Q2 2021 3D Systems Corp Earnings Call

[music].

Good morning, and welcome to the 3 D systems Conference call and audio webcast to discuss the results of the second quarter 2021 mine.

My name is Donna and I will facilitate the audio portion of today's interactive broadcast.

At this time, all participants on a listen only mode.

A question and answer session will follow the formal presentation. If you would like to ask a question on the phone you may do so by pressing star 1 on your telephone keypad and.

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.

At this time I would like to turn the conference over to John and I believe our junior Vice President Treasurer and Investor Relations. Thank you. Sir Please go ahead.

Thank you Donna and good morning, and welcome to 3 D Systems Conference call with me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer, Jack <unk>, and Aruba, Executive Vice President and Chief Financial Officer.

And Andrew Johnson, Executive Vice President and Chief Legal Officer.

Webcast portion of this call contains a slide presentation, and we will refer to during the call.

Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website.

For those who have accessed the streaming portion of the webcast. Please be aware that there may be a few seconds delay and that you will not be able to pose questions via the web.

The following discussion and responses to your questions reflect management's views as of today only and will.

I'll include forward looking statements as described on this slide.

Actual results may differ materially.

Additional information about factors that could potentially impact our financial results is included in last Night's press release, and our filings with the SEC, including our most recent annual report on form 10-K, and quarterly reports on form 10-Q.

During this call and we will discuss certain non-GAAP financial measures and 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.

Finally, unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2020.

Now I am pleased to turn the call over to Jeff Graves our CEO.

Thanks, John and good morning, everyone and thank you for joining our call today.

When we reported second quarter results last year, our company and the world at large was increasingly gripped and the Covid crisis, no 1 could foresee how long and painful this situation will become we.

We were concerned foremost about the safety of our employees and and meeting the ongoing needs of our customers, particularly in the healthcare industry. We are focused on rapidly turned to treatment of the victims of the pandemic.

While there will be many dark days ahead, the resiliency of our employees and of our customers sustained and inspired us to weather the storm.

We will forever be grateful to our <unk> systems colleagues and to the multitude of frontline workers, who struggled each day to take care of the sick protect the well and keep our essential services running.

It was and this cauldron that our new <unk> systems leadership team was formed coming together quickly to develop plans not simply to stemmed the losses, but to position our company to emerge from the pandemic stronger and more focused than ever and ready.

Ready to capture the exciting future. We saw ahead for additive manufacturing.

Our first essential step was to develop a clear purpose statement, which is to be leaders and enabling additive manufacturing solutions for applications and growing markets the demand high reliability products.

We then executed a 4 phase plan to enable this vision.

We reorganized into 2 business units restructure to gain efficiencies divest non core assets and invest for future growth.

Our results since that time has shown consistent steady progress first worth and returned to growth and profitability by Q4 of last year.

And then continued momentum this year, which carried us and Q2, well beyond 2019 second quarter levels and important pre COVID-19 benchmark for all companies to measure themselves against.

Looking specifically at this year's second quarter results given the difficult environment of Q2 last year, it's no surprise to see exceptional rebound and revenue profitability and cash performance.

And when adjustments are made for divestitures, which we refer to as our organic performance.

Our topline grew almost 60% year over year and EBITDA by a whopping 650%.

Through a level of 12, 4% of revenue for the quarter.

Jack <unk>, who will review details for you on a few moments.

In addition to the usual year over year comparisons 2 additional reference points are helpful and understanding our business momentum.

1 is our consecutive quarter performance, which reflected revenue growth of over 11% and Q2 versus Q1 of this year.

The second reference point and perhaps the 1 that's most compelling is to our pre pandemic performance. If we compare Q2 of this year to the second quarter of 2019, our organic revenue grew 11, 4%.

And which reflects true acceleration and the adoption of additive manufacturing and the effectiveness of our intense focus on select market verticals and applications.

From a cash perspective, I'm very proud of the team's ability to manage the business efficiently in this rapidly changing environment, which resulted this quarter and the generation of over $13 million of operating cash flow.

And this allows us to make critical investments needed to support the exciting growth opportunities that we see ahead.

So reflecting on the overall state of our business from a strategic positioning standpoint, our combination of global scale industry, leading breadth of technology across metals and polymer platforms and our consistent financial performance is now combined to differentiate our company and positioned us well to be a partner of choice to lead.

Oems and healthcare and industrial markets.

Turning then to our divestitures and in order to improve our focus and greatly enhance our ability to invest and exciting growth opportunities. We've moved aggressively over the last year to divest non core assets.

In June we announced an agreement to sell our on demand parts business. This business focuses on the rapid production of components using additive and subtractive manufacturing methods, which in addition to having divergent business metrics from our core focus often put us in conflict with other service bureaus, which is an increasingly important market.

Per additive technology.

So this sale not only increased cash for investment and increases our available market for future sales.

More recently, just after quarter, and we announced the planned divestiture of Synbiotics, our medical simulation business. This is a very good business and 1 that does not align with our core focus on additive manufacturing.

By selling it to a strategic buyer, we created a sustainable leader and medical simulation, while delivering to us significant cash for future investment and our core a true win for all stakeholders.

And executing these divestitures, it's important to note that we have now completed our plan to exit non core businesses the.

And the proceeds from these sales will leave us and a strong position with a cash balance of roughly a $5 billion.

And no debt.

We now move forward with strong organic growth and profitability at both the gross margin and EBITDA margin level positive operating cash flow capable of sustaining the investments needed to meet increasing customer demand and plenty of dry powder on our balance sheet for additional growth investments.

I again want to thank all of my colleagues and <unk> systems, who have worked so hard on executing our business plan, which has successfully reinforced our leadership position over what's been an extremely challenging 12 months.

As we near completion of our divestiture efforts and our momentum accelerates and both of our business units, we turn to the future and have begun making investments for continued growth and profitability.

Over the last several months, we announced plans for the expansion of our facilities and Rock Hill, South Carolina and Littleton, Colorado.

In addition, we recently announced the creation of a new executive leadership role Chief Technology Officer for additive manufacturing.

The purpose of this role is to drive organic growth by expanding and accelerating application development and product innovation, including all hardware software and materials development for production scale additive manufacturing solutions.

I am pleased that Dr. David Lee joined the company and this capacity.

David has been a pioneer and additive manufacturing with more than 30 years of experience and the industry with this new role, we're accelerating our investments in people processes infrastructure and technologies that position us for future growth and profitability.

<unk> systems has tremendous potential to revolutionize markets through the enablement of production scale additive manufacturing and delivering breakthrough innovation is essential to achieving this vision, we're very fortunate to have David join us on this exciting journey.

Before I continue I'd like to offer and example of how our application focus is driving our development efforts and translating into accelerated growth opportunities for our business as.

As many of you might remember over the last few years, we developed a new printing platform called figure 4 to DLP based technology that opened up new and exciting applications for polymer components.

Central to figure for success is the availability of new polymer materials that offer a customer attractive performance characteristics to this and over the last year, we've expanded our investments and photopolymer development targeted towards specific applications and market verticals.

As an example for the automotive applications a key relationship was established with Toyota Gazoo racing, where our joint teams focused on a new figure for material called pro Black 10.

This was successfully introduced for racing applications, but our work did not stop there looking to expand to larger components sizes. We worked with the Toyota team to modify the material and process for broader SLA application. This work has now led to the introduction and the new material called Acura Amex rigid black and material. It is excellent mechanical and buy.

And environmental performance, along with automotive quality surface finish and can be printed economically and large SLA formats to deliver tremendous productivity improvements over competing production processes.

Moving forward this material will provide application solutions well beyond automotive such as consumer goods service bureaus and specialty contract manufacturing markets. It is this combination of materials printing technology and software focused on specific breakthrough customer applications. That's at the heart of our organic growth engine.

And finally before I close I'd like to comment on an area that I am, particularly excited about for our longer term future and that is regenerative medicine.

1 of the key reasons behind Dr. Lisa appointment as our new CTO for additive manufacturing is that it allows our cofounder Chuck hull to focus increasingly on our groundbreaking biotechnology efforts as our chief Technology Officer for regenerative medicine.

As we've stated before our partnership with United Therapeutics is central to our combined efforts to print human organs, beginning with a human loans.

These efforts are by any measure extraordinary and we look forward to updating you on progress at some point and the future.

Building upon this core development program, we are accelerating our efforts to bring to develop and bring to market other non Oregon human applications for the body.

Just as with our existing healthcare business. This extension of 3 D printing into other human applications involves the combination of new tailored materials very high precision printing technologies and customized software solutions in.

In addition to being printable the materials used in these applications must be very specific requirements, including physical and mechanical properties as well as having biocompatibility characteristics to limit or even eliminate the risk of rejection and patients.

And this pursuit, we're partnering with other firms that can bring specific technology or application knowhow that can move US ahead more quickly.

On such partnership that we announced this quarter is with coal plant a biomaterials company that brings unique expertise and plant derived are each college and material.

1 application of this material that we're focused on is its uses printed soft tissue matrices for breast reconstruction procedures today.

And today the soft tissue matrices are most often derived from human cadavers.

And application expertise for regenerative medicine, there will be many more to follow.

And natural extension of our efforts in this area enabled in part by our recent acquisition of <unk> is our move to support academic and other research laboratories that are studying the fundamental science of regenerative medicine.

From this foundation for which <unk> has a presence and over 350 research labs around the world. We're increasingly excited about the potential of pursuing applications and the pharmaceutical market were printed customized 3 dimensional tissue samples can be used for advanced drug therapy development. The.

And the ability to print specific 3 dimensional tissue specimens, representing either healthy vascularized cellular structures or even tumorous tissues offers the potential of enabling tailored experiments for drug development, which could shorten time to market and improve patient outcomes.

While these investments will take time to bear fruit with our strong foundation and healthcare, which now comprises over half the company's revenue.

And on key technology partnerships that we're now establishing we believe we are well positioned to play a leadership role in this emerging field of regenerative medicine.

So to summarize having executed our 4 phase plan launched last summer. We're now a company exclusively focused on additive manufacturing with industry, leading scale and the broadest range of metal and polymer technologies all linked together.

Due to the pandemic.

We saw this turnaround accelerate in the second quarter.

After seeing a return to growth in Q1 industrial continued to rebound in Q2 growing sequentially 8.3% as compared to the first quarter of 2021 the.

The performance of our industrial segment reflects the continued market rebound combined with organizational enhancements that we have implemented as part of our reorganization and restructuring efforts.

These enhancements have resulted in reduced internal friction.

A more holistic view of our customers and pursuits and improved sales efficiency for our segment oriented approach on.

Our improved model as evidenced by the sale of a record 3 of our flagship factory 500 metal machines, this quarter, which was sold into the aerospace and transportation segment.

While the last 2 quarters have seen good growth from solid execution combined with improving macro economic conditions. We continue to see challenges that could impact economic performance, including new variance of the COVID-19 virus inflation concerns and continuing supply chain shortages.

In regards to this last item, we have begun to see tightening of costs and available availability for certain components that go into our products.

Our team continues to manage through through the issues and we remain positive about the second half, but we see this as a potential headwind as we move through the year.

Now, we turn to gross margin.

We reported a gross profit margin of 42, 4% in the second quarter of 2021 compared to 31, 2% in the second quarter of 2020.

Non-GAAP gross profit margin was 42, 4% compared to 41% in the same periods last year.

When compared to the first quarter of this year gross profit decreased from 44%.

The sequential decrease was primarily the result of nonrecurring write downs related to equipment and inventory impacting margin by approximately 140 basis points.

Even with this nonrecurring charge and announced divestitures, we continue to expect non-GAAP gross margins in a range of 40% to 44% for 2021.

Operating expenses for the quarter were $79.1 million on a GAAP basis, an increase of 14, 5% compared to the second quarter of 2020.

This year over year increase is primary primarily related to higher stock compensation expenses, including higher expense for employee bonuses that are tied to the strong performance of our business.

Our non-GAAP operating expenses in the second quarter were $55.2 million.

3.3% decrease for the second quarter of the prior year.

Compared to the first quarter of 2021, non-GAAP operating expenses increased 7.7% as our focus turns to growth and we invested in our operational infrastructure, which will allow our people and systems to better absorb the growth of strategic investments are made.

Adjusted EBITDA defined as non-GAAP operating profit plus depreciation was $20.1 million or 12.4 percentage of revenue.

<unk> to a negative $3.6 million or a negative 3.2 percentage of revenue in the second quarter of 2020.

Compared to the first quarter adjusted EBITDA margin is slightly lower driven by the investments mentioned earlier to improve our corporate infrastructure and support future growth.

Now, let's turn to the cash flow statement and balance sheet cash.

Cash on hand decreased $600000 during the quarter.

This decrease was driven primarily by acquisition cost of $10.9 million and capital expenditures of $4.3 million offset by cash generated from operations of $13.5 million.

We ended the quarter with no debt in full capacity on our $100 million undrawn revolving credit facility.

We were quite pleased with our continued strong cash continued strong generation of cash from operations, which as mentioned was $13.5 million.

This compares favorably to cash used in operations of $18.7 million in Q2.2020.

Our strategic reorganization and cost management have enabled this extremely positive turnaround in operating cash flow.

Yes.

Before I conclude my commentary I would like to provide additional detail on the expected impact of our 2 recently announced divestitures the on demand parts business and Synbiotics.

We expect both deals which will be the last of our planned divestitures to close.

The mid third quarter, after which they will no longer be included in our results on.

On a quarterly basis. These combined businesses generated approximately $25 million of revenue per quarter, and non-GAAP contribution margin of approximately $5 million to $6 million per quarter.

So what will be looked like when these divestitures are complete.

From a strategic standpoint, we will be a company with a singular focus on additive manufacturing and exciting and fast growing industry, driven by both healthcare and industrial markets worldwide.

We will go forward as 1 of the largest and best known comprehensive providers of additive manufacturing technology, comprising the broadest range of polymer in metal printing platforms in the industry on.

Our market, leading metals materials market, leading materials portfolio and an extensive suite of software to enable large scale efficient conversion.

Net tronic component designs to finished products for our customers worldwide.

From a financial standpoint, following the completion of our divestitures in the third quarter, we will have the strongest financial profile and our industry.

We will be a roughly $5 billion revenue profitable company with strong cash generation from operations.

The outstanding balance sheet with approximately $500 million of cash and no debt.

This profile is unique in our industry and positions us well to invest in exciting organic growth, including expansion of our development infrastructure and technology teams, having unique talents that are demonstrating daily new applications of this exciting manufacturing technology for our customers the world over.

We are also in an excellent position to execute on strategic growth opportunities that will support our long term objective to reach sustainable double digit revenue growth gross profit margin of 50% and adjusted EBITDA margin of 20%.

We believe that with our focus scale profitability and balance sheet, we are very well positioned to continue to succeed in this exciting growth industry of additive manufacturing.

Finally, I wanted to provide an update on our Investor day event that we had scheduled for September 9th in the Denver, Colorado area.

As many of you know we are seeing a rise in cases of Covid infections, primarily primarily related to the delta area.

This has created uncertainty in the bill in the ability of some interested parties to travel and to attend in person gatherings.

Out of an abundance of caution for the safety of our investors analysts and employees, we have decided to postpone our investor day event, we plan to rescheduled to a later date this fall and our preference is to continue as an in person event, depending on the trends of the virus variant the vaccine rollout and new <unk>.

Guidance for public health officials.

We will provide an update as soon as possible and look forward to sharing on our long term growth strategy in more detail with the investment community.

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

Thanks J R.

The last 12 months are now behind Us and I truly believe the next 12 months can be the best This company has seen in its history financially. We are arguably the strongest company in our space, which means for the best positioned to take advantage of accelerating adoption of additive manufacturing.

We'll use our balance sheet to drive growth in our core business.

On a keen focus on driving recurring revenue streams will be deliberate and searching for strategic investments that will support the core business we built.

We will now take your questions.

Operator.

Yes.

Ladies and gentlemen, the floor is now open for questions. If you would like.

To ask a question. Please press star 1 on your telephone keypad at this time.

All information on total indicate your line is on the questions. Thank you.

You May press Star 2 if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once again Thats Star 1 to register your questions. At this time. Our first question is coming from Ananda Baruah of loop capital markets. Please go ahead.

Hi, Good morning, guys. Thanks for taking my question and congrats on the ongoing solid execution.

Thanks, David.

Youre welcome it's good to see it get to see it sort of sort of clicking contains a click altogether.

I guess, just 1 for me I.

I guess any Navy Navy a couple of parts, but all related.

Do you guys see the organic growth profile.

Going forward.

And Jack you sort of referenced double digit in getting to that but just any context around how you see the organic growth profile going forward and what the key action items.

And milestone and died.

Keen on achieving that and then just as.

Sort of like an additional part of that what but could also happen till AJ exceed debt.

That's it for me thanks.

So I'd say what another thanks for that question, that's very thoughtful and I'll comment and then I'll leave it for Jaguar, if he wants to supplement as well so look.

Adopted a very specific business model a year ago, and our model is really working well for us. We're extremely application focused in very specific markets and clearly healthcare is tremendous I mean, we've got a lot of expansion capability, there and industrial verticals are becoming increasingly attractive.

Across a number of them. So there is plenty of room to hunt.

And that horizons, expanding every day as businesses reopen and the reopening of non Doe with them with new concerns and paradigms about their supply chain I think EWC. This broadly as folks are nervous.

On the rise of the Delta virus now ready when Kevin the same conversations of last year of <unk>, where we make parts how do we get them at how do we how do we get them on this as our customer conversations.

Additive manufacturing can address but a great many of those concerns and offer higher performance parts.

Whether it's for human application of our industrial markets. So their willingness to experiment to try new applications to come in and work with our application engineers their appetite for that is up tremendously and as the economy.

Reopens on the industrial side and healthcare continues to grow and I think we see we see no end in sight for that I think the adoption of production scale industrialized additive manufacturing is here and it's going to really take root and growth from here. So on that that's a comment I would say for the entire industry for.

Specifically I think our business model is somewhat unique we really focus on.

On finding the right customer and exciting market verticals and really demonstrating exciting applications I'll give you. An example of non debt what's been really terrifically exciting is in the semiconductor manufacturing industry.

We pioneered some applications with 1 of the leading providers of semiconductor manufacturing equipment over the last couple of years, we've really accelerated on the last year as there has been a chip shortage and there's more demand for new machines. They are investing in our customers are investing more R&D dollars development dollars for new manufacturing platforms and their pull.

On the best attributes of additive manufacturing to help get them Theyre a lot of that is around the heat transfer of control.

Extending the thermal stability of the equipment. So you can print very find detailed semiconductor chips. That's just 1 example, but there is a window of embracing now additive that's really exciting so the punch line from a growth rate perspective, if you look at our Q1 to Q2, probably the best reference point you have is Q1 to Q2.

<unk>.

If I remember the numbers correctly, Jack Tar from your from your portion of the dialog here, we were about mid teens in healthcare growth and we were nearing double digits on industrial actually high single digits and I think now that youre going to see that momentum continue I think in health care the ability to customize products for implants D is really it.

Tractive it improves patient outcomes.

Reduces the cycle for healing for for getting patients out of the hospital. It improves the performance of parts for their for their rehabilitation, often and at least in skeletal applications and other med devices dental has talked about a lot I mean, clearly we have a lot of momentum in the dental area as well and thats continuing to expand indoor.

Australia, I think youll see it take root broadly in many verticals, so I will I.

I would expect the growth momentum to certainly continue.

And.

There's a lot of opinion about what the whole industry will grow at.

People talk about.

Mid to high teens, even 20% plus whatever that overall industry growth rate is I think we will certainly be able to to mirror that ourselves and hopefully in the most preferred markets. So that we also get not only volume leverage, but some gross margin improvement from being in a really difficult parts of the <unk>.

So again I would.