. The cash payments that we owe the government are spread out over several years. You can see -- you'll see the details in the K and then in the publication. So that -- no ongoing impact on the business. And then to top it off, Shannon you go way back in this industry, we exited that the business that was largely the cause of these issues back in 2020. I think we closed the deal in 2021 through the sale of that Quickparts business, that OEM business. That was machining work we were doing in China as a part of that business. We sold that business and got out of it. It wasn't the business for us. And we've since that time also, in parallel, enhanced our compliance program. So I'm very pleased with our position going forward. I'm pleased to settle with the government, and it's all behind us.

Great. Thank you so much.

Thanks.

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

Hi. Good morning. This is Blake Keating on for Brian. I'll just ask a quick one here since we're at it's been an hour. I just wanted to talk about you mentioned in the medium-term, your breast scaffolding and tissue products. I was just looking to dive into that a bit. Is this the application that you've partnered with CollPlant on? And then along with that, what do you think is going to differentiate your product versus the others? There are some private companies that are focused on breast scaffolding with 3D bioprinting. What do you think going to differentiate that product versus theirs?

Blake, thanks for the question. No, this program has nothing to do with CollPlant. And in fact, we developed most of our own materials that we believe are better suited the application, quite frankly, which is why we've gone our separate way right now there. And their college of material may find a home in certain applications. I hope it does. We're not dependent on that at all for our human tissue work. The way to think about the breast tissue work is this one example of large volume tissue applications in the body. So you can think of a lot of trauma examples where someone gets a -- have some damage to their body that resulted in large amounts of tissue being removed. And this -- the ability to print vascularized scaffolds, that's really what distinguishes us. Vascularized scaffolds that you can then embed human cells into in the case of the breast tissue work, and I'd say probably many other parts of the body, you're actually using the patient's own fat cells for implanting in the scaffold. So these are 100% biocompatible scaffolds and implanted cells. They're kept alive, obviously, indefinitely by the vasculature that's printed into it. And it's a natural addition back to the human body of their own tissue material basically. So we love the solution. I think it highly differentiates us from anybody else in the market. And it's just one example of various parts of the body that we'll end up moving into as we run with this technology.

Understood. Thank you for the color.

Maybe one more question, Kevin, and then we'll cut it off. Okay?

Certainly. Our final question today is coming from Ananda Baruah from Loop Capital. Your line is now live.

Hey, guys, good morning. Appreciate it. Just real quick. Yes, I'm going to ask one thing just given the time. But just sticking with regenerative and you've given a lot of rich context today Jeff, is there anything -- I don't know, if you saw as you've seen this, you may have because you're in the industry now. But end of last year over in the UK, it came out that some base editing technology has been used to cure certain types of cancers. What's interesting is the technology isn't yet approved sort of by the managing bodies, but if you'll find the paperwork and if you can get access, you're able to use it. And I guess the question is, do you think -- yes, do you think before FDA approval, there are certain things that certain of the things that you're working with in regenerative or even in orthopedics, that could come to market and be used -- we could see proof of concept even prior to being FDA approved, that would help people kind of lay a trail of bread comes out to where that witness is going.

Yes. No. It's an excellent question, because full and formal FDA approval obviously takes a lot of time, there's breakthrough designations. There's the -- I'm spacing the term right now, but there's the sympathetic approvals where a patient is going to die if they don't get the treatment. There are those categories that the FDA and similar bodies overseas has in order to allow a new technology to get to market faster. Obviously, we go through all of the work to get full FDA approval, but wherever we can get breakthrough designation or early use designation, for example, this hospital in Austria, very early use of this Kumovis technology for an implant or scaling plant, which changes patients' life. I mean and it was -- and really from our perspective of printing, it was very low risk application for us. And it was great to get it out there and get it used, so, that all helps in getting final regulatory approvals. But to your point, and it's a good question, is there are pathways you can follow to get early designation if somebody is going to die or for other reasons, if you have breakthrough designation that you can get it in there. Part of the reason I wanted to really form our medical advisory board was to get guidance on that is where do we have an opportunity to go for early approvals for fast-tracking any of the technologies, obviously, balancing risk with patient outcomes to make sure we gather the right data. We're spending a fair amount of money on animal testing now, which we haven't talked about much at all publicly, but we're doing a fair bit of animal testing on a variety of these technologies in order to gather data to know when we're ready to go to the regulatory bodies and then, what kind of depth we have to go to in discussion. So, we're going through all the right steps to get there and hopefully -- and we will get them to market as fast and as safe as we possibly can. Again, the first things to market I would expect will be the pharmaceutical applications for drug discovery. What we're producing in these vascularized chips is remarkable. The ability to keep cells alive for months is an incredible step forward and the ability then to test to develop big statistics on new drugs. So that's our goal, and it's soon to be our capability here. That we'll be talking about. After that, human body applications, either for tissue or to your point, orthopedics, and then beyond that in the future, obviously, organs. That's where we're headed. I think it's a brand-new history and I feel great about our leadership position in it.

All right. Thanks, Jeff. That's great context. I appreciate it.

Okay.

Thank you. We reached end of our Q&A –

All right, Kevin, we –

Over to you, go ahead, please.

I'm sorry. We should probably wrap it up. Listen, let me just thank everybody for the call. I appreciate you guys tuning in and asking such good questions. We'll look forward to updating you each quarter. The world is a very dynamic place. You have our best thinking on 2023, and we'll update you as we go along each quarter. So thanks.

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