Q2 2023 3D Systems Corporation Earnings Call

Hello, and welcome to the <unk> systems, Q2, 2023 conference call and webcast if any once it require operator assistance. Please press star zero on your telephone keypad.

A question and answer session will follow the formal presentation you May press star one at any time she places the question queue.

As a reminder, this conference is being recorded its now my pleasure to turn the call over to your host Nikki Husky, Vice President Treasurer and Investor Relations. Please go ahead Mac.

Good morning, and welcome to <unk> Systems' second quarter 2023 conference call with me on today's call our Doctor 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.

The following discussion and responses to your questions reflect management's views as of today only and will include forward looking statements. As described on this slide actual results may differ materially additional information about factors that could potentially impact our financial results is included in this morning'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 slides accompanying this webcast you will find additional disclosures regarding regarding these non-GAAP measures, including reconciliations 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.

Thanks, Mac and good morning, everyone. Thanks for joining us today and to reinforce with mixed said I would refer you to the charts that are up on the web there are a couple on there that I think you'll find really interesting at all I'll comment on as we get through them well, let me begin on slide six.

Let me start this morning by taking a step back and talking about what's happening in our industry right now and after that I'll provide an update on our engagement with Stratasys and then provide some comments on our second quarter performance and wrap up with our view of the on the business for the remainder of the year before handing the call over to our CFO Michael Turner.

We're going to cover a lot in today's call, but I want to start by saying that there are three clear takeaways that I want to leave you with today.

First quarterly results across the industry clearly affirmed that the critical need for scale now why why is this topic suddenly on everyone's lips.

For the first time in our history customers are interested in moving three D printing out of the lab and into real factory production environments.

Our supplier to be successful with these customers they must have a global presence compelling technologies and an economic model that allows both the customer and the supplier to generate the profits needed to sustain investments and create value for all of their stakeholders.

That's one of the largest pure play added up companies in the World three D systems, clearly has a standalone path to attain increased scale through organic growth.

Our proposed combination with Stratasys, which we have actively pursued on a friendly basis for over two years accelerates attainment of this goal benefiting our customers and our shareholders on a faster timetable.

That's why we relentlessly stuck with this discussion for so long.

The second main take away is that unlike many in our industry three D systems continues to deliver organic growth not simply through acquisition while our.

Orthodontics business continues to overshadow other market trends outside of this segment, we've grown revenues organically by roughly 2% during the first half of the year and our guidance implies high single digits and low double digit growth for the full year.

While these results don't reflect our full potential they do affirm our long term growth strategy with our markets, becoming better balanced over time.

Third we are fully committed to our high potential regenerative medicine platform, we have a multi pronged strategy that's delivering remarkable results strongly reinforce our confidence in the realization of significant value for this new market.

Walking this value requires sustained investment, but we're confident it's the right decision for our shareholders. As this will be increasingly clear going forward and I'll have more comments to follow later in the presentation.

So those are the three main points now let me elaborate on them.

As I reflect on how the first few months of progressed one central team has emerged.

<unk> matters. It may be the one thing that all companies in our industry can agree upon right now.

It is important to remember that this is an industry defined by innovation and growth.

We're going through a profound change in the nature of our customer and I put that customer and in quotes.

Our explosive multi year growth opportunities across many many markets, but to access them requires that we meet the need of factory managers not lab managers or design engineers.

That's where the growth is at factory managers put a premium on not only the precision of the printer, but also the economics of its operation in the complete factory workflow not just the printing process.

The reliability and reproducibility of the operations and the ability of a supplier to service the product over its decades long life.

These are completely different requirements to those of our lab manager or design engineers, who were our primary customers and so recently.

In addition, most large customers have multiple factories scattered throughout many parts of the world. They want to ensure three D printing, where it's most valuable and not worry about the depths of local technical support or the unique training of operators.

These are new requirements for most companies in our industry and meeting them takes scale.

Scale that brings a global sales and service footprint ever improving operational efficiencies and importantly, a broad range of printing technologies to support the full range of application needs.

For the large established in the industry, we're able to do this for select market verticals today, which in our Kirsten cases, well demonstrated in the dental orthodontics market, where we've grown to support multiple large scale fleets of printers in factories on three continents.

Our fleets of printers produce more components in a day than the rest of the industry combined.

In 2021 and early 2022 this exposure helped us disproportionately as everyone in the world seem to want straight to straighten their teeth and inflation has not yet impacted their spending.

Over the last year inflation effects on discretionary consumer spending that's taken a dramatic toll on in demand for orthodontics and we as a key supplier felt this impact acutely Fortunately the bottom seems to be in now in sight for this market, which we which will bring us relief, but the longer term answer is to diversify our market expansion.

Rongeur as we're working hard to do.

To replicate our orthodontic success in other markets are reorganized the company by market vertical when I arrived in 2020.

For our two business units health care and industrial we now target specific high value market verticals picking a lead customer to work with intimately on their applications in each.

These applications often span both polymer and metal printing technologies, which is why we've aggressively invested to sustain our broad portfolio of hardware, which is the broadest in the industry today.

Others are now working to emulate this approach.

Our customer success as demonstrated within a market and then we work to scale the optimal processes for their applications and move them into their factories for mass production.

This approach is what's driving our positive organic growth in markets outside of orthodontics.

Just as we are strong in orthodontics, others in the industry may be strong in the other individual market verticals or with specific neurotechnology offerings. However, no. One has yet positioned to access multiple market opportunities that are now rapidly emerging in front of us and they are very exciting to say the least.

To be very clear I would not trade, our strengths and opportunities of three new systems for anyone else's.

Faster any of us can attain scale more quickly value can be created for our customers and our shareholders alike.

<unk> three D systems, we see two paths to realize our mission to achieve scale.

Right now there's an immediate pass through a combination of stratasys.

Second is through the execution of our Standalone plan, which is built around securing new customer contracts and high value market verticals, such as aerospace and defense semiconductors electronics med devices, and others commercializing our regenerative medicine business.

Returned to growth in orthodontics of course, and the emergence of new significant dental applications to be very clear. Both paths are very sound highly executable and will create significant value over time.

Because of the decision point is right in front of US now I want to again highlight why we feel strongly about our proposed combination with stratasys and why we spend so much time and effort pursuing this combination over the last two years.

This combination presents unmatched value creation for potential for all stakeholders in the additive manufacturing industry.

Creating a leader in the industry with exceptional financial profile that will provide three critical elements to all stakeholders sustainable profitability innovation and value creation.

Shortly as we mentioned two weeks ago, we now feel the total value delivered from highly accretive cost synergies is at least $110 million given redundant investments in R&D SG&A. In addition to Cogs efficiencies all of which we feel can be realized within 18 months of closing delivering even more value to shareholders.

We had originally anticipated.

Not only briefly comment on the ongoing discussions between our two companies.

After some delays stratasys has progressed through an exhaustive diligence process in order to compare the two combination options before them ourselves and desktop metal they've.

They've clearly stated they need scale and technology diversity to be successful and I believe our D. O brings this in an overwhelmingly compelling manner I'm happy to say that our teams are now rapidly, bringing the diligence effort to a close.

It's no secret that I had hoped to move faster and at times, it's been very frustrating given that we're both public companies and the benefits of our specific combinations so very clear.

It's been reinforced by the feedback we've received since submitting our proposal from shareholders of both companies who have been crystal clear that they share their view of the tremendous value creation in this deal.

While we had hoped to be in a position to announce a deal with stratasys today, we're not in a position to do so however.

However, with the end of the process insight, we will see it through to its ultimate conclusion.

Bottom line is that we're going to do what's right for shareholders and I'm not gonna, let near term noise distract us from the NGO, particularly when successful create so very much short term and long term value for all stakeholders.

Now moving.

Being an alternative to slide seven.

I'd like to move on to what's become an ever more exciting driver of our long term growth plan regenerative medicine.

As we've mentioned previously we're investing heavily in our regenerative medicine business, because we truly believe in this transformational potential.

The ability to manufacture human organs and other parts of the human body as well as reproduced human physiology in the lab to speed the development of new drug therapies will enable life changing health outcomes for people in need around the world.

While creating significant value for our shareholders.

Our innovation engine continues to make great process progress in all three facets of this new business for.

For Oregon's our initial focus has been on three D printed lungs, the most complex product ever three D printed.

Through our partnership with United Therapeutics.

Since 2017, we continue to execute on an aggressive 10 year plan.

And with the progress that we've made we're on on the precipice of some huge milestones in the years ahead.

As a reminder, we've set a goal for human trials in 2026, and I've already accomplished much of the heavy lifting related to development. We believe we're tracking well towards this path, which only a short time ago would've seemed like a pipe dream.

To put the opportunity in context, a bit in 2021, there were 20 569 lung transplants completed worldwide. According to the U S Department of health and human services.

At the same time 3111 patients were added to the waiting list in the United States alone.

Fraction of those that could benefit from this procedure, if an adequate supply were available.

The number of patients formally added to the lung transplant waiting list has grown almost 28% compared to the last decade that began in 2010, you can understand our enthusiasm for this opportunity when you put that unmet need against our clear path to commercialization.

Moving onto drug development, and our opportunities with systemic bio I'd refer you to slide eight and and if you could take a moment to get there some of the concepts here are just amazing.

H vials are proprietary organ on a chip platform is a novel application, which allows pharmaceutical companies to test their drugs on a cellular rise chip that mimics the response in human organs during trials.

While others have attempted to commercialize the organ on a chip concept driven by the clear benefits in drug development, our technology is unique.

Leveraging our breakthrough in the in the printing of Vascularized tissue using our printer perfusion technology developed for human organs systemic bio has now demonstrated the four core technology advancements needed for success as shown on this slide.

These elements just working left to right include first the creation of very precise computer models for Vascularized tissue, where in the vascular network can sustain life in the human cells that will surround them.

Next converting this model into a three dimensional scaffold at the precision needed for the intended tissue structure.

And then cellular rising the scaffold in order to convert it into a living human tissue with a device desired healthy or diseased cells.

And then demonstrating as you'll see in the far right hand photograph that this entire three dimensional tissue structure supplied with blood and nutrients can sustain that sell life for an extended period of time measured in days and weeks not minutes.

That photograph on the right is a profound breakthrough it demonstrates the sustainability of life in the laboratory, where it can then be studied on a reproducible basis by new drugs.

We believe this will help accelerate the pharmaceutical industry tremendously overtime.

With the team and facilities established under the leadership of Mr. Hassi Pereira, we designed our first time, we signed our first contract with a major pharmaceutical company last quarter.

This study, which will span several quarters is the first demonstration of the technology to our pharma customer.

We expect another contract award with a second major pharma company later this year and we have five additional programs with other major pharma companies in our pipeline.

While it takes time to establish a new technology with these companies once done the growth opportunities are significant and there's enormous number of variations in the technology can be pursued.

Also of note earlier. This year. This is very important the F D. A announced that animal testing of new therapeutics is no longer a requirement in order to move into human trials. This provides an added incentive to introduce new more effective testing methods for new drug therapies.

From a value creation standpoint, it's fairly well known that bringing a new drug to market is an enormous cost with one estimate putting it at $2 $3 billion per drug.

However, what's more eye opening for US is the market that the average return on investment for a new drug is just one 2%.

We believe that our H by us product can significantly reduce both the time and cost for our pharmaceutical partners. We're just in the first inning here with our partners in this space, but much like with our Oregon business, we've seen incredible pairing of technological breakthrough coupled with incredible demand.

And finally earlier this week, we announced a new partnership with their adaptive a protein engineering company.

Their product the Osteo adept is used primarily for primarily for orthopedic regeneration or very simply put regrowing damaged bone.

As shown on slide 10 through the marriage of our technologies, we will combine the theory adaptive protein material with our three D printed custom orthopedic implants, so youll highly targeted bone regeneration.

Initial applications will be for spinal and cranial maxillofacial repair.

Market, we know well given our extensive history.

We believe the value added through these targeted protein crude treatments can be significant.

In terms of technology maturity their adaptive has already earned three breakthrough medical device designation from the FDA with human trial is targeted for later this year.

We estimate that this product alone could address a roughly $4 billion annual market.

Now moving.

Two more on the core three systems business and our results through the first half of a first half of the year on slide 11.

While we're encouraged to see sequential revenue growth from the prior quarter and we'll call out that are non dental the businesses has grown over 3% year to date. We also acknowledge what we delivered was below our expectations. So you add more color on the second quarter performance, it's important to discuss them in two distinct sections as we did on our first call our dent.

Orthodontics market and our non dental markets.

As many of you may be familiar with the dental orthodontic market and specifically one customer represents a material portion of our overall business.

And as we constantly message this market went through a period of significant growth in 'twenty one 'twenty two.

After broad economic pressure began impact consumer spending more recently the businesses started into a rapid decline.

The pain was compounded by the inventory builds that were completed over the COVID-19 period, when the supply chain disruption was a major concern for all companies.

This led to a decline in revenue for our business by over $50 million over the last four quarters.

While we're encouraged by the recent public data points to suggest the orthodontic markets may have started to stabilize its important to note that customer inventory level still remains somewhat elevated we'd expect a slight lag between demand recovery in subsequent impact to our business.

Given these factors in Q2, we again faced a tough comparison to prior year and the decline in dental was the primary driver behind the consolidated company's performance.

With that said the dental business continues to be Directionally consistent with what we expected at the beginning of the year. We continue to expect our dental business to be down approximately 35% for the full year 2023.

Looking to the second half of this year, we expect that our comparisons to the prior year will become more favorable.

Turning to our non dental markets second quarter progress, we witnessed opportunities within both our industrial and health care segments get pushed into future periods.

The unexpected weakness for the quarter and our non dental revenues. Fortunately a significant portion of these opportunities were booked in July but the point remains as bullish as we are regarding the long term demand drivers the near term environment. This year is more uncertain.

Mers are continuously reevaluating their capital expenditures in light of rising interest rates tightening budgets and a more cautious macroeconomic outlook and as such sales cycles in some verticals seemed to be elongated.

Putting aside those dynamics for a moment, we were encouraged to see growth in some of our underlying verticals that we view as vital to our long term strategy.

Notably in the personalized health solutions portion of our health care segment, we delivered another strong quarter of double digit growth. While this is only a portion of our non health care segment. It's a critical driver to our future performance and one that we believe were advantageously positioned relative to our competition.

Given our broad range of printing technologies and materials basis spans both metals and polymers and multiple five 10-K approvals from the FDA, we continue to make great strides in medical applications for the human body.

And as just put our advantageous position in the context of typical product design time in this application can span years always into go through on average six months to achieve FDA approval.

Moving onto our industrial segment pressure within vertical such as service bureaus and energy were nearly offset by growth in other verticals, such as foundries aerospace and defense consumer and durable goods and semiconductors.

Within industrials, we're proud that our unique tightened extrusion printing platform continues to gain traction evidenced by our recent announcement of our E X T 10, 70 being selected by matrix Moon, and additive manufacturing focused training center and three D systems reseller in India, and our collaboration with Suwannee and additive manufacturing service.

Provider in Japan.

Both fantastic examples of growing the presence of our tightened platform internationally since its acquisition earlier last year.

Now to slide 12 for an updated view on what we expect for the remainder of 2023.

Well, Michael will go into specific financials in more detail shortly I would stress the importance of a few key points from this morning's prepared remarks.

Dental represents a material portion of our business and is home to our largest customer we've acknowledged the headwinds in this business would face at the very beginning of the year and has continued to perform largely in line with our expectations. Our dental customers are starting to see signs of stabilization and we expect year over year comps will become more favorable in the second half of the year.

Well, we still feel there's some level of inventory to be worked through in the short term our position in orthodontics is very strong and will remain a corner at cornerstone of our dental business for years to come.

In our non dental business as I mentioned previously we saw more conservative shift in customers capital expenditure appetite within the quarter. We expect this trend of elongated sales cycles to continue throughout the rest of the year, which has led us to adjust our full year expectations now target high single digit to low double digit percentage revenue growth for the full year outside.

Orthodontics.

Well this is prevalent in both non dental healthcare and industrial it's not without the bright spots of continued growth that I discussed earlier.

So with that I'll turn things over to Michael Michael Alright, great. Thanks.

Thanks, Jeff and good morning, everyone.

Before I go into the normal details of the financial results I'd like to circle back on three important points that Jeff has already made there will underscore most of my prepared remarks. This morning.

First on February the 28 of this year.

We informed you that we expect our dental business to be down by approximately 35% for the year.

Further commented that this would be more pronounced in the first half of the year due to the timing of order patterns in the first half of last year, followed by the subsequent decline in demand for digital orthodontics.

That unfolded in the back half of 2022.

Our view on this has not changed and the year over year declines that we've experienced in our dental markets. During the first half of the year are very much in line with our original expectations.

And our view for the full year decline of 35% remains unchanged as well.

The second point I'd like to make is what has changed is a shift in customer order patterns during the quarter.

<unk> impact and put ourselves there resulted in orders being shifted out of Q2 and into Q3 due to elongated sales cycles as customers began to reevaluate their capital expenditures in light of rising interest rates tightening budgets and a more cautious macroeconomic outlook.

Where can certainly expecting these elongated sales cycles to continue for the remainder of the year, resulting in a shift of sales demand that will adversely impact our view of full year 2023 sales attainment.

I'll Circle circle back to this in more detail shortly.

And the last comment I'd like to make pertains to you year to date sales growth.

Excluding the softness in dental sales will be expected to occur in 2023, and despite a shift in customer order patterns that occurred late in the second quarter. We're very encouraged by the growth we generated in this difficult environment.

Particularly as we've seen a contraction in organic revenues for most of the companies in the space So far in 2023.

So with that important backdrop in place I'll begin with a summary of revenue for the second quarter on slide 14.

Second quarter revenue of $128 million decreased 848, 5% compared to the same period last year, primarily reflecting the expected weakness in our dental markets, excluding our dental business second quarter sales decreased by approximately 2% versus the prior year driven by the shift in customer order.

As previously discussed on a year to date basis, however, excluding our dental business revenues have grown by more than 3%.

Specific to our segments second quarter health care solutions revenue decreased 15% to $61 million compared to the same period last year and was primarily driven by continued softness in our dental market, which was down 23% versus the same period last year and in line with our expectations for the.

Remainder of our healthcare solutions business revenue declined by approximately 4% versus the same period last year due to the shift in customer order patterns already discussed.

On a year to date basis health care solutions revenue decreased approximately 20% to $110 million due to the expected softness in our dental market.

Which was down approximately 35% and in line with our expectations, our non dental health care business was up roughly 7% due to continued strength in personalized health care solutions, which is up more than 15%, partially offset by a decline in part ourselves due to the shift in customer order patterns discussed earlier.

Turning now to industrial solutions.

Second quarter revenues declined by approximately 1% to $67 million compared to the same period last year due primarily to lower printer sales related to a shift in <unk>.

Customer order patterns on a year to date basis, our industrial segment has grown by approximately 2% to 140 million due to strength in markets market segments, such as transportation Motorsports boundaries academic research and aerospace and defense we.

We are particularly pleased by the continued momentum that we were able to capitalize on in some of these sectors of the market, which are notoriously difficult to penetrate.

Moving onto slide 15 to talk about gross profit gross profit margins in the second quarter of 2023 were <unk> 39 per cent compared to 38% in the same period last year and were flat sequentially.

This year over year increase was primarily due to favorable mix pricing and the benefits of our cost optimization exercises.

And source more manufacturing production.

Moving now to slide 16.

Adjusted EBITDA decreased by $4 million.

The negative $7 million in the second quarter compared to the same period last year. The decrease in adjusted EBITDA was primarily driven by lower dental dental sales volumes.

Spending in regenerative medicine, which we remain committed to you for all the reasons that Jeff discussed earlier.

Decline is due to lower sales volumes in our dental orthodontics market slightly offset by lower operating expenses and gross margin expansion, primarily due to the benefits of our cost optimization exercises to in source more manufacturer production.

Net loss of $29 million resulted in a diluted loss per share of <unk> 22 cents.

And then a diluted non-GAAP loss per share of seven cents.

This year over year decline in EPS reflects all the factors we have previously discussed.

Now turning to slide 17 for an update on our balance sheet.

We ended the quarter with approximately $492 million in cash and short term investments on hand, a decrease in cash through that in the first half of the year is due to the normal seasonal use of cash from operations of $46 million capital expenditures of $14 million and acquisition and other investments of $16 million.

Turning now to slide 18.

Full year 2023, we are providing the following guidance revenues of $525 million to $545 million non-GAAP gross margins of $40 to 42% and we expect to generate positive EBITDA during the fourth quarter of this year.

Noting that we maintain the expectation to invest $10 million to $12 million associated with our regenerative medicine in the current year.

This update this updated guidance reflects the assumption that the elongated sales cycles that we experienced during Q2 will remain in place throughout the balance of the year. This range of revenue guidance results in growth rates of approximately 7% to 12%, excluding the anticipated 35% decline in our dental orthodontics markets.

Well this isn't what we had hoped for when entering the year. We're encouraged by the growth we expect to generate in this difficult environment.

Particularly as we've seen organic revenues for most of the companies in this space contract year over year.

Before opening up the line for Q&A I'd like to reiterate a few key points from our remarks. This morning.

First excluding the expected decline in our dental orthodontic market and despite the shift in customer order patterns, we experienced during Q T. We've generated year to date revenue growth of approximately 2% on a purely organic basis.

Which is encouraging to us given the contraction in organic revenue that we've seen for many other peers in the space. So far this year.

And we're now expecting growth rates of approximately 7% to 12% for the full year, excluding the anticipated 35% decline in dental revenues that we've got it to all along.

Lastly, I want to underscore our firm belief that many of the challenges that we've experienced this year would be solved by achieving scale in the industry and while we have plenty of confidence in our ability to accomplish this on a standalone basis, a combination with stratasys would provide for immediate acceleration of scale attainment.

Which would allow for the combined companies to immediately begin delivering on three critically important elements to all stakeholders sustainable profitability sustainable innovation and value creation.

With that we'll now open the line for questions operator.

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 Q1 moment. Please while we poll for questions. Our first question is coming from Troy.

Jensen from Lake Street Capital markets. Your line is now live.

Hey, gentlemen, good morning, Thanks for taking my question.

Good morning, guys.

Hey, Jeff.

So first of all I guess the weakness in dental that's been well communicated and kind of inline with expectations. I guess my question would be just positioning the account going forward has there been any change in our share.

Share with that with this big customer.

No not not a bit as far as we know Troy. It's it's literally they want a hard ramp but you know during the Covid period, when everybody was worried about getting materials and parts.

And everybody wanted to straighten teeth at the time and interest rates were low. So so people have the money to spend so it's been a it's been a confluence of both a drop in demand and burning off inventories. So you know it's it's a it's directionally. It's just when we expected this year, but there's no other effects going on that we're aware of at all.

Gotcha, Alright, Jeff on for you to remind me I thought entering the year don't you think industrial is going to grow about 15%.

Yes, we did Troy and Thats. So yeah, the only the only unexpected disappointment a quarter really were late.

Late in the quarter, we saw a push out of.

POS for some of our high ASP products is and again.

My impression was and is today, it's not share loss because most of those P O.

Were landed in in July and early July most of them came through.

Customers are just slow rolling capital spending still.

Interest rates are high the economy is still a bit uncertain people are managing cash. So directionally. It is where we were we expected. It's just a little bit of slow rolling of some of the larger Pos.

And Troy until proven otherwise until it's proven otherwise we're just assuming that continues now throughout the year.

I don't want to get you know I don't want to give my hopes up that hey, that's gonna miraculously change I hope it does but we're just assuming right now just kind of cascades through the year as it did in Q2.

Sure right. So right now you'd think industrial is a high single to low double digit growth. This year, yeah, yeah, it'll still it will still grow organically and pretty nicely, but not where we had hoped at the beginning of the year.

And I think those deals will eventually flow through and we'll see that.

Our recovery or rebound in the growth rate, but you know.

This year, that's where we expect pretty healthy organic growth not quite what we expected at the beginning of the year.

Right, Okay, and then quick one for Michael and that's what I'm asking guidance here at all but just are.

You're directionally on gross margins I know you guys are doing a lot on cost cuts and just try to mix shifts going forward and you're just hypothetically. If you guys do like $600 million revenue next year, what would gross margins look like for you guys.

Yeah, we so Detroit that's that's a great question. We expect continued margin expansion right, where we're starting to get the full impacts of the.

Cost optimizations that we did last year to in source manufacturing.

And as well as the.

Cost outs that we executed in <unk> and <unk>.

Within the quarter.

Additionally, we've announced you know the in sourcing of metal production and into our <unk>, France facility that we're at the we're working hard to execute on this year. So we would expect margins to continue to.

To continue to increase I mean I think.

And that 42 to 43, maybe even as high as 44% for next year.

Perfect Awesome, well guys and good luck going forward are you getting my emphasis put on the merger sounds so good luck.

Thanks, Troy Thank you Troy.

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

Thanks, guys. This is Danny aggregate John on for Greg today.

Good morning, Dan.

Hey, guys I was hoping to kind of touch on the dental as well I know previously you had kind of said destocking would kind of start to abate.

Mid year and as we look at we're now kind of Middle August as you look back on that.

How has that progressed relative to your expectations I know you kind of said overall it's in line.

And then on top of that how has.

Maybe demand at the end consumer shifted.

Kind of that mix there.

Well theres been some clear communicating firm, they're the leader in that industry about in demand and how that's evolved you know I think when inflation first spiked demand really went through the floor. What has been said publicly now by them is that they basically to paraphrase look at their market in terms of adults and kids.

The kids segment seems to be back in the adult segments lagging, which is consistent with consumer discretionary spending adults are dragging their feet now on getting their teeth straightening.

I do think that situation is all stabilized now so it's great to see the kids segment back the <unk>.

<unk> segment undoubtedly will follow because people still will have a fundamental desire for that and especially as global as that business is now. So the end demand profile. We think you know it is kind of bottoming and should be should be starting to recover the lag for us is that they did build inventory in the supply chain.

Coming out of Covid, because everybody again was worried about just having enough raw material or or machines components. Whenever your business was everybody was worried about that so everybody stocked up on inventory and.

They were no exception, so so they're down it's just a matter of burning down inventory. So it's a balance between in demand going up inventories being burned off we estimated that would that would take 35% out of the out of that revenue for us this year and in Directionally, it's tracking that way, we're not changing our overall yearly estimates of that.

So I hope some time will be surprised with demand bouncing back but people have to remember there is a lag between that and demand going up and the demand signal flowing through dos. So fundamentally nothing has changed and we're pleased to see the market seem to be bottoming now and once the inventories are at reasonable.

Again, I think you'll see a nice upturn.

Yeah.

Got it maybe one on the guidance, maybe specifically the EBITDA side.

Positive EBITDA for the year it would imply a pretty good improvement in the second half year. So I guess, what's your confidence level with with what you've done on the cost side, so far and maybe assuming more of a stagnant environment.

Is there any additional levers you'd have you'd have to pull to get that or do you think that's a.

Wait on that cost side. It makes your comp yeah. So Danny just to be Crystal clear, we expect positive EBITDA in Q4, not necessarily the full year right and while we don't give quarterly guidance right. We would expect Q3 to kind of be slightly negative to roughly breakeven and then you can kind of do the math from there.

Yes.

Okay, and then and then on the on the cost programs I mean, we're seeing good solid traction there I mean actually we got a little more cost out within the quarter than we previously anticipated and and and we continue to aggressively manage and control costs as necessary.

Obviously, we want to.

Not cut too deep we want are preserved for the future.

But that we are taking appropriate actions, there and seeing good solid traction.

Alright got it I'll leave it there thanks.

Alright. Thanks.

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

Thank you very much.

Wondering if you sort of take a higher level approach.

To the bio printing business.

And given I think youre seeing some significant.

Yeah, I don't know.

An improvement in air at least results that you know in terms of the trials and everything Youre doing.

Does it make sense at some point too.

Literally run this as a separate business, maybe I know you have United Therapeutics I mean is this.

I'm just trying to figure out is this something that gets sold eventually gets IPO eventually because it does.

It's such a bright spot in terms of your business at least in terms of the results that we've seen so far and again its just a different investor base.

Yes.

With a much longer time horizon than maybe some of the ones that look at three D. Printing I don't know Im just wondering how youre thinking about it.

No theyre progressing Shannon, it's a it's an excellent question because our traditional investor bases are largely industrial tech people.

You know a growth oriented industrial technology folks generally and that's what most of this industry speaks to.

This business is you take three D printing now into printing human products.

It's it is a different type of market. It is a biotech market.

<unk> it.

It was the right thing to kind of incubated you know and you know as a part of our R&D program at some point I think youre exactly right it becomes a separate business.

And.

There's a really nice amount of technology crossover both directions. So what we what we've what we've learned on on printing and other segments industrial and health care, we can apply to regenerative and vice versa. We're learning a lot and regenerative there we're now carrying back into our industrial markets, but outside of that technological crossover.

They really are different end markets and potentially different customer a different investor basis. So what I I can't speculate exactly on the timing, but I think the path you laid out is probably correct as it will become a separate business unit for us and in that sense, we have flexibility to bring in new outside investors in that business that have.

And interest in that if the capital requirements are such that that's needed we'd have the flexibility to spin. It if if it made sense to do so so however, we can continue to untracked value and that over time, that's exactly what we would do so I I see it growing kind of in the direction you you suggested.

And as the as we hit some of these key milestones and it becomes more and more publicly clear what this business is capable of.

I think its the time will be right. Some tighter buys separately set it up as a separate business unit.

Whether we spin it or we take outside investment that's a decision that will have to follow.

Okay. Yeah. That's helpful. And then I think on the industrial side, you mentioned that a number of deals that were pushed actually have either closed or are closing or I guess, you said closed in July . So I'm wondering is it that you're just seeing incremental push outs. So it's just you know kind of a rolling issue within the industry.

And that's why you're providing a bit more cautious commentary.

Yes, exactly right Shannon very simply it's a and it because it was particularly on higher ASP products, both in metals in polymers, but particularly on bigger capital spend from our customer they're moving a little bit more slowly on improving P. O's. So what we had what we saw not come in and at the end of Q2 largely landed in July .

Hi in July in Q3, and we just kind of expect that trend right now until proven otherwise to just kind of roll through the year.

Yeah.

Is there and I guess are there any specific industries or again, hi, hi, it's really can probably yes, but as we think about.

I mean, that's pretty honestly she is pretty broad industrially I think everybody is you know being conservative on cash spend and it sounds that they don't have they've got great checkbooks.

I just want to be prudent in how fast they expand capacity or bringing in new capabilities. So and again. It was it was tilted toward our higher expense items and yeah. So you would you would imagine that's just people's slow rolling Capex spending and it wasn't it wasn't dramatic but it does change the outlook in the year, which is why we updated.

<unk> and Shannon just just to be clear.

This impacted both industrial and health care. It was largely on the printer side of the of our portfolio. So it was literally across all segments of our business.

Formerly it affected printers, that's exactly where it hits in it for example, our personalized health service businesses is going very strong and that's about procedures, that's about medical procedures in hospitals.

And helping people repair their body.

Everything else that the printer driven was exposed to that same kind of dynamic.

Okay, great. Thank you so much.

Youre welcome Shane Shannon.

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

Hey, guys. Thanks Colin.

Okay.

Sure.

My question is.

So to what degree does your design.

The combined with the Stratasys has to do with accelerating key industry adoption and if so how would that adoption look like anyway.

So if I heard you correctly.

Is it influenced by industry adoption of three D printing.

That's right Randy desire combined with sure yet well sure yeah, absolutely. It's a it's an accelerator I. So what you know as a Standalone company. What we're doing right now is trying to replicate what we've done in orthodontics across other market verticals and the scale that you get to by combining with a company of Stratasys to size that.

It brings in very complementary technologies. It gives you more horsepower to do that more quickly. So it doesn't directionally change things, but it does allow you to move faster. So that's that's that's what I love about this combination is strategically it's the same path that we're on and ultimately I believe theyre on too.

But it just allows it to occur much more quickly and the window of opportunity right now for customers to look at three D printing in factories, it's open right now.

Coming out of Covid, our customers' experience same thing we did they were all worried about their supply chain and the bigger the customer the more worried they were because most of those supply chains, but if you go outside of health care. Most of them are extended around the world. You know so you got parts coming out of out of Asia, You've got assembly operations all over the World you had tons of labor component.

<unk> during the Covid period and has caused everyone to re look at their supply chain and once you do that you look at the location. You also look at the content you look at what technology, you're using to make parts and with three D printing they get an improvement in performance of the part and now they get very good economics, but you've got to you've got to go out and touch them in <unk>.

Got it demonstrates that technology Forum. Many of these guys have never used three D printing and in a factory before at all they've never used it. So that's why I pointed out the customer is really change its now factory managers and if you.

If you've ever I grew up part of my career in factories, and if you've ever if you ever meet at factory manager. They are some of the most focused conservative people in the world. They do not want to Miss the delivery. So if theyre going to bring in three D printing new technology, you're going to have to demonstrate a form sell them on the economics the risk.

And the complete workflow economics, so what stratasys combination with US does it just increases the pace of that capability and it makes it more robust because it's again a broader technology offering gives us it gives us a better financial profile for continued investment the cost synergies are amazing to me 110.

So the bottom line, so you've got a good sustainable profitable business and that again from a customer standpoint, that's what you want to see in our supplier.

We have to serve these guys on multiple continents. Most of the big ones were the real where the real volume is out there on multiple continents. So you've got to have a footprint, where you can support that and we will get there on our own market vertical by market vertical it's fine, but if we can combine with stratasys, we get there a whole lot faster with a hole.

Lot more efficiency.

That's why we've been working out for you. That's why we've been working at it for two years honestly. The logic has been there for two years since we reorganized this business so.

So I hope we can make it happen.

Awesome. Thank you so much for that really appreciate it.

Youre welcome.

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

Good morning, guys.

Okay.

Hi, Good morning, Hey, good morning.

Hello.

Sure.

Thanks, Susan.

Yes.

Some of that market is catching on as needed.

No more.

Absolutely.

All right.

John .

I'm, sorry, I missed part of that Michael did you did you catch so there's questions Tyler I just want to make sure I heard your question clearly it was about tightened and specific action in certain in certain markets and then segments is that your ultimate question.

Chris.

Yeah.

This is the operator I do apologize I would remind you pick up your handset.

You got to climb climb out of that barrel Tyler.

It's hard to Hardie, but no. If your question is about tightened I am very happy to take it out you know tightens a marvelous platform. It's a rugged large platform that our customers really enjoy.

Its carbon a really nice niche in the extrusion market.

Making making a robust range of tooling for different applications now it was a small U S startup company that we acquired just over a year ago and so it's got really nice traction in the United States. We're now seeing it begin to take root in Europe and in Asia, because the value proposition.

It has very high they can make large parts quickly it's got a.

And the raw material input as Pelletizing, it's from pellets. So it's a lower fundamentally lower cost raw material. So you get you know customers get a really good value they get speed size and lower raw material cost for introducing tightened and so the payback for them has been really attractive.

It's a good for us so it's a it's a really great sustainable business from my standpoint that I think will carve a really nice niche in the in the extrusion market, Yes, Tyler when one other thing that you know I think about when we talk about Titan.

Very interesting aspect as it has in line.

Finishing in kind of a post harp production or post production work that can be done right and the machine itself Sir.

That that allows for a stream.

The streamlined workflows, it's pretty cool that the guys that started this company in a very bright bright energetic young guys. They came out of the CNC milling industry. So this Titan has a rotating head on it you can you can move from extrusion to machining very quickly. So you can print out very large part at.

High speeds and then you can rotate the head and go back and machine the surface off to make it really smooth. So it's a it's the it's kind of the best of both worlds all in a self contained unit and easy to use so we're really bullish on it and are excited to see its growth.

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

Thanks, Kevin for hosting US listen thank you all for tuning in we look forward to updating you again next quarter and for taking questions along the way I wish you all a great day and a great quarter ahead. Thank you.

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