Q2 2020 3D Systems Corp Earnings Call
Greetings and welcome to the three D. systems, Q2, 2020, <unk> conference call and webcast.
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I will now turn the conference over to our host Jessica Stansell of Investor Relations. Thank you may begin.
Good afternoon, and welcome to three systems Conference call with me on the call are Dr., Jeffrey Graves, our President and Chief Executive Officer Wayne Pensky.
Interim Chief Financial Officer, and Andrew Johnson, Executive Vice President and Chief Legal Officer.
Please note that given the current situation would come in 18, we're not all at the same location.
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The following discussion and responses to your questions reflect management's views as of today only and see if we're looking statements I described on the fly.
Actual results may differ materially I.
Additional information about factors that could potentially impact or financial results is included in today's press release their filings with the FCC, including her 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 2018.
No I'm pleased to turn the call over to Jeff Graves, our CEO Josh.
Thanks, Jessica and good afternoon, everyone.
I hope that all of the joined US today on our call, we're staying safe and healthy through these unprecedented times.
Let me start by reminding everyone that our top priority is the well being of our employees and their families or communities and our customers.
We've incorporated measures to safeguard all of these groups to the best availability in response to the cobot 19 pandemic with clear protocols being implemented across the company.
I'm very proud of the stamina and team worked shown by our employees and helping one another while meeting our customer commitments to the maximum extent possible over this difficult period.
Well there are many challenges we've maintained all of our key operations worldwide and expect to do so moving forward.
Over the last two months since joining three systems as CEO I talked extensively with our employees our customers in our business partners, that's real several of our analysts and long term shareholders.
In short through these discussions you've reaffirmed for me why join three D. systems, namely the we have a tremendous them somewhat unique opportunity as a leader in this industry and I'm tremendously excited by the passion of our employees and the breadth of our technology and capabilities within our company, we have incredible strengths upon which the builder future.
[laughter] I've also learned it there's a wide consensus that we need to change if we're going to be successful.
To be blog.
Well, we've made significant progress in key technology areas and can Dave can today, you can boast of one of the strongest portfolios of Threed printing hardware software and materials in the industry.
In recent years, we've not translated these elements into consistent growth and profitability.
My singular goal is to make this happen.
In short, we need to focus to prioritize and to streamline our efforts in order to reinforce our leadership in this exciting industry.
Success starts in any company with a clear statement a purpose one of the describes the sustainable value that accompany brings to the world and that will serve as a central focus going forward.
He needs to resonate with our employees, our customers and our shareholders alike.
And just to say clear unwavering priorities the focus everyone's efforts on the same goals each day.
With that intent over the last two months I've held many business reviews individual discussions to learn about the value we deliver the markets in customers we serve.
From these discussions much has become clear about what's working what's been holding us back.
Most importantly, it's allowed a clear purpose statement to be developed which builds on the unique history and strengths of our company and then we'll guide us to an exciting future ahead.
Our purpose statement as it is as follows.
We are the leaders in enabling additive manufacturing solutions for applications in growing markets the demand high reliability products.
As this statement implies using a strong application focus will target our efforts on growth markets. The place a premium on performance and reliability engineering and technology cultures, the seek innovation as a way to deliver value to their customers and often involving processes. The tend to be highly controlled due to their criticality.
[noise] using this purpose statement as our guide post, we're simplifying and focusing our organization by realigning the company's breadth of capabilities to serve applications in two key market verticals health care and industrial.
Moving forward, we will no longer emphasize the individual software or hardware materials elements of additive manufacturing separately, rather the combination of these elements into specific application solutions within our targeted markets.
In other words will be laser focused on overall growth and profitability in these market verticals rather than measuring our success in any single technology element we provide.
Within health care will focus on dental medical devices surgical planning and simulation.
Industrial will encompass aerospace defense automotive and durable goods.
Within these targeted markets will focus heavily on specific applications the benefit the most from the use of additive manufacturing.
For example in health care this could be orthopedic implants wall and industrial it could be the manufacture of highly complex heat exchangers.
I want to spend a few minutes on why we think this approach will be successful.
1986, when Chuck whole founded our company based on his invention of Threed printing.
He brought together in the laboratory for the first time hardware software and material science in a unique way decrease solid objects from computer models.
This approach embody the strong application focus requiring all three elements to be combined in a highly controlled manner to create the desired object.
Well became clear overtime wasn't this approach when applied on an industrial scale with appropriate materials, which dramatically expand the flexibility engineers have to design and build unique components for improved functionality a commercially viable cost.
Since that time, we've taken delight often to the point of distraction in advancing the individual elements of the process and along and along the way forgotten that the true value is in the unique combination of them that can add tremendous value to the customer.
This restatement of our company purpose and the reorganization of our entire business is designed to return us to the strong application focus that enabled us to not simply had been a machine.
But instead and Vincent and tire industry. The can transform the way components can be designed and manufactured for critical applications.
This is the heritage of our company and as the cultural Foundation that we build upon moving forward.
With this foundation there are four distinct advantages that we will leverage to deliver value in an increasingly competitive market.
First where the complete breadth of technologies and services were uniquely poised to ramp customers from inception through full scale additive manufacturing adoption.
Starting with the exceptional application expertise within our customer innovation centers, we can bring together our market, leading hardware software and materials technologies into a defined process and workflow to translate a customer's product design into real hardware.
Once defined we have the capability to them scale the process through our advanced manufacturing centers to production quantities in order to complete the required quality and process certifications.
Once accomplished our customers can then expand the process further in whatever manner, they wish to meet their customer demand requirements.
Second we are the only organization that can provide a complete range of custom wax plastic and metal additive manufacturing application solutions to mass customer needs.
Our five printing platforms SL, a SLS figure for MGP and DMP are able to meet an exceptional range of customer application needs using well over 100 unique materials the broadest range in the industry.
And with our ongoing investments that capability continues to expand each day.
Third our organization has the most extensive additive manufacturing service coverage across the globe, we have experts located across five continents, and our local to more than 80% of our customer base to provide ongoing production support training and periodic upgrades to our products in the field.
To support new applications, we have customer innovation centers in the U.S. than in Europe, as well as eight on demand manufacturing sites across four continents.
And fourth we have the deepest experience in actual production parts among all additive manufacturing Oems.
Our customers Prince up to 500000 production parts every day.
Over a range of applications within the dental medical device aerospace automotive and jewelry or markets worldwide a remarkable number.
While other companies May claim leadership using narrow measures when it comes to real production experience no. One can claim the history of success. The Threed systems is delivered no one.
I'll now provide two recent examples of how our expertise and product suite has enabled us to win.
And I'll ask you forgive us at the outset for my having to avoid certain customer sensitive details.
The first examples of health care case study and with a medical device OEM for in a knee replacement solution.
Challenge here was to develop and commercialize a state of the art orthopedic joint with an optimized surface structure and superior performance traditional machining and coating processes provide a pathway to produce such a component, but there is it was a high degree of variability in the product, which led the low yields increased quality risk significantly higher material.
Costs and extended manufacturing cycle times.
Threed systems utilized it's holistic solutions portfolio to partner with the medical device OEM to produce not only a superior product, but one that can be manufactured a much lower costs and a reduced cycle times.
In this case, we brought together our advanced metal printing system combined with our Threed expert software to produce the joint implant in both titanium and stainless steel.
We then delivered these components from both our Littleton, Colorado, and Leuven, Belgium facilities to simplify customer logistics.
Central to this success was not only the individual technology elements, which were all excellent in their own right, but the manner in which they were integrated buyer application engineers, who partnered with engineers from the medical device Oems to optimize the design of the implant, while creating a robust highly efficient manufacturing workflow.
These workflows within demonstrated at scale in our May advanced manufacturing operations when demand now grew our internal production capacity, we facilitated the transfer of the process to third party factories selected by the OEM for strategic diversification of its supply chain in our service team developed a customer centric plan to support large that.
Brian and worldwide product launch it was a great success story from inception to full commercialization.
Similar examples are found on the industrial side of our business. For example, a recent recently a private aerospace company with an in house Super alloy foundry used to produce critical propulsion components invested in a complete threed system solution to enable accurate consistent and cost effective production of high performance components.
The system combined our industry, leading stereo lithography printers with Kastl resins, and a software package that was optimized for investment casting pattern manufacturer.
Central to success, where our application experts that integrated the technology elements into a seamless workflow that ensure that these novel rocket components would perform as needed in this highly demanding application environment.
This process is now fully integrated into our customers production process and they are using results to push the frontier a flight to an entirely new level.
These types of projects reinforce my excitement in this role and hopefully bring to life. The examples of why joint Threed systems I look forward to sharing our progress as we now refocus organization and build upon the strong culture and foundation of this remarkable company.
In connection with the organizational realignment announced today, we have an opportunity to maximize efficiencies and align our operating costs with current revenue levels.
Through this restructuring effort, we expect to reduce the annualized cost by approximately $100 million by the end of next year.
This should enable the company to be profitable at current revenue levels and be well position to leverage our sales growth as its realized.
Through this restructuring will reduce our workforce by nearly 20% with the majority being completed by year end.
This reduction in force is a difficult, but essential step in our ongoing strategic actions designed to better position the company for sustainable and profitable growth.
I'd like to express my appreciation to each of the employees impacted by this decision for their dedicated service.
Other cost reduction efforts will include reducing the number of facilities in examining every aspect of the company's manufacturing and operating expenses. The reduction in our footprint is primarily in office space in part enabled by our learnings from the cobot actions, which have accelerated our efforts to work remotely.
Reduction our physical sites as a real cost opportunity for us given the volume of acquisitions. The company completed several years ago.
The company will incur a cash charge in the range of $25 million to $30 million and severance facility closing and other costs primarily in the second half of this year, we may incur additional charges in 2021, as we finalize the actions to be taken.
We're also evaluating divestiture of parts of the business the do not aligned with our strategic focus.
With that let me turn the call over to Wayne will now provide our results for the second quarter 2020 Wayne.
Thanks, Jeff Good afternoon, everyone for the second quarter, we reported revenue of $112 million decrease of 29% compared to the second quarter 2019, and a decrease of 17% compared to the first quarter. This year.
The lower demand was across all products and services due to coven 19, as many customers were shut down or on a significantly reduced level of activity.
We reported a loss of 33 cents per share in the second quarter compared to a loss of 21 cents in the second quarter of 2019.
We reported a non-GAAP loss of 13 cents per share on the second quarter compared to zero cents per share on the second quarter of 2019.
During the quarter, we recorded a charge of $10.9 million to cost of sales a certain product lines reach their end of life, we're no longer producing these items.
This charge is the only significant nonrecurring difference between GAAP and non-GAAP numbers this quarter.
Our operating expenses decreased 25% to $69 million.
Consistent with our new strategic focus we will start discussing revenue by two key markets health care and industrial.
Healthcare revenues are the same as we've previously disclosed in the past.
Industrial revenues comprised although sales.
We are not yet capturing any meaningful submarket detailed information. So next level details goal is to markets as a work in process.
Revenue from healthcare decreased 11% year over year at the $50 million driven by the decrease in the dental market related to cover 19.
For the first half of 2020 healthcare revenue decreased 9% as compared to the same period last year.
Industrial revenues decreased 38% year over year to $62 million with decreases now products materials and services across to all geographies due primarily to cover 19.
For the first half of 2020 industrial revenues decreased 26% as compared to the same period last year.
We reported gross profit margin of 31.4% in the second quarter compared to 46.6% in the second quarter of 2019.
Adjusting for the charge due to the end of life inventory, our non-GAAP gross profit margin second quarter was 41.3%.
We are impacted by the lower volume and the resulting lower absorption of overhead.
Many of the restructuring actions were taking will help get our gross profit margin back to level set at the beginning of this chart.
We've also seen the cash used for inventory has got nearly $25 million. So far this year.
As the market started to turn down in the latter part of the first quarter to the pandemic. We are unable to slow down our inventory levels fast enough due to committed lead times with our contract manufacturers and suppliers.
We are focused on reducing our inventory levels, but it will take some time.
Operating expenses were $69 million, a decrease of 25% compared to the second quarter 2019.
Including a 27% decrease in selling general administrative expenses and an 18% decrease in research and development expenses.
Non-GAAP operating expenses in the second quarter $57 million, a 20% decrease from the second quarter the prior year.
Primary differences between GAAP non-GAAP operating expenses is that we exclude amortization of intangibles and stock compensation expense from the non-GAAP amounts.
And the first half of 2020 or selling general administrative expenses were nearly 44% of revenue.
That is simply to high amenity restructuring actions, we will be taking our focused on reducing those costs.
We ended the year with $64 million a cash.
Cash on hand has decreased $70 million since the beginning of the year.
We used $26 million for debt repayments.
$21 million for operation and that includes the nearly 25 nine use for inventories.
12, and a half million dollars for onetime payments to purchase non controlling interests and $7 million for capital expenditures.
Our term loan is now $22 million. So our net cash position. This positive that is cash less that is $42 million.
We have 100 million dollar revolver that was undrawn as of June thirtyth, and as $24 million of availability based on terms of the agreement.
Then sure we have sufficient financial flexibility to complete this restructuring and to work through these uncertain times caused by the pandemic.
The board of directors approved and at the market equity program allows the company from time to time tissue update total of $150 million a shares of the company's common stock to the public at the company's discretion.
We believe this cost actions combined with the financial flexibility offered by the at the market equity program and our existing revolver net cash position.
We'll provide a solid financial footing on which to focus on the business.
Back to growth.
With that I'll turn the call back to Jeff.
Yes.
Thanks Wayne.
So in summary, there are three main themes, we've disk themes that we've discussed today.
First defining our strategic focus in stating our purpose.
Second reorganizing the company around to market verticals healthcare and industrial.
Third doing the necessary restructuring to return the company to profitability and positioning in for sustainable growth and margin expansion.
This restructuring involves eliminating $100 million of cost over the next 18 months, while investing for growth in key application areas.
With a clear statement a purpose and a return to the ideals. We were founded on I believe Threed systems will be a leader in additive manufacturing and will be central to the value creation, though it will enable.
And with that we'll now open the floor for questions Diego.
Thank you.
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Our first question comes from Greg Palm with Craig Hallum Capital Group. Please state your question.
Hi, guys is actually Danny Haggard, John for Greg today.
I guess just going over the the overall restructuring you know new strategy.
Any detail on maybe are you looking at walking away from possibly certain end markets or maybe technologies as part of this overall restructuring.
Oh, I wouldn't view it as walking away from markets, it's rather a focusing on on key markets that we've actually been if for some time, but the key difference here is it's a very strong application focus within those markets and what we care about our bring that bringing the key technology elements together in those markets.
To deliver value.
So no longer will we will we focus and celebrate the selling of an individual printer somewhere in the world, where we're going to celebrate the application progress we make in our key markets that we're really going to drive sustainable growth and profitability not that we won't opportunistically sell the technology elements to it.
Customers, who perhaps have an installed base that could benefit from them, that's fine, but the real growth that will feel will come from expanding the application applications within our key markets. So thats really what we're going to focus on a grow so I wouldn't look at it as a walking away I would looking at I would look at it more as a focusing on what's going to drive the highest value.
Got it that's helpful and then I guess as we look at the end of this year obviously.
Reducing operating costs by 100 million per year, but on the next year, how do you want us to look at AD.
Q3, and Q4 for for operating costs.
But I.
In terms of by the end of the year, we expect to have on a run rate basis about 60% of those savings in effect.
And sorry, if you want to measure us in terms of how we're doing on that the ultimate measures are we profitable.
And we expect a run rate basis, then the air to be at a breakeven levels that we entered 2021 to be hoping to be you at the small profitable going forward.
Okay, Great and then I guess, maybe just last one here.
Any update on capital allocation priorities.
Well, we'll certainly fund is the highest priority getting aren't getting through our restructuring activities.
Obviously, we need to we need to service our debt, we have some minimum capital requirements.
To to upgrade upgrade existing equipment and things but.
The majority of our capital deployment will be spent against our restructuring activity right now.
Thank you.
Our next question comes from Sarkis, Sherbetchyan with B. Riley financial please state your question.
Hey, good afternoon. Thanks for taking my question here.
Sure.
So regarding the reduction of operating costs and getting to that 60% of savings by the end of the year.
What's the cadence between.
The cost of goods line relative to SGN, a and R&D.
Sure I think of that roughly split of sort of 40% cost to sales, 40%, SDN and 20% R&D and round numbers.
Got it and as a follow on to that.
And a small profit going forward and 21.
Is that kind of assuming.
Revenue run rate of what we saw this quarter or are we to assume you kind of go in with the market growth rates.
Now if you if you look to the revenue from the first half of the year.
If we if you use that as a run rate because there was clearly a lot of volatility in the first half of the year.
On the up and down side. If you if you look at that in the second half of the year and our pace of cost elimination through the second half of the year on a run rate basis, we would expect in that model to be profitable by the end of the year Fairway fair way to look at it.
If you followed that.
When we're talking about profits is that net income.
Correct correct.
Okay. Thank you.
Thank you. Our next question comes from Paul Coster with JP Morgan. Please state your question.
Yes, Thanks for taking my question first off the.
Current trends, Jeff what are we seeing is stabilizing or is it just completely uncertain.
End market demand.
Paul there's just a tremendous amount of noise I assume.
So theres a tremendous amount of noise I would tell you theres a few things that encouraged me number one in most of the world into different degrees you see sites Preopening. So from a service standpoint, and getting production running again.
You can start seeing people operating machines.
Demand should follow that say see factories reopening and machine starting to run again, so thats a good thing.
Areas that were viewed as non essential like dental treatments and orthopedic surgeries things like that are now allowed again.
To at least some extent so those fundamental demand drivers to be a very good thing for US now what we do what we what is not clear because there's just so much noise still out there is pace of improvement.
But directionally the we should with that opening star seeing increased demand around the world and then we would expect capital spending to follow that demand.
What's your.
It will sort of on unclear on how to interpret the out in the money.
The market equity issuance on the one hand.
Pretty decent bouncy and Youre, obviously, taking bold action had to look after the I could see investor and yet.
Yeah. So it was like it's moving in opposite directions.
Well six motion under what circumstances would you withdraw it.
Well I mean is the withdrawal and the pace of it won't be highly dependent on the on the revenue rebound the being other pandemic subsiding, but I would tell you Paul we want to make sure with great comfort, we can get through our restructuring there's there's tremendous value to be unlocked in this restructuring activity and the refocusing of the company. So weve.
Got it investments to make their too you know not only severance related investments site closures, but there is some efficiency investments in IP and others that we need to make with very short term paybacks that are essential to that I am. So we want to make sure. We can clear that and we want to make sure that should the pandemic go the other direction that we've you know that were safe we've got some cushion.
And and all that so so thats it thats the motivation for putting it out there the pace of it we just want to make sure that we can execute our actions in the short as possible time period, because we truly believe on the other side of this whereas the pandemic receives that this new structure, we're adopting is going to drive some pretty exciting growth.
Growth and profitability expansion and we want to be ready for it as quickly as we can.
Thank you had just a reminder to ask a question press star one on your telephone keypad.
Our next question comes from Brian Drab with William Blair. Please state your question.
Hi, Thanks for taking my questions and I'm wondering just.
Build up that loss line of questioning on the ATM.
In your model.
So 150 million.
Potential offering.
How much would you use.
This year in the car model, which sounds like maybe aspirational target is to get second half revenue in line with first half nearly 60 million run rate cost out.
I guess you must have some idea how many shares would have to be issued or they would strategically makes sense to issue.
Yes, we're not going to disclose it think of this is sort of a stock buyback will report how much we've issued at the end of each quarter.
But we want to do as little as possible I buy that's one do enough to make sure that we're comfortable getting through this period.
What it's a little bit easier to describe what will drive it up and down I mean, clearly if the pandemic extends and gets worse in places re close and all of that the restructuring is essential we'll get through that and and look at further efficiency moves, which all cost some cash.
If revenue lift quickly and the world recovers nicely.
We would certainly rain a backend of theirs. So it's probably easier to talk about Directionally, what will drive it to one one.
Extreme or the other.
But we're we want to have it in place and ready to go a you know to make sure. We can get through this period, because again I think is a great looking company out the other side of it.
Okay. Thanks, and then just one more question for now the.
So part of the channel is what I'm wondering about in terms of the cost cutting and I know that a lot of sales have been brought in.
To wrap style, but can you talk at all about what percent of sales of.
Printers, and other equipment is going through the channel and.
How you will continue to support the channel or if some of these cost cuts are going to.
Maybe I mean.
No the in that area of channel support.
Well I would I you know I can't I don't I don't have frankly speaking I don't have the detailed to share with you, but I would tell you in terms of above a business model going forward.
Certainly the healthcare industry it benefits greatly from direct sales there are some channel partners that can help with that but there are there is a great deal of it.
That does benefit from from direct sales. So we will have a direct salesforce servicing a great deal of that market.
We'll have in into industrial will have a mixed a mixed model. Some direct sales some channel sales and their first for geographic coverage will certainly have a network of channel partners as we do today. So I think the will drive some efficiency now as we look at organizing by market by these market verticals because of.
The past we've had.
Yes, basically separate sales organizations in channels to market for software versus hardware platforms. So we'll be able to collapse. Some of that and then take some of that efficiency and build out our direct sales model and with these market verticals. So I don't have specific numbers to share with you, but directionally, that's where we're headed.
Okay. Thanks very much.
Sure.
Thank you there no further questions at this time I'll turn the floor back to Jessica staff will for closing remarks.
Thank you for joining us today and for your continued support of Threed systems.
A replay of this webcast will be available after the call on the Investor Relations section of our website. Thank you.
Thank you. This concludes todays teleconference. All parties may disconnect have a great day.