Hello, and welcome to the 3D Systems First Half 2024 Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mick McCloskey, Vice President, Investor Relations. Please go ahead, Mick.

Hello, and welcome to 3D Systems' first half 2024 conference call. With me on today's call are Dr. Jeffrey Graves, President and CEO, and Jeff Creech, EVP and CFO. 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 our latest 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'll 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 periods of 2023. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thanks, Mick, and good evening, everyone. With our 2023 10-K filing and our 2024 earnings releases for Q1 and Q2 now complete, we're hosting today's call to discuss our results for the first half and our outlook for the rest of the year. Following my opening comments, I'll turn the call over to our CFO, Jeff Creech, to take a deeper dive into the first half financials. We'll then wrap up our prepared remarks and open the call for questions. As a backdrop to our discussion today, I'll comment briefly on our delayed 2023 annual report filing. On December 4th of last year, we announced that following a comprehensive months long proposal and evaluation process, that our audit committee had ultimately decided to dismiss the company's independent auditor following the 2023 year-end audit and moved to a Big 4 audit firm beginning in 2024. This decision was made upon -- based upon many factors, including an assessment of each firm's capabilities in the context of our growing size and complexity as a company. Having informed all parties of our decision last December, the 2023 audit ultimately took much longer than anticipated and with significantly higher costs incurred. These costs, which we view as transitory, got a significant impact on our OpEx costs in the first half trailing into Q3. However, they're expected to return to historically normal levels in Q4. Moving forward, we do anticipate realizing greater efficiencies in the years ahead. With that, let's turn to Slide 5. When we last spoke in February, we mentioned the weakness we were seeing in our end markets with respect to customer CapEx spending. We believe then and now that this was driven largely by a high level of uncertainty on the part of our customers in forecasting consumer demand in the…

Jeff, thank you, and good evening, everyone. I'll begin our revenue summary on Slide 9. For the first half revenues of $216 million, we see a decline of 13% from prior year, almost entirely driven by software printer sales with materials largely flat and a partial offset in services growth. However, when unpacking the individual quarters of 2024, revenues grew sequentially from Q1 to Q2 by over 10% and across printers, materials and services, as well as across both healthcare and industrial business. Within healthcare, total first half revenues of $94 million declined 14% from prior year. While healthcare materials and services performed very well in the first half, this was more than offset by a decline in printer sales, as Jeff referred to previously. For our industrial markets, first half revenues of $122 million declined 13% from the prior year, driven by declines in both printers and materials, again with a partial offset from services growth. Within industrial submarkets, we saw strong first half growth in key areas such as semiconductors, aerospace and defense. However, this was more than offset by weakness broadly throughout most other major end markets. Now turning to Slide 10, let's speak about gross profit. Non-GAAP gross margin for the first quarter was 40.1%, improving 110 basis points from the prior year. Second quarter non-GAAP gross margin of 40.9% improved 200 basis points from the prior year. Collectively, for the first half, this resulted in margins of 40.5%, a nearly 160 basis point improvement from the first half of last year. Margin performance was primarily driven by favorable mix in materials and services and benefits from our in-sourcing activities, but was partially offset by unfavorable absorption given our lower sales volumes. I would also add that gross margin includes the negative impact associated with an…

Thanks very much, Jeff. So, I'll conclude with our remarks on Slide 14. While the broader economic climate remains challenging, our businesses started to sequentially recover, and we're encouraged by the view ahead. Sales pipelines are increasingly robust and the growth in services from our applications [in years] (ph) lays a healthy groundwork for expected new customer growth ahead. We continue to launch new product innovations such as our EXT 800 Titan Pellet Printer in June, with more stage for release in the near future to meet a rising demand. From a cost standpoint, we have a clear path for operating cost reduction going forward and options for significant organizational optimization in the future. Within our software portfolio, we are now concentrating our Oqton platform exclusively on the industrial markets that place a high value on quality and assurance of supply, many of which have a regulatory element as well. We have key commercialization efforts in place such as last year's announced development agreement with Baker Hughes, which is designed to accelerate innovation in the energy sector with the Oqton industrial MOS system. In our regenerative medicine initiative, we remain tremendously excited about our partnership with United Therapeutics, and specifically our lung development program. This program not only is opening an entirely new market, but is also spawning incredible technology innovations that will impact our company and the world for years to follow. From a 2024 perspective, considering the weak start to the year, there was evidence of strengthening in the second half, we are updating our full year 2024 revenue projections in the range $450 million to $460 million. With this revenue outlook, we anticipate non-GAAP gross margins of 40% to 42%. Given the effect of our restructuring efforts and declining G&A costs related to the 2023 audit, we now expect full year OpEx to be in the range of $248 million to $253 million, and adjusted EBITDA improving such that Q4 approaches breakeven performance. We thank you for joining the call today, and we'll now open the line up for questions. Kevin, if you'd open the line, please?

Certainly. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.

Hey, gentlemen. Thanks for the time. I'm excited to talk to you. It's been a while.

Thanks, Troy.

Hey, so, I just want to say, the -- I thought results were decent given kind of what we kind of knew. So, congrats on what you could do. But quickly, there's challenge a little bit on dental, I guess. I've heard more questions about the direct printing of aligners and has more to do with the cost of materials, and -- so how the total cost reflects versus vacuum casting. But thoughts on that. And just kind of rank order in dental, is it dentures or night guards or are these direct printing of aligners that you're most excited about?

Yeah, great. Two great questions, Troy. So, let me -- I'll talk to both of them in that order. So, the direct printing method has been challenging, that's why it's taken us a couple of years to develop it. The niche I believe it will carve in the market, Troy, is an ability to move teeth more effectively. So, basically, it should broaden the market for clear aligners. I think working with the leader in the field of clear aligners, we've gotten the cost down to be more attractive year-over-year for a long time. So, it sets a big hurdle for direct printing method. But what we're finding is direct printed aligners can deal with more difficult -- if you will, more difficult cases. And it also opens up multiple channels to market, because with these smaller printers, you could actually disperse them geographically, you could put them in major cities, you could even potentially put them in a dentist office. So, it offers more channels to market, more ways of delivering the product more quickly to patients. And I believe it can -- it has the potential at least to move teeth more effectively. And it's a different -- it's obviously a different cost structure. So, we're excited about the technology. I still -- we're looking for commercialization in late '25. It's a high bar to displace the indirect method, but I do believe it will carve a niche in the market. So, I wouldn't tell you it's our -- we're envisioning it to be our highest revenue product in dental, but it will have its home and I think we've got very compelling technology to offer. In terms of what we're most excited about for the denture stuff is fantastic. It's made by a jetting method that's very…

Okay. And if I could slip one more question in, just on the pipeline comments, I've always said, in a downturn, pipeline always looks great, right? So, you'll deal with [indiscernible] and you're adding some new ones, right? So, pipeline grows, but what's changed in the pipeline? And is it defense driven? Or any more color on kind of just kind of recent activity would be helpful.

Yeah, sure, Troy. You, obviously, have been following our industry for a long time and ask good questions. The pipeline is -- and we're trying to get better at quantifying it, but I can tell you just qualitatively it's never been bigger in over the last few years, it's running up, and it's because the economics or the value of these parts that we're able to print now out of more and more specialized materials is going up and up. We delivered a part for the Navy for naval application not long ago, and it was a part that does well in saltwater, okay. So, it was a unique but accepted material for the US Navy. And what was the selling point on that component and why they're moving into production is, it gets us out of drydock and back to the ocean quickly. So, the comparison to making that through traditional casting methods, which it could be, it was not an exotic design, but the traditional casting methods would have put that lead time at over 400 days. We got it turned around, Troy, in four days, we got it back. So, it's an example of what can be done. So, I would tell you the pipeline for defense applications is very strong and we're really excited about that. The semiconductor industry, we're doing a lot of exploratory work in metals for the semiconductor industry for semiconductor fabrication. So, the folks that make that equipment, which is very expensive, complex equipment, they drive great benefits from 3D printing, first of all, in the design of the product, but also in the economics, many of those components are assembled, but you can put together now into assemblies -- into one assembly if you will, one large component if you want…

Okay, awesome guys. I wish you the best. Good luck.

Thanks, Troy.

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

Thanks. This is Danny Eggerichs on for Greg today. Appreciate the comments on kind of the pipeline and just being that the pipeline has strengthened and it sounds like momentum kind of built in Q2 and is expected to for the second half as well. Just kind of curious if you feel like visibility has improved as well or just for pipeline conversion or just being cognizant of overall macro, do you feel like maybe it's still kind of too early and you're glad that interest is coming back, but it's still kind of a wait-and-see game?

Yeah, Danny, first of all, it's good to hear your voice as well. Thanks for the question. It's probably more of a latter, Danny. I mean, I'm really encouraged that customers are bringing it out and modeling the economics, looking at the part -- quality of the parts, all of that. The proof in the pudding will be then placing orders for equipment which requires them to up their CapEx budget. So, I wouldn't get exuberant about it. I mean, we're projecting, as we said, continued growth from Q2 to Q3 to Q4, and we put that kind of the mid-single-digit levels, which we're happy to see the trend. Maybe we'll do better than that, but it largely depends on the outlook our customers have for end demand. So hopefully, the world will see continued -- the inflation coming down. And then, I've been encouraged by the Fed's comments about lower interest rates. I think that will be a strong push for more demand for our customers, more CapEx spending in their plants. When that happens, you should see a direct flow through to our business. So that's what we're waiting on. You see the same public metrics that I do. So, you kind of get to hold your breath. And then, we're coming into an election and we're in a volatile world. So, all those caveats, but I'm encouraged with the trend. It is a big pick up in interest from Q1 to Q2, but very pleased with that. And we'll see where Q3 and Q4 go, but right now it looks positive.

Okay, understood. Then maybe on dental and maybe more specifically this large aligner contract, the simple math implies kind of like a $50 million average annual value. Is that the right way to think about it, or is there a way to think about maybe the cadence of that throughout its lifetime and then just being that average annual value is quite a bit lower than maybe that business has historically done? Is it safe to say all the things you're doing elsewhere in dental are kind of aimed at filling that hole?

Yeah, I might phrase that a little bit differently, but yes, I mean we're excited about -- fundamentally, Danny, the dental industry is converting to 3D printing broadly. And that's why we rolled out our strategy about participating in all four elements, basic elements of the market. So, in terms of modeling that contract, it's very hard to predict year-to-year noise, but the overall value of the contract was our best shot at saying what it's going to be. And if you knew nothing, you draw a line through the points and say that's where it's going. I guarantee you that won't be right. It will be -- it will fluctuate from that. So, you can listen to the public players that talk about end demand and you can get a sense for how that demand flows through to us. It's hard to be precise in model, we haven't attempted that. We've just set a cumulative value over the five years. And we have no real further insight than that. I think it's a safe bet, it'll be in that total range, but the timing will depend on the end demand. And that's driven in part, Danny, by the inflation pressures consumers are feeling. They don't tend to buy as many aligners when food is expensive and gas is up. So, hopefully, that's all coming down and you see that rise. The other markets for dental, you can view it as kind of filling the gap, but in their own right they're very exciting. I mean dentures have been made by hand to-date, so largely by hand. And you'll see a complete conversion to 3D printing in the -- over the next several years. And it's a big market, not only in US, but in Europe and even parts of Asia. So, we're thrilled to be in it. We're committed to it. It looks great. Night guard, we were still gauging the size of that market. The performance requirements are little less than having to straighten teeth, but there's some interesting work going on to improve the intelligence, if you will, of aligners or night guards to help with sleep apnea and help other -- with other issues. So, I don't know where that will take the market, but certainly it lends itself to 3D printing. And then finally, you have tooth repair, the standard tooth repair that we've been in that business for a long time. So, those are four big pieces of dental, and we're heavy player in all of them today, probably the biggest, and we look forward to getting even bigger overtime as the market converts to 3D print.

Okay, great. Excited to see all that take hold. I will leave it there. Thanks.

Thanks so much, Danny.

Thank you. Our next question is coming from Jim Ricchiuti from Needham & Company. Your line is now live.

Hi, thanks. Good afternoon. So...

Hey, Jim.

Hello. Sequential growth, you're anticipating Q3, Q4. Is that -- talk to us a little bit about how you might see that playing out in both healthcare and industrial? Are you anticipating growth in both those sectors sequentially in the second half?

Yes, we are Jim. We should see growth in both of them. The sustainability of growth in healthcare looks very high, and so I'm very pleased about that. Again, there was a drop off in printer sales in healthcare, where we're selling printers to like contract manufacturers that are making implants, things like that, that was soft, again driven by CapEx. But the rest of healthcare was, if you will, [indiscernible] very healthy. So, we saw growth there, expect that to continue. We expect to see some rebound on the industrial side, primarily from recovery of printers with CapEx spending become boosting up over the rest of the year. So, those are the basic drivers, Jim.

Okay. And that ties into the next question, Jeff, just in terms of how we're thinking about Q3, Q4, is it going to be driven the sequential growth? How much of a recovery are you anticipating in systems, or is this materials and services that's driving some of this improvement?

Yeah, I would expect both, but the biggest recovery, Jim, are probably in printers. Again, that's really what's held us back. That's what bottomed out in Q1. And Q1 was a really tough quarter and Q2 was up 10%. Most of that was driven by improving printer sales. And I would expect the rest of the year will be that, too. But the installed capacity, it's being worked pretty hard. So, material pull-through in services should be good. And remember, part of services are our application engineers that are doing new product development with customers as a part of our sales process. So, those 80 engineers are very busy. We include that in the services number and I would expect it to continue to grow.

Got it. Thanks a lot.

Thanks, Jim.

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

Hey, thanks for taking my questions. This is Tyler on for Brian. I was just wondering if you could give some direction on how dental sales performed in the first and second quarter? And then, I'll have a follow-up.

So, overall, dental sales -- certainly materials for dental sales were strengthened throughout the quarter, materials utilization. And again remember the aligner market is a big one for us. So, we saw strengthening there. The rest of the market was [indiscernible], I mean it basically mirrored a lot of the performance of the rest in terms of printer demand. So, you saw Q1 was a weak quarter, Q2 improved kind of along with the broad market and we would expect that trend to continue. So again, materials pull-through should remain pretty healthy for the rest of the year and grow. And then you've got increasing printer sales. So, those are things that should drive the rest of the year in dental.

Okay. Thanks, Jeff. And just kind of wanted to touch on the night guard situation a little more. I think you mentioned that this will be a direct print. Was it made by hand before or was it kind of made with a mold that you could 3D print as well? Just kind of like the opportunity there. I know you said you guys are kind of observing what the op may be and I've also heard about it a lot, too. It just assists with sleep apnea, et cetera. So, it's pretty interesting device to get into. So just any more details you have there?

Yeah, Tyler, there is two advantages to 3D printing them. Today, they are formal form, okay over a dye. And because you don't -- you're not trying to move teeth at night, you're just trying to protect it, the price points can be pretty low for standard protectors in your mouth. What 3D printing allows you to do is number one, obviously, create more complex aligner if you wanted to do other things like participate in straightening or address sleep apnea and things like that, you have more design flexibility. The other thing though, which I think will be really interesting to see play out is, you use dual materials. So, you can have a hard surface where the protectors mate with teeth, you have a soft surface around your gum for comfort. So, I think the ability of 3D printing to make dual materials, which is unique is a real attribute. And then, for consumers that are concerned about a better night sleep and they don't want to wear the traditional night guards, I think it's a really interesting extension of that market. We are -- that is our newest segment, if you will, in the dental market. And we're still kind of feeling our way along with Glidewell in terms of the market potential, but I can tell you we have an excited partner and we'll see how fast we can move. Certainly, the technology is there and we've got to make sure that the cost effectiveness works as well, okay?

Yeah, just kind of following up really quick on that, is that kind of -- does that fall into like the discretionary bucket just like aligners would or is this more of a need for patients?

Tyler, I laugh, because if you go back 20 years, who would have thought aligners were critical to life, but they became critical to people and people view it very high on their priority list to have really straight teeth. And so, it's really moved up the list. Night guards are kind of similar. I mean, a lot of people grind their teeth at night and I know many, many people -- next time -- I challenge next time, you're at your dentist, ask him how many night guards they're selling to people, very high percentage of people buying night guards these days. The overall consumption is certainly larger than dentures and have to replace their teeth and it's because people are living longer, their teeth wear down at night because they grind and they're wearing these aligners. So, as those advanced now with 3D printing, we can look at doing it basically a better aligner if you will, more -- one that conforms to your mouth better, that's more comfortable and potentially even later on in life put instrumentation in there to monitor sleep, to monitor stresses, things like that are all on the drawing board. But 3D printing helps up the option for all of that.

Great. I appreciate answering my questions. I'll pass it along.

Okay. Thanks, Tyler. Take care.

Thank you. Next question is coming from Ananda Baruah from Loop Capital Markets. Your line is now live.

Yeah, guys. Welcome back. Good to see you back online with you guys again.

Yeah, good to hear your voice, Ananda. Thank you.

Yeah, no doubt. I guess, apologies if you went through this. I jumped on when the Q&A started, because there's a couple of calls going on tonight. But did you -- Jeff, did you talk about where across the portfolio the pipeline you are seeing pipeline improvement?

Yeah, it's -- Ananda, it was first and foremost in the market, I don't know if this makes sense, that absolutely need 3D printing. So, military and defense, aerospace, those are strong, okay? The specialty markets like semiconductor equipment, we've been working at semiconductor equipment for years and it's finally paying off for us. We've got enormous amount of interest in metal parts for the semiconductor equipment industry. And if you think of the CHIPS Act and all the manufacturing coming down the pipe on that, we're really excited about that, because we can save them a lot of money by consolidating assemblies into fewer numbers of parts, and you can have a much higher performing part in some of the critical components in those systems. And some of them -- if you've ever been close to a manufacturer of semiconductor equipment, some of them are incredibly difficult applications to survive in. And so, you can do that with 3D printing a lot better than anything else. So, there's been a big demand in those kind of areas, especially equipment things. So, we put all that in the industrial category. On the medical side, orthopedics is really doing well. Our personalized self-service doing very well. We're bringing the cost down at good reliability for -- a very good reliability and obviously quality in a regulated situation for patients. And so, people basically going through bone repairs for either cancer treatments or damage to bones. It's becoming very economically viable to make those kind of implants now with 3D printing. So, we've been in that market for a long time with modeling first years ago, the [banking] (ph) aids for surgery and now the implants, all of those are now growing nicely for us. So very pleased with that. And then, dental, it was off to a slow start at the beginning of the year, but is increasingly interesting to people. We're doing a lot of trials with new materials things like that. So, we're broad based both industrial and healthcare.

Okay, cool. That's super helpful. I appreciate the context. And a quick follow-up. Do you by any chance have any sense for kind of like what the apples-to-apples installed base is, or maybe the apples-to-apples incremental kind of rev dollar looks like relative to 2020 when the revenue bottomed out? I'm just trying to get a sense of where it is today relative to that, if there is any useful context you guys have?

Sure. No, Ananda, I apologize. I don't have any numbers at hand, but it's a great question. I'm sure the installed base has grown. I know, for us, it's grown meaningfully. And I would expect that's true for the whole industry. So that's a good point. We'll see if we can come back with some numbers for you. I don't have them sitting here today, but I'm sure it is up, and obviously, I'm optimistic for the future, and it will continue to rise.

All right. That's helpful. Thanks, Jeff. Good to connect with you.

All right, Ananda. Yeah, good to hear your voice, buddy. Take care.

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

Thanks, Kevin. And listen, thanks to everybody on the call and webcast. I appreciate your time and interest. We look forward to updating you on schedule after our third quarter earnings release, and we'll give you a feel for both the market and our performance. Thanks so much. Take care.

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