Hello, and welcome to the 3D Systems Q1 2023 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Treasurer and Vice President of Investor Relations, Mick McCloskey. Please go ahead, sir.

Good morning, and welcome to 3D Systems' First Quarter 2023 Conference Call. With me on today's call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Michael Turner, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President, Chief Corporate Development Officer and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to 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 last night's press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2022. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Mick, and good morning, everyone. I'll begin this morning with some comments on the major drivers of our first quarter performance and how we anticipate the rest of the year unfolding at this point. I'll include progress we've made against some key strategic objectives, including partnerships and initiatives that we've previously announced. After that, I'll hand the call over to our CFO, Michael Turner, for a more detailed discussion of our first quarter financial results and our updated guidance for 2023. With that, let me turn to Slide 5 and start with a quick recap of the quarter. In describing our current market dynamics, we can best be characterized as being strongly bifurcated with one specific market being soft and the remainder being strong. I'll begin with the negative and that being the dental orthodontics or more specifically, the cleared intel aligners business. As most of you know, we have a particularly strong position in this market. As we've said for the last few quarters, demand has been severely impacted by reduced consumer discretionary spending as inflation has forced many consumers to focus on meeting life necessities such as food, gas and rent. While we're pleased that this market seems to be stabilizing, it has yet to return to growth. Compounding the economic impact on the actual market demand has been our customers' desire to reduce inventory levels, which had grown significantly during the COVID period. We expect this pressure to continue through midyear and then moderate as supply and demand come back into balance in the second half. This assumption is reflected in our guidance for the year. Looking ahead, provided a deep recession can be avoided as inflation now moderates, we would anticipate this market returning to growth in 2024. Turning then to the orthopedic half…

Thanks, Jeff. Before I start, I'd like to make a few comments regarding seasonality and year-over-year comparisons as an important backdrop to today's discussion on Slide 12. As I commented during our last call, it has been typical for 3D systems to begin each year with a relatively lower first quarter, then go through somewhat higher second and third quarters and finish the year with a strong Q4 with customers plus our annual budget of the stock up on inventories for the coming year. 2022 did not follow the same trend primarily due to a shift in demand patterns in the dental market. Therefore, we would expect the distribution of quarterly revenue for 2023 to be more in line with the distribution of quarterly revenues in 2021 as opposed to what we saw in 2022. I stage a bit more, let's turn now to our first quarter revenue summary on Slide 13. Our results in Q1 came in largely as expected, with dental softness impacting our growth on a year-over-year basis. Excluding the expected decline in sales to our dental customers, we experienced solid growth across our businesses, demonstrating consistent growth in demand for the rest of the end markets served by our Industrial and Healthcare Solutions segments, which I'll detail for you shortly. Q1 revenue of $121 million decreased 8.8% compared to the same period last year. Q1 revenue on a constant currency basis decreased 6.5%, reflecting the anticipated weakness in the dental orthodontics market. Q1 revenue from our nondental markets increased 12% on a constant currency basis compared to the same period last year. Specific to our segments, Healthcare Solutions revenue decreased 24.3% to $48.7 million compared to the same period last year. Healthcare Solutions revenue on a constant currency basis decreased 23.4% versus the prior year due…

[Operator Instructions] Our first question today is coming from Troy Jensen from Lake Street Capital.

Maybe quick first for you, Jeff. The strength in industrials, is it primarily DMLS or what technologies are most upside in that vertical?

So Troy, first of all, thanks for the question and also the prior questions that you've asked. That's part of the response that we included in the script this morning. Are you asking about what technologies are driving the growth, Troy?

Yes. I just see there's been a lot of strength in metals is what I'm going to. If you look at a couple of your competitors have ported. And I'm just wondering if that's the specific technology that's been in the most in industrials.

No. Encouragingly, Troy, it's pretty broad-based. I mean, metals done well this year, and metals clearly, additive for metals is being adopted more widely now, and we're benefiting from that. I would also tell you though our polymer platforms are doing quite well. And that's full spectrum from SLA and DLP doing quite well in our new extrusion platform with Titan's doing well. So across the MJP platform, it is in big demand as well. So it's very broad-based, both from a technology standpoint, and from an end market standpoint.

Glad to hear. So -- and speaking to that, your Q1 was somewhat soft, I guess, versus consensus, but you're maintaining full year guidance. So just talk about visibility in the second half. And in conjunction, Mike, if I just take 22% in Q1 versus what you guys have printed that gets us like a revenue number of about 5.50%. So is that what you're endorsing specifically or what's this call?

So the way I would talk about revenues for the year, Troy, if you just take our -- the previously provided guidance range of $5.45 to 5.75%. Just take wherever you want along that path and just kind of plot it against the 2021 distribution of quarterly revenues. And that's largely how we think it would hold out. So it literally using the midpoint, it'd be like -- yes, you can do the math. So just take the numbers and use the seasonality. And Troy...

The visibility, though, in the second half to...

Yes. That's what I was just going to comment on, Troy as you know, it's a crazy world right now, and we see no reason to change our outlook that things are going to kind of go along as planned. We've paid particular attention to the clear aligner market to track that one. It's a big influence on us. But -- and we baked that in what we expect there, and we will try to be very transparent on the call about what we expect. The rest of the market, we're assuming basically continues to behave as it is. The -- it looks like inflation is coming down a bit. The interest rate and hopefully, the interest rate increases will kind of moderate at least the increases. We're not expecting a booming economy or a big bus, we're kind of projecting along the way. So we'll have more clarity after the second quarter. But I think our estimates right now are very reasonable given what we all know about the world. I think they're quite reasonable, and they assume no heroics in terms of economic performance out there by any country or region.

Very perfect. And thank you for that $10 million to $12 million regenerative investment. I think that's important to know.

Next question is coming from Jim Ricchiuti from Needham & Company.

This is actually Chris Grenga on for Jim. Are you seeing any difference in demand trends across geographies, any relative strength or weaknesses that are worth considering there?

No, it's -- we sell primarily into U.S. and European markets. And I would tell you, it's fairly uniform across both. I think they're both experiencing the same kind of economic ups and downs and both geographies are exposed to the same geopolitical risks. So there's been no significant difference between them. And we're seeing strength in outside -- again, outside of dental orthodontics, we're seeing strength across the board in both economies for our technologies.

And if you could, what rate of decline in dental did you see excluding the largest customer?

We don't typically break it out like that. I mean, on the slide of the presentation, you can see that we've lumped all of dental together and it was down. We quoted 46%, and we maintain our view that we'll be down 35% for the full year. Just given my comments earlier that the dental had a particularly strong first half of 2022, followed by a weaker second half.

So the comps in the first half will be a little more negative than they are going to be in the second half. So just to give you a little bit more color to the -- clearly, our dental business, and I think the dental business for additive in total is really dominated right now by orthodontics. But that will be changing in the next several years here as printing really believe transforms that industry in the move into dentures, parcel denser other dental implants and things that are kind of in their infancy right now, but we expect that to be a nice growth driver over the next few years. And that technology has come along quite nicely. But today, as Michael pointed out, it's really dominated by orthodontics.

Great. And just to confirm, the cost savings in connection with the restructuring initiative, those are all in operating expense, correct?

No. There's -- I mean, I would call it roughly 15% that are going to be included in gross profit with the rest of OpEx.

Your next question today is coming from Paul Chung from JPMorgan.

So can you expand on how to think about the TE Connectivity kind of partnership? What the ramp there is, how material can be given the kind of very strong revenues in COGS CTE. Was this partnership kind of embedded in the initial guide given last quarter or kind of incremental or too early to tell?

Yes, I would say it's embedded. And I would say it's still -- in terms of development and wide-scale acceptance, it's still in early days. The reason -- there's a couple of reasons we're really excited about it. Number one, the -- just the basic logic behind moving to additive for connectors and what I refer to as kind of the tail of their curve in terms of part types, they literally make millions of different types of connectors, but there's a long tail on in terms of lower volume, high mix, complicated polymer connectors that additive really works well for the economics really work out nicely for. And the limiting factor there has been #1 throughput on the machines, and that's really gotten there, which is great, but also the materials development and process along with that, you have to have you have to print a very high precision, very reproducibly and they have to be printed with special materials that are -- that have flame retardancy and other characteristics as blessed by the Underwriters Labs UL. So getting all of that correct has taken some time. And we're very close to having all of that finished up and be really moving into basically scaling development now with them as a partner. So that's why we jointly went public with our cooperative agreement. The ultimate potential for connectors is enormous. It could -- that could easily become a dominant revenue stream for us over the coming years. The pace of adoption will take a few years to ramp and they have factories all over the world to accommodate, which gets back to the reliability and robustness of fleets of printers. So the direction we're headed as a company is to address those markets where you're installing tens or hundreds of printers. You link them together with intelligent software and you put a high-value material through those printers to deliver value to the customer. Those are the 3 legs of the stool that you have to get right. We've been working with TE for a number of years now, and it's gotten to the point of maturity where we both wanted to be very public about it. And we believe that's a great trend for the future. So it certainly has the potential to become a very large customer for us, a very large marketplace, and it's an excellent application and example of additive.

Great. And then on matter, can you expand on some of the details there, how that decision came about where you're looking to kind of gain share, who the main competitors are in your view and how you're positioned for the project in the U.S. Any details on the installed base?

Yes, it yes, go ahead. I'm sorry, Paul, go ahead and finish your question.

Just a comment on the revenue margin profile and any other details.

Yes. Yes. So any market -- I can tell you from a March standpoint, any market we're moving into now, we are -- we have a long-term goal of having 50% gross margins. And any market we move into with any technology has that potential. So I would tell you, we have every confidence that we matter can live into that. Their machine and I'm not sure if you were at the rapid tracer or not, I'm told that you were. If you saw that unit, it is really a clever unit. It's got a small footprint, so it can go in factories of all sizes, obviously, you can sell many of them that are a big factor, but you can also access smaller factories. It is very self-contained and has an excellent recycling capability that's kind of unique in the industry. It has 3x the build volume of other competitive products on the market and there are very few of them today. There are very few products for that footprint that access that part of the market. It has 3x the volume, the print volume of the leading competitor out there, and we can sell it very close to the same kind of price point. So we can access the same type of customer base. So we are very bullish on that technology. And it's always a choice of make or buy in terms of spending our R&D money. This came along and we initially signed a selling agreement with them to market the product, and it was so popular with our channel partners that we said this is a technology we really want to own and run fast with. So we like it a lot. It's an excellent group of engineers up in Sweden, very smart guys that have done a really good job of getting this unit designed and built. And again, we can give you some more metrics on the machine itself as we publish them. But it's small, fast and yet it's got a very big printing footprint, and the recycling capability is unmatched. So it's really clever. So I'm very bullish on that entire value proposition. We -- we've gotten the approvals we need or they have got the approvals they needed in Europe to sell it. We're still working our way through the approvals in North America. That's a matter of timing. So we'll get all those in hand. The deal closed in July, and our objective is to be in market as quickly as we can.

Great. And then lastly, on free cash flow, where can we expect inventories to kind of shake out as we exit the year? Are there any kind of risk to write-downs there? And given the kind of heavy investments in working cap last year, what are some levers to kind of drive some upside to guidance there and CapEx that as well would be helpful.

Yes. So thank you for the question. Yes. So free cash flow, obviously, we have the build of inventory, the heavy investment inventory in the second half of last year as we in-source into our Rockville, South Carolina facility. We had to purchase some inventory related to that. So obviously, we've got a pretty big lever to pull there as we work down through that inventory. I don't see a significant risk of any inventory write-offs. I mean we're constantly evaluating our inventory; the age of that inventory is now real significant issues there. But yes, that is going to be a big number that we pull as we work down inventories and we have a dedicated team working on that effort. So we feel pretty good about.

Paul, a big motivator to in-source that manufacturing was we just believe we can manage that supply chain much better ourselves. So the inventory we had to buy when we did that transaction was large, and we're going to burn our way through it this year. I think we've got a good plan to do that free up cash from inventory. To Michael's point, it's all good inventory. It's virtually all good inventory. We expect very few write-offs and we'll just convert it to cash over time.

Next question is coming from Brian Drab from William Blair.

I've had a really choppy signal for some reason. So I hope you can hear me. Can you talk at all about -- especially with the new agreement that you have signed or have in the works for [indiscernible], when do you think that this is going to be a revenue-generating business? Are you getting any more visibility to that?

Yes, Brian. And by the way, you're coming through just fine. Yes, I was thrilled to get our first contract from a major pharmaceutical company, and it's one that everybody worldwide is very aware of. It's a great endorsement of the technology, and we look forward to that collaboration. It will stretch out for several years now. And the way those companies work, the first one is hard to land. There's a lot of bureaucracy, as you might imagine. So you work your way through that, and it's taken some time. We have several more in the pipeline that we're working hard on now. I'd be disappointed if we didn't have a couple of more contracts this year. And along with that, I wish we could announce names and sizes. Hopefully, we'll be able to do that more in the future. All in all, clearly, we mentioned the investment we're making in that business and in our soft tissue business this year of $10 million to $12 million. We expect to start generating revenue next year in Systemic Bio to start generating revenue next year. The revenue generated this year, we really haven't factored into our guidance. So there may be some positive upside on that one. But we're mainly targeting it to next year. And then I think you'll see a fairly rapid climb to be cash flow breakeven and then growing from there. That's the game plan.

Okay. And I know you answered some questions on -- we matter, but I'm just not very familiar with the company. And I don't know if I missed it, but did you say what their installed base is? And is there any way you could comment even like with the range, how much that acquisition cost or do we have to wait, I guess, maybe to the second quarter 10-Q.

Yes. It's -- we don't -- so a couple of comments on that, Brian. We don't expect any material -- we haven't modeled any material revenue in the business this year from those guys. We closed in July. We're still working our way through the approval in the U.S., as I mentioned. And they are now, we will be when we wrap up the deal. We didn't mention the investment. I would tell you, you can imagine it's a small kind of mature R&D type investment. In terms of the installed base, their customer feedback has been very positive, and our channel partner feedback. They do not have a huge installed base today. But when we look at their competitive position, we're very optimistic about how they'll do in the market. And there's clearly room for other players as well. It's a big and growing market for small footprint SLS for industrial applications. So we're bullish on them. They don't have a big installed base today. They've got some -- an excellent product and a couple of more coming, and we're excited about it. In terms of the spend on it, it was modest. And certainly, we got there a lot faster and with less cost than we would have on our own in this case.

Next question today is coming from Shannon Cross from Credit Suisse.

This is Ashley Ellis for Shannon this morning. First, could I just clarify the restructuring savings targets? Are those net or gross?

Those would be -- you mean net of the -- of any severance or exit costs, Ashley, is that what you're asking?

So are you expecting the majority to fall through to the bottom line?

Yes. Yes. The $4 million to $6 million range that we set for 2023, yes, we expect that to fall straight through to EBITDA.

Okay. And then with the decision to manufacture more metal systems in-house, is that a result of kind of the success you've seen in Rock Hill -- or is that -- is it a different transaction? How should we think about CapEx and inventory for that?

Yes. It's a different location. So we've insourced metals. We were -- we manufacture our metal printers in Europe. And we've been sourced into Rio France, an existing plant in Rio. So Riom will now make our small and mid-frame metal systems and our large metal printing system is still outsourced in Belgium. So obviously, we model a savings based on doing that and much more control of our supply chain going into it. So again, I think it's a great move. There should be modest inventory changes with that. It's -- we're taking from a very good manufacturer of the product outside. So it's not nearly the impact on inventories that we experienced with the prior insourcing in Rock Hill.

Okay. And then I just wanted to better understand the kind of the puts and takes for gross margin through the year. I know you pointed to 2021. But if I look at 1Q '21 and what you did for the full year, it was a step-down and maybe that was due to some divestitures and stranded costs. But could you kind of help me bridge that, from 39 to 42.

Yes, that's a great question, Ashley. And you're right, there's been nothing but choppiness and kind of confusion over the past 2 years as it relates to gross profit as we adjusted to the changes in the macroeconomic conditions that we have some divestitures, so on and so forth. But in general, I think you should think about our gross profit margins. There's obviously a fixed component there. So as we scale on the top line, we'll get some leverage in that gross profit margin. So the short answer here, I think, is that the gross profit margin that we turned in, in Q1 was exactly in line with what we expected. And we kind of expect that to start stepping up kind of steadily as we progress through Q2, Q3 and then Q4 to settle out in that range of 40% to 42% for the full year. So it is -- I agree, it's difficult to look back at prior years and really understand the trends, but that's what you can expect for this year.

Our next question is coming from Greg Palm from Craig-Hallum.

I appreciate the quarterly color this time around. I'm just curious if you think back to Q4, when you reported and you didn't give this color, how did the quarter shake up relative to internal expectations? And I guess, have you seen anything different these last couple of months from customer behavior that gives you any sort of concern for the rest of the year?

Yes, that's a great question. I'll start out and I'll let Jeff kind of fill in some blanks here. But we did mention in the earnings call and in our kind of prepared remarks last time that we would expect the unfolding of 2023 revenue by quarter to be very similar to 2021 revenue by quarter. But to answer your question, if you were just kind of to do the math and you took, say, the midpoint of our guidance range and you applied it to that 2021 distribution. Then yes, I mean, I think it's fair to say we fell towards the bottom end of the range, but still above the bottom end of the range. Just that's just normal puts and takes in quarterly distribution. But as we commented, it came in roughly as expected. So no real surprises internally for us.

Yes, Greg, if you looked at -- in terms of our internal estimates, I think the year is shaping up exactly what we had kind of thought it would -- and I know it's always difficult externally to get the quarterization correct. But we were not surprised by Q1 performance. In fact, it's nice to see a degree of normalcy in terms of puts and takes, as Michael said, that's the normal noise within a quarter. But nicely, the if anything floated out of the quarter, it was -- it's still in folks plans, and it's still working its way through. I think the world is nervous, so you see things -- you see purchases and things kind of dragging a little bit more as people are spending CapEx. The good news is they have the money to spend. That's encouraging to have a clear need to spend it. And they're just nervous like all of us are about the world situation in the economy. But it's -- we expect the year to unfold as we would have told you in the fourth quarter when we did our earnings release for year-end. Second, we'll give another update midyear. But right now, we feel pretty good about the guidance range on both revenue and EBITDA.

I guess I'm trying to tie up that commentary because it feels like we're sort of anything but normal this year. And obviously, the guidance assumes a much more heavily back half year and a pretty significant ramp in Q4. So what gives you the visibility now just given all of the uncertainties out there that you can sort of achieve normal seasonality as compared to 2021?

It's -- well, I'd tell you, Greg, in this space, when you're selling into factories, into industrial environments, purse orders aren't placed without a lot of prior discussion. So I would tell you, our revenue forecast is based on really solid, I'd call them longer-term discussions around capital needs of our customers. And it generally is CapEx. It's not OpEx from our customer standpoint, and they talk to us a long time, do a lot of trials before they place a purchase order. So we do have -- we may not get the timing exactly correct, but we do have a very good feel for purchase order forecast, what's in the pipeline and what's coming. And you can always be surprised, and that's why we always give kind of a midyear update after Q2, that's probably a little bit more precise in the second half. But I would tell you right now, and it's -- the world is anything but normal. But if you didn't know that, if you didn't open a newspaper and you just looked at the business flow day to day, you'd say, this feels pretty normal. It's not much out of the ordinary. The only other thing I would add to that is kind of some fundamental pillars of our guidance we provided at the -- for year-end. We said that we expect dental to be down 35%, and we kind of pointed to the mid-teens growth in the rest of the business. And we sit approximately right there today, right? We grew at low over 12% in the rest of our business. So things from our perspective are coming in as planned. I mean there's a lot of year left, and there's puts and takes with the rest of the lot of the year. But where we sit right now, we still feel really good about our outlook.

Yes. Okay. I appreciate that. And then just last one, just a clarification on the adjusted EBITDA guide. Is that based on sort of the midpoint of the guide for the year? Or do you think you can achieve that even towards the lower end?

It's a great question. So let me just kind of walk you through it a little bit. We'll start at the midpoint. If you just take the midpoint of our guidance range and you again, apply that 2021 distribution of revenue and then you just kind of assume our Q1 OpEx and just on a non-GAAP basis, just for clarity, that's roughly $6.5 million. If you just assume that, that runs out and then we've got a steady depreciation add back of a little over $5 million, and then you drop in the midpoint of our savings range of $5 million I mean that would get you in a range of, call it, $4 million to $6 million of EBITDA just at the midpoint. So if you do that same math at the lower end of the range, you're going to be in and around breakeven EBITDA. We still have plenty of levers left to pull if we go that direction. We're absolutely committed to hitting that $2 million number. And I think we've just added more certainty to that with the actions that we've taken with the restructuring.

Your next question is coming from Alek Valero from Loop Capital Markets.

So my question is, so given the current cost savings program that you guys announced last in, how should we think about the right cost structure for the current revenue run rate? Are you guys there now? And additionally, if this is appropriate cost structure, can you guys maybe provide some context or some color around how we could think about operating leverage potential over the next few years?

Yes, it's a great question, and thanks for asking, Alex. So I think the way I would answer that question is there's certainly a component of volume scale, and we've got the balance sheet to kind of weather the storm right now. And so we're preparing to see some steel growth over the next few years, which will get our operating expenses more in line with our target percentage of revenue. So I think right now, we're a little higher than we want to be. The restructuring efforts we just took that were enabled by some of the optimizations that we put throughout the business. I think we'll help with that. So I think we're in the right ballpark, but certainly, volume scale is a strong component of it as we move forward.

And just as a quick follow-up. Can you guys maybe update us on how you guys are thinking about M&A currently? And maybe like what areas of focus you guys are looking at?

From an M&A standpoint?

M&A for us, M&A would be very -- for both of us is very modest, very opportunistic. There's -- we have a very robust internal development activity. And again, we spend an appropriate amount of money on both hardware, software and materials as a key part of our investment strategy. We really have most of the assets we need. Occasionally, you get something coming along like we matter that we can plug in into a niche in the market that is really a nice quick payback on the investment. But more and more, we're well suited to do that ourselves. The industry itself has been going through a lot of changes. So I don't know on a larger scale what may come. But I feel great about our balance sheet. We've got well over $0.5 billion of cash on the balance sheet will be EBITDA positive this year and cash flow -- free cash flow breakeven or better -- so we feel really good about our balance sheet should something come along is of interest to us. But in terms of meeting anything, we're in pretty good shape.

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

Thanks, Kevin. So just a quick thanks to everybody for joining us this quarter. We look forward to updating you again after next quarter's results. Until then, be well and thanks for calling in.

Thank you. That 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.