Q4 2022 3D Systems Corp Earnings Call
Speaker 2: Hello, and welcome to the 3D Systems fourth quarter and full year 2022 conference calling webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation.
Speaker 2: As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Russell Johnson, Vice President, Treasury and Investor Relations. Please go ahead. Good morning and welcome to 3D Systems' fourth quarter 2022 conference call. With me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer, Michael Turner, Executive Vice President and Chief Financial Officer.
Speaker 3: 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 post questions via the web. The following discussion and responses to your questions reflect management views as of today only and will include forward-looking statements as described in the 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, we will discuss certain non-GAAP financial measures.
Speaker 3: 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 Grays, for opening remarks. Thank you, Russell, and good morning, everyone. I'll begin this morning with some comments on 3D Systems performance and achievements during 2022, and then I'll share my thoughts on the company's outlook for 2023 and what we'll be focusing on in the year ahead. After that, I'll hand the call over to our CFO , Michael Turner, for a more detailed discussion of fourth quarter and full year 2022 financial results, as well as our guidance for 2023. So with that, let me turn to slide five and start with a quick recap of last year. I'll say up front that while we came in short of our original financial goals set at the beginning of the year, I'm very proud of what our company ultimately achieved, particularly given the headwinds that we encountered during the year, a few of which were common to many companies and one of which was unique to ours.
Speaker 3: It's important that we be as clear as possible about these factors as they directly relate to our view of the year ahead and actions we're taking in response to them. First, while COVID-driven supply chain issues were nagging problems throughout the year, they were no worse than what we had anticipated and they continued to improve throughout the year as expected. Much more impactful, however, was the rapid rise in inflation, which reduced consumer demand for a variety of elective medical procedures. At 3D Systems, we felt this most acutely as a significant slowdown in our dental orthodontic business, which declined significantly as consumers shifted their spending to more basic necessities such as groceries, clothing and energy for their homes and cars.
Speaker 3: This inflation also manifests itself in higher labor and material costs in our products, which created challenges and growth profit margins as our pricing opportunities at times lag the cost trends. Second, economic uncertainty and recession fears led some of our customers, particularly in the industrial manufacturing space, to become more cautious and defer new investments in equipment and inventory. Third, while the COVID situation improved in the United States, economic activity in parts of Asia continued to be disrupted by factory shutdowns and restrictions on daily life. And finally, the tragic war in Ukraine not only led us to halt sales in Russia, but also dampened demand for key European markets in general. And hard to manage.
Speaker 3: who will approve to be a very challenging year. Thanks to their efforts, we had a solid second half of 2022, delivering well in our key customer commitments. One of the most important things to emphasize with regard to 2022 was that it approved to be an extraordinarily productive and strategic year for our company. When you consider the foundation, we put in place for our company's future. Last year, we made it clear that 2022 would be an investment year for three systems. And indeed, we invested during the year and a number of key areas, refreshing our product portfolio, continuing to build a world-class regenerative medicine business, and improving our corporate and regulatory infrastructure, such that it can be leveraged to support future growth. I'm pleased to say that we're already harvesting the benefits of some of these investments in the form of important new technologies, new customers, and new sources of revenue. Capitalizing on these early wins will be a key focus for us in 2023, and I'll speak more about that in the moment. Thank you very much.
Speaker 3: It's also important to note that we invested heavily during 2022 in the highly attractive emerging businesses such as regenerative medicine. While these efforts are largely pre-commercial today, their future impact will become increasingly apparent over the next two years. And while this investment spending impacted our 2022 results, I'm committed to stay the course in 2023 and beyond, pretty well balancing these expenses with efficiency initiatives that are needed in order to assure customers of our ability to support their growth needs over the long term. These investments are absolutely the right strategic decision for 3D systems given the continued acceleration of additive manufacturing and production environments and the opening of entirely new markets as the cost of adoption continued to fall. Work the forefront of this dynamic and well positioned to deliver the value of promises for all of our stakeholders. Moving to slide 6. During 2022, a crucially important investment focus for us was updating and expanding our industry leading product portfolio, including hardware materials and software. In particular, our hardware teams undertook the comprehensive efforts to refresh our most critical primary platforms.
Speaker 3: And they've already achieved several important milestones on this front. Last year, we launched the SLA750 and SLA750 dual, our fastest ever stereolithography printer that's ideal for large format, high volume polymer applications. This all new platform is the largest, fastest, and most precise SLA printer on the market, and has enjoyed an enthusiastic reception from our industrial, aerospace, and automotive customers. Just last week, we announced the BWT Alpine F1 team has purchased four of our new SLA750 printing systems after having extensively tested the product during its beta phase. The Alpine F1 team is currently producing 25,000 additively manufactured parts per year using 3D systems equipment and materials. The team will use our SLA750 to accelerate their bills of complex aerodynamic parts for wind tunnel testing, as well as small composite tools and high temperature bonding jigs. The SLA750's evolution is a perfect illustration of the strategic capability we're building at 3D Systems, the ability to drive growth through rapid innovation by accelerating new products from the design lab to the customer market. And two weeks ago, we introduced a major upgrade to our industry leading jetting printer, the MJP 2500W Plus, which is ideally suited for jewelry and other small precision casting applications.
Speaker 3: Last week, we witnessed the achievement of a major milestone for our healthcare solutions group when a surgical team at Austria's University Hospital in Salzburg
Speaker 3: executed the first clinical implantation of a 3D printed cranial plate manufactured from medical grade peak polymeric materials using a Komovitz printer. This printer was specifically developed for precision printing of medical grade high-performance polymers such as polyether, ether ketone, or peak. Using a Komovitz printer installed at the point of care inside the hospital, the surgical team customized and printed a cranial implant to precisely match the patient's specific anatomical profile and related physiological needs. In this instant it was critically important to not only create a suitable skull plate for protection of the brain, but given the size of the replacement section needed, to also lightweight the unusually large cranial plate.
Speaker 3: by 3D printing it with a porous honeycomb internal structure, an outcome that would have been impossible using traditional manufacturing techniques. This type of personalized, patient-specific, point-of-care implant application that takes advantage of the performance and biocompatible properties of peak material is exactly why we acquired Comovis and are integrating their platform into our overall portfolio. As this technology now comes online, we're uniquely positioned to provide surgeons a full spectrum of printed solution options, ranging from titanium and cobalt chrome for joint and bone replacement, to advanced medical-grade polymerics for spinal, cranial, and other targeted orthopedic applications, each of which is customized to precisely match the patient needs using the digital tools and processes that we've pioneered.
Speaker 3: over the last decade in our healthcare business. These solutions provide better, faster, and lower cost outcomes to patients in a rapidly growing range of orthopedic applications, which will drive sustained, long-term growth in our existing healthcare business. When combined with our Optin software platform, which is now in process, the ability to standardize and automate orthopedic workflows will further accelerate the application of this technology for patients around the world. I'm proud to say we're the leader in this market, and we're making the key investments required to remain so. As we move forward with these and other investments in our product portfolio, our goal is clear. 3D systems will continue to offer the most complete, innovative lineup of 3D printing solutions in the industry, and will remain the partner of choice for customers wishing to unlock the vast potential of true serial scale additive manufacturing. Moving now to slide eight. Another strategically important area of investment focused during 2022 was regenerative medicine. As I've shared with you previously, I believe that regenerative medicine is the next frontier for additive manufacturing. Moreover, I'm convinced that 3D systems is uniquely positioned to lead this emerging growth industry.
Speaker 3: of systemic bile.
Speaker 3: A wholly owned startup company, the celebrity expertise and vascularized tissue printing to develop a manufacturer unique organ on a chip technology called HVIOs, for use in drug discovery and development by the pharmaceutical industry. I want to remind everyone that systemic bio will not be a traditional vendor of 3D printers and materials. In sense, the systemic bio will partner directly with major pharmaceutical companies to jointly develop HVIOs' chips tailored to specific organ and disease sponges. They market those ships directly to pharmaceutical and biotech companies engaged in drug discovery. I'm sure you can all appreciate the substantial increase to our company's baseline profitability that we would drive by becoming a major supplier of customized high-value biotech products to the pharmaceutical industry.
Speaker 3: as well as the re-rating of our company's valuation multiple that could resolve from this change. As we speak, our systemic bio team is actively engaged in commercial discussions with potential partners and customers. I look forward to having more news to share with you on the front in the near future. Just two weeks ago, we announced yet another milestone, a new regenerative tissue program that's a direct outcome of the success we've achieved in 3D printing human organs, scaffolds.
Speaker 3: This internal research and development effort is combining bioprinting technology, biocompatible 3D printing materials, and patient-derived cells to manufacture vascularized hydrogel scaffolds that mimic a patient's anatomy and physiology and can deliver improved outcomes in a variety of surgical applications. The first 3D printed product that we have under development is regenerative breast tissue. This breakthrough application could offer dramatically improved implant-based reconstruction option for millions of women diagnosed with cancer each year. It could also open up a significant new market opportunity the 3D systems is uniquely positioned to address. A key point regarding our ongoing investment initiatives is we're only pursuing R&D programs and new additions to our product portfolio that we believe offer attractive returns and are consistent with our company's mission to provide application-focused solutions to high-value, high-growth industrial and healthcare markets.
Speaker 3: Given its strategic importance, we maintained our heavy investment focus during 2022 despite macroeconomic and geopolitical headwinds, as well as greater than expected softness in our key orthodontic market. Doing so required us to target our investment spending very carefully, control our operating costs, and utilize our strong balance sheet. I remain convinced that the programs we supported during 2022 and will continue to fund in 2023 are building a solid foundation for future growth and profitability that we'll be able to leverage for many years to come. Moving now to slide 9, I'd like to highlight several recent internal activities that have already provided us with important performance benefits and will continue to do so as we move through 2023. Last year, we achieved meaningful success in better aligning our manufacturing and supply chain operations with our company's operating profile and emerging product portfolio. During the second half of 2022, we completed a major step in this process by insourcing
Speaker 3: a significant amount of our polymer printing platforms into our South Carolina manufacturing operations. This transition required us to incur some one-time cost, as well as to take inventory onto our books ahead of need, which in part explains our elevated inventory levels at the end of the year. The change has already improved our gross margins and possibly impacted delivery reliability and product quality for our customers. In 2023, as we accelerate the pace of new product releases and track to our financial performance targets, you have my commitment that we will be laser focused on driving operational excellence and cost efficiency. Yesterday, we announced an important step in this process, a restructuring initiative that will improve our 2023 profit profile by better aligning our European engineering and manufacturing operations for our three metals platforms, streamlining our software organization, which is now consolidated under Okton, and focusing our product portfolio on platforms that bring the highest long-term value to the market. These actions, which is a culmination of integration activities and optimization planning conducted throughout the rest of the world, have been calls for investment
Speaker 3: We're prudently assuming that the dental market slowdown that we experienced in the second half of 2022 will persist throughout 2023. Outside of dental, we see considerable strength in virtually all other markets across our healthcare and industrial solutions segments. Putting this all together, we expect to achieve consolidated revenue growth for 2023 in the mid-single digits, supported by growth rates in the mid-teens for our non-dental markets.
Speaker 3: This growth profile, plus the operational and cost efficiencies that will drive throughout 23, should allow us to generate positive adjusted EBITDA and free cash flow for the full year, excluding any one-time restructuring costs that we may incur. I want to emphasize that our 2023 guidance fully reflects continued investments in growth areas of our business, including new product developments, R&D, and creating a world-class regenerative medicine business, all of which are critically important activities designed to support future growth. As we enter the new year, I've never been more excited and confident in our company's leadership position in the 3D printing industry, particularly given the technology, application expertise, and operational foundation we've worked so hard to put in place over these last few years. In 2023, we're committed to drive financial results in line with our leadership position.
Speaker 3: Finally, before concluding my remarks, I'd like to note one additional topic. Earlier this week, the U.S. Departments of State, Justice, and Commerce announced that these agencies have settled their open investigation with 3D Systems into alleged export control violations by 3D Systems that previously took place between 2012 and 2019. We disclosed this matter in our FCC filings for some time now.
Speaker 3: I believe the settlements, 3D systems will be subject to civil, monetary penalties, as well as certain remedial compliance measures as a part of our three-year consent agreement. The company is pleased to have reached the settlement with the agencies. It remains committed to continuing to enhance its export control program. Looking forward, I'm very proud of the compliance culture processes and infrastructure that we've now established with 3D systems, and that we'll continue building upon. We are fully committed to not only meeting all required standards, but being a true leader in what is an essential element of all complex global businesses today. With that, I'd like to turn the call over to Michael Turner or CFO . Michael. Thanks, Jeff. Before I start, I'd like to remind everyone that 3D systems may very significant to the best tiers of 2021. The earnings release that we issued last night contained tables with non- GAAP measures for letting our four-year 2021 results from which we excluded the impacts. The importance of these divested businesses. Likewise, on today's call, any reference that I make to our full-year 2021 results will be on the same extravess of your basis. The point of this adjustment is to make our 2022 results comparable to our 2021 results on an organic basis.
Speaker 3: However, it's important to make that we completed our divesture program during the third quarter of 2021. Therefore, any tables contained in the last nine charting release relating to our fourth quarter 2021 results, and likewise any reference that I made to our fourth quarter 2021 results on today's call do not reflect any adjustments for the vestures. Turning out of slide 11, I'll start out with a discussion of full year 2022 results for our consolidated business. As you have mentioned, our business encountered a variety of external challenges during 2022. It calls our full year results to come in below what we expected at the beginning of the year. These challenges include FX Edwin's high inflation recessionary fears and the war in Ukraine. And of course, the biggest headwind we face during the year was of inflation and economic uncertainty, reduce the demand for many elected medical procedures. As a result, we experience an unexpected and significant decline. In dental market revenue during the second half of 2022, this was particularly impactful for 3D systems, because dental sales represent a large percentage of our total business. However, after making a midyear adjustment to our 2020-
Speaker 3: $32.7 million compared to the same period in the prior year. Excluding unfavorable impacts of FX, consolidated revenues decreased by 7.6%.
Speaker 3: With the climate revenue, primarily reflects sharply lower full of quarter-dental market sales, partially offset by continued solid product and service demand across other areas of the business.
Speaker 3: Turning now to slide twelve for review of segment revenues for our healthcare solution segment full year, twenty, twenty two revenue, excluding divestitures. And the unfavorable impacts of effects decrease two point nine percent as compared to twenty, twenty one, two other con and our dental market of approximately ten percent started in mid twenty, twenty two outside of dental. We saw healthy growth there in twenty, twenty two and some of the other major business lines within our healthcare solutions.
Speaker 3: including strong sales to customers at 3D print, various types of medical devices, such as orthopedic implants and surgical guides. Additionally, our sales of virtual surgical planning and point of care solutions to doctors, surgeons, and hospitals grew in the fourth quarter. These two areas of our healthcare business often involve medical procedures that are less elective in nature, and therefore have been proven resilient even in times of economic uncertainty. For our industrial solutions segment, full year 2022 revenue, excluding divestitures, and the unfavorable impacts of FX increased by 9.7 percent.
Speaker 3: as compared to 2021 driven by continuous strength and precision microcasting applications and demand for production machines and energy and commercial space applications. Moving now to quarterly segment results. For our healthcare solution segment, fourth quarter revenue, excluding unfavorable effects and backs declined 16.6% year-over-year due primarily to dental market headwinds partially offset by continuous strength in medical devices. For our industrial solution segment, fourth quarter revenue, excluding unfavorable effects impacts increased 1.1%.
Speaker 3: Revenue during the quarter benefited from continued strength and precision microcasting applications for jewelry customers, as well as growth in semiconductors and electronics partially offset by relatively weaker sales to aerospace and motorsports customers, as compared to a very strong fourth quarter in the prior year for both of those end markets. Moving now to gross profit on slide 13. Gross profit margin for the full year 2022 was 39.8 percent compared to 42.5 percent in the prior year. The decrease in margins is due to multiple factors, including 2021 divestitures of non-core assets, inflationary impacts on input costs, freight, and unfavorable changes in product mix due to selling more printers and less materials in 2022 than the prior year. This year over year mix shift impact was particularly impactful in our key identical market vertical. For the fourth quarter of 2022, gross profit margin was 40.9 percent compared to 44.1 percent for the same quarter last year. The factors driving the year over year decline and margin are largely the same as for the full year. But while our margins are down in 2022 versus 2021, we achieved sequential margin improvement in the fourth quarter with a 100 basis point increase from Q3 levels, which followed a similar increase from Q2 to Q3.
Speaker 3: We have been able to improve margins despite challenging macroeconomic environment through a combination of price actions and increase focus on operational excellence, which include the benefit of bringing some of our outsourced production back in house. During the 2nd, half of 2022. Turning now to operating expenses on slide 14. Operating expenses for the year for the full year 2022 increased 11.6% to 331.3M dollars compared to the prior year. The higher operating expenses include spending and targeted areas to support future growth. Including expenses from required businesses, research and development and investments of personnel corporate and corporate infrastructure partially offset by the assets of expenses from divested businesses. The higher expense also includes 17.2M in the crude expenses for legal and other settlement costs that were largely related to the export control investigation that as Jeff mentioned just a moment ago. We have now settled with the US government.
Speaker 3: On an on-gap basis, which excludes non-recurring charges into vestures, full year 2022 operating expenses, or 241.1 million, a 22.1% increase of the prior year, which primarily reflects sending the sport feature grade. For the fourth quarter, operating expenses increased 18% to 82.7 million, compared to the same period of prior year-gaddle. On a non-gap basis, fourth quarter operating expenses were 64.1 million, and 18.2% increase from the same period of year-gaddle. The increase in non-gap operating expenses primarily reflects sending the sport feature grade, including expenses from acquired businesses, research and development and investments in personnel and corporate infrastructure. Moving now to slot 15, Adjustivity to Die, which is defined as non-gap operating profit. Plus, depreciation was negative 5.8 million for the full year 2022, compared to 56.2 million for 2021.
Speaker 3: For the fourth quarter of 2022, a just to be the dollar was negative 4.8 million compared to 17.9 million for the same period last year. For the time in the just to be the dollar reflects all the factors that we previously discussed. One point I'd like to remind everyone of, as I did on our third quarter call, 3D systems profitability during 2022 is significantly impacted by a variety of growth investments, which includes SNA and R&D expenses from businesses that we've acquired over the last year and a half, including often tightened to notice and most recently DDP polar. It also includes investments we're making to build our regenerative medicine business, which is still largely in a pre-commercial stage. We invested almost front in 2022 and will increase our level of investment in 2023. These acquisitions and other investments in emerging businesses are hiding strategic 3D systems and we expect them to contribute significantly to our revenue growth. They've been attending over the years. However, for the time being, these businesses and aggregate have yet to generate meaningful revenue for us. As such, you should expect our just to be thought of, rumbly low our natural potential for a period of time due to the near-term expense impacts of recent acquisitions and investments in pre-commercial businesses. Although, as I'll discuss in amendment, we are forecasting a return to break even a better adjustment on 2023 after a negative year in 2022. In 3PS, 4-year-22, we had fully-deleted loss per share of 96 cents compared to income per share of $2,50,000 for 2021. It's going to be charged just for stop-based compensation and other non-recurring items with detail on the appearance of the earnings release. Our 2022 non-gap loss per share was 23 cents.
Speaker 3: both adjusted EBITDA and free cash flow to be break-even or better. I want to highlight several points related to this new guidance. First, we are not providing 2023 guidance for non-GAIC operating expenses as we did for 2022. However, we have added 2023 guidance for both adjusted EBITDA and free cash flow. We made this change because we believe that these two metrics, one which addresses profitability and the other which addresses cash generation, are most consistent with how investors will evaluate our overall performance going forward. Given that we are now guiding the new metrics, I want to make sure that we have a common understanding on definitions.
Speaker 3: For purposes of this guidance, I define free cash flow as a just to be the dot plus changes in trade working capital, less capital expenditures. Also, they both adjust to be the dot on free cash flow or maintenance, including your restructuring, and all one time charges that we may incur during 2023. And lastly, I want to note that our 2023 guidance fully incorporates two known headwinds. It includes increased operating expenses associated with our continued investment in our pre-commercial, regenerative medicine business, which we expect to be approximately $9 million higher than in 2022. And it also assumes that our dental orthodontics demand will be down roughly 35% versus 2022, primarily driven by customer supply chain inventory reduction initiatives. All settings, headwinds, or the favorable impacts of the restructuring that Jesper to earlier in strong growth in our core non-dental markets. The key takeaway here is our guidance for 2023 into space break even the positive adjust to the dot and free cash flow. After fully incorporating these known headwinds, which demonstrates that the fundamentals of our core business are sufficiently robust to draw solid overall performance for the company. Finally, although we are not providing quarterly guidance for 2023, I want to make a comment about seasonality. In the past, it's been typical for 3D systems to begin each year with a relatively weaker first quarter and then get through with somewhat higher seconds. In the year with a strong Q4, it's customer spluster annual budgets and stock up on inventory should become a year. 2022 do not follow the same pattern due to the decline in our dental markets in the second half of the year.
Speaker 3: as well as other macroeconomic challenges. Based on the current forecast upon which our 2023 guidance is based, we are expecting to return normal seasonal trends as I just described, which should result in a quarterly split of revenues similar to what we experienced in 2021. That concludes my remarks. Operator, we are now ready to open the line for questions. Thank you. Now we can now be conducting a question and answer session. If you'd like to be placed in the question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. For participants using speaker equipment, maybe necessary to pick up your handset before pressing star one. One moment please while we pull for questions. Our first question today is coming from Troy Jensen from Lake Street Capital. Your line is now live. Hey, gentlemen, thanks for the time here. Congrats on results. I thought we're better than feared for the most part, but I'm quick. I just for you to start Michael, a point of clarification. You're prepared to mark. You're right at the end. Did you say that healthcare was down 35% or are you expecting that to be down in 23 at that level? We expect 2023 dental. Our dental mark is to be down 35% year every year in 23. Not over here. Okay. Cool. I got you. And then just thoughts on like share loss. Is that just customer adoption stole that much? Or just shares obviously an important topic for this or this customer's. So just share thoughts on that, please. For that market specifically Troy. Yeah. Yeah. You know, align. That is what I know. It's a no, Troy. There's no share loss. It's strictly correction and the supply chain at this point that if you, if you, you know, watch, watch public company announcements that the impact on that business has kind of moderated now. It's flat down. They've just got to burn off some of that. They had built inventory, you know, pretty aggressively as they expanded their production capability. And then they got, and they got hit with the consumer discretionary spending drop. So they're just clearing inventory. So we've, you know, we've tried to just be very realistic in the year to say it's going to take this. This consumption rate is going to take a lot for them to do that and return at normal levels, but no share loss.
Speaker 3: Okay, perfect. And then, Jeff, you know, we need to talk historically about just the importance of profitability in this industry, especially from the leaders like you guys in additive. I guess I was hoping to get, you know, you thought somewhat the ethics is for like bioprinting and regenerative that isn't generating, you know, revenues here. But as Michael pointed out, there's a lot more than just the regenerative stuff with some of the, you know, traditional additive stuff that you'd lot to, that's kind of pre-revenue. So, just thoughts on, I think Michael, your term was natural potential of the market. And I think the market profile, let me know what you think this business could be. Where is it right now if you didn't have all these aggressive investments? Well, and it's a discussion we have actively inside a lot, especially coming into the years of the budget. You know, it's, you know, for companies that, you know, for companies that are in the themselves as growth oriented companies, it takes no great brain power to just, just broad-based cut costs. Well, we've tried to do in 23. So, what's really going to drive meaningful shareholder value over the next few years? Make sure we've funded that. And then let's be realistic on top line revenue. And then let's aggressively take cost out where we can. So, it's that balance of looking out for the next few years on the adoption rate of additive and key markets that are going to drive growth. You know, really valuable growth. And balancing that off those investments off again. And it's cutting costs and making sure that we're profitable. So, we've just put us taking a ground this year and said, look, we can strike a nice balance. We can, we can have EBITDA profitability. So, we profitable adjusted EBITDA and we can generate positive free cash flow. And remember our balance sheet, we still have well over a half a billion dollars cash on the balance sheet. But I think customers, you know, especially right now, and uncertain times, they need to see you making money. They need to see a particularly generating cash to know that you're going to be around and be able to support them. And you know, especially we're selling now into, you know, relatively conservative.
Speaker 3: large, older line industrial companies that are adopting additive, their conservative and their supply chain designs. So they want to know that we're going to be around and making money. So it's not enough to have cash on the balance sheet. We've got to be adding to that cash. And yet we still have to be investing significantly for long-term growth because Troy, the number of applications and production is just exploding. And not only healthcare, but industrial applications. So now not all of them can you make money at. So you got to be careful there. But we try to pick it, choose carefully. So what you see us giving in guidance is kind of the net result of that is we feel it's really important that we're committed to positive even, the dawn, positive free cash flows this year. And we have accumulated a lot of inventory last year with the insourcing. So we've got a lot of a much upside in terms of working capital reductions. We've got, we're being prudent in our, in our, in our efficiency. And we're going to make sure we deliver on those. And then we're spinning as much as we can still on the growth initiative so we end up with that result. So, and we're generally medicine is taking a meaningful piece of it. But when, when the returns on that investment become public Troy, I think everyone in retrospect to look back and say they were great investments. So we've, we're kind of pleased with the balance. It was a real challenge this year, particularly because the weakness and dental is how fast would that come back. So I think we feel very comfortable with our top line. We're, expectations at this point and we'll update if we change where we're focusing heavily on costs wherever we possibly can. And we're funding key initiatives and we think we have real value in the next few years. Michael, do you want to, do you want to add any more to them? I don't, I don't, I think, I think you have it. But yeah, Troy, so the, you know, that's that kind of covers it any, any questions that is that's a really thoughtful question. And, and it's a, it's a subjective answer. I just feel this year. It's a bit important to show our customers and, and our shareholders that were, were positive and the dog. And then we're going to, and be positive and free cash flow on. And even though we got a great balance sheet, we want to make sure that stays really strong. No, perfect answer. Hey, I'll, one quick question. I'll just throw it out there and see the floor. But, um,
Speaker 3: I thought the fact that you're guiding for these guys to grow 15% this year in England could be a recessionary year is pretty healthy. So just that's not on that. Oh, I'll leave you guys. Yeah. Troy, it's reflective of true production applications starting to really grow. And I'd be nice. We were modeling and mid teams this year. And I think that's going to be early days when you look over the next few years because there's so many folks moving it into factories and factory managers are very conservative people and companies are, but factory manager particularly are promoted because they're conservative generally. And even they're adopting it and moving it into the floor and be it at a moderate pace, but it's remarkable. The number of new applications that are coming on the screen every day in both polymers and metals and customers like dealing with us because we have both and we know we can support them in the world wherever their needs are. So I'm really bullish. I looked at that number two and said, well, you know, can we deliver that? And I based on our customer back analysis. Troy, it's very doable. I believe. Awesome. Awesome, guys. Well, good luck this year. And I think so. Thanks. Troy, please. Stay warm. Thank you. Next question is coming from Greg Palm from Craig, how am I? Is that live? Yeah. Thanks. This is Danny Eger. John for Greg today. I'm hoping to dig a little bit more into Dental here right off the bat. Obviously, big year over your decrease expected here. I mean, is there anything that could make you more bullish? Some.
Speaker 3: that could go right in this upcoming year, whether it's on the system side or the consumable side where maybe that 35% is kind of a base case and there's potential upside to that or you don't have really good visibility for that. That's a great question. It's great to hear from everybody in the coal climate. It's the first thing in the morning. No, it's a great question. So we have a very intimate relationship with the leader in orthodontics today.
And I think if you look at what they state publicly in terms of their business now kind of bottoming, my interpretation, business bottoming, and I think my guess is that's a culmination of many factors you've got wars going on and inflation, but things seem to be kind of stabilizing. So I would agree, I mean, just as a consumer, I would agree that that outlook is probably reasonable. And when you factor in the supply chain, you know, burn down of inventory that they want to accomplish with us, that results in our revenue stream. Is there upside on that? Certainly. I mean, I hope everybody looks in the mirror and says their teeth need to be straightened. That would be great. If there was increased demand that it would flow through with to us very nicely, and particularly probably the second half of the year, as inventory is brought in line, but it is really that simple. How much how much money will people be willing to spend on on straining their teeth?
doing that correction because that's really the driver in the market. And that I think we've been very reasonable in our projection right now. So now there could always be a downpouring the economy again and things could soften. Inflation, I am hoping comes under control and people have the money to spend on optional items like that. But it is really important in people's lives and we're really well positioned if there is some upside there in demand. But I think we've been prudent in our projections right now. Got it. And then I guess industrial and non-dental healthcare, I think that that mid-
you know, teens growth was better than a lot of us were expecting. You know, are those, do you think growing at similar rates or is one out growing the other and how has that changed in recent months? Yeah, and that is probably similar rates. I would tell you that the non-dental half of our healthcare business, the orthopedics and point of care work, that's fabulous. And I think, you know, we've gotten the technology to a point now of broad acceptance and the costs are coming down fairly rapidly so that orthopedic repairs to the human body are becoming, they're, as I said in the, in the prepared remarks, better, faster and cheaper. So you can now have better patient outcomes, faster turnaround times, less hospital time, and all the insularity benefits from that, you can do it at a lower cost and provide a better technology solution. And I think it's, we're really hitting our stride in orthopedic acceptance. And we were closely with the FDA on approvals of each procedure and you got to work through that. It takes a little time.
But the economics and the outcomes are in our favor, and I'm very bullish on that. Orthopedics, I think it's transforming orthopedics, frankly. And there's ripple effects, less inventory in the supply chain, better patient matching of solutions, all of that, all of that you get. And the example I gave, I'm just over the moon about with the skull repair, it brings all the benefits of additive manufacturing together in one example, and it's fabulous. And this will change this patient's life. So it's great. On the industrial side, it, again, brought acceptance. I mean, when you look at everything from rocketry and satellites to new ground transportation with electric vehicles, and even online manufacturing. Now we're not going after a lot of high volume standard components, you know, made out of steel and other lower cost materials. We generally are in the higher volume markets of titanium and nickel.
and some of the other high-value materials and applications. That's the first adopters if you will have added of. But especially these younger companies, where there are fewer design paradigms, they love additive. And if you look at the percentage of additive parts in some of these really progressive industries that are moving fast, it's really high. You're talking 70, 75% of components in some modern vehicles that are not ground-based vehicles, you have the modern flight vehicles for air and space that are made with additive manufacturing. And either directly or indirectly through castings. And it is remarkable. So I think all of the tides are going in the right direction for adoption. And the only thing that can really slow it down is a drop in capital spending by companies if they are worried about cash. But our customers generally are in good shape on cash. So they're willing to make investments to reduce supply chain risk and improve the turn time. So it's right now it's green fields ahead. There's enough to be nervous about in the papers. But unless things get worse, I'm pretty confident in those numbers we put out there.
of the other high-value materials and applications. Because that's the first adopters, if you will, of additive. But especially these younger companies, where there are fewer design paradigms, they love additive. And if you look at the percentage of additive parts in some of these really progressive industries that are moving fast, it's really high. You're talking 70, 75% of components in some modern vehicles that are not ground-based vehicles. You have the modern flight vehicles for air and space that are made with additive manufacturing. And either directly or indirectly through casings. And it is remarkable. So I think all of the tides are going in the right direction for adoption. And the only thing that can really slow it down is a drop in capital spending. By companies, if they are worried about cash. But our customers generally are in good shape on cash. So they're willing to make investments to reduce supply chain risk and improve the turn time. So it's right now, it's green fields ahead. There's enough to be nervous about the papers. But unless things get worse, I'm pretty confident in those numbers we put out there. Yeah, that's all good stuff. Maybe just sneak.
can one more quick one on your inventory levels. I mean, pretty big jump again both year over year and sequentially just update on your comfort levels there and how we should think about that going forward. We're very comfortable going to have enough inventory to make product. Yeah, it's no, when you look at comfort is how much cash do we top in inventory? It is right now outrageous. I mean, we we in-sourced manufacturing. We had to take it under our books and I think it hit us in Q3 and probably a little overlapping Q4. Our inventory level jumped up a lot because the supplier we were using to make product and just an absurd amount of inventory. So we took on the good inventory. We've got it on the shelf now. We'll be working our way through that. It's certainly a source of cash in 23 and it's an important one to us. So we're going to be working inventory levels down to a much more respectable level throughout the year. What I am really pleased about is by taking over that manufacturing. We immediately improved the quality of delivery metrics for our products and it was critical to our customers in their growth. So we immediately did that. Now we'll work on inventory. And I just think our type of business is much better suited for many platforms for inventory. We have a lot of internal manufacturing and that's a trend. We'll probably continue not 100% but in for our low volume high mixed complex products. We have a great manufacturing base here in South Carolina. And we're developing the same in Europe . And we'll we'll see more of that to come.
Got it. Next question is coming from Shannon Cross from Credit Street. Thank you very much for taking my question and good morning. I wanted to ask a bit on the COGS side. Your restructuring program is really targeting OPEX. I'm curious about COGS. I had a, I don't know, more of a meta question, I guess, in terms of the biotech opportunity that you have. Could you maybe think about, I mean, you mentioned, you know, the long has potential to be through, you know, I guess, into maybe human trials in five years. How should we think about...
the business model more fiend over the next few years. I don't want specifics, but maybe if you can talk in generalities about what kind of revenue growth projections there might be or how to think about comparable margin profiles. Just because you really have sort of few separate businesses and I think it would be really helpful for people to frame what they're investing in. Thank you. Yep, so let me, it's on the latter question, there'll be a lot more than becomes probably the next two years in terms of our projections because we have to be able to give some estimate on getting through the FDA and when the, you know, what the uptick and volumes will be.
I'll come back to that part of your question, Shannon, just a second. But on the first one in terms of COGS and OPEX, obviously, we thought it was important this year that we really drive costs out of the business, that we drive efficiencies, that we'd be positive, but adopt performance and positive free cash flow. It's important. It's more than symbolic. Obviously, we have a big balance sheet, so we're fine from a stability standpoint. But it's important that we show you can make money in this business and yet still invest for a long-term growth. So that was our objective. Because we've in-source part of manufacturing, now that's about 40% of our polymer platforms. We have a really nice opportunity on COGS and the supply chains getting a little bit better. And as we launch due products,
targeting components that are more widely available, things that we can really get some better pricing on from a purchase standpoint. So we're working COGS really hard. We're also still working pricing very hard. So I wish gross margins were rising faster than they are. But they are on upper trend. We're going to continue that, which is reflected in pricing and COGS. In terms of op-X, honestly Shannon, we could generate a lot higher EBITDAI in the short term if all we cared about was 2023. We're spending money on refreshing our traditional platforms because Adlib's moving into factories and they want fast, productive, cost-effective machinery. So we've got a ways to go on that. The SLA 750's a marvelous example. And this new version of our 2500 and as a Jenning Plumple, great examples. We've got several more to go. And you'll hear about more of that. So in 2023, those are factory-grade machinery to be good in production. We feel it's important to complete that build out and refresh of our product line, which will largely happen in 2023. And then on the side, we've got this remarkable effort in regenerative medicine. So I'll hit that question next.
And we are spending millions of dollars on that ourselves, and we also have an incredible partner in the United Territory Putics who we're co-developing the organs with. They are, you know, in my opinion one of the best partners I've ever encountered, we are intimately involved with them in developing human organs, which I think will change millions of people's lives. But because of that, Shannon, that core technology, we're able now to take our own investments and branch into other areas, which I believe will bring shorter-term benefits. Like the human tissue work on breast reconstruction, marvelous area, still have to get through up the approvals and all that. But it's just one example of dozens of applications in the human body, which will bring midterm, I think that is kind of midterm benefit. But then the really, really neat area that we started talking about last year was doing printing what for us is relatively small, that the complex, mass-curized tissue specimens.
to sell into the pharmaceutical market. And that's really neat because you can, there's a huge payoff for getting better testing of new drugs. You can take a year or two out of the development cycle of developing a new drug. It's worth billions of dollars to the company that is doing it and it'll participate in that. Obviously the firm of company gets a lot of benefit from that. We'll get some benefit from helping with the testing. But we will, in that case, we will be selling pre-package. You can see these on our website. They're called HVOS, Organ on a Chip, where we print that device tissue. We implant those scaffolds with human cells, either healthy or diseased. And the coolest example on the website is on one end, our healthy liver cells, all kept alive for, for, for, for at this point, weeks and months.
through blood flow, through that chip. Now on the other end is our cancer cells that they want to test a new drug on. So when you make this chip, you can pass blood with test drugs through it to look at the effect on the liver cells and on the other end on the cancer cells in one test. And we can make those specimens shannons by the hundreds and soon to be thousands. We'll be announcing a new facility down in Houston, which will be the first bio factory to make those chips in the coming days. Okay. We're in discussions with a large number of farm companies today and I expect analysts to come out, you know, certainly more than one this year about the use of those specimens.
I'm extremely proud of their remarkable people that are now giving us their insights and programs. And we're trying to really pave the way for commercialization of these technologies. I think it's the benefits to mankind who are remarkable and to our shareholders will be equally important.
So I feel great about that work from every side. That may have been more than you wanted to know, but I'll have to stop myself from talking about it now. I can go off and rest through the day, Shannon. That's very helpful. I get the last thing if I could just touch on it and I realize this was a prior administration, but just with regard to the settlement agreement, I think it was about a $15 million fine, and then you have some more expenditures over the three years. Is there anything else that we should be aware of related to it or that could have any impact on your business to sort of close the loop on it? Thanks.
No, Shannon, we're happy to settle with the government. We're done. That span 2012 to late 2018, early 2019. Since that time, I would tell you we've made tremendous progress on our compliance infrastructure. I've personally been involved with it since 2020 and it's first class and we'll make it even better. The cash payments that we owe the government are spread out over several years. You'll see the details in the cake and in the publication. So that'll know ongoing impact on the business. And then in the top of it, auction and you go way back in this industry, we exited that the business that was largely...
largely the cause of these issues back in 20. I think we closed the deal in 21 through the sale of that Quick Parks business, that ODM business. That was machining work we were doing in China as a part of that business. We sold that business and got out of it. It wasn't the business for us. And we've since that time also, parallel enhanced our compliance program. So I'm very pleased with our position going forward. I'm pleased they've settled with government and it's all behind us. Great. Thank you so much.
the cause of these issues back in 20, I think we closed the deal in 21 through the sale of that quick parts business, that ODM business, that was machine work we were doing in China as a part of that business. We sold that business and got out of it. It wasn't the business for us. And we've since that time also, parallel enhanced our compliance program. So I'm very pleased with our position going forward. I'm pleased they've settled with government and it's all behind us. Great, thank you so much. Thanks. Thanks.
Thank you. Next question today is coming from Brian Drabbe from William Blair, line is now live. Good morning, this is Blake Keating on for Brian . I'll just ask a quick one here, since we're at 10 an hour. I just wanted to talk about you mentioned in the medium term, your breast scaffolding in tissue products. I was just looking to dive into that a bit. Is this the application that you've partnered with COFLAN on? And then along with that, what do you think is going to differentiate your product versus the others? There are some private companies that have focused on breast scaffolding with 3D vial printing. What do you think is going to differentiate that product versus theirs? Well, thanks. Thanks for the question. No, this program is not a new COFLAN. In fact, we developed both of our own materials that we believe are better suited to the application quite frankly, which is why we've gone our separate way right now there. And the college and material may find a home in certain applications. I hope it does. We're not dependent on that all for our human tissue work. The way to think about the breast tissue work is this one example of a large volume tissue applications in the body. So you can think of a lot of trauma examples where someone gets a, you have some damage to their body that resulted in large amounts of tissue being removed. And this, the ability to print the back of your eyes.
scaffolds. That's really what distinguishes us. Vascularized scaffolds, you can then embed human cells into, in the case of the breast tissue work, and I'd say probably many other parts of the body. You're actually using the patient's own fat cells in planting in the scaffold. So these are 100% bio-compatible scaffolds and implanted cells. They're kept alive, obviously indefinitely, by the vascular tour that's printed into it. And it's a natural addition back to the human body of their own tissue material, basically. So we love this solution. I think it highly differentiates us from anybody else in the market. And it's just one example of various parts of the body that we'll end up moving into as we run with this technology. Understood. Thank you for the look at the color. So maybe one more question, Kevin, and then we'll cut it off, okay? Certainly. Our final question today is coming from Ananda Bruel from Moop Capital. Your line is our line. Hey guys, give me an appreciate it. Just real quick. I'm going to ask one two.
given the time, but just sticking with regenerative and you've given a lot of rich contact to the HF. Is there anything that I don't know if you saw, if you've seen this, you may have a seizure in the industry now, but you know, end of last year, over in the UK, it came out that some of some base editing technology has been used to cure certain types of cancers. What's interesting is that the technology isn't yet approved, you know, sort of by the managing bodies, but if you'll find the paperwork and if you can get access, you're able to use it. And I guess the question is, do you think, yeah, do you think before FDA approval? There's certain things that certain of the things that you're working with in regenerative or even in orthopedics. That's what comes to market. The use is proof, we could see proof of concepts even prior to being FDA approved. That would up.
to help people, you know, kind of lay a trail of bread comes out to where this is going. Yeah, it's an excellent question because full and formal FDA approval obviously takes a lot of time. There's breakthrough designations. There's the, I'm spacing the term right now, but there's the sympathetic approvals where a patient is going to die if they don't get the treatment. There are those categories that the FDA and similar bodies overseas has in order to allow new technology to get to market faster. Obviously we go through all of the work to get full FDA approval, but wherever we can get breakthrough designation or early use designation, for example, this hospital in Austria, you know, very early use of this commos technology for an impromptu or skull implant, which changes patients. And it was, you know, and really from our perspective of printing was very low risk of application for us.
And it was great to get it out there and get it used. So that all helps in getting final regulatory approvals. But to your point, and it's a good question, is there are pathways you can follow to get early designation? If somebody's going to die or for other reasons, if you get breakthrough designation, that you can get it in there. Part of the reason that I wanted to really form our medical advisory boarders to get guidance on that, is where do we have an opportunity to go for early approvals for fast tracking any of the technologies? Obviously balancing risk with patient outcomes, to make sure we gather the right data. We're spending a fair amount of money on animal testing now, which we haven't.
talked about, you know, much at all, probably, but we're doing a fair bit of animal testing on a variety of these technologies in order to gather data to know when we're ready to go to the regulatory bodies and then, you know, what kind of depth we have to go to in discussion. So we're going through all the right, right steps to get there and hopefully, and we will get them the market as fast and as safe as we possibly can. Again, the first things to market, I would expect will be the pharmaceutical applications for drug discovery. The what we're producing in these Vascularized chips in NADA is remarkable. The ability to keep cells alive for months is an incredible step forward in the ability then to test, to develop big statistics on new drugs. So that's our goal and soon to be our capability here, that we'll be talking about. After that, human body applications, either for tissue or to your point or orthopedics, and then beyond that in the future, obviously organs. That's where we're headed. I think it's a brand new industry and I feel great about our leadership position in it.