Q3 2020 3D Systems Corp Earnings Call

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Greetings and welcome to the Threed systems third quarter, 2020 conference call and webcast.

Time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Melanie Solomon Investor Relations for Threed systems. Thank you you may begin.

Thanks, Jesse good afternoon, and welcome to Threed Systems Conference call with me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer, Jack turned to Reelect, Chief Financial Officer, and Andrew Johnson, Executive Vice President and Chief Legal Officer.

The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website.

Those who have access the streaming portion of the webcast. Please be aware that there may be a few second delay and that you will not be able to pose questions via the web.

The following discussion or responses to your questions reflect managements 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 today's press release, and our filings with the FCC, including our most recent annual report on form 10-K.

<unk> 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'll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Unless otherwise stated all comparisons in this call. If you guys are results for the comparable period of 2019.

Now I'm pleased to turn the call over to Jeff Graves, our CEO Jeff.

Thanks Melanie.

Let me start by saying Thank you all for joining our call. This morning, I hope everyone's bearing up well and staying healthy ending stressful times.

Well the challenges of Cowen the Cobra virus continue I'm very proud of our employees for balancing so well their needs and those of their families with the commitments we've made to our customers.

As businesses become more efficient and dealing with the effects of the COVID-19 pandemic and as the economies around the world forget the open we're pleased to see rising demand across the markets we serve.

We're hopeful that these trends continue as we move through our fourth quarter and this momentum is sustained in the new year.

On our last call, which was my first since joining the company in late May we talked about the importance of clarifying our strategic purpose and how would drive our actions moving forward that's it.

A reminder, our Threed systems purpose statement is as follows.

We are the leaders in enabling additive manufacturing solutions for applications in growing markets the demand high reliability products.

We developed this purpose statement to provide the strategic focus needed in order to simplify our operations to improve our operating efficiencies, while prioritizing our investments to deliver greater value to our customers.

These actions will lead to improved profitability in the short term on enhancing growth and margin expansion in the future.

Having to find or purpose statement, we moved rapidly forward in our transformation journey, which can be described very simply in four phases of activity reorganize restructure divest and invest.

We're moving forward on each phase what parallel efforts I'd like now to update you on our progress with each well.

Let's begin with reorganization as.

Yes, we briefly touched on last quarter, one of our first actions was to reorganize the company to focus on two key market verticals healthcare and industrial.

Within health care, our primary focus is on digital applications medical devices medical simulation and virtual surgical planning.

Industrial's include aerospace defense automotive and durable goods applications.

These growth markets all place a premium on performance and roll by ability for key components.

Have engineering and technology cultures, the seek innovation as a way to deliver value to their customers and.

And processes that tend to be highly controlled a regulated.

As our company has an established strong foundation in these markets. Our goal in this reorganization is to focus our efforts on acceleration of our customers adoption of additive manufacturing for specific application solutions within their new product offerings.

With our exceptional technology portfolio that encompasses hardware software and materials are.

Our application engineers are uniquely positioned with tools and expertise needed to support our customers and their adoption of additive manufacturing well.

Well, our global service teams supports their ongoing needs in the field.

It's a unique and winning combination that we believe will enable exciting growth and profitability in the years ahead.

As validation of our capability to deliver this value you need look no further than our current success.

Today, our technologies are delivering over a half million production components for our customers each day try.

Translating to over 180 million components on an annual basis, a number the dwarfs all other competitors in this industry.

It's this foundation that we will build upon moving forward with an intense focus on our customer success and adopting this exciting manufacturing technology, but a much greater scale each year.

With the appointment of our two business unit leaders this quarter, along with our new Chief Financial Officer, Jack turn a rule you I'm very pleased to welcome to our call today, our management team's complete and we're fully focused on executing our game plan.

Having describer reorganization, let me now update you on our restructuring efforts, which we introduced on our last earnings call.

Our expectation is that we will deliver $100 million of cost savings on a run rate basis by the end of 2021.

We also stated that $60 million of the savings would be achieved by the end of 2020.

I'm pleased to tell you that we're on track to deliver to our plan.

Actions being taken include a combination of restructuring our workforce consolidating real estate in facilities and optimizing nonemployee spend.

In executing these plans our leadership team created a set of operating principles to guide their efforts, which included a high level prioritizing employee safety and ethics each day working as one team always acting with the customer success in mind being bold and decisive in our decision, making and focusing on on.

Quality in all aspects of our business.

These operating principles help ensure that we're moving forward rapidly through our restructuring efforts, while ensuring the long term success of our customers partners and employees.

With a focus embodied in our purpose statement in parallel to the reorganization restructuring efforts, we were able to identify certain assets that were no longer core to the company and begin the process of divestiture.

As a result of these efforts earlier this week I was pleased to announce the sale of our Semidrying Gibbs Cam software businesses for $65 million. These businesses were focused on subtractive technologies, rather than the additive manufacturing and and wall highly valuable to their customers was not core to our future additive manufacturing business.

Yes.

The proceeds from this sale will further strengthen our balance sheet, leaving us in a net cash position and will be used in the completion of our restructuring efforts at for investment in future growth initiatives.

We expect to continue Divesture efforts over the next several quarters.

Jack Tarr will comment further on our plans for the balance sheet and specifically around our plans for the ATM equity program in a few moments however.

However, let me add that with the prospect of further divestitures of non core assets in the next few quarters, we'll be evaluating in parallel investment opportunities to enhance growth and profitability of our core businesses.

As with our divestiture actions any investments, we make will follow a rigorous and disciplined process with an unwavering goal of creating shareholder value in this increasingly exciting industry well keep you updated on our plans and progress in future earnings calls.

With that I'd like to end my opening comments with examples of how our focus and expertise is bringing value to our customers and delivering exciting new growth opportunities for the company.

As many of you know the pandemic has changed the operating environment for organizations around the world and there's a keen interest in the application of additive manufacturing to create a more flexible and versatile supply chain.

In healthcare this is especially true for hospitals as illustrated in our recent experience with the veterans Health administration.

The V.A. is the country's largest integrated health care system, providing health care through 1200 55 facilities.

We're over 9 million veterans each year.

Earlier. This month, we were extremely proud to be awarded a multimillion dollar contract to help the V.A. establish an additive manufacturing production capability for medical devices.

As a part of this program through these systems will establish the required workflows medical grade quality systems, and regulatory approvals deploy our additive manufacturing printers, and then fully trained staff the operations.

This turnkey capability will be operational by the end of 2021, after which the V.A. can independently produced medical devices for their own in that work years.

The pilot application is covert nasal swabs, which were enabling with our SLS platform and medical grade nylon powder, which will be followed by several other medical device applications.

The experience gained with the V.A. and other early adopters positions as well.

Positions us well to support other hospital systems in the future.

Well, we enjoy the business opportunities. We see ahead. The best part of this is the fact that we get to support the wonderful mission of the VA and the critical support it provides to our veterans all while allowing what our team at Threed systems does best.

Next let's turn to technology.

Enabling our applications progress in both of our business units are continuing technological breakthroughs in hardware software and material systems.

As an example, a year ago, we announced a new 15 million dollar program sponsored by the U.S. Army to create the world's largest fastest most precise metal printer. This.

This groundbreaking nine laser system, which builds upon our newly expanded DMP family of printers will be able to manufacture aerospace quality one meter by one meter by 600 millimeter components.

Using a broad range of high temperature and lightweight aerospace alloys for a range of advanced flight and ground vehicle applications in.

In spite of the challenges of Covance. This past year, we've made substantial progress in the program successfully completing our first test prints in late October we.

We'll be sharing more updates on this program and the exciting applications that are enabled by us in the near future.

With that let me turn the call over to Jack to our who will now describe our results for the third quarter and our current market outlook Jack tour. Thanks, Jeff Good morning, everyone for.

For the third quarter, we reported revenue of $135.1 million, a decrease of 13% compared to the third quarter of 2019, and an increase of 21% compared to the second quarter of this year as we saw a rebound in customer activity from the worst of the pandemic related shutdown.

We reported a loss of 61 cents per share in the third quarter compared to a loss of 15 cents in the third quarter of 2019.

Included in the third quarter 2020, net loss was a 14 point 48.3 million pretax noncash goodwill impairment charge. This impairment charge was identified in connection with the and there isn't goodwill impairment test that was in the substituted by certain target triggering events associated with the decline of the company's share price.

Finally, due to the impact of the business and economic environment from the COVID-19 pandemic.

Impairment charge will not result in any cash expenditures and will not affect the company's cash position liquidity availability or covenant test under our senior secured term loan facility and our senior secured revolving credit facility.

Turning to non-GAAP results, we reported a non-GAAP net loss of three cents per share in the third quarter of 2020 compared to four cents per share in the third quarter of 2019.

Consistent with our new strategic focus announced last quarter. We are now discussing revenue by market healthcare and industrial revenue from healthcare increased 6.1% year over year to 59.8 million driven by stronger sales in the dental market. Following closures in the first half of the year related to the pandemic.

Industrial sales decreased 23.8% year over year to $75.3 million with decreases in all products materials and services across all geographies due primarily to the endemic and associated reduced level of customer activity.

On a sequential quarter over quarter basis, we saw strong revenue improvement of approximately 20% in both of our vertical businesses.

Now, we turn to gross margin, we reported gross profit margin of 40% to 43.4% in the third quarter of 2020 compared to 43.3% and third quarter of 2019.

Our gross margins were impacted due to lower absorption of overhead costs, but the lower volume in Q3 2020 versus the third quarter of 2019 offset by our initial cost reduction activities.

Many of the restructuring actions, we are taking will further help strengthen our gross profit margins over the coming quarters.

Operating expenses for the quarter were $126.2 million on a GAAP basis, an increase of 59.4% compared to the third quarter of 2019, including a 1.4% increase in Sq the expenses and the 9.9% decrease in R&D expenses also.

Included in operating expenses as the goodwill impairment charge that I mentioned previously.

Excluding this goodwill impairment charge operating expenses for the quarter decreased 1.6% or 1.3 million to $77.9 million compared to $79.2 million for the third quarter of 2019.

Importantly, our non-GAAP operating expenses in the third quarter were $58.8 million of 15.2% decrease from the third quarter of the prior year. The primary differences between GAAP and non-GAAP operating expenses.

The exclusion of the aforementioned goodwill impairment 11.9 million in restructuring charges as well as amortization of intangibles and stock based compensation consistent with our historical GAAP to non-GAAP adjustments.

Now, let's turn to the cash flow statement and balance sheet, we ended the quarter with $75.3 million of cash and cash equivalents cash.

Cash on hand has decreased $58 million since the beginning of the year, we used $26.5 million for debt repayments $32.6 million for operations, which includes nearly 24 million used for inventory.

$4.5 million for onetime payments made in the first quarter of 2020 to purchase non controlling interest.

And $11 million for capital expenditures, partially offset by proceeds of $25 million from the issuance of common stock.

Our term loan is now $22 million. So our net cash position at quarter end was 54 million, we have $100 million revolver that was undrawn as of September 32020, and has $31 million of availability based on terms of the agreement.

Let me make quick comment on inventories, we have seen the cash to use in inventories go up nearly $24 million. So far this year.

As the market rapidly turn down in the first half of the year due to the pandemic, we were unable to slow down our inventory additions Beth no do the committed lead times with our contract manufacturers and suppliers with these adjustments now made our sales now strengthening and a strong focus on sales forecasting we expect.

Improvements as we exit the year.

Finally, let me end my remarks with a comment on our at the market equity program called our ATM program, which we announced last quarter.

At the time with coated raising and the economic impact highly uncertain. We believe the ATM program was unnecessary risk abatement needed to ensure a support for our restructuring initiatives and to provide financial flexibility during highly uncertain times.

Under this program in the third quarter, we issued $25 million of common stock, leaving $125 million million still available to us on the program if needed. However.

However, with the improved business environment progressing progress and our restructuring efforts and test and the cash generated from the Q3 stock sales, we do not anticipate additional sales under the ATM program in Q4. Furthermore, as we announced earlier. This week, we have signed an agreement to divest our summer.

Tron and gives Kim software businesses and our expectations are that this deal will close in Q4.

We announced a $65 million purchase price and expect price adjustments of approximately $5 million for liabilities that we are transferring to buyer.

In addition, we expect about $10 million to $15 million of taxes, primarily for distributions of cash between our foreign entities in the parent that has built up over time. The final net cash number will be around $45 million to $50 million. This transaction will leave us in a net cash position on our balance sheet. Therefore, following the closure of the same.

All of the maternity Gibbs Kim and the receipt of proceeds there from we plan to evaluate the continued need for the ATM program and there may very well elected to terminate it altogether with.

With that I'll turn the call back now to Jeff Jeff. Thanks.

Thanks, Jack ups are.

So to summarize I'm very pleased with the progress, we're making on our transformation and the strategic realignment of our company.

Our reorganization is complete our leadership team of seasoned professionals is in place our restructuring efforts continue and we are on track to deliver $60 million in run rate cost savings by the end of 2020.

We continue to see demand returning as the economy opens up from the effects of the pandemic.

As a result, while the risks related to covert will continue for some time, we anticipate continued strengthening of the business moving forward.

I want to thank our employees customers and stakeholders for their loyalty and dedication during these challenging times.

With continued focus and strong execution, we look forward to emerging from this period stronger than ever and excited about a very bright future ahead.

And with that we'll now open the floor for questions operator.

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Our first question comes from the line of Greg Palm with Craig Hallum. Please proceed with your question.

Great. Thanks, Good morning, everyone, I guess, just kind of starting with the quarter, obviously exceeded a lot of our expectations, but materials segments, specifically bounce back really hard I mean, almost to pretty cold at levels, which surprises us given I think many of your customers are still kind of gradually ramp up.

Back operations, so what drove the sizable increase relative to Q2.

Yes, Greg I think it's pretty straightforward I think the customers.

Reacted pretty promptly when when the cold shutdown occurred.

A few quarters ago depleted inventories and now as their production ramps up they they need to bring in materials. So I mean clearly the supply chain was was heavily depleted there was a nice bounce back you had the opening of some entire industries that shutdown like dentistry. So we were we were pleased with the rebound it was nice and.

Strong and we would expect to see our customers increasingly use the assets they purchased previously to.

To make cars. So we were pleased with that.

Yeah, Okay, good and I guess, what I'm in a normal year U.S.

Usually you'd see a seasonal bump in revenue and I'm talking across the company in Q4 from Q3, I mean, taking out the impact of the expected divestiture I mean, they know and really this this years anything but normal but do you still see ongoing improvement in the topline what are you seeing thus far in October.

Yes, Greg I say I have to I hope is the most abnormal year I ever experience if you.

I I would assume Greg that the normal seasonality will still occur we'll still be in place but.

The opening of the ratcheting back in different parts of the world. It just makes us so darn unpredictable I I can tell you broadly we continue to see strengthening in the markets.

You know what.

Just six companies have really adapted and incredibly to this cobot environment in terms of being creative on logistics and supply chain. So while that was a huge impact as the economy shutdown. Initially was it as they go through some fits and starts with shutdowns.

Around the world they are much much better at dealing with logistical issues and getting product and so as long as their demand remains and they continue to desire to ramp up production. We continue to see strengthening and I would expect it you know some seasonality patterns that are you've historically observed to continue its just such a such a.

As our year this year with Covance. So I don't know if it will amplify it or dampen it based on history, but I am pleased to see that the world continues to get incrementally better.

That's the best I can tell you.

Okay. That's helpful and I know you know given that level of revenue if we assume sequential strength in December versus September I'm, assuming that puts you at a level that it was probably higher than what you were expecting last quarter. When you talked about being you know net income or adjusted net income profitable exceeding that.

Sure so on top of that new level of revenue and given what we know about the progress of the restructuring I mean do you expect to report profitability in Q4 than.

Well, we're we're not going to provide guidance, Greg because the of the volatility in the market I you know thats the way that the Directionally, that's where the math would go but I would just be really cautious about predicting what happens with co. But it's just such a dog on a wildcard I can tell you that demand continues to rise.

We were able to ship.

You would expect volumes to rise.

So with that Thats the direction, the math works, but I again I just don't believe we're in a position to really comment on on a quarter by quarter. How this goes as the as the pandemic continues to rage.

Yeah, No worries understood all right I'll hop back in queue. Thanks.

Thanks, Greg.

Thank you. Our next question comes from the line of an Anda with loop capital markets. Please proceed with your question.

Hi, Good morning, guys. Thanks for taking the questions.

Congrats on the progress that out just a couple for me.

Jeff you able aside from dentistry.

Able to get visibility to you instead of which end markets or no.

Maybe maybe improving more quickly.

Then the other end markets that it's a more hardware and supplies perspective.

You know and ended there is a lot of variability, but I, what I was really pleased about a dentistry Dennis obviously at the peak of the of the pandemic shutdown. It would it really ground to a halt.

Sure everybody knows when they go to Dennis you just couldn't you will see anybody so now that so thats holding back up that's great, but what I'm, particularly pleased about is that the rest of the healthcare market now portions of that were shut down as well there were orthopedic areas and things that were viewed as non essential operation. So people postponed those but I mean, we're we saw.

While our broad strengthening in the health care markets across virtually virtually all of our customer base and we were we were really pleased you might have anticipated. The dentistry thing you know, there's a lot of pent up demand, but I would say it was it was a nice broad resurgence in health care and and is the fact that we got to actual year over year growth may not only.

Sequential quarterly growth, which we were thrilled about but the year over year growth of 6% to 7% was fabulous I in this environment, we're very pleased with that and I think it hearkens well toward our our real focus on health care for the future, it's a great market to be up.

And are you what's the state of the industrial markets right now.

Sounds like maybe that's not contributing it makes it so that that's still something to call is that well I want to.

On a percentage basis as I think we mentioned are we mentioned in the release that in both of them. Both are both healthcare and industrial rose sequentially about 20% little over 20% and both of them, but industrial is starting from a much lower base industrial is still down year over year, and it's great to see the resurgence at CES.

Got a long way to go and you can view it as cup half full or empty I mean, it's got a long way to go which is is depressing went down a long way, but it's got a lot more headroom moving forward as well and and obviously health care strong. So I love the markets. We plan I mean, we are well positioned with key customers in both AD I am.

Im bullish on both of them right now.

Okay, Great and then just with regards to divest Gerry how is there any way anecdotally you could also just think about kind of the context of what the advocate might be the company.

You know tens of acquisitions sort.

Sort of I call it physically handle but a number of years ago.

Is there any sort of in various stages of integration.

Any help you can give us there to think about not what you'll do but what the opportunity set up may be that you guys will be exploring.

And not us it's very it's very hard to provide much more color on that I can tell you. There was a once we said publicly that we were really focused on additive manufacturing there were a lot a lot of inbound interest on a number of these assets well it nicely it put us in a position to sit back and say you know number one we want to we want to run good processes make sure our shareholders.

Good good value out of anything we do divest, which you really want to be thoughtful about they were accumulated for a reason you want to be very thoughtful about where you divest so I am really not in a position to comment on specific.

Specific expectations, plus valuations will depend on what buyers see about the future of the business and any synergies. They bring so it's just hard and I apologize for that I know, it's it's probably frustrating to try to bound but I. We just want to be very thoughtful about it nicely now with this this first one which was probably the most obvious.

This one because it was heavily focused on subtractive technology. We're net were increasingly in a position where we can be very thoughtful and make sure. We make a decision on what we'll divest and then how we go about doing it.

Yes listen any context is helpful. So that is helpful. I have a quick follow up there.

Same same question is.

For for sort of the opportunity set for your evaluations.

Yes.

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Are there any assets for which he say.

For the right price, we do it I mean I get the death out that's the answer is always yes, but I mean, I really what I'm, saying is this is.

Is it mostly hey, listen this is Doug said add so we why that kind of divest. It is worth case, it's a distraction right or some of these are kind of gray area and for the right price we take the gray hair, we detailed the grey area.

No and I would tell you just qualitatively there's not much that's integrate area. There's there's stuff that we look and say look in the long term I'm not sure that fits with where we're going and bear in mind and not at these these are fine businesses. They are they really are very fine businesses Theyre just focus outside of our core and for that reason, we think there may be better owners out there and we want.

We want to drive to get the right value for them of course, but but strategically.

They really should be owned by a company that will continue to invest for growth in that business, but they are all fine businesses. They are very good.

But there's not much that's really that gray. The grayness has has crept up just a little bit because some of these groups of folks can do multiple activities and over time, they have grown to focus more on the core business, but there's still elements that are non core so as you might imagine separating.

Non core stuff when that's happened.

Is tricky and you because obviously a buyer wants to get get the right value as well and so we just want to be thoughtful about how we how we separate those and and and go after them, but there's not there's not a lot of great. There. This is our purpose statement is very specific you know additive manufacturing focus.

Around specific applications, that's what we're going to continue being it's our heritage and its what we can be we believe best in class at.

So things that are outside that perimeter, we are overtime.

To look at divesting.

That's really helpful. Thanks, so much.

Thanks, a lot.

Thank you. Our next question comes from the line of Sarkis Sherbetchyan with B. Riley. Please proceed with your question.

Hi, Good morning, Gentleman, Jack sorry, Thanks for taking my question here.

Yes, so just wanted to kind of follow up on the last line of questioning.

If we kind of look at the.

The other parts of the business that that could be divested right because they no longer fit the strategic direction, you're going in I guess from a a very high level like what's the magnitude of sales and potentially associated a piano expenses that could come out of of Threed systems, a piano, assuming all said and done.

Well the the I'm sure the answer will frustrate you, but it's highly dependent on.

Which which businesses and at which or which parts of businesses that we end up divesting. So it's kind of it's very similar to another question for you.

It's it's just really difficult for us to give you a target of either size or timing and my apologies for that but I. We just want to be very thoughtful about what we separated from the company and divest and I were just not in a position today to guide you on either what those are or the the impacts coming from them.

So thats the best we can do to just find the direction we're going.

Okay, No worries I guess.

We can may be focused on.

This and the Tron and gifts can software businesses for a second.

Maybe if you can disclose what the financial profile of those businesses were right and also maybe talk about the multiples.

Received for those businesses.

Sure so.

The same is Rotten gives him revenue is around $35 million to $40 million.

It's been declining high single digit to low double digit rates annually.

The direct costs is.

Associated with the business that will be transferred to the buyer are around $20 million to $25 million.

There is also some small level of corporate overhead type costs that we'll look to evaluate but it's largely not material. So you can think of it as the $35 million to $40 million revenue declining $20 million to $25 million of costs.

Mhm.

And the 20 to 25 million in cost out contemplated in the run rate savings that you guys have communicated to achieve in the next 18 months.

No that's not contemplated in that.

Thank you for that.

And I guess, just kind of moving on.

Jeff you mentioned.

Sales, improving and some expected continued strength.

Maybe whats kind of the the more specific tangible drivers to support this comment I know, it's a difficult environment, but just anything that we can kind of anger.

Hang our hat on and.

Take.

Going forward.

No. It's it's interesting if you if you look at the markets that we participated and up and up pretty kind of pre co. But those are strengthening broadly. So so in healthcare you'd say, it's medical devices broadly dentistry, you know as as we're certainly return to growth that's a nice business for us.

And that and the virtual surgical planning is more popular than ever frankly, I mean, as a as surgeons get back to business and they're taking care of patients. So we love those businesses are growing the new the new facet of the in the health care business is the one we released a press release on here yesterday morning, I believe around.

Okay, and I think you can look at that as an example of of the how folks are rethinking their supply chains and particularly.

Hospital systems that we're really caught short when cobot hit as everyone knows on pp and respirators and a number of critical areas and as they as we move forward down react to that they're they're looking at how do they create a more responsive supply chain and anticipate actually to fill short term.

Needs for critical patient care and the VA has moved out aggressively in that direction and we're thrilled with it where there they have hired us now to to basically put in a turnkey production capable system in a number of their hospitals to to provide men.

Medical devices on a short term basis and it it'll it'll give them much more flexibility and short term capacity to address medical device needs. That's a brand new market. That's that's a new one.

And we think we're very well positioned to do that with our range of.

Printer hardware.

The approved materials.

On software systems that are very well adapted to the environment and our knowledge of the quality systems that are required. So so I love, our traditional markets and health care they are growing again.

The the extension now to to supply chains and hospital systems, great Great opportunity. There I think to drive further growth incremental growth on the industrial side I think you will see the same basic response is there's the traditional demands for.

For certainly for ground transportation put it that way cars.

New electric vehicles and things like that so those companies will all we'll all be looking to increase sales and clearly they were severely impacted by supply chains that have largely moved around the world to low cost countries that were extremely hampered.

During the covert period. So so you see the resurgence of sales, but so overall demand and then you see on top of it a move for more flexible supply chains. So I look at some of those and say those could become very exciting markets for US you know aerospace clearly commercial aerospace is in the doldrums right now.

Because of the cobot impact.

Hopefully that will rebound over the next couple of years and that's always a at early adopter. If you will of these new manufacturing techniques. So I kind of covered the waterfront for you there, but I am sincere about each one of them Nate I think you've got historical demand trends and on top of it you got this need for a more flexible localized supply chain.

To make up for disruptions around the world So that means and it's true for our entire industry. I think it's if you are going to come into a nice period here, where there is rising demand.

That is certainly helpful.

Yes, one more for me and I'll hop back in the queue.

You mentioned as you're going through the divestiture process you know you're kind of also looking to enhance investments in growth, but just wanted to get your sense for.

Looking at your portfolio positions are there any opportunities either in materials or maybe new processes.

To kind of build or buy and what I'm getting to is it sounds like the the fiber or composite markets is also pretty interesting from an additive perspectives.

Are you considering any investments in that direction do you have anything in your portfolio that can help bridge the gap I just want to kind of understand.

The opportunity set there.

Yes, so I would say I know to answer the last part first yes, we have probably the broadest range in the industry of hardware software and materials systems and we're very proud of that when we can we can bring application solutions to our customers I think better and faster than anybody in the world.

And that's what we're going to really focus on going forward now to keep that stream going.

We have to make key investments in technology, whether it's organic or inorganic we really need to so we're constantly evaluating and talk a lot about our material systems. We have great hardware systems, and we continue to launch new hardware platforms materials or what customers actually use and turn into compose.

So we want to make sure we stay really fresh on and at the leading edge of the range of materials. We can put through our platforms. We have a great team in place, particularly the polymer side too.

To to leverage the technology and grow so those areas for investment are really ripe and we will continue to put money in those areas periodically we will launch new platform new hardware platforms to to stay current on those and that's really around speed efficiency and in the case of aerospace.

Enhanced high temperature capability multi materials capability things like that and then on the software side, we have a great suite of software.

Around both our plastics and metals capability, which allows customers to not only print with high precision, but faster faster each day and that really comes together through our our.

Our centers of excellence in our application engineers, who were very very focused on because those are the guys that bring it home for customers and defined workflows. The customers can use so I think for it to be competitive in this industry you need to have all three capabilities hardware software materials and the better you Bree.

And that together and applications the more successful you're going to be in the industry.

Thanks, I'll hop back in the queue.

Yes.

Thank you.

So long as many questions as possible. We ask that you. Please limit yourself to one question and one follow up and then re queue for any additional questions.

Our next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Hi, Thanks for taking my questions.

Symmetry on that as a software business that was running over 80% gross margin before it was acquired by three D. is that the kind of level of gross margin at that businesses.

Was running at Maria can you talk about that okay, yes of the.

$20 million to $25 million of costs that I mentioned so.

Associated with that business, I'd say about 10% of the 10% to 15% hit the hit the cost of goods sold blood.

Okay and then.

Do you feel.

Hi.

They are I think 52 acquisitions that are made.

915 period is similar on the.

As we look through that list is that the largest one that you. When you think of the one that you can divest is this probably the biggest one that you're able to do or are there other big fish in that.

Ill.

Oh no. There are there are other assets that we could potentially divest or be larger. It's you just want to kind of work your way through.

There was a lot of inbound demand obviously on the semi tron assets. They are there and they were excellent assets again, they were focused out of our core there were focused largely on subtractive technologies, but they were they are so under under our ownership, we weren't going to invest in that direction. So it was a declining business for us, but excellent assets for someone else.

And I think the owner can be very proud of it and we will see a great future there.

We did retain portions that team that we're involved in in additive manufacturing, especially the software for additive really talented group of people that.

That we did retain for work on additive manufacturing, which made it a complex divestiture, but it was nice to have the inbound interest and we worked really hard to get that done.

Because it and strengthen our balance sheet allowed us to much more flexibility moving forward and not it's not by any means but the largest asset we could divest.

But we will consider each one in its own right in and what the timing and and and.

Process, we want to follow is so if thats helpful to you, but I again I think it was a win win the divestiture and it certainly frees up resources for us to invest in our core.

Yes, very helpful. Thanks very much.

Thanks.

Thank you. Our next question comes from Jim Ricchiuti with Needham and company. Please proceed with your question.

Hi, good morning.

I realize you are not in a position really to talk a whole lot about.

The top line in Q4, just given all the moving parts I'm. Just wondering if you can give any help to us in terms of how we might think about it.

GAAP operating expansion, particularly we don't know the timing of and Symetra.

Any help you can.

Okay.

Yes sure so.

Regarding the timing is to try and closing we expect that to happen in Q4, but we think it will be later in Q4. So I think it will be a smaller impact to kind of changes in our opex number.

Regarding how I think about Opex right. So we're going through this restructuring program you know I'd say, we've got half the costs out now we want to exit the year with a $60 million cost savings run rate that will tell you that we got to get the other half of that $60 million out in Q4.

Thinking about the Opex line I'd say about.

70% of that 60 million savings.

He has the Opex line. So if you think about we're halfway done you get the other half in Q4 ramping ramping to that 60 million, 70% of it hits Opex I think.

That that gives you some perspective of what we'd expect the opex number today.

Okay, and then just with respect to the sequential improvement you saw in the product line product revenue line any any colors to your single you're seeing some nice.

Okay.

Yes, the I'm, sorry, you're breaking up a little bit I think you're asking about the sequential.

Crude revenue in the AD product side, and what I'm trying to get to is.

Any particular areas within the product portfolio, where you're seeing some improved demand.

I'd be I would say it was pretty broad based so within our product line, we saw materials, we saw it and printers.

Weve prudent as we saw in software. So it was across the board within our printer category. We saw in both plastics and metals. So it was a it was a pretty broad based recovery on the revenue side.

Thanks.

Thanks, Jim.

Thank you. Our next question will come from Paul Coster with JP Morgan. Please proceed with your question.

Yes, thanks, Jeff So I'm trying to get to a decent EBITDA number and I'm just wondering with the write downs what happens too. So do you guys see moving forward, perhaps you can kind of give us some sense of what the run rate is now.

Yes, so our.

Depreciation run rate's been about 25 million.

Yeah, I think it will reduce a few million dollars.

But yes, it will move a little bit, but it won't be significantly different.

Okay, and do you expect any sort of restructuring charges in the fourth quarter cash non cash.

Yes, we do so we're expecting about $9 million or restructuring charges.

$6 million or that we're expecting on the cash side, another 3 million noncash.

Okay, and then I assume that the simonton business was in industrial segment or well.

Yes that was in the industrial segment.

Okay and that obviously given subject is closing probably doesn't start to impact revenues until the beginning of 21, that's a fair assumption, we're expecting a call it mid December close.

Were there any synergies.

Between the Semichem software and.

Productivity material sales.

Not that I'm aware of now and it was a completely different customer base, Paul So not really with the as I mentioned, we did keep a small number of.

Software design engineers that were working on on software for our additives system. So whatever whatever synergy we had with owning the business we kept those resources in.

And with that with our parent company and what what the buyer was really understand where the subtractive resources.

Got you and Jeff I wanted to go back to your opening statement I might have missed it but I think you said something about half a million.

Objects being created every day, using three d. princes zero princes princes or whatever but perhaps.

Perhaps you can just elaborate on that but the main question is on the objects getting bigger or are they getting smaller in other words, you know so trying to understand what the implication is in terms of material Quincy yeah.

Yeah, Paul Esa if additional question on the size yeah.

Yeah, I know you heard correctly, so our our technology and my comment was around specifically around three systems technology, our technology to that to the best of our estimation and I'm trying to be somewhat conservative on the numbers are not being aggressive, but it's a half million today, we're making our technologies are being used to make half a million components today.

And that's that's not a stretch I mean, that's that's our printers our materials our software that's not including any any other peripheral home stretch application. Those are hard core components that are being made with our base technologies every day, because I have to smile when I hear about numbers other people.

We are excited about in the whole industry is growing which is great, but I look at our legacy in our installed base. After me today are 180 million components. A year are made with our technologies. We're building up a tremendous base of experience and that's what's also fueling our service team.

To keep the machines replenished and keep them running well and it's very successful in terms of size. It's a really interesting question.

We're learning and then our software is really TARP. This in part about how to pack components more densely in the machine. So you can increase the customers efficiency. So that's very helpful are they physically getting smaller.

I would say it's.

It's hard it's really hard to say a trend I have there is a lot of small stuff being made but but wow. Our newest machines that are of course, our largest machines are making some some really large components, especially on the industrial side of the business. These days.

So if you look at our newest metal metal printer is half a meter by a half a meter size componentry.

Customers are actually making those size parts out of titanium and other materials. So it's it really is exciting I cant give I'll I'll look at that I can't give you a really.

Any more insight on the size of the parts made I can't tell you the smallest us being more densely packed in the printer, which is helpful for efficiency.

Okay. Thank you very much thanks.

Thanks, Paul.

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Please proceed with your question.

Yes. Thank you good morning.

I was wondering if you could comment on the trajectory of gross margins given all the puts and takes in particularly.

Some of this inventory drawdown that that you're talking about that that should happen here in the fourth quarter.

Can you give us some color on how we should think about this trajectory.

Yes, sure let me, let me start with gross margins.

So.

With Q4 with Q3 gross margins.

If I look at the product line versus versus the services line products line.

Was.

It was down year over year.

Down slightly year over year and that was driven by two effects right on the one hand, we had.

Lower volumes year over year on the other hand, we had.

The cost restructuring actions. So those were sort of fighting each other we remained slightly down but essentially flat on the services line, we were up year over year that was driven by improvements in our parts manufacturing business volumes.

As well as our field services business, lower labor costs, and lower parts costs is there, which which drove that improvement.

Regarding inventories.

We're at.

Ended the quarter to $127 million as I talked about in my prepared remarks up $24 million. This year, we've we've done a lot of actions to sort of.

Improve the the cadence between the sales forecasting teams in the supply chain teams to enhanced flexibility in our supply chain and so were expecting by the end of the year inventory turns to be back to historical levels. So, we'll drawdown will draw that inventory to get back to where we've historically been.

Okay. Thank you and as a follow up.

Jeff as you think think about this divestiture process.

Do you how are off timeline in mind to just sort of completing all the divestitures that you view as non core is this going to be something that we think is to.

Two quarter phenomenon 2021 phenomena or does it get stretched out longer depending on sort of what the appetite is for the from a buyer perspective.

Yeah, I would tell you and not to not to think of it as two quarter phenomena I think kind of looking at were going to be continuing to evaluate work on things through 21.

Because there are a number of considerations and these things all take time, you want to you want to run disciplined processes, what drives you to shorter time frames.

Our just an employee considerations disruptions, we don't want to leave a lot of uncertainty internally.

And we do want to move along the same time, we want to run good processes for the things we do divest. So so I know that all adds up to probably looking out through 21, and just look at systematically and we'll keep you well keep you updated as we make decisions and as we can obviously conclude things each time, we'll keep you up to.

Good.

Just in reference to your first question on gross margins I, one of the nice things about our focus at our reorganization and our focus is we're driving growth in markets that really value additive manufacturing, meaning they get a lot of value out of it for their customers and those tend to be markets that have a higher gross margin associated with that.

They put a premium on on the capability of the component the quality of the component the quality systems that you have for example of healthcare those tend to be higher gross margin businesses are more markets and bus. So broadly Jack chart told you about the kind of the short term comparisons in the puts and takes core.

Her by quarter on gross margin I was actually pleased that we could hold the gross margin relatively flat in a in a condition, where we're we're still facing.

Lower demand versus last year in the industrial space, we were able to get enough cost out of the business to hold gross margins at a good level, but moving forward over the over the future years I love the businesses that we're in which is a generally carry a higher gross margin associated with them and as we have a built out service team and becoming more so.

Indicated every day as we look at leveraging that team that tends to bring higher gross margins as well. So I said, it's a nice environment to be end were focus where the value is and I would hope that trend is one you will see in future quarters.

So Jeff just if I could follow up on that comment I mean is there any consideration or any thinking around.

Yes separating out the.

Attach of materials to printers as and allowing.

Oh, it being more of an open systems based approach as opposed to a close systems based approach from a material perspective, I mean, if I heard your gross margin comments I mean, it sounds like that wouldn't really change, but just wanted to.

See if you had any thoughts on if the business model was going to have a bigger change in your mind no. Yeah, no. It's a great question and it's one that we.

We and our competitors all take different positions on we tend to be able to deliver a lot of value out of linking the materials and the printers together. So in many many of our systems, we can derive extra value by.

By targeting tailored materials by tailoring immaterial for certain printer and application.

And that's why we've taken this approach being extremely applications focused.

So we try to we the reason that we want to we want to sell materials with printers is not only financially driven we can do we can deliver much more value that way to our customers. So if we ever get to a point, where we say look our material that we can offer through a printer is not special if it's the same as everybody else is material or.

Commercially available then we wouldn't link them together, but as long as we can we can deliver special value to customers that are worth something to them that they really value and we'll pay for by tailoring materials to certain printers.

It's a it's a great outcome for our customers and it's a good economic outcome for us.

So thats the kind of work that we're focused on and on doing more of going forward.

Okay, great. Thanks, a lot.

Thanks.

Thank you. Our next question comes from Kenny balance with Aaron Berg Capital markets. Please proceed with your question.

Good morning, everyone and thanks for taking my question, obviously covered a lot here, but I just wanted to.

Hit on the direct metal printers.

Any update on the commercial launch from earlier. This spring is kind of briefly mentioned in the comments, but how are you thinking about that market opportunity there.

And what is competition kind of look like particularly as the recovery China comes into play and 20 point on.

Yeah, well, obviously bullish on on metal printers, it's going to be a very big market out there and there are a variety of technologies being used to pursue it with ours ours is particularly good with aerospace type materials or or difficult materials to process, meaning many very unique very good atmosphere control.

Oil and obviously, we have very some very large printer. So so were you know for example, aerospace companies or is it making flight hardware out of very sensitive high temperature materials, you want the best atmosphere for making the part you can find and I. That's the technology, we really exploit it in our printers. So now.

Going forward, we're working on making them faster and better and and able to demonstrate a broader range of materials or even multiple materials into the same printer.

So that's a challenge for us I would say metals in general a nice growth market our platforms are being well received.

350 has been in production for a while and it's.

And continued demand across a large number of markets. The 500 is much newer for us and were able to start shipping it now and and building up an installed base and kind of seeing what the customer experiences like on a larger scale. There about we anticipate growing demand for that as well so I don't want to overpay.

Solid oversell, it and say you know, it's going to change the entire business, but the future of metals is very big and we will certainly look fully participate a lot of our customers want to move from plastics and metals.

And back to plastics again over time, depending on what the components. They are trying to manufacture. So we believe very strongly in offering the that range of technologies to our customers.

Awesome and then just kind of quick as a quick follow up would you highlight metal as it particularly interesting area for investment.

The divestments happen and you have more cash on hand.

No I wouldn't I actually I wouldn't say, specifically metals plastics have an enormous range to go.

And if you look at the range of plastics for a day again, we're heavily focused on broadly on industrial applications that I mean, that's applied healthcare too, but they are useful devices. They are actual components that are going to move into machines are in human bodies.

It it changes a lot day to day for metal the plastic and back again, so I am I am very excited about metals I am equally excited about plastics and there was a prior question, which I neglected to address on on reinforced plastics are blended plastics things like that I think have a great future.

Whether its carbon fiber carbon reinforced more alloyd or or more blends of plastics going through printers fantastic opportunity. So I'd say I'm I'm equally bullish on both I like both areas and and our customers do as well.

Awesome. Thank you very much Jeff.

Thanks for the questions.

Thank you our last question will take a follow up from Greg Palm with Craig Hallum. Please proceed with your question.

Yeah. Thanks for sneaking me and I guess, one of the questions I've been getting from investors is sort of the pathway to organic growth and I guess the assets, you're divesting or the majority that you're looking to divest shrinking in revenue similar to symmetry I don't know if you can confirm that and then as we think about health care I mean by our math, that's a segment that act.

He has been growing pretty consistently on an organic basis over the years. I mean is that something you can expect to continue going forward.

Yes, absolutely, Greg and I would tell you.

Just it just generically the company had so many exciting opportunities.

We were trying to do just broadly speaking Greg too much too far we were under investing in many areas and certainly the the subtractive assets that we sold with gifts can assume it's Ron is an example, and I'm not convinced it under the right ownership. Those are those are shrinking markets. They.

We're shrinking businesses for us because we weren't able to invest properly in them and when we as soon as we laid out our purpose statement and we said we're going to invest an additive that meant that trajectory is going to continue so it's best to get rid of that stuff put it under the right ownership for growth in the future and let us focus on areas, where we can go.

Grow our customer base and healthcare just use as an example is absolutely Fabulous we do you know.

Pockets of great work with some of the leading healthcare companies in the world and but if I look at their demand. They they want us in a number of other areas that we just haven't been able to invest in because we were trying to do too much for too many and so we're as we're getting out of things, we're trying to double down on the things that are working and growing and how.

Care is a great example, med devices.

Surgical planning.

The those those areas are fabulous this new work, we're doing with the V.A. Those are the kind of areas that we're going to really focus on for all the way from sales and marketing through our technology base and application engineering, because there is real growth in those areas and I saw the industry's growing I think you'll end up seeing us grow as well.

Our short term priority here is to drive to profitability.

Stop doing things that are non core get the cost out of the business get to profitability and earn cash that we can reinvest in our core business for further growth and I I think you will see that increasingly in the discussion turning increasingly to growth as we go into 21.

Yes, Okay, and then just to be clear on the gross margin trajectory I mean, so the divestiture of symmetry on that we'll take out some pretty high margin business I assume on the flip side, there's probably divestitures that you are looking at that are lower margin. So maybe that can that can offset that but but jack to I mean, I think you mentioned.

Restructuring efforts and the impact to gross margins going forward I mean, do you have an internal target over the next year or we could go from here.

So what we said.

Is right.

Right 60 million of run rate cost savings exiting this year $100 million in total by the end of next year right. So if you think about.

30% of that roughly is on the cost of goods sold one that probably gives you some perspective on where we expect gross margins to end up.

Okay, but even with the divestiture of symmetry and that would certainly put some upward pressure on gross margins just by that yeah right.

It's fair I mean that is a high margin business.

Yeah, Okay, all right great. Thanks.

Thanks, Greg.

Thank you. This concludes our question and answer session I'll now turn the floor back over to Melanie Solomon furniture for closing comments.

Thank you all 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 have a good day.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.

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