Hello, and welcome to the 3D Systems Q2 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 Mick McCloskey, Vice President, Treasurer and Investor Relations. Please go ahead, Mick.

Good morning, and welcome to 3D Systems' Second Quarter 2023 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, 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. 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 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. Thanks for joining us today. And to reinforce what Mick said, I would refer you to the charts that are up on the web. There are a couple on there that I think you'll find really interesting, and I'll comment on as we get through them. Let me begin on Slide 6. Let me start this morning by taking a step back and talking about what's happening in our industry right now. And after that, I'll provide an update on our engagement with Stratasys and then provide some comments on our second quarter performance and wrap up with our view of the -- on the business for the remainder of the year before handing the call over to our CFO, Michael Turner. We're going to cover a lot in today's call, but I want to start by saying that there are 3 clear takeaways that I want to leave you with today. First, quarterly results across the industry clearly affirm the critical need for scale. Now why is this topic suddenly on everyone's lips? Because for the first time in our history, customers are interested in moving 3D printing out of the lab and into real factory production environments. For a supplier to be successful with these customers, they must have a global presence, compelling technologies and an economic model that allows both the customer and the supplier to generate the profits needed to sustain investments and create value for all of their stakeholders. As one of the largest pure-play additive companies in the world, 3D Systems clearly has a stand-alone path to attain increased scale through organic growth. However, our proposed combination with Stratasys, which we have actively pursued on a friendly basis for over 2 years, accelerates attainment of this goal, benefiting…

All right. Great. Thanks, Jeff, and good morning, everyone. Before I go into the normal details of the financial results, I'd like to circle back on 3 important points that Jeff has already made that will underscore most of my prepared remarks this point. First, on February 28 of this year, we informed you that we expect our dental business to be down by approximately 35% for the year. We further commented that this would be more pronounced in the first half of the year due to the timing of order patterns in the first half of last year, followed by the subsequent decline of demand for dental orthodontics that unfolded in the back half of 2022. Our view on this has not changed in the year-over-year declines that we've experienced in our dental markets during the first half of the year are very much in line with our original expectations. And our view for the full year decline of 35% remains unchanged as well. The second point I'd like to make is what has changed is a shift in customer order patterns during the quarter, particularly impacting printer sales that resulted in orders being shifted out of Q2 and into Q3 due to elongated sales cycles as customers began to reevaluate their capital expenditures in light of rising interest rates, tightening budgets and a more cautious macroeconomic outlook. We are conservatively expecting these elongated sales cycles to continue for the remainder of the year, resulting in a shift of sales demand that will adversely impact our view of full-year 2023 sales attainment. I will circle back to this in more detail shortly. And the last thing in the comment I'd like to make pertains to year-to-date sales growth. Excluding the softness in dental sales that will be expected to…

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

So first of all, I guess, the weakness in dental that's been well communicated and kind of in line with expectations. I guess my question would be just positioning the account going forward. Has there been any change in share with this big customer?

No, not a bit as far as we know, Troy. It's -- literally, they weren't a hard ramp during the COVID period when everybody was worried about getting materials and parts, and everybody wanted straight teeth at the time and interest rates were low. So people had the money to spend. So it's been a confluence of both a drop in demand and burning off inventories. So it's -- directionally, it's just what we expected this year, but there's no other effects going on that we're aware of at all.

Jeff, and for you to remind me, that entering the year, didn't you think Industrial is going to grow about 15%?

Yes, we did, Troy. And that's -- so yes, the only unexpected disappointment in the quarter really were -- late in the quarter, we saw a pushout of POs for some of our high ASP products. And again, it's -- my impression was and is today, it's not share loss because most of those POs were landed in July, in early July, most of them came through. I think customers are just slow rolling capital spending still. Interest rates are high. The economy is still a bit uncertain. People are managing cash. So directionally, it's where we expected. It's just a little bit of slow rolling of some of the larger POs. And Troy, until it's proven otherwise, we're just assuming that continues now throughout the year. I don't want to give my hopes up that, hey, that's going to miraculously change. I hope it does, but we're just assuming right now just kind of cascades through the year as it did in Q2.

Sure. All right. So right now, you think Industrial is high single to the low double-digit growth this year. Is that the comp…

Yes, it will still grow organically and pretty nicely, but not where we had hoped at the beginning of the year. And again, I think those POs will eventually flow through, and we'll see that recovery or rebound in the growth rate. But this year, that's what we expect, pretty healthy organic growth, not quite what we expected at the beginning of the year.

And then quick one for Michael. And not that I'm asking guidance here at all, but just directionally on gross margins. I know you guys are doing a lot on cost cuts and there's just a lot of mix shifts going forward. And just hypothetically, if you guys did like $600 million in revenue next year, what would gross margins look like for you guys?

Yes. We -- so Troy, that's a great question. We expect continued margin expansion, right? We're starting to get the full impact of the cost optimizations that we did last year at insource manufacturing and as well as the cost-outs that we executed within the quarter. Additionally, we've announced the in-sourcing of metal production into our Rio and France facility that we're working hard to execute on this year. So we would expect margins to continue to increase. I mean, I think kind of in that 42% to 43%, maybe even as high as 44% for next year. Perfect.

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

This is Danny Eggerichs on for Greg today. I was hoping to kind of touch on the dental as well. I know previously, you had kind of said destocking would kind of start to abate midyear. And as we look at -- we're now kind of middle August, as you look back on that, how has that progressed relative to your expectations? I know you kind of said overall, it's in line. And then on top of that, how has maybe demand at the end consumer shifted to kind of that mix there?

Well, there's been some clear communicating from the leader in that industry about in demand and how that's evolved. I think when inflation first spiked, demand really went through the floor, what has been said publicly now by them is that they basically -- to paraphrase, look at their market in terms of adults and kids. The kids segment seems to be back and the adult segment is lagging, which is consistent with consumer discretionary spending, adults are dragging their feet now on getting their teeth straightened. I do think that situation has all stabilized now. So it's great to see the kids segment back. The adult segment, undoubtedly, will follow because people still have a fundamental desire for that and especially as global as that business is now. So the in demand profile, we think, is kind of bottoming and should be starting to recover. The lag for us is that they did build inventory in the supply chain coming out of COVID because everybody again was worried about just having enough raw material or machines, components, whatever your business was, everybody was worried about that. So everybody stocked up on inventory and that they were no exception. So there now just a matter of burning down the inventory. So it's a balance between in demand going up, inventories being burned off. We estimated that would take 35% out of that revenue for us this year. And it directionally, it's tracking that way. We're not changing our overall yearly estimates of that. So I hope sometime we'll be surprised with demand bouncing back. But people have to remember, there is a lag between that in demand going up and the demand signal flowing through to us. So fundamentally, nothing's changed, and we're pleased to see the market seem to be bottoming now. And once the inventories are at reasonable levels, again, I think you'll see a nice upturn.

Maybe one on the guidance, maybe specifically the EBITDA side, positive EBITDA for the year would imply still a pretty good improvement in the second half here. So I guess, what's your confidence level with what you've done on the cost side so far and maybe assuming more of a stagnant environment? Is there any additional levers you'd have to pull to get that? Or do you think that what you've done on that cost side makes you confident?

Yes. So Danny, just to be crystal clear, we expect positive EBITDA in Q4, not necessarily the full year right? And while we don't give quarterly guidance, right, we would expect Q3 to kind of be slightly negative to roughly breakeven and then you can kind of do the math from there. And then on the cost programs, I mean, we're seeing good solid traction there. I mean, actually, we got a little more cost out within the quarter than we had previously anticipated and we continue to aggressively manage and control costs as necessary. Obviously, we want to not cut too deep, we want to preserve for the future, but we are taking appropriate actions there and seeing good solid traction.

Your next question is coming from Shannon Cross from Credit Suisse.

I was wondering if you sort of take a higher-level approach to the bioprinting business. And given I think you're seeing some significant, I don't know, improvement in at least results that in terms of the trials and everything you're doing. Does it make sense at some point to literally run this as a separate business? Maybe I know you have United Therapeutics. I mean is this -- I guess I'm just trying to figure out, is this something that gets sold eventually gets IPO-ed eventually because it does -- it's such a bright spot in terms of your business, at least in terms of the results that we've seen so far. And again, it's just a different investor base with a much longer time horizon than maybe some of the ones that look at 3D printing I don't know. I'm just wondering how you're thinking about it as things are progressing.

Shannon, it's an excellent question because our traditional investor bases are largely industrial tech people, growth-oriented industrial technology folks, generally, and that's what most of this industry speaks to. This business, as you take 3D printing now into printing human products, it is a different type of market. It's a biotech market and it was the right thing to kind of incubate it as a part of our R&D program. At some point, I think you're exactly right, it becomes a separate business. And there's a really nice amount of technology crossover in both directions. So what we've learned on printing in other segments, industrial and healthcare, we can apply to regenerative and vice versa, we're learning a lot in regenerative that we're now carrying back into our industrial markets. But outside of that technological crossover, they really are different end markets and potentially different customer -- or different investor bases. So what I -- and I can't speculate exactly on the timing, but I think the path you laid out is probably correct is it will become a separate business unit for us. And in that sense, we have flexibility to bring in new outside investors in that business that have an interest in that if the capital requirements are such that, that's needed, we'd have the flexibility to spin it if it made sense to do so. So, however, we can continue to untrap value in that over time, that's exactly what we would do. So I see it growing kind of in the direction you suggested. And as the -- as we hit some of these key milestones and it becomes more and more publicly clear what this business is capable of. I think it's -- the time will be right sometime to probably separate set it up as a separate business unit. And whether we spin it or if we take outside investment, that's a decision that we'll have to follow.

And then I think on the industrial side, you mentioned that a number of deals that were pushed actually have either closed or are closing -- or I guess you said closed in July. So I'm wondering, is it that you're just seeing incremental pushout, so it's just kind of a rolling issue within the industry. And that's why you're providing a bit more cautious commentary?

Yes. Exactly right, Shannon. Very simply, it's -- and because it was particularly on higher ASP products, both in metals and polymers, but particularly on bigger capital spends from our customer, then moving a little bit more slowly on approving POs. So what we had and what we saw not come in at the end of Q2, largely landed in July in Q3. And we just kind of expect that trend right now until proven otherwise, to just kind of roll through the year.

Is there -- and I guess, are there any specific industries or again, highest still we can probably guess. But as we think about…

That's pretty broad. Honestly, Shannon, it's pretty broad industrially. I think everybody is being conservative on cash spend. And it's not that they don't have -- they've got great checkbooks. It's that they just want to be prudent in how fast they expand capacity or bring in new capabilities. So -- and again, it was tilted toward our higher expense items. And so you would imagine that's just people's slow-rolling CapEx spending. And it wasn't dramatic, but it does change the outlook in the year, which is why we updated guidance.

And Shannon, just to be clear, this impact to both industrial and healthcare. It was largely on the printer side of our portfolio. So it was literally across all segments of our business kind of formally.

Yes. It affected printers. That's exactly where it hits. And for example, our personalized health service business is going very strong, and it's -- that's about procedures. That's about medical procedures and hospitals. -- and helping people repair their body. Everything else that's printer driven was exposed to that same kind of dynamic.

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

My question is, so what degree does your desire to combine with Stratasys has to do with accelerating key industry adoption? And if so, how would that adoption look like and where?

So if I heard you correctly, how is it influenced by industry adoption of 3D printing?

That's -- your desire to combine with your Stratasys.

Yes. Well, sure. Yes, absolutely. It's an accelerator. So as a stand-alone company, what we're doing right now is trying to replicate what we've done in orthodontics across other market verticals. And the scale that you get to by combining with a company of Stratasys' size and it brings in very complementary technologies, it gives you more horsepower to do that more quickly. So it doesn't directionally change things, but it does allow you to move faster. So that's what I love about this combination is, strategically, it's the same path that we're on. And ultimately, I believe they're on too. But it just allows it to occur much more quickly. And the window of opportunity right now for customers to look at 3D printing in factories, it's open right now. Coming out of COVID, our customers experienced the same thing we did. They were all worried about their supply chain. And the bigger the customer, the more worried they were because most of those supply chains, but if you go outside of healthcare, most of them are extended around the world. So you've got parts coming out of Asia. You've got assembly operations all over the world. You had tons of labor and component shortages during the COVID period, and it's caused everyone to relook at their supply chain. And once you do that, you look at the location, you also look at the content, you look at what technology are using to make parts. And with 3D printing, they get an improvement in performance of the part and now they get very good economics. But you've got to go out and touch them and you've got to demonstrate the technology for them. Many of these guys have never used 3D printing in a factory before at all. They've…

Your next question is coming from Brian Drab from William Blair.

This is Tyler Hutin on for Drab. Okay. I just want to touch on the extrusion platform of the table. So you guys mentioned some of the end markets that is getting traction. And can you just dive into that a little more where you're seeing the most traction and just kind of where the opportunity is going?

I'm sorry, I missed part of that. Michael, did you get Tyler's question?

So, Tyler, I just want to make sure I heard your question clearly. It was about Titan and specific traction in certain markets and then segments. Is that your ultimate question?

[indiscernible].

Would you mind picking up your handset? This is the operator. I do apologize. Would you mind picking up your handset?

You got to climb out of that barrel, Tyler. It's hard to hear. But no, if your question is about Titan, I'm very happy to take it. Titan is a marvelous platform. It's a rugged large platform that our customers really enjoy. It's carving a really nice niche in the extrusion market, making a robust range of tooling for different applications now. It was a small U.S. start-up company that we acquired just over a year ago. And so it's gotten really nice traction in the United States. We're now seeing it begin to take root in Europe and in Asia because the value proposition is very high. They can make large parts quickly. It's got a -- and the raw material input is palletized, it's from pellets. So it's a lower -- fundamentally lower cost raw material. So you get -- customers get a really good value. They get speed, size and a lower raw material cost for introducing Titan. And so the payback for them has been really attractive. The margins are good for us. So it's a really great sustainable business from my standpoint that I think will carve a really nice niche in the extrusion market.

And Tyler, one other thing that I think about when we talk about Titan, one very interesting aspect that has in line finishing in kind of post part production or post-production work that can be done right in the machine itself. So that allows for streamlined workloads.

It's pretty cool. The guys that started this company is a very bright energetic young guys. They came out of the CNC milling industry. So this Titan has a rotating head on it that you can move from extrusion to machining very quickly so you can print a very large part at high speeds, and then you can rotate the head and go back and machine the surface off to make it really smooth. So it's kind of the best of both worlds, all in a self-contained unit and easy to use. So we're really bullish on it and are excited to see us growth.

Thank you. We 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 for hosting us. Listen, thank you all for tuning in. We look forward to updating you again next quarter and for taking questions along the way. I wish you all a great day and a great quarter ahead. Thank you.

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.