Q2 2022 3D Systems Corp Earnings Call
Hello, good morning, and welcome to 3D Systems Conference Call and Audio Webcast to discuss the results of the second quarter 2022. My name is Kevin and I'll facilitate the audio portion of today's interactive broadcast. All participants have been placed on 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.
At this time, I'd like to turn the call over to Russell Johnson, Vice President, Treasurer and Investor Relations. Please go ahead.
Good morning and welcome to 3D Systems second quarter 2022 conference call. With me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer, Wayne Penske, Interim 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. 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 include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact their financial results is included in last night's press release and our filings with the SEC, including a most recent annual report on Form 10-K and quarterly reports on Form 10-Q . Thank you.
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 2021.
With that, I'll turn the call over to our CEO , Jeff Graves, for opening remarks.
Thank you, Russell, and good morning, everyone.
I want to thank all of you for joining today's discussion of our second quarter results.
As always, it's my pleasure to have this opportunity to speak with you and share my perspectives on our ongoing efforts to make 3D systems the world's most innovative and successful provider of additive manufacturing solutions.
As I look out on the environment in which 3D Systems is operating today, I see much to be optimistic about, but I also see a complex and volatile mix of business conditions that's challenging our ability to deliver consistent results during 2022.
On one hand, it's clear to me that the underlying trends supporting the broad adoption of additive manufacturing solutions in production environments are both strong and resilient.
across our diversified economy in applications ranging from the traditional manufacturing shop floor to the biotech laboratory where life-saving medical treatments are created.
Additive manufacturing technologies are enabling new levels of efficiency, flexibility, and innovation.
These macro trends give me tremendous confidence in this industry and in 3D systems role as a leader in it.
It's this confidence that's guiding the strategic actions we're taking this year to consistently invest in new additive technologies and in our internal infrastructure to support future growth.
On the other hand, the new normal of our post-pandemic world is proving anything but normal.
as we highlighted in yesterday's earnings release.
During the second quarter, 3D systems, like many other companies, encountered a more difficult global business environment than we had anticipated when we exited 2021.
Our performance this quarter was impacted negatively by various macroeconomic and geopolitical factors, most notably stubborn supply chain issues, foreign exchange volatility, and our exit from the Russian market.
While these factors such as these are often hard to predict or control, the reality is that they generated unexpected headwinds for our business during the second quarter and led to revenue growth and profitability below our internal expectations and no doubt below the expectations of our investors as well.
Looking ahead to the second half of the year, we now believe that these factors, combined with an expectation of dampened consumer discretionary spending, driven by the rapid rise in the price of food, gasoline, and other daily necessities, will impact our results.
As a result, we're taking a more conservative stance on our outlook for the balance of the year and reducing our 2022 guidance.
While we hope that these effects will be short-lived, I feel it's important to be prudent to plan for them until the data suggests otherwise.
Fortunately, we have the scale, the balance sheet, and then an exceptional customer base which allows us to weather these short-term headwinds and continue to prudently invest for the strong growth opportunities we see when inevitably these headwinds subside.
We'll do so with the same financial discipline that I hope you now have come to associate with this leadership team.
For today's call we'll start with my summary comments on the quarter and the full year forecast and then Wayne Penske will provide more details.
For the consolidated company, after adjusting for the significant divestiture program that we completed in 2021, revenue for the second quarter grew 3.2% year-over-year and 7.8% in constant currency.
As I mentioned, several exogenous factors had an outsized impact on the second quarter top line.
These include the rapid strengthening of the US dollar and the frustrating continuation of component shortages and other supply chain disruptions that we experienced during Q1.
They also include the ongoing tragedy of the war in Ukraine, which led us to exit the Russian market and has since negatively impacted business confidence in the European countries, such as Germany, where 3D systems, in particular our industrial segment, has traditionally had a strong presence.
Were it not for these headwinds, our consolidated revenue for the second quarter would have grown by healthy double digits year over year as we had anticipated.
So while we're by no means satisfied with our quarterly results, it's important to view them in the light of the very challenging and volatile macro environment we face during the quarter.
To reinforce the message we have stated previously, with the increasing adoption of additive manufacturing and production environments across both our healthcare and industrial customer base.
We anticipate delivering solid double-digit annual revenue growth once these shorter-term headwinds subside.
Turning to our divestiture adjusted segment performance, in the second quarter revenue for our industrial segment grew 3.8% year over year and 11.2% in constant currency.
While revenue for our healthcare segment grew 2.9% and 4.7% in constant currency.
The foreign exchange impact on our industrial segment was quite significant due to that segment's exposure to manufacturers and service bureau customers in Europe and Asia-Pacific.
Industrial also experienced the biggest revenue impact due to our exit from the Russian market.
In healthcare, second quarter revenue came in softer than expected. The slower growth in healthcare was driven largely by postponement of elective procedures.
due to both a resurgence of COVID, which once again limited patient access to hospitals.
and to greatly heightened inflationary pressures on consumers, which forced them to prioritize their purchases and postpone optional care, particularly in the dental market.
Fortunately, once the impact of COVID again subsides and inflation begins to cool, we expect these elective procedures to once again accelerate.
However, to be clear in our updated guidance, we've modeled these conditions as now extending through the year end of the year.
So in short, we're reducing our revenue estimates for the full year, assuming that the challenges we saw as we exited the second quarter continue throughout the remainder of the year.
These primarily include the impact of currency, inflation, and supply chain disruption.
In addition to these objective factors, we're also receiving clear signals from selected customers that their visibility into near-term demand trends has diminished.
In response, they're slowing their expansion plans and adjusting purchases to more tightly control inventory levels until their visibility into demand improves.
Major drivers of this uncertainty are the potential impact of recessionary pressures on consumer confidence.
the stubborn high inflation environment which is an important driver of reduced discretionary health care spending.
Secondly, but not an insignificant factor driving us to be conservative in our forecast at this point, is the potential impact of energy supply constraints on our European customers stemming from increased EU government efforts to reduce their dependency on Russian oil and gas supplies.
The net effect of any such effort, which looks increasingly probable, will be further dampening of demand on capital or capital investments, particularly in Germany.
One obvious area that influences our second-hand forecast is our dental business, which had previously enjoyed very strong double-digit growth in the U.S. and internationally.
Given the current geopolitical tensions, the resurgence of COVID in China, and the curtailing of consumer discretionary spending throughout Europe and the U.S., we're projecting slower growth in our dental segment in the second half.
We once again view this as transitory, but still material in our full year forecast.
As we exited the second quarter and evaluated all of these risk factors, we've updated our forecast and are now taking a more conservative view of our projected four-year performance, all of which is reflected in our updated four-year guidance that Wayne will discuss in a few moments.
While we're disappointed in having to take this step, we're doing so out of an abundance of caution and in the spirit of transparency to our investors.
I can assure you we don't take this decision lightly, and you have my commitment that will work hard through the balance of this year to regain momentum in our financial performance that we've built over the last two years. Actions we're taking include a variety of steps to optimize our cost structure, improve the efficiency of our operations, and refine our technology portfolio to assure exciting and profitable growth in the years ahead.
Reflecting this focus on operational efficiencies, in July we took a major step forward by transitioning the sourcing and manufacturing activities for much of our polymer-based printers in-house and terminating our agreement with a major contract manufacturer.
In sourcing these high tech, high mix, low volume printer platforms took months of planning and required us to incur some upfront exit and inventory costs.
But over time we believe this approach gives us much better control of our critical supply chain elements resulting in reduced manufacturing costs.
improved inventory management, and improved customer-facing metrics such as quality and delivery performance.
This step, in combination with our new product design efforts, is a key element in delivering higher gross margin performance, the goal of which is to exceed 50% in the years ahead.
We have additional efficiency actions in flight, and we'll update you on our progress as we move through the year.
Before I end my remarks and hand over to Wayne, I want to comment on important progress and collaborations between 3D systems and what I believe are two of the world's most innovative technology partners.
First, in June , our long-time biotechnology development partner, United Therapeutics, announced that in close partnership with 3D Systems, they have successfully printed the most complex object ever produced by mankind.
A complete human lung scaffold consisting of over 4,000 kilometers of pulmonary vasculature and airways with wall thicknesses measured in fractions of the diameter of a human hair.
The complexity and precision that we've now demonstrated using biocompatible materials and our most advanced production printing platform technology is truly groundbreaking and represents a key milestone in our regenerative medicine efforts.
In the first unveiling of this incredible capability, United Therapeutics President and CEO , Dr. Martine Rothblatt, and 3D Systems Founder and Chief Technology Officer for Regenerative Medicine, Chuck Hole.
appeared at the CNN-sponsored Life Itself Conference, hosted by Dr. Sanjay Gupta and Mark Hodash.
In her presentation, Dr. Rothblatt declared for the first time publicly her vision to have these personalized bioprinted lungs cleared for human trial within five years.
With our team's increasing momentum, earlier this year we expanded the scope of our collaboration to include the manufacture of human livers and kidneys.
All of these efforts are tied to the singular goal of producing an unlimited supply of fully biocompatible human organs for transplantation to people who need them around the world.
While the goals are ambitious, I believe more than ever with it we'll meet them. And I want to thank Dr. Rothblatt for her vision and unwavering support in leading us here.
with the foundation of progress that we've made in materials, hardware, and control technologies for printing human organs, which I believe are quite unique in the world.
One of my most important goals for 3D systems has become the building of a world-class regenerative medicine business around the emerging science of photopolymer-based bioprinting.
Building upon the incredible work our teams conducted with United Therapeutics, in 2021, we acquired two development companies, the Levy and Volumetric Biotechnologies.
in order to bring additional technology and specialized technical skills to our regenerative programs at 3D Systems.
Having now integrated these exceptionally talented scientists and engineers, I'm extremely pleased with our accelerating progress and committed to this groundbreaking technology, which offers the potential to improve countless lives of people who are suffering from chronic diseases or injuries around the world.
With the progress that we've now made and the expanded capacity and capabilities we have in our program. Each one is is every city member and arrange them to activate the existing elements.
Two very exciting adjacent fields of applications have now opened up to us.
One is the printing of non-organ human tissue for a wide range of applications within the body.
We're actively working on a targeted subset of these high-value non-organ applications, and we'll be discussing progress publicly when appropriate.
The second application field, and one that we believe offers exciting and potentially mirror term opportunities, is the printing of vascularized tissue for use in drug discovery.
With our ability to now print vascularized tissue that enables very precise, predetermined blood flow while accommodating an enormous range of human cells, including both healthy and diseased cells, the effectiveness of developmental drugs therapies can rapidly be evaluated in the laboratory.
Our goal is to reduce the development time for new drug therapies and over time reduce or even eliminate the need for animal testing.
Given the ongoing exploratory efforts we have underway with leading pharmaceutical companies, we're excited about the potential of this technology and are now investing in both the people and the infrastructure we'll need in order to bring this to commercial operation.
You can expect to hear more about these efforts later this year.
In support of these developmental efforts, we're also now putting in place for the first time in our company's history a medical advisory board to provide input on each of our regenerative medicine programs.
Under the leadership of Dr. Steven Klasko, a recognized visionary leader in the global healthcare community, in the second quarter we were pleased and honored to announce the appointment of the Honorable Dr. David Shulkin, former Secretary of Veterans Affairs, and more recently the Honorable Alex Azar, former Secretary of Health and Human Services, and a recognized leader in the pharmaceutical industry.
This distinguished group of advisors, along with additional members soon to be named, will play an important role in our development and commercialization of these remarkable new products.
In addition to the progress we're making in regenerative medicine, we were very excited to announce this week an agreement to acquire DP Polar, the Germany-based developer of the industry's first additive manufacturing system designed for true high-speed mass production of customized components.
DP's Polar's technology is truly path breaking.
It features multiple fixed printing heads and a rotating build platform that enables continuous high-speed 3D printing at industrial scale.
Among its many unique features, it can embed objects such as sensors, electronics, or magnets into printed parts by using inline robotic pick and place capability.
With its ability to achieve production speeds up to five times higher than traditional batch process printing platforms, which represent the standard in the industry today, this novel technology opens up many new exciting high-volume applications for the future.
We're extremely excited to join forces with DP Polar at this pivotal time for additive manufacturing when interest in production scale applications is rising fast.
While their machine is still in beta testing, and therefore the acquisition will not benefit our near-term results, DP Polar's technology is an ideal fit with 3D Systems' broad portfolio of polymer materials and production-focused software systems.
We believe that integrating this platform with our existing industry leading solution set will drive its rapid adoption into a wide range of high-speed automated production environments.
In summary, I want to emphasize that despite near-term headwinds that are challenging our results this year, we remain confident in our long-term outlook, the targets we laid out at our Investor Day in May.
With a strong balance sheet and a disciplined approach to running our business, we will continue to look for ways to invest strategically for long-term growth with a focus on key healthcare in industrial markets.
With that, I'd like to turn the call over to Wayne. He'll describe our second quarter financial results and our 2022 guidance revision in more detail. Wayne? Thanks, Jeff. Good morning, everyone. We had three significant divestitures in 2021. As we discussed the non-GAAP measures from the tables we presented in last night's earnings release, and as we'll discuss today, we excluded from the 2021 results the impact of the divestitures. We did this to make the 2022 results comparable to the 2021 results.
As Jeff discussed, revenue for the quarter did not meet our expectations due to three factors, the strengthening of the US dollar, persistent supply chain issues, and geopolitical factors such as the Russia Ukraine war.
Revenue for the second quarter was $140 million, a decrease of 13.8% compared to the prior year.
Excluding divestitures, revenue increased 3.2%, and on a constant currency basis, revenue increased 7.8% compared to the prior year.
This top-line growth reflects continued solid demand in both our health care industrial segments and demonstrates our ability to grow the business against a very challenging background of supply chain, macroeconomic, and geopolitical pressures.
Just to put dollars behind the three factors.
Nearly $6 million of this impact was a tribute to the sharp appreciation of the U.S. dollar that occurred during the second quarter and reduced the U.S. dollar value of our international sales made in different currencies.
which typically represent about 40% of our total sales.
In the second quarter of last year, we had approximately $4 million of sales in Russia that did not repeat in the second quarter of this year because we exited the Russian market.
If the exclude Russia sales from 2021, then our adjusted growth rate is 11.3%.
Finally, supply chain issues, in particular component shortages, prevented us from filling more than $9 million of firm customer orders.
By way of comparison, in the first quarter of 2022, we were unable to ship approximately $7 million of customer orders because of supply chain issues.
Jeff discussed a few of the actions we are taking to reduce these late shipments.
Looking at the first half of the year, revenue excluding divestitures grew 6.5% year over year to $273 million. On a constant currency basis, first half revenue grew 10.4%.
So even in a very challenging operating environment, we were able to achieve double-digit year-over-year growth in the first half of 2022.
In the second quarter, we had a loss per share of $0.26 compared to a loss per share of $0.08 in the second quarter of 2021.
The current quarter includes a $11 million non-recurring charge, or $0.09 per share, for certain estimated legal costs and other settlements.
The divestitures had contributed five cents of earnings to last year's second quarter.
Our non-GAAP loss per share in the second quarter was seven cents compared to non-GAAP earnings per share of six cents in the second quarter of 2021.
The year-over-year decline reflects inflationary impacts on input costs, impacts from acquired businesses.
as most are in development stage or just beginning commercialization.
continued growth oriented investments in R&D including to enhance our product portfolio and improve our corporate infrastructure.
A revenue excluding divestitures and a constant currency basis for our health care segment increased 4.7% and our industrial segment revenue increased by 11.2% as compared to the second quarter of last year.
The healthcare growth was fairly consistent across all markets and products.
Softer discretionary spending, likely limited growth in end markets such as dental and elective surgeries.
Industrial revenue growth was driven by continued strength and precision microcasting applications such as jewelry.
by demand for production machines for aerospace applications, by continued pull-through materials by our significant installed base of printers.
Partially offsetting the sales growth industrials are actually from the Russian market. The future machine and material sales in Europe due to macroeconomic concerns.
and to China due to COVID-related lockdowns and supply chain disruptions.
The gross profit margin was 37.9% compared to 42.4% in the prior year.
Gross profit margin was lower due to multiple factors.
including the 2021 divestitures of non-core assets.
The input cost and freight inflation that was in effect of what we were able to pass through to customers by way of price increases.
and manufacturing variances within certain of our contract manufactured products.
We also saw small impacts in gross margin due to mixed effects of selling more printers and less materials in the prior year.
As reflected in our revised guidance, we expect gross margins to remain steady as we move through the year to the continued impacts of inflation on input costs.
Our operating expenses increased 7.7% to $85 million in the second quarter of 2022 compared to the same period a year ago.
This includes the $11 million nonrecurring charge previously discussed.
On a non-GAAP basis, operating expenses were $60.9 million as compared to $48.9 million from the same period a year ago.
The higher non-GAAP operating expenses reflect spending in target areas to support future growth.
About half this increase was due to expenses from recently acquired businesses.
While the remainder reflects increased research and development costs to refresh and enhance our product portfolio and investments to strengthen our corporate infrastructure.
Just as EBITDA defines as non-GAAP operating profit plus depreciation, it was a negative $2.6 million for the second quarter compared to $12.9 million for the second quarter of 2021. The second quarter is a negative $2.6 million for the second quarter of 2021.
The year-over-year decline in adjusted EBITDA margin reflects all the factors that we've previously discussed. The year-over-year decline in adjusted EBITDA margin reflects all the factors that we've
We now turn to the balance sheet. The end of the quarter was $638 million of cash and short-term investments on hand.
Our cash and short-term investments declined approximately $151 million since the end of last year, driven primarily by $83.3 million paid for acquisitions and equity investments.
Cash used in operations of $38.2 million.
capital expenditures of 10.4 million dollars.
We continue to have a strong balance sheet with sufficient cast to support organic growth, including in regenerative medicine.
As previously stated, we regard 2022 as an investment year during which we will make additional targeted investments in high potential growth areas of our business and in our corporate infrastructure as part of our overall strategy to profitably grow revenue in both the healthcare and industrial segments.
After we complete the acquisition of DP Polar that Jeff discussed, we will likely take a pause in acquisitions to make sure we focus on execution and fully integrate the recent acquisitions we have made.
Nonetheless, we will always remain alert for any game-changing investments.
In 2021, we began providing guidance on full year non-GAAP gross profit margins.
This year, we expanded our guidance to include revenue and non-GAAP operating expenses.
Given our lower than expected performance of that quarter combined with the challenging macroeconomic environment we've received for the second half of the year, we are revising our full year 2022 guidance.
We now expect revenue to be within a range of $530 to $570 million.
which reflects an estimated $20 million of negative foreign exchange impact for the full year.
as well as additional negative impacts from reduced spending in selected end markets such as dental, elective surgeries and international manufacturers caused by the challenging environment.
We now expect non-gap gross margins to be in the range of 39 to 41 percent, due to the reasons mentioned earlier.
We are narrowing the range of our non-GAAP operating expenses to be between $245 to $250 million.
This revised 2022 guidance assumes no significant additional changes in the macroeconomic environment that could negatively impact business demand or disrupt our supply chain.
such as COVID, geopolitical events, or foreign exchange volatility.
I'll now turn it back to Jeff before we transition to Q&A.
Thanks, Wayne.
Before we take your questions, I'd like to add one more additional comment. As you likely saw last week, we announced that Michael Turner will join 3D Systems as our new Chief Financial Officer at the end of this month.
I'm delighted to have Michael join our team. He's an accomplished financial executive with a strong technical background, who's ideally suited to lead our finance and accounting function.
I encourage all of you to connect with Michael after his arrival to introduce yourselves and get to know him as you wish.
I'd like to also take this opportunity to thank my colleague and good friend Wayne Penske for so ably serving as our interim CFO for these last several months.
Wayne will be staying on for a while to ensure that Michael has a smooth transition into his new role, but then will be returning to his well-deserved retirement.
So Wayne, thank you very much for all you've done for us.
So, Kevin, I think we can now open up the line for questions.
Certainly. When I'll be conducting a question and answer session, if you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment please while we poll for questions.
Our first question today is coming from Greg Palm from Craig Allen Capital Group. Your line is now live. Your line is now live.
Yeah, good morning. Thanks for taking the questions here. I wanted to, you know, first dig into the guidance a bit because last quarter when you provided guidance, you talked about demand outstripping your ability to fulfill. So I guess if we think about the reduction for the second half, how much is
incremental FX headwinds relative to where we were last quarter was at the 20 million how much you know if any is additional supply chain challenges that you're now running into and how much is true demand falling off and I guess of the demand anyway you can break out more specifically the impacts across the various end markets or geographies
So, with respect to FX, you're correct that the $20 million is the difference between what we did last guides versus this guidance.
With respect to supply chain, I wouldn't view that really as a factor in terms of changing our guidance. While we didn't assume any improvement, we didn't assume it was going to get any worse. So I wouldn't view supply chain as a factor for reducing the guidance.
The rest is really about the slower demand in the end markets, primarily dental, and then the rest is if you think about what's happening in Europe in terms of the slow down of our customers in terms of their ability to...
just the manufacturer, I think everybody's taking a pause, their inventories probably went up in the past, they're probably trying to manage that inventory down and much more cautious about their own outlook.
Yeah, Greg, it's very much what you'd see in the newspaper every day. People are having to spend more money on gas and food. And basically, they're cutting back on certainly on discretionary items, which is particularly impacting the dental industry. So that's a major second half effect for us as that rolls through the supply chain. And again, we view that as temporary. The outlook for that business is quite strong.
But undoubtedly it's projected to have an effect in the second half of the year. Hopefully with inflation peaking soon, that'll start rolling back. But it's prudent at this point to assume it just lasts throughout the year and we go on. The other effect clearly is with COVID spiking up in different parts of the country and the world, it's nudged out. The treatment in hospitals for COVID patients is nudged out discretionary.
operations, especially around orthopedics. So that outlook has flowed somewhat too. And it's much like the initial spike in COVID did back in late 20 and early 21. So we'd expect it to be transitory and somewhat highly transitory, but you just don't know how many of those variants are still out there. So instead of looking at it quarter by quarter, which we'll continue to do, we just assumed this condition lasts throughout the year and we updated our guidance.
That's helpful. I mean, Jeff, presumably the dental that you're alluding to is more of the big project type stuff. I mean, do you have any visibility into, you know, whether that's just getting pushed out to next year or is it unclear still at this point?
Yeah, I think the demand is going to, I mean, just my opinion, Greg, demand is going to remain for those products. They're very popular. And I think people are just having to make short-term decisions with, you know, with gas and food becoming so expensive. And I use that symbolically. I think everything is becoming more expensive. People have had to just put off things that are, you know, are truly discretionary, but still highly valued. So all of the feedback we get is that it's temporary and it will pass.
the growth outlook. In fact, if you listen to that customer base, which they are public companies, you can listen to them. What they say is their long-term outlook is still for very strong double-digit growth. And the numbers I've heard are 20% to 30% that they talk about publicly. But for this year, it's been ratcheted back to low double digits, high single digits. And that ripples through the supply chain. So we see no other indications that they're planning for long-term dampening.
I mean, all of the other discussion and things are all around continued strong growth. It's a very short term factor.
Understood. And I guess last one, I mean, just in light of everything going on, it's surprising that you're raising your OpEx guide. I mean, I guess, going forward, how should we think about, you know, investments on a go forward basis as we get into next year and beyond?
But no, it's good questions, Greg. It's funny when challenging economic environments hit, I think historically you see companies do one of two things. Obviously everybody becomes more prudent and they watch their spending. But for folks with a strong balance sheet, I think you see them saying, look, some of the weaker competitors in our space are going to really struggle in this environment. They weren't billed for short-term headwinds.Americax.org
And with our scale and our balance sheet coming into the year, we were very well equipped to deal with a downturn and continue investments. So we're able to pick up talent, we're able to pick up, you know, I look at this DP Polar group, an outstanding group of people, that, you know, small companies struggle in these environments because they have to rely on longer-term revenue projections and that becomes more variable and they burn through their cash. So…
So in essence, for bigger companies like ours with a strong balance sheet, it gives us an opportunity to really kind of double down and say, we're gonna come out of this really strong. And when you look at our infrastructure investments, if you make the assumption you're coming out of it strong, you better have the infrastructure then to support the growth. So that's why we're maintaining the infrastructure investments we're making. So now, I won't tell you we're not looking at all of them and we're cutting back where we can and we're managing through our costs. We definitely are. We're gonna run a good business.
We believe in running a profitable cash generating business, but there are certain periods of time where you have an opportunity to really move ahead, and I think that's us right now. If you look at regenerative medicine, which are really organic investments at this point, and you look at this high speed production process the DP brings us, those types of investments really pay dividends in the long term if you can maintain them. So while everybody's struggling, it's our chance now to really kind of push ahead.
OK, good. All right, well, best of luck going forward. Thanks.
Thanks, Greg.
Your next question is coming from Troy Jensen from Lake Street Capital. Your question is coming from Troy Jensen from Lake Street Capital.
Hey, gentlemen, thanks for taking my question. Maybe to follow up on Greg's.
question line here. Supply constraints, it seems like it's been three or four corridors now that Wayne and Jay talked about. Six to eight million dollars of demand that you guys can fulfill and to me you guys would be building a big backlog right with these with these orders that you can't ship so you factor that in with
you know, just kind of the reduction of about $50 million in revenues with a growing backlog. I just wonder if you can touch on, you know, what's happening to these orders, and is the backlog visibility improving at all? It's an insightful question, Troy, as always. Yeah, so backlog is building, there's no doubt about it. And we don't usually talk about those numbers, but there's no doubt about it, backlog's building. We were able to, we left more on the table in Q2 than we did on Q1. And we don't want to use that as an excuse for the second half.
because I do think that things are going to plateau and then get better. But we thought the second half would be significantly better when we entered the year, and at this point, we're going to wait until the data says it is better to really talk about it. So in terms of the durability of orders, when you push orders out, obviously there is a fraction of people that may choose to cancel. But by and large, we're not seeing any diminishing of demand. Folks are willing to wait for product.
And part of our move in manufacturing, Troy, to bring our largest contract manufacturer operation back in house.
is we really believe we can better control it and meet our delivery commitments and manage our supply chain. It's a big move for us. It required a lot of planning. But especially when times get tougher, you just don't get the attention from big contract manufacturers that you want. And it's much better to run it in-house. So we're making that move. I think it's a permanent move with the high mix of product that we need to provide to our customers. It's a better way to manage the supply chain. So.
We took a big step in July to bring that in house, and I think you'll see incremental improvements going forward. Between that and supply chains truly getting better around the world, I think we'll come closer and closer to meeting our growing demand that we see out there.
All right, thank you. I would just follow up for you, Jeff. You have DP polar. I guess when I think of inkjet, I think more of prototyping, and I think that's because material properties. I believe these machines need to use acrylic materials.
So when you talk about a production machine, are you producing molds? Right? No.
And with your background, Troy, you particularly appreciate this machine. They have a great, by the way, if you go to the DP Polar website, they have a fantastic YouTube video posted there of the machine, and it demonstrates the technology. With their printing technology, their inkjet printing technology, it can actually accommodate much more of our current portfolio of materials that are printed.
So, a lot of our materials will be able to be printable, if not now, in the near future. And those heads can be interchanged with other printing technologies. So you can substitute other printing technologies for those print heads. And they're stationary, which makes it much simpler. And it prints on a rotating platform. So no, no, it is particularly geared toward continuous production and high-speed production of products.
Our estimates are, Troy, anywhere from three to over five times more productive for production applications.
And the doubly cool thing when you watch the video is you can use pick and place robots to put electronics or magnetics within the component as it's printed, which really gives you another capability with 3D printing that you don't have in the current batch processes.
Can I do multi-materials?
Yes, you can do multi-materials. You can build components of all different geometries continuously as you rotate the platform. It is just a fantastic technology. And one of the key pieces of IP here, Troy, is the machine intelligence because the spinning platform is spinning base plate is so large, there's a big velocity difference between the inner radius and the outer radius. So the intelligence of the machine will be able to uniformly print across broad.
across multiple printheads, across a broad radius is really exceptional. And they've been working at it for several years and they've got a great concept that's now been demonstrated in moving in the beta-shib and phase now.
All right, Jeff, well, thank you for that info and good luck on the second half.
Thanks, Troy.
The next question today is coming from Ananda Barua from Loop Capital. Your line is now live.
Hey guys, good morning. Appreciate you taking the questions.
A couple of times I could.
Just sort of going over, going back to sort of the commercial context, what you guys talked about, reduced visibility from some of your customers. Are you also yet seeing a meaningful demand impact from those folks, or are you just sort of getting the softer signals that the visibility is being reduced?
No, there's a concrete fault in demand. I'd say it's still positive. There's still demand out there, but it's definitely at a lower rate of demand growth, the second half that we had originally modeled. The second half that we had originally modeled.
And what they attribute that to, which they pass on to us, is customers are really struggling, their customers are struggling because they're having to spend more on the basics of life than they are in, for example, in improving their smiles. You know, things that are truly optional. And, you know, there's sad extensions to that too in orthopedics where procedures that are labeled optional.
are often very painful for patients, and they really would like to take care of them. But hospitals have been managing their capacity with COVID. They don't wanna overcommit their capacity. So they've discouraged optional procedures, and we factored that into our second half planning. So both of those factors impact our healthcare business. We view both of them very much not as transitory. But I'm tired of waking up every morning saying, oh, it's gonna get better next quarter.
At this point, I think we just said, well, we'll project it through the end of the year. And hopefully it'll be better than that. But I think it's a good time to be conservative and just say these pressures are going to be here for the full year.
That's the right thing to do. I mean, investors are going to see the guy and slow it anyway. At some point, maintaining the guy probably would just be a headwind to the stock. I mean, you don't like to see this move today in the stock, but...
you know, it would be a headwinds apart sensation.
point.
So it's a wise thing to do, Jeff.
we can get about it.
and on the, I guess on the non-consumer adjacent.
kind of verticals, you know, let's say you're the tried and true manufacturing verticals. What's the context there at this point?
So I think, you know, supply chains around the world are trying to catch up, and you probably see this in your personal life. And certainly if you've gone out to buy a car recently, or even a spare part for a car, I had to replace a fuel pump the other day, and it had to be shipped from Germany, and it took weeks. Things that used to take days take weeks. So I think supply chains on the industrial base worldwide are still playing catch up. So there's really nice demand, and with one exception, I'll tell you that, there's really nice demand in the industrial environment because...
Our customers are looking to bring manufacturing closer to home over time, and they want more flexibility. If they're going to do it, they want more automation, they want more flexibility, they want lower cost. So it gives an opportunity for 3D printing to really move in there and demonstrate its capability and production environment. So that's good. That's really a good tailwind to have. The one area of the world that's problematic is Europe , and particularly Germany, which is an industrial powerhouse.
the outlook they have and the concerns they have around the Russian energy supply has caused the government to send signals to watch industrial production, you know, cut, potentially cut back in certain industries and parts and you know if you follow their announcements, the big German industrial firms, you get worried about that because you know come wintertime they need the energy and companies consume a lot of energy. So they're trying to cut back early, store energy, and I think that's led to an overall concern.
a solution and a good outcome there. But I think it's prudent to just have a wait and see attitude.
That's helpful context. Thanks Jeff. I'll see you before there. Thanks a lot. Thanks for that.
Our next question is coming from Wamsie Mohon from Bank of America. Your line is now live.
Hi, thank you for taking me.
Hi, thanks for taking the question. This is actually John on behalf of Wamsie. Just want to quickly touch up on gross margin. I know the full year guide midpoint around 40 implies slight improvement in the margin trajectory in the second half. So just wondering what might be driving that improvement, and when do you expect these headwinds of consumer spending or supply chain constraints to...
to gradually recover. You take the first one, Wayne. I'll take the second one, which will be pure speculation. With respect to the margin outlook, the midpoint at 40%, that's not terribly different than how we did in the first half of the year.
And so I think we need to do a little bit better on one, passing on price increases, and secondly, just in terms of the input costs going up. So it assumes a slight improvement there, but not a huge improvement.
And in terms of when things will get better, you know, we came into the year with just a base assumption, and I think we were very transparent about this, that supply chain issues which impact our gross margins were going to be a struggle through the first half of the year and then they would improve in the second half. I think as we exited Q2, you know, the number of risk issues in the world has probably increased versus the beginning of the year. And as we looked at trends in the second half, we just thought, you know, it's prudent not to really speculate on when things will...
jobs and I think every company is working their way through that and that that will happen in the second half and I think 23 will be better but at this point when we're only dealing with 22 guidance we say let's just assume everything stays as tough as it is now for the rest of the year and I think that's a prudent position to take and that's what we've done.
Gotcha. And a quick follow-up, if I may. Just curious, are you seeing the slowdown more related to the system side or the consumables? Oh, very good question. So it depends on the market and the place in the world. It's a very interesting question, actually. Most of our customers look through this downturn period and they say, OK, let's watch inventory, let's cut down on...
on consumable materials to kind of run leaner. I think in the first half we probably saw people building because they thought the second half was gonna be strong, so they built inventories, supply chains were disrupted, it caused everybody to add inventories. I think in the second half here we're seeing people be a little bit more prudent, if you would, in managing their inventories, their cash position, make sure they don't have too much on hand. So I would tell you, consumables in the second half we're projecting is...
probably a bit softer than or probably and Wayne correct me on this but I think it's consumers the second half we're probably projecting to be to be softer certainly softer than we would have originally imagined
in the first half. In the first, yeah, softer than the first half. And then on the, but on the capital side, on new printers and things, we see that demand remaining strong, basically across the market. So that tells you really basically, customers are looking through this and saying, I'm gonna need the printing capacity, but I may not need the consumables right now in the next couple of quarters. So it hurts our mix, but it does encourage you that the long-term you're installing more printers.
There's going to be more consumption of consumables, including materials and software in the long term, because the capacity will be out there. So that is a good question and thanks for asking it. Any other color on that, Wayne? Generally speaking, our forecast is the second half is about the same in sales as the first half.
Yeah, I originally projected it up with a richer mix. Okay? Okay. Understood.
I think the next question is coming from Brian Drab from William Blair. Your line is not mine.
Hi, thanks for taking just a couple quick questions here. In the second half of the year, do you expect the typical...I know it's hard to forecast anything right now, but are you incorporating typical seasonality in the fourth quarter with revenue from the third quarter?
Yeah, typically, Brian , as you know from following it, there's usually a bump in the fourth quarter. It's a little bit stronger going into the end of the year. I would just encourage you, though, if any year is going to be watered down, I think this year will be. I wouldn't expect there to be—we're not expecting a huge change quarter to quarter. If anything, there may be a slight shift toward Q4 over Q3. Is that fair? Yeah, it's pretty minor. If you look in the prior years, the fourth quarter had a much more noticeable bump.
than we're forecasting right now. Right. And fourth quarter's a ways away. I mean, we could still get it. But again, Brian , we took the approach this time of, let's just assume the world just kind of stays like it is now for the rest of the year. So in terms of building a model, that's the way I favor it for this year. OK. And you gave the industrial and health care change in revenue year over year. I may have missed it. But it didn't.
Did you tell us what dental was, either up or down, year over year in the second quarter?
We did not. We didn't put that out there, Brian . We didn't put that out there.
If you look at it for the first half, dental for the first half is about the same as the prior year. If you look at it for the first half, dental for the first half is about the same as the
And if you look out for the guidance for the second half, dental will be lower than the second half than it was in the first half.
Okay, all right. That really goes back to Jeff's comments about, you know, what's the best way to do
Is there a forecasting their own growth?
If they over forecasted previously and drop it down now, they probably need less printers and a little bit of consumption of less materials. That's just it, Brian . I think they came into the year assuming their growth rates were going to be consistent with prior year growth rates, and they were building fast. So I think they've certainly seen a drop off in their demand due to discretionary spending issues, and that's rippled through the supply chain. So, bought into this year.
There was clearly an effort to manage the inventory on their part and in the face of softening demand for their products here in the second half.
And they've gone out of their way to assure long-term growth rates, they're maintaining the same guidance, and I think that's true. But in the short term, it certainly is impactful in the second half.
Yeah, got it. Understood. Okay, thanks for that color.
You're welcome, Brian .
Thank you. In the interest of time, we ask you to please ask one question from this point forward. Our next question is coming from Noel Diltz from Sceepo. Your line is now live.
Hi there. So I was hoping that you could expand a little bit on how you have to respond from a production standpoint when you have, say, a slowdown with a large customer in terms of what you're expecting from demand. So for example, are you going to have to work through some excess inventory here in the back half of the year, and how should we think about that from a cash flow perspective? Thanks. Thanks.
Yeah, well certainly we have built inventories and I'll give a little color and maybe you can comment more from a cash perspective if we can estimate that. We have built, no doubt we've built inventory. Noel, it's been such a difficult time just making sure you have all the components to meet demand in these printers. So we have undoubtedly built inventory. So now as things slow down we've got to manage through that inventory.
So it probably doesn't help you much when... So Noel, the first half inventories went up about $16 million.
as we sort of reflect, you know, how much of what Jeff was just saying. But as we talked, as Jeff mentioned earlier, we are going to bring some of the manufacturing in-house.
And you'll see in the 10Q that was posted this morning, that meant in July we actually bought another $15 million of inventory. So inventory that previously was on our books now came on our books as part of bringing inventory in-house. So since the 1Q is over we'll focus on onespeaking and it's going to be
Now, we think that number is probably too high, and our goal in life is to work that down a little bit, but you will see inventory going up just for that reason.
And a lot of it will happen, Noel, when the supply chain just becomes more predictable. We've had to inventory a lot of extra parts because you really didn't know what was going to hang up your shipments.
So, and Murphy's Law, you know, we hung up more shipments than we did in Q1 than we did in Q2. So, it's, you know, you never quite have all the right stuff, too much of one and not enough of another. So, that'll work down as supply chains get smoother and more predictable, and I think we'll be more efficient at doing it than we would have in an outsourced model. But it'll take a little time. So, you'll see a bump up, and it is listed in the queue, right? See a bump up in the queue. A significant bump up as we took that inventory back in our books.
from our contract manufacturer, and I think you'll slowly see a bleed off over time, which will be a cash generator for us.
Great, thank you.
Great, thank you.
Thank you. Next question is coming from Paul Chung from JP Morgan. Your line is now live.
Hi, thanks for taking my question. So just on the move back to in-house manufacturing, you know, what percent of the portfolio is kind of moving in-house and where are you moving it? Why is this because you're not your current hedges yet, you know, does it do a good job
Can you quantify kind of the margin uplift from these actions and you know, should we expect kind of higher levels of CapEx kind of moving forward as a result?
There were several, I see you're meeting Kevin's goal of one question. There's several parts of that question. They're all good ones, by the way. One nice thing about this move was the plant is right here in Rock Hill, South Carolina. It's very close to our current headquarters and a lot of our engineers here in town. We took the lease back over ourselves. We took production back in house.
So there is some incremental cost with that, but in general I think we'll manage those costs. We were paying for them anyway to the contract manufacturer with a markup. So I think there should over time be a cost savings there as we drive more efficiency out of that plant. Same thing with the inventory. So it's right here, there is no physical move, frankly, of the production process. It's us taking over the lease again and really running the plant ourselves.
So there's no move required, thank goodness. We're not moving product around. In answer to part of your question, though, it is a very significant part of our polymer-based production. And it probably approaches half. It's a very big percentage, and hopefully that will grow over time. Our industry, Paul, well, I can't speak for other companies, but we offer the broadest range of printing platforms in the industry. It's what our customers want, because they want a large flexibility in solving their application issues.
So we offer, and it's part of our model, we offer the broadest range of printing technologies in the entire industry, from polymers to metals, and we're going to keep that model. What we're doing to make it more efficient is moving to a modular engineering approach, so we have more part commonality between platforms, and we're bringing manufacturing back in-house. Because contract manufacturers notoriously are, they're not as efficient with low-volume, high-mix product lines.
high-tech product lines. So by bringing it back in-house, I think we'll do a better job of managing that and when you combine it with the move to modular engineering, I think you'll see some significant cost reduction over time in our cogs just due to efficiency of design and manufacturing. But it'll take time. Those are usually multi-year efforts, but I would tell you it's a key part of us getting to 50% gross margins is improving the gross margin on our Prairie Lerner let's
Did that cover all the pieces of your question, Paul? Oh, just the CapEx levels. I assume there's going to be a little bump there. These are assembly operations, so there's really very little capital involved. We'll make some CapEx investments in IT infrastructure and things to run the plant better, but it's largely an assembly operation. Yeah, it won't be noticeable. Gotcha, thank you. You're welcome, thanks. Our final question today is coming from Jim Rashudi from the Edelman Company.
see this conflicting thing of short-term headwinds and long-term demand growth, and pretty exciting demand growth, you need to come out of it on the other side ready for that. And so, you know, the desire is to maintain continuity in R&D spending. Our SD&A we look at because our DNA costs are high right now, but a lot of that is geared toward improving our infrastructure and efficiency. So I think you can...
You can quite clearly see GNA coming down in future years, but we've got to invest to make sure our foundation's strong and that we have the platform to support growth. R&D spending, I'm hoping that we can manage that down over time as well, but I would tell you in this industry right now, it's a disruptive industry, and you've got to watch how much you're spending on R&D because those production platforms, when they hit, are going to be very...
sticky sales and you know that's it's going to drive a lot of consumable utilization so you need to have the platforms in order to meet that demand and that's it's one reason we invested in DP Polar is we picked up years of R&D work that's been done with a machine that's ready to go to beta customers now to accelerate that whole process so I'm not giving you a crisp answer I want to I want to be very very selective about R&D
spending and make sure we're doing it correctly. With the leadership we have in place now, I think there's a really nice opportunity to focus and get more out of our R&D spend with modularity and platforms.
In terms of bringing the overall spend down, I really don't want to make commitments on that in the long term. As we grow they're easier to bear, so the scale really helps.
But on a dollar basis, we have to be very careful. G&A, I think we can bring down. And even sales efficiency, we can bring down over time with the scale we have. But G&A particularly, I think we can bring down in future years. Wayne, anything you want to add? Yeah, I guess the only thing I'd add, with DP Polar, that'll make our seventh acquisition a little over last year. And each of those comes with a little bit of SD&A and R&D costs. And so we've added those into the mix.
and most of them are early stage, they're development companies or early stage of commercialization. We're not yet bringing a lot of revenue. So as those guys progress, we'll get a little bit more leverage from those. In the interim, we just need to manage them as best we can.
Does that answer the question? You got it. Sure thing. Yeah, thank you. Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to Dr. Graves for any further closing comments. Thanks, Kevin. So thank you all for joining the call this morning. We look forward to updating you again on our business next quarter, and we wish you all a great day. Thank you.
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