3D Systems Corporation Q1 2023 Earnings Call

Hello, and welcome to the <unk> systems, Q1, 2023 conference call and 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. As a reminder, this conference is being recorded.

My pleasure to turn the call over to your host Treasurer, and Vice President of Investor Relations. Mr. Mccloskey. Please go ahead Sir.

Good morning, and welcome to <unk> Systems' first quarter 2023 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, and Andrew Johnson, Executive Vice President Chief Corporate Development Officer 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.

It 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.

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 in our press release and <unk>.

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 2022 and with that I'll turn the call over to our CEO , Jeff Graves for opening remarks.

Thank you Nick and good morning, everyone.

Again this morning with some comments on the major drivers of our first quarter performance and how we anticipate the rest of the year unfolding at this point.

I'll include progress, we've made against some key strategic objectives, including partnerships and initiatives that we previously announced.

After that I'll hand, the call over to our CFO , Michael Turner for a more detailed discussion of our first quarter financial results and our updated guidance for 2023.

With that let me turn to slide five and start with a quick recap of the quarter.

In describing our current market dynamics, we can best be characterized as being strongly bifurcated with one specific market being soft and the remainder being strong.

I'll begin with a negative and that being the dental orthodontics or more specifically the clear dental liners business.

As most of you know we have a particularly strong position in this market.

As we've said for the last few quarters demand has been severely impacted by reduced consumer discretionary spending.

Inflation has forced many consumers to focus on meeting life's necessities, such as food gas and rent.

While we're pleased with this market seems to be stabilizing it has yet to return to growth.

The economic impact on the actual market demand has been our customers desire to reduce inventory levels, which had grown significantly during the COVID-19 period. We expect this pressure to continue through mid year, and then moderate as supply and demand come back into balance in the second half. This assumption is reflected in our guidance for the year.

You had provided a deep recession can be avoided as inflation now moderates, we would anticipate this market returning to growth in 2024.

Turning into the orthopedic half of our health care business.

The story becomes very positive there.

This market continues to be robust, which in Q1 translated again into strong double digit revenue growth as many of you are aware of <unk> systems was a pioneer in this field beginning with the creation of customized medical models in the early two thousands.

That time, expanding significantly into human musculoskeletal applications based on our rapidly growing orthopedic expertise.

This transition from simple medical models into applications within the human body was the Titanic undertaking for our company spanning many years with success requiring not only the development of compelling technologies with the establishment of a world class process disciplines and quality practices accompanied by the required regulatory approvals that are the <unk>.

This inventory for any company that wishes to participate in this market.

Fast forward to today, we're a recognized leader in cranial maxillofacial and spinal orthopedic applications and over the last few years, we've expanded our focus to include many additional indications and the human skeletal system.

This expansion in our orthopedic business is a key element of our strategic growth plan for the future.

Success in these new orthopedic indications requires first so we continue to advance our printing hardware and materials systems.

Which now fully encompass both metal and polymer platforms and to do so with increasing software integration that incorporates AI and machine learning to optimize the full medical workflow.

From receipt of the patient's digital imaging data through the surgical planning process with the patients surgeons and then to the printing and finishing operations, which provide patient specific medical implants. We.

We can produce these implants within days of the initial request and do so while manufacturing custom surgical instrumentation and cutting guides to aid the surgeon in the or.

To date, we have used this process to bring life changing orthopedic repairs to well over 150000 individual patients and the number grows daily.

Often an example is helpful and fully converting the nature of what we do if you look at the left hand side of slide number five you'll see an actual digital image of a patient suffering from a cancerous tumor in their leg and pelvic region.

Traditionally this type of tumor would've been removed by amputation of.

Much of the surrounding bone structure, which in this case would have cost the patient one of their limbs and part of their pelvis.

Through the use of our Dichondra print and Freeform software our engineers working with the patient surgical team, we're able to design and print the needed high precision cutting guides in surgical instrumentation that allow the tumor to be carefully removed.

And then in the same operation install a custom patient specific <unk> titanium implant to reinforce the remaining bone structure, thereby avoiding amputation balloon.

This complex implant was manufactured using our Austin <unk> expert printing software in combination with our <unk> hundred 50 metal printing system.

This entire process from first interaction with the patient data the completed medical device was done in days, allowing the patient to receive the treatment. They so badly needed shortly after the first diagnosis.

While the technology itself is remarkable speed and economics of this entire orthopedic workflow has now improved to the point of large scale adoption.

Even with this progress we continue to challenge ourselves to push even further on capability and cost efficiency. For example, this year, we moved from a single laser metal printing platform to a dual laser system with dramatically improved production throughput and we've recently expanded from a focus on titanium materials, which are preferred for many applications in the human body.

Two a special cobalt chrome material that's needed for use in articulating joint repair and replacement such as the human need.

We're the first to do this through three D printing, which opens the door for a much greater degree of economic customization enjoying replacement.

Which is becoming a common need in an active aging population.

Moving to our industrial solutions group. We're also seeing continued strong demand driven largely by automotive electronics and military aviation and space markets.

In the electronics market I would specifically call out electrical connectors as a leading application for additive manufacturing, which can be attributed to a very high number of parts types that are geometrically complex and produced at lower volumes on a or on a very regular basis.

These types of applications benefit greatly from the avoidance of hard tooling and dedicated injection molding capacity for their manufacturer.

While our development efforts for connectors has been progressing behind the scenes for some time in the first quarter. We were pleased to announce publicly our collaboration with GE connectivity, a world leader in connectors and sensors.

Our joint program focuses on developing and additive manufacturing solutions to produce electrical connectors that meet stringent regulatory requirements at scale.

For use within our partners Global factory network.

The production solution illustrated on the right hand side of slide five comprises of Monotype modified figure for modular printing platform unique polymeric materials that have been the first known in the past the UL standards for flame Retardants.

Our <unk> software and our global services capability.

The Midland to the success has been a newly developed total polymer that we engineered specifically to meet <unk> connectivity requirements for performance and cost.

And in parallel the hardware performance to produce the precision in speeds at an industrial scale.

This is a great example of how we're partnering with industry leaders in key markets to accelerate innovation and build competitive advantage through additive manufacturing solutions. We believe Te connectivity has the potential to become a significant customer for us and we're honored to be their partner.

As 2022 was an investment year I am pleased to address the progress we're making on some of our recent acquisitions.

Moving to slide six.

Last quarter, we shared the achievement of a major milestone for our health care solutions group when a surgical team is Australia's University hospital in Salzburg executed the first clinical implantation of the three D printed cranial plates manufacturer for medical grade Pete polymeric material using a <unk> printer.

This printer was specifically developed for precision printing of medical grade high performance polymers.

Seed early approval by the European regulators for this procedure and a similar process is underway in the U S with the FDA.

Using a <unk> printer installed at the point of care inside the hospital the surgical team customized printed a cranial implants to precisely match the patient specific anatomical profile and related physiological needs a.

A few months after the procedure was performed were thrilled and Mr. Turner.

Mr Turner and the belief that this is brought to him.

We are deeply indebted to the talented surgeons and staff at Salford University Hospital, we brought together for the first time, our unique software hardware and materials technologies and a point of care hospital setting to address the specific needs.

We believe that the success provides a realized demonstration of the potential for enhancing orthopedic outcomes, who use a comprehensive digital manufacturing technology within a hospital setting.

Our focus on point of care implementation of these integrated technologies as a key priority for our company.

And one that we believe will bring significant benefits to patients around the world in the years ahead.

Here's a picture of Mr. Trummer several weeks after the surgery, where his recovery is on track and very apparent for all.

Now turning to slide seven.

The next area I want to update you on as the recent news regarding our software division, often which we acquired in 2021.

<unk> unique cloud based AI enabled manufacturing operating system accelerates deployment in automation and digital manufacturing in production environments to improve efficiencies and reduce cost.

Ocwen recently announced the first comprehensive update on the adoption of this system in the dental market.

To date several hundred dental labs have now adopted ottens manufacturing operating system worldwide in the first 18 months of its availability.

With dental lab is now migrating quickly to the opt in platform to manage their operations customer feedback has been overwhelmingly positive as demonstrated by churn rates ranging from negative 20 to negative 30% for the software meaning that customers are not only renewing their initial licenses that are rapidly expanding the number of licenses or using it each.

Are there operational sites.

Production efficiency gains exceeded 50% in the first year of implementation and.

And the ratio of lifetime value to customer acquisition cost of over five demonstrates the value creation through Oct and adoption.

Now moving to slide eight I'd like to provide some updates on some of our most recent exciting R&D efforts.

Another strategically important area of investment focus last year was regenerative medicine.

And we had announced the formation of systemic bio a wholly owned startup company, that's leveraging our expertise in vascularized tissue printing to develop a manufacturer unique organ on a chip technology called <unk> for use in drug discovery and development by the pharmaceutical industry.

Systemic bio will partner directly with major pharmaceutical industry partners to jointly develop <unk> chips that are tailored to specific Oregon and disease functions and then market those ships directly to pharmaceutical and biotech companies engaged in drug discovery.

I am very happy to announce today that we've signed our first contract with a major pharmaceutical company for application of our <unk> chip technology.

While we do not yet have permission to disclose the company name in this program, we will establish a bio printed vascularized tumor model to be used for drug discovery and development efforts in oncology.

Given development timelines in the industry, our efforts will seek to accelerate the development of new patient specific therapies using these tumor models.

This will be a multi year collaboration to test the responsible a patient's tumor to a variety of anti cancer therapies through the use of our <unk> technology.

We're extremely excited about the potential for the widespread adoption of our <unk> for <unk> Chip technology and view. This initial contract as early initial validation of our approach to reducing the development cycle for new drug therapies.

Turning then to slide nine.

As we've stated before a key point regarding our ongoing investment initiatives is that 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 mission to provide application focused additive manufacturing solutions to high value high growth.

Industrial and health care end markets.

As you saw in our announcement last week, we were very excited to enhance our selective laser centering our SLS offerings with the planned acquisition of <unk> matter with their gravity is central in a central plus an enterprise line of SLS printers. We met her brings affordable turnkey closed loop solutions that make SLS.

Assessable for smaller production environments, enabling a broader population of potential customers, whose manufacturing space is limited.

In addition, their portfolio of over 20, Sos material types enables them to address a wide range of applications for industrial medical device and academic research markets.

Importantly, we met our emphasizes a new standard for customer ease of installation and use and a focus on environmental sustainability with its unique integrated powder handling and recycling system.

While having a robust internal development program can meet most of our emerging customer needs. We view strategic bolt on acquisitions, such as re matter with their unique printing technology is having a smaller but important role to play in our continued expansion into new customer specific applications across our two business units.

We expect to close that we met a transaction in early July .

Shifting to our internal development efforts I am pleased to share that our announcement late late last year of the revolutionary SLA 750 dual with full world's first synchronous dual laser SLA printer continues to garner excitement and remains on track for a summer release as a reminder, the trailblazing SLA doable.

Delivers twice the speed and three times, the throughput of competing platforms dramatically improving productivity and cost efficiency.

Industrial printing system as confirmed through our extensive beta testing with select customers will be the industry leader in print size speed accuracy resolution <unk>.

Delivering parts with unmatched surface finish and mechanical performance.

On leverage with the Ogden manufacturing platform. It unlocks the true power of seamless integration on the factory floor.

We believe that this system will become a mainstay in industries, such as transportation Motorsports consumer technology, and durable goods manufacturing services aerospace and healthcare for many years to follow.

In addition to introducing our newest growth initiatives I believe it's good discipline to provide an update on some of our previous announcements.

Particularly if there is a directional change to note.

Along these lines in February of 2021, we announced the collaboration with Jabil Corporation, a longtime customer and partner for the development product we called Roadrunner.

Using extrusion technology this product aimed to offer several benefits to industrial markets, including increased speed high temperature material capability.

Larger build area and enhanced precision yes.

With road runner was the customers would use a standard filament input material much of which jabil was capable of supplying.

However, as this program got underway, we continued studying alternatives, including moving to a pellet extrusion technology, which offer the potential for a much lower material costs.

As we dug further we discovered a small company in Colorado called tightened robotics that have developed such a printing platform and.

In short order, we elected to acquire tightened and integrated into the <unk> systems family of printing platforms and operating systems.

Net result was a quicker share of path to market for a machine that from the outset that many of the attributes we were looking for in the road runner system.

Today, the tightened platform is in full production and is rapidly gaining customer acceptance across several significant industrial markets.

Since acquiring this talented group of engineers, we've continued to build on the tightened platform reinforced with technology that we both developed ourselves and gleaned from our subsequent acquisition of <unk>, which as I mentioned earlier has a novel extrusion technology for high performance medical and aerospace grade polymers.

Both the <unk> and tightened platforms are now being integrated and expanded upon through our internal investments to continue our move into the broader extrusion market.

Stay tuned for future developments in this area.

As there very well may be a sign of road runner in the offering.

The second initiative that we'd like to update you on is the partnership we announced in June of 2021.

Which focused on the bio printed regenerative soft tissue matrix for use in breast reconstruction.

While the initial exploratory efforts of our partners results were promising as the program progressed material sciences in our laboratories independently developed alternative materials, which we believe will better suited for both breast reconstruction and other soft tissue applications.

As such earlier this year, we decided to pursue these applications by ourselves and have continued our own efforts in the printing of vascularized soft tissue using our unique materials and printing technology. We detailed this effort in our release, we made in February of this year.

The human tissue program is showing great promise in the large animal studies that we've completed to date.

Because we have subsequently announced we remain excited about this suffered in the rapidly increasing number of human applications that continue to emerge from this program.

And finally regarding our acquisition of the high speed rotary printing platform VP polar <unk>.

Moving along quite well with the first beta phase units that will launch with select strategic customers and key industrial and health care growth markets. We expect the first of these units to be installed in late summer and more to follow in the fall.

These units are specifically designed for high speed printing of high volume high mix polymer components.

We will update you once again as we gain customer feedback from this initial trial launch.

Now moving to slide 10.

Before turning the call over to Michael I'd like to update you on our outlook for 2023 and beyond.

Let me make a very clear statement of our operating philosophy.

As a leader in our industry. We believe it's important to demonstrate that we can deliver both exciting growth and profitability level sufficient to support the ongoing investment requirements that are needed in order to meet rapidly expanding customer applications.

As such earlier this year, we announced a restructuring initiative to 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 often.

Focusing our product portfolio on platforms that bring the highest long term value to the market.

We're progressing very well on those fronts and as we announced last night, we've now expanded our restructuring efforts to reduce head count by approximately 6% across all functions of the company.

We feel it's necessary to prudently manage our cost structure in step with the uncertainties associated with the broader macroeconomic environment.

And most importantly, our previous investments in productivity are now, allowing us to harvest more cost efficiencies as the year progresses.

As Michael will detail for you later, we have increased our guidance to deliver $2 million or more in adjusted EBITDA in 2023 with no change to our outlook for revenue non <unk>.

GAAP gross profit margin and free cash flow.

In closing I'd like to address a question that tourism from some of our analysts that follow the company regarding our historic core health care and industrial businesses.

And the additional investments that we're choosing to make in regenerative medicine.

Which is not generating material revenue for us today.

Very specifically were being asked why particularly in these challenging times, but we're choosing to make these investments.

First let me be as clear as possible about the magnitude of our investment.

Including within our full year 2023 guidance is a plan to invest between 10 and $12 million and systemic filed and our other regenerative medicine initiatives related to human non Oregon tissue development.

In addition to this we're also receiving significant external support for human Oregon development efforts from our partner United Therapeutics to.

To state the obvious if we were not committed to this effort our EBITDA performance will be much greater this year.

The reason that we're making these investments is very simple.

We have an incredibly unique and exciting opportunity to drive unprecedented change in the field of medicine.

And in tens of thousands of People's lives, who can benefit from this technology.

It is an opportunity we are uniquely positioned to unlock with a series of highly strategic investments would have the potential to drive significant change for the future of the company and more importantly, a life changing impact on society and.

And we're fortunate to be in a position to fund them with our strong balance sheet and profit generating businesses inherent in our core portfolio the.

The benefit for all stakeholders, including our shareholders our employees.

And importantly, the People's lives that we will impact will be exceptional.

As to our timeframe I'll remind you of the goal with our partner United Therapeutics CEO Martine Rothblatt stated at last Summer's CNN sponsored life of south of that.

But within five years, we will have a printed Oregon and human clinical trials.

Today, we're a year closer to making this goal a reality.

You can expect more announcements related to our human in pharmaceutical efforts in the future.

Until then our core businesses are thriving we're making the progress needed in each key market to ensure that we retain our leadership position.

And with that one.

Turn the discussion over to Michael for more detail on our financial performance and our outlook Michael Thanks, Jeff before I start I'd like to make a few comments regarding seasonality and year over year comparisons as an important backdrop to the discussion on slide 12 as I commented during our last call. It has been typical for three D systems to begin each year with a.

Relatively lower first quarter, then go through somewhat higher second and third quarters and for this year with a strong Q4 as customers cluster annual budgets and the stock up on inventory for the coming year.

2022 did not follow the same trend primarily due to a shift in demand patterns in the dental market.

Therefore, we would expect the distribution of quarterly revenue for 2023 to be more in line with the distribution of quarterly revenues in 2021 as opposed to what we saw in 2022.

Safe rent more of let's turn now to our first quarter revenue summary on slide 13.

Our results in Q1 came in largely as expected with dental softness impacting our growth on a year over year basis, excluding the expected decline in sales to our dental customers, we experienced solid growth across our businesses demonstrating consistent growth in demand for the rest of the end market served by our industrial and health care solutions segments.

Which I'll detail for you shortly.

Q1 revenue of $121 million decreased eight 8% compared to the same period last year Q1 revenue on a constant currency basis decreased six 5%, reflecting the anticipated weakness in the dental orthodontic market Q1 revenue from our non dental markets increased 12% on a constant currency basis compared to the.

The same period last year.

Specific to our segments healthcare solutions revenue decreased 24, 3% to $48 $7 million compared to the same period last year.

Healthcare solutions revenue on a constant currency basis decreased 23, 4% versus the prior year due to continued softness in our dental orthodontic market as expected, which was down approximately 46% versus the same period in the prior year.

Our dental orthodontic market had a particularly strong first half of 2022, followed by a significant decline in the second half of 2022 broadly due to adverse macroeconomic conditions in our last earnings call. We mentioned that we expected this market to be down approximately 35% in 2023 and that view remains unchanged today.

For the remainder of our healthcare solutions business revenue from our non dental markets was up by more than 22% on a constant currency basis versus the same period last year and we continue to expect double digit growth in this business driven by strength in both the orthopedic market and the CMS space on the basis of increased market adoption in <unk>.

Typical reinsurance.

Turning now to our industrial solutions segment, where revenues increased five 6% to $72 5 million compared to the same period a year ago as.

As we noted in the past our industrial solutions segment is more exposed to FX rate movements on our healthcare solutions business, excluding the impacts of FX industrial solutions revenue increased by over 9% versus the prior year driven by strong performances in consumer auto and OEM academic and research and electronics and connectors.

Jewelry and service bureaus continue to be key markets for industrial solutions.

Moving now to gross profit on slide 14.

Gross profit margin in the first quarter of 2023 was 39% compared to 40% in the same period last year.

non-GAAP gross profit margin was 39% compared to 41% in the same period last year.

The decrease was primarily due to lower overall sales volumes resulted resulting in reduced fixed cost leverage unfavorable sales mix and input cost inflation on a sequential basis non-GAAP gross profit margins were down by approximately 200 basis points due to normal seasonal trends with the lower volumes driving lower fixed cost leverage with <unk>.

Maintain our view that full year gross profit margins will be between 40% and 42% for the year.

I'll speak more on seasonal impacts the gross profit margin shortly.

Moving now to slide 15, adjusted EBITDA decreased by $12 million to negative $10 million in the first quarter of 2023 compared to the same period in the prior year.

The decrease in adjusted EBITDA, primarily reflects lower sales volumes in our dental and orthodontic market and inflationary impacts of our input costs as well as spending in targeted areas to support future growth, including expenses from acquired businesses research and development costs as well as investments in regenerative medicine and corporate infrastructure.

Sure.

Net loss of $29 $4 million resulted in a diluted loss per share of 23, <unk> and a diluted non-GAAP loss per share of <unk>.

The year over year EPS decline reflects all the factors that we've previously discussed.

Turning now to slide six for an update on our balance sheet.

We ended the quarter with approximately $530 million of cash and short term investments on hand, which was down $39 million from year end levels. The decrease resulted primarily from the normal seasonal use of cash from operations of $28 million capital expenditures of $9 million in taxes paid and net share settlement of equity awards.

$2 million we.

We continue to have a strong balance sheet with sufficient cash to support organic growth and our investments in our pre commercial businesses and we maintain our view that we will achieve breakeven or better free cash flow during 2023.

I'll conclude my remarks on slide 17, with an update on our restructuring efforts and our updated full year 2023 guidance.

Last night, we announced the next phase of our restructuring initiatives to improve operating efficiencies throughout the organization in order to drive long term value creation. The next evolution of this restructuring initiative were targeted reduction in head count by approximately 6% of our workforce, which is being enabled by prior investments made to improve business processes.

Operational efficiencies gained from continued integration of acquisitions completed over the last few years.

We expect this initiative to reduce operating expenses by approximately $4 million to $6 million in 2023, and provide annualized savings of $9 million to $11 million beginning of 2024.

This is in addition to the restructuring initiatives that we announced earlier this year, which we continue to expect we will deliver savings of two and a half of $3 5 million in 2023, and five 5% to $7 million in 2024 and beyond.

We expect the combined impact of both initiatives to deliver six five to $9 5 million of savings in 2023, and $14 $5 million to $18 million in 2024 and beyond.

As a result of this most recent phase of our restructuring initiative.

And our unchanged views on the fundamental drivers of demand growth, we are raising our full year 2023, adjusted EBITDA guidance to $2 million or better and reaffirming our guidance for revenues, which we continue to believe will be in the range of 545 proppant or $75 million non-GAAP gross profit margins, which we continue to expect to be in.

The range of 40% to 42% and free cash flow, which we expect to be breakeven or better in 2023.

I'd also like to note as Jeff mentioned earlier. This guidance includes expected investments of $10 million to $12 million in systemic buyer and our regenerative tissue program. This year.

Before I conclude my prepared remarks, I'd like to talk briefly again about our expected pacing of revenues throughout the year, rather point you to my seasonally my seasonality comments from earlier this morning, as well as from our last earnings call.

The short message is that if you apply our full year sales guidance to the distribution of 2021 actual sales by quarter. It should provide an indicative view of how we would expect 2023 to unfold.

This will also have an impact on our quarterly gross profit margins.

Due to volume impacts on fixed cost leverage resulting in lower margins in the first half of the year and higher margins in the second half of the year.

We believe that the prudent actions, we continue to take are necessary and demonstrate our ability to harvest productivity gains and efficiencies.

Drop organic growth and deliver on our commitments to profitability and enhancing long term value creation for our future.

That concludes my remarks, operator, we are now ready to open the line for questions.

Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. 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 remove your question from the queue.

For participants using speaker equipment than may be necessary to pay comprehensive before pressing star one one moment. Please while we poll for questions.

Our first question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.

Hey, gentlemen, good morning, and thanks for taking my question here.

Maybe quick first for you Jeff.

Strength in industrials.

Is it primarily the MLS or with technologies.

Seamless upset in that vertical.

So good morning, Troy first of all thanks for the question and also the prior questions that you have assets part of the responses that we included in the script. This morning.

Are you asking about what technologies are driving the growth Troy, Yeah, I'd say theres been a lot of strength in metals is what I'm trying to if you look a couple of your competitors it operated in.

Just wondering if thats the Ccs technology, that's benefiting the most and industrials.

Now Encouragingly Troy is pretty broad based I mean metals is done is done well this year and metals clearly additive for metals is is being adopted more widely now and we're benefiting from that I would also tell you, though our polymer platform is doing quite well.

That's full spectrum from SLA, and DLP doing quite well in our new extrusion platform with tightened is doing well so across the NRM JMP platform is in big demand as well. So it's very broad based both from a technology standpoint, Troy and from an end market standpoint.

Glad to hear so and speaking to that.

Q1 was somewhat soft I guess versus consensus.

But you are maintaining full year guidance are you just talking about visibility in the second half and in conjunction Mike If I just take 22%.

In Q1 versus what you guys just printed that gets us like a revenue number of about 50.

You are endorsing specifically here.

Bob.

So the way I would talk about revenues for the year Troy If you just take our.

Previously provided guidance ranges.

545.

575, just take wherever you want along that path and just kind of plotted against the 2021 distribution of quarterly revenues and that's largely how we think it will pulled out so.

It literally even the midpoint it would be like.

Yes, you do the math, so it's just taken numbers than usual seasonality.

And Troy <unk> visibility, though in the second half.

Yeah.

What I was just going to comment on choices.

Visits a crazy World right now and we see no reason to change our outlook.

Things are going to kind of go along as planned.

We pay particular attention to the to the clear aligner market to attract that one it's a big influence on us, but and we baked that in what we expect there and we will try to be very transparent on the call about when we expect the rest of the market.

We're assuming basically continues to behave as it is.

It looks like inflation is coming down a bit.

Interest rate and hopefully the interest rate increases will kind of moderate we see increases we're not expecting a booming economy or a big bust, we're kind of projecting along the way. So we will have more clarity after the second quarter, but I think our estimates right now are very reasonable given what we all know about the world by then I think they are quite reasonable and they assume no hurry.

<unk> in terms of economic performance out there by any country or region.

Perfect and thank you for that $10 million to $12 million that regenerative investment that's been put into them.

Good luck guys.

Thank you Troy Thanks Troy.

Thank you. The next question is coming from Jim Ricchiuti from Needham <unk> Company. Your line is now live.

Hi, good morning, its actually Chris Chris Greg on for Jim Good morning.

Chris any different.

Are you seeing any difference in.

Demand trends across geographies any any relative strength or weaknesses that are in the worst case.

Considering there.

Now, we sell primarily into U S and European markets and I would say, it's fairly uniform across both I think they are both experiencing the same kind of economics.

Ups and downs and.

Both Dr and geographies are exposed to St geopolitical risk so theres been no significant difference between them.

Seeing strengthen outside again outside of the dental orthodontics, we're seeing strength across the board in both economies for our technologies.

And.

If you could.

What rate of decline in dental.

Excluding the largest the largest customer.

We don't typically break it out like that.

On the slide of the presentation, you can see that we've lumped all of dental together and it was down recorded 46%.

We maintain our view that there will be down 35% for the full year just given.

Given my comments earlier that they have been all had a particularly strong first half of 2022 followed by a weaker second half so the comps in the first half will be a little a little more negative than they arent going to be in the second half.

So just to give you a little bit more color too.

Clearly, our dental business and I think the dental business for additive in total is really dominated right now by orthodontics.

That will be changing in the next in the next several years here.

<unk> printing really transfer I believe transforms our industry.

And the move into dentures partial dentures, other dental implants, and things, they're kind of in their infancy, right now, but we expect that to be.

This growth driver and over the next few years.

Technology is coming along quite nicely, but today as Michael pointed out it's really dominated by orthodontics.

Okay.

Great. Thanks, and just to confirm the cost savings in connection with the restructuring initiatives those are.

All in operating expense correct.

No.

I mean, I would call it roughly 15%, but they are going to be included in gross profit with the rest in opex.

Thanks, so much I'll take the rest offline.

Alright, Thank you thanks, Chris.

Thank you. Your next question today is coming from Paul Chung from Jpmorgan. Your line is now live.

Hi, Thanks for taking the question. So can you expand on.

How do you think about the GE connectivity.

Kind of partnership.

What the ramp there is some material can be.

During the kind of.

Strong revenues and Cogs.

With this partnership kind of embedded in the initial guide.

Given last quarter or kind of incremental or too early to tell.

Yes, I would say it's embedded in I would say, it's still in terms of development and wide scale acceptance, it's still in early days.

The reason there is couple of reasons, we're really excited about it number one.

The just the basic logic behind moving to additive for connectors and what I referred to is kind of the tail of their of their curve in terms of part types. They literally make make millions of different types of connectors, where there's a long tail on in terms of.

Lower volume high mix complicated.

Polymeric connectors that additive really works well for the economics really work out nicely for us.

And the limiting factor there has been number one throughput on the machines and Thats really gotten there.

Which is great, but also the materials development and process along with that you have to have you have to print a very high precision very reproducible.

And they have to be printed with special materials that are.

Flame retardants and other characteristics as blessed by the underwriters labs UL, so getting all of that correct has taken some time and we are very.

Close to having all of that finished and finished up and be really moving into basically scaling development now with them as a partner. So that's why we jointly went public with our.

Cooperative agreement the ultimate potential for connectors is enormous.

It could that could easily become a dominant.

Revenue stream for us.

The coming years, the pace of adoption will take a few years to ramp.

And they have factories, all over the world to accommodate which gets back to the reliability and robustness of our fleets of printers. So the direction, we're headed as a company.

The address those markets, where youre installing tens or hundreds of printers, you link them together with intelligence software and you put a high value material through those printers to deliver value to the customer those are the three legs of the stool, Jeff to get rights, we've been working with for a number of years now and it's gone to the <unk>.

Point of maturity, where we both wanted to be very public about it and we believe it's a great trend for the future. So it certainly has the potential to become.

A very large customer for us a very large marketplace.

And it's an excellent application an example of additive.

Great. Thank you and then on <unk> can you expand on some of the details there how that decision came about.

What are you looking to kind of gain share who the main competitors are in urea in your view and how your position.

For the project in the U S.

Any details on the installed base.

Yes.

Yes go ahead.

I'm sorry, Paul go ahead finish your question.

No I'll just comment on the revenue margin profile and any other details.

Yes, so so any any mark I can tell you from March separately any market, we're moving into now.

We have a long term goal of having 50% gross margins in any market, we move into with any technology has that potential. So I would tell you. We have every confidence that we can move into that.

Their machine and I am not sure. If you were at the rapid tracer or not I'm told me you were if you saw that unit is really.

Clever unit.

Yes.

<unk> got a small footprint. So it can go in factories of all size you'd obviously you can sell many of them at a big factor, but you can also access smaller factories. It is very self contained.

It has an excellent recycling capability is kind of unique in the industry. It has three times the build volume of other competitive products on the market and there are very few of them today are very few products, where that footprint that access that part of the market. It is three times the volume of the print volume as the leading competitor out there and we can see.

Well at a very very close to the same kind of price points. So we can access the same type of customer base. So we're very bullish on on that technology.

And it's always a choice of make or buy in terms of spending your R&D money. This came along and we initially signed up a selling agreement with them to market the product and it was so popular with our channel partners that we said this is a technology, we really want to own and run fast with so.

We like it a lot it's an excellent group of engineers up in Sweden.

Smart guys that have done a really good job of getting this unit designed and built.

And again, we can give you some more metrics on the machine itself as we publish them, but it's small fast and yet it's got a very big training footprint and the recycling capability is unmatched so it's.

It's really clever so I'm very bullish on that on that.

Higher value proposition.

We've gotten the approvals, we need or they had gotten the approvals they needed in Europe to sell it we're still working our way through the approvals in North America.

That's a matter of timing so we'll get we'll get all of those in hand, the deal closes in July and our objective is to be in market as quickly as we can.

Great and then lastly on free cash flow, where can we expect inventories to kind of shake out as you exit the year.

Are there any kind of risk to write downs, there give me kind of heavy investments in working cap last year what are some.

Levers to kind of drive some upside to guidance, there and Capex guide as well would be helpful. Thank you.

Yes. So thank you for the question, yes, so free cash flow, obviously, we have the build of inventory that heavy investment in inventory.

In the second half of last year as we in source.

So our Rockville, South Carolina facility, we had to purchase some inventory related to that so obviously, we've got a pretty big lever to pull there as we work through that inventory I don't see a significant risk of any inventory write offs.

Constantly evaluating R.

Our inventory of the age of that inventory so no real significant issues, there, but yes that is going to be a big lever that we pull as we work down inventories and we have a dedicated team working on that effort. So we feel pretty good about.

Paul a big motivator to in source that manufacturing was we just believe we can manage that supply chain much better ourselves with the inventory we had to buy when we did that transaction was was large.

We're going to burn our way through this year I think we've got a good plan to do that free up cash from inventory to Michael's point, it's all good inventory, it's virtually all good inventory, we expect very few write offs and we will just converted to cash over time.

Great. Thank you so much.

Thanks, Paul.

Thank you next question is coming from Brian Drab from William Blair. Your line is now live.

Hey, Thank you I have had a really choppy signal for some reasons I hope you can hear me.

Can you talk at all about.

Especially with the new agreement.

Sure.

Have signed or having the worst for buyout.

When.

Do you think this is going to be a revenue generating business are you getting any more visibility to that.

Yeah, Brian and by the way you are coming through just fine yes.

I was thrilled to get our first contract from a major pharmaceutical company and it's one that everybody worldwide is very aware of it as a great endorsement of the technology and we look forward to that collaboration it'll stretch out for several years now.

And the way those companies work. The first one is hard to land in a lot of your accuracy as you might imagine.

He worked their way through that and it's taken some time, we have several more in the pipeline that we're working hard on now I'd be disappointed if we didn't have a couple more contracts this year.

And along with that I wish we could announce names in sizes, hopefully, we'll be able to do that more in the future.

All in all clearly.

We mentioned the investment, we're making in that business and in our soft tissue business. This year, the $10 million to $12 million.

We expect them to start generating revenue next year and systemic bio to start generating revenue next year. The revenue generated this year, we really haven't factored into our guidance. So there may be there may be some positive upside on that one, but we're mainly targeting it toward next year.

And then I think you'll see a fairly rapid decline to be cash flow breakeven and then growing from there.

That's the game plan.

Okay, Thanks and.

I know you answered some questions on we matter, but I'm just not very familiar with the company and I don't know if I missed it but did you say what their installed bases and is there any way you can comment.

Even like.

With a range how much that in.

That acquisition costs.

Do we have to wait I guess maybe to the.

Our second quarter 10-Q.

Yes.

We don't and so a couple of comments on that Brian We don't expect any material rent, we haven't modeled any material revenue in the business. This year from those guys. We closed in July we're still working our way through the approvals in the U S. As I mentioned.

And they are now we will be when we wrap up the deal. We Didnt mentioned the investment I would tell you. It see it you can imagine it's a small kind of mature R&D type investments.

In terms of the installed base there.

Customer feedback has been very positive and our channel partner feedback they do not have a huge installed base today, but when we look at their competitive position.

Very optimistic about how we will do in the market.

And there is clearly room for other players as well.

It's a big and growing market for small footprint SLS for industrial applications. So we're bullish on them. They don't have a big installed base today, they've got an excellent product and a couple more coming.

And we're excited about it in terms of the spend on it. It was deal was modest and certainly we got there a lot faster and with less cost than we would have on our own on our own in this case.

Got it yeah, I know that's a growing sub segment in the market. So it makes sense.

Oh up more later thank you.

Thanks, Brian .

Thank you. Your next question today is coming from Shannon Cross from Credit Suisse. Your line is now live.

Alright, Thank you Ashley Ellis on for Shannon This morning.

Can I just clarify the restructuring savings targets are those net or gross.

Those would be <unk> net of the of any severance or exit cost actually is that what youre asking are you expecting the majority of the phosphate and the bottom line.

Oh, yes, yes, the $4 million to $6 million range that we.

But we said for 2023, yes, we expect that to fall straight through to EBITDA. Okay.

Okay.

With the decision to manufacture more metal systems in house is that.

And kind of the success you've seen in rock hill or is that or is it a different transaction, how should we think about capex and inventory for that.

Yes.

It's a different location. So we've in sourced metals, we will manufacture our metal printers in Europe .

And we've in sourced into re on France, or an existing plan and we own. So we own will now make our small and mid frame metal systems and our large metal for our metal printing system is still outsource in Belgium.

So obviously, we model of savings based on doing that and much more control of our supply chain going into it so.

Again, I think it's a great move there should be modest inventory changes with that it's it will.

We're taking over from a very good manufacturer of the product outside.

So.

It's not nearly the impact on inventories that we experienced with the prior in sourcing in Rockville.

Alright, thanks for the details and then I just wanted to be.

I understand kind of the puts and takes for gross margin through the year I know you pointed to 2021.

If I look at <unk> 21, and what you did for the full year.

Step down and maybe that was due to some divestitures and stranded cost, but could you kind of help me bridge that.

Good morning, Tim.

Yes, that's a great question Ashley.

And Youre right Theres been nothing that Choppiness and kind of confusion over the past two years as it relates to gross profit as we adjusted to the change in the macroeconomic conditions that we have some divestiture so on and so forth, but in general I think you should think about our gross profit margins. There is obviously a fixed component there. So as we scale on the top line, we will get some.

Leverage.

In that gross profit margins.

<unk> answer here I think is that.

The gross profit margin that we turned in in Q1 was exactly in line with what we expected when we kind of expect that to start stepping up kind of steadily as we progress through Q2, Q3, and then Q4 to settle out.

That range of 40% to 42% for the full year.

So it is I agree it's difficult to look back at prior years and really understand the trends, but that's what you can expect for this year.

Okay. Thank you very much for the detail.

Thanks Ashwin thank session. Thank.

Thank you next question is coming from Greg Palm from Craig Hallum. Your line is now live.

Hi, good morning. Thanks, I appreciate the quarterly color. This time around I'm just curious if you think back to.

Q4, when you reported you didn't give this color how did the quarter shaped up relative to.

Internal expectations and I guess have you seen anything different these last.

A couple of months.

From customer behavior that gives you any sort of concern for the rest of the year.

Yes, so that's a great question I'll start out and I'll, let Jeff kind of fill in some blanks here, but.

We did mentioned in the in the.

The earnings call and in our in our kind of prepared remarks last time that we would expect the unfolding of 2023 revenue by quarter. It would be very similar to <unk> 2021 revenue by quarter, but to answer. Your question. If you were just Canada.

Do the math and you say the midpoint of our guidance range and you applied it to that.

That 2021 distribution.

And then yes, I think it's fair to say, we fell towards the bottom end of the range, but still above the bottom end of the range.

Just.

That's just normal puts and takes in the quarterly distribution, but.

We as recombinant it came in roughly as expected.

So no real surprises internally for us.

Yes, Greg if you looked at.

In terms of our internal estimates I think the year's shaping up exactly as we had kind of thought it would in Q4.

And I know, it's always difficult externally to get the quarter's Asian correct, but we were not surprised by Q1 performance. In fact, it's nice to see a degree of normalcy in terms of puts and takes as Michael said, that's the normal noise within a quarter, but nicely.

If anything floated out of the quarter. It was still in folks plans and it's still working its way through.

I think the world is nervous so you see things you see parts stores and things kind of dragging a little bit more as people are spending capex. The good news is they have the money to spend that's encouraging to have a clear need to spend it and theyre just nervous like all of US are about the new world situation of the economy.

But.

We expect the year to unfold as we would have told you in the in the fourth quarter. When we did our earnings release for year end.

Secondly, we will give another update mid year, but right now we we.

Feel pretty good about it.

The guidance range on both revenue and EBITDA.

I guess I'm trying to tie off that.

<unk> commentary because.

It feels like we're sort of anything but normal.

This year and obviously the guidance assumes a much more heavily back half of it.

Year, and a pretty significant ramp in Q4, so what gives you the visibility now just given.

All of the uncertainties out there that you can sort of achieve normal seasonality.

As compared to 2021.

Well I would tell you Greg in this in this space when you are selling into into factories into industrial environments purchase purchase orders arent place without a lot of prior discussion. So I would tell you. Our revenue forecast is based on on really solid I would call them longer term discussions around caf.

<unk> needs of our customers.

It generally is capex is not opex from our customer standpoint.

And they talk to us a long time, we have a lot of trials before they placed purchase order. So we do have we may not get the timing exactly correct, but we do have a very good feel for purchase order forecast, what's in the pipeline and what's coming and you can always be surprised and.

Why we always give kind of a mid year update after Q2 that you're probably a little bit more precise in the second half, but I would tell you right now.

The world is anything but normal, but if you didn't know that if you didn't open the newspaper and you just looked at the business flow day to day, you'd say this feels pretty normal.

And not much out of the ordinary.

The other thing I would add to that is kind of some fundamental.

Fundamental pillars of our guidance, we provided at the FERC.

For year end.

We said that we expect them to be down 35%.

And we kind of pointed to a mid teens growth in the rest of the business and we will.

We said approximately right there today right we grew at a little over 12% in the rest of our business. So things from our perspective are coming in as planned I mean, theres a lot of year left.

And there is puts and takes with the rest of the lot of the year, but.

Where we sit right now we still feel really good about our outlook.

Yeah. Okay. I appreciate that and then just last one just a clarification on the adjusted EBITDA Guide is that based on sort of the midpoint of the guide for the year or do you think you can achieve that even towards the lower end.

It's a great question. So let me just kind of walk you through it a little bit we.

We will start at the midpoint. If you just take the midpoint of our guidance range and again apply that 2021 distribution.

Revenue and then you just kind of assume our Q1.

Opex and just on a non-GAAP basis, just for clarity that's roughly 60.

$5 million.

We just assume that that runs out and then we've got.

Our steady depreciation add back a little over $5 million and then you drop in the midpoint of our savings range of $5 million I mean that would get you in a range of call it 4% to $6 million to EBITDA just at the midpoint. So if you do that same math at the lower end of the range youre going to be in and around breakeven EBITDA. We saw plenty of levers left to pull if we.

If we go that direction, we are absolutely committed to it and that $2 million number and I think we've just added more.

Certainty to that with the actions that we've taken with the restructure.

Understood Alright. Thanks.

Yes, Thanks, Greg.

Thank you next question is coming from Alex <unk> from loop capital markets. Your line is now live.

Hey, How's it going guys good morning.

Question.

We added something that Fernando.

So my question is given the current cost savings program that you guys announced how.

How should we think about the right cost structure for the current revenue run rate are you guys. There now.

Additionally.

As this is the appropriate cost structure can you guys, maybe provide some context or some color around how we should think about operating leverage potential over the next two.

A few years.

Yes, it's a great question and thanks for asking.

So.

I think the way I would answer that question is there is certainly a component of volume scale and we've got the.

The balance sheet to kind of weather the storm right now and so we're preparing.

Two.

To see some some steel growth over the next few years, which will get our operating expenses more in line with our target percentage of revenue. So I think right now we are.

We're a little higher than we want to be.

The restructuring efforts. We just took that were enabled by some of the optimizations that we've put throughout the business.

I think will help with that so.

I think we're in the right ballpark, but certainly volume scale as a strong rebound in evidence we move forward.

Awesome. Thank you for that and just ask a quick follow up.

Can you guys maybe update us on how you guys are thinking about M&A currently.

Maybe like what.

Areas of focus you guys are looking at.

From an M&A standpoint.

<unk>.

M&A for us.

<unk> would be very for bolthouse, a very modest very opportunistic there is we have a very robust internal development activity in and again, we spin.

An appropriate amount of money on both hardware software and materials as a key part of our investment strategy, we really have most of the assets we need.

<unk>, you get something coming along like we matter that we can plug in into a niche in the market.

It is really a nice quick payback on the investment.

But more and more well suited to do do that ourselves.

The industry itself.

There has been going through a lot of changes so I don't know on a larger scale what may come but.

I feel great about our balance sheet, we've got well over half a billion dollars of cash on the balance sheet.

We will be EBITDA positive this year in cash flow free cash flow breakeven or better. So we feel really good about our balance sheet should something come along that's of interest to us but.

And in terms of meeting anything we're in pretty good shape.

Does that answer your question.

It does very helpful. Thank you so much sir.

Youre welcome. Thank you we've reached end of our question and answer session I would like to turn the floor back over to Jeff for any further closing comments.

Thanks, Kevin So just a quick thanks to everybody for joining us this quarter, we will look forward to updating you again after our next quarters results until then be well and thanks for calling in.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.