Q3 2023 3D Systems Corp Earnings Call
[music].
Hello, and welcome to the three D systems Q3, 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. You May press star one at any time she placed in the question queue. As a reminder, this conference is being there.
It's now my pleasure to turn the call over to Nick with Husky, Vice President of Investor Relations. Please go ahead Matt.
Good morning, and welcome to <unk> Systems' third quarter 2023 conference call with me on today's call are Dr. Jeffrey Graves, President and Chief Executive Officer, and Andrew Johnson Executive Vice President and interim Chief Financial Officer. The webcast portion of this call contains a slide presentation that we will.
Referred 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 reflects 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 recent 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 these non-GAAP measures, including reconciliations with comparable GAAP measures finally, unless otherwise stated all comparisons in this call will be against our res.
<unk> for the comparable period of 2022.
Yeah.
I'll turn the call over to our CEO, Jeff Graves for opening remarks.
Thanks, Mitch and good morning, everyone. We.
We appreciate you joining us today.
Before I begin I'd like to first acknowledge the unimaginable tragic events that have happened in Israel over the last several weeks our company and in fact, our entire additive manufacturing industry has deep ties to Israel, where Andrea engineering breakthroughs have been made that benefited people worldwide over many years.
Two our Israeli colleagues and so all of those impacted by the atrocities that we're committed.
And by the ongoing turmoil in the region. Please know that you're in our thoughts and prayers for a rapid return to peace and security for all May God Bless you in these troubled times.
Today, we take this call from Frankfurt, Germany, where we're showcasing our current and future technologies are formed Ax, which for those of you who may be I'm familiar is the largest global additive manufacturing conference that brings together our community of minds and will actively shape. The next generation of intelligent industrial production.
Later in the call I'll offer a few insights that we're sharing this week as we preview our exciting new technologies that will enter production in 2024.
But let me start this morning by providing an overview of our third quarter 2023 results.
Some insights into the operating climate, we anticipate over the next few quarters.
I'll then cover our recently announced restructuring initiative, which we expect to result in improved profitability and cash performance, while preserving crucial investments for future growth.
The net result of these cost actions and investments will be the delivery of tangible near term benefits and shareholder value.
While accelerating the adoption of additive manufacturing in industrial and health care markets in the years ahead.
Given our scale.
One of the largest pure play additive manufacturing companies in the world and the strength of our balance sheet, we're well positioned to execute these initiatives even in the face of a challenging macroeconomic and geopolitical environment.
Before handing the call off to our interim CFO, Andy Johnson I'll briefly cover the incredible outlook for our new products and technologies a record number of which are targeted for release in 2024.
I'll start on slide six with some perspective on our third quarter results, where we see the industry today.
As I commented in this morning's release and from what we shared in our announcement a few weeks ago I firmly believe that additive manufacturing is rapidly establishing itself as a highly attractive production technology that can deliver unique value across virtually all industrial and health care markets.
The ability to economically mass produce low volume high mix components or if desired even fully customized products is now being realized by companies worldwide.
These production solutions bring unique value to our customers through improved component designs reduced capital investment needs and enhance sustainability.
<unk> systems, we offer the broadest range of additive technologies in the industry, bringing together, both metal and polymer hardware platforms and exceptional materials portfolio and intelligent cloud based software with unmatched application focus to deliver bespoke solutions to our customers.
Put it very simply the maturing of three D printing technology for production applications is the key long term driver of exciting growth for our company and for the industry in total.
So with that said why are we in the industry more broadly experiencing a weak overall demand environment for our products well there are two very basic reasons.
One is that inflation is increasingly impacted consumer discretionary spending which in our case directly affects the sales into consumer products, such as clearer liners for orthodontic treatment.
The second which is a much broader effect is it the rising macroeconomic and geopolitical risks have caused our customers to slow capital spending on new production capacity, which affects their adoption of new production technologies, such as additive manufacturing.
Rapid rise in higher for longer interest rate expectations combined with the macroeconomic risk factors have created a challenging financing environment, that's weighing on the speed and decisiveness of customers to invest capital to bring additive manufacturing more fully into the factory floor.
To be clear, there's no decline in interest in direction.
The rate at which Capex is being approved at executive levels.
Our larger customers have strong balance sheets, they're conserving cash until the future is clear smaller companies with weaker balance sheets or having to be even more careful for three D. Systems. This translated into weakening sales in Q3, and a more conservative outlook for future quarters without.
Without clear evidence of economic growth, we're taking decisive actions to reduce our cost structure in order to ensure improved profitability and cash performance.
These actions include head count reductions consolidation of our operating footprint and other reductions in discretionary spending.
Importantly, we are preserving our core investments in new technology and application development in order to ensure that we're well positioned to deliver exciting growth when the macroeconomic turns more favorable.
To recap our third quarter performance there was clearly pressure on revenue, but we were pleased with our operational execution and technology progress both of which contributed to significant improvements in gross margin and profitability levels.
Revenue for the quarter of roughly $124 million reflected softness in our dental sales the overwhelming impact of which was clear aligner for orthodontics.
It also reflected softness in printer sales driven by factors I mentioned previously.
While we had anticipated the softness in dental the printer sales shortfall was greater than anticipated, particularly late in the quarter as tensions in the world increased significantly.
Moving forward, our dental business based upon customer feedback.
We anticipate the liner market to stabilize but with continued need to reduce inventory in the supply chain and weakness in consumer discretionary spending we would anticipate a slower recovery in 2024 than expected earlier in the year.
Offsetting this to some extent is the continuing migration of orthodontic solutions for metal brackets and wires to clear liners with the progress being made in materials and printing technologies, we anticipate the gain of overall market share for these solutions to continue and.
And to provide more growth opportunities in the future.
And despite what we view as a significant short term headwinds, we're making major strides to control what we can internally.
Earlier this year, we implemented two waves of cost initiatives that are in line with our expectations and on track to deliver over $7 million of savings in 2023.
In September we announced the incremental progress on the in sourcing of metal and polymer production printers in a real France in Rock Hill, South Carolina facilities.
These actions combined with a strong focus on supply chain optimization are enabling not only greater cost efficiencies, but enhanced quality control reduce manufacturing cycle times and the acceleration of new product introductions.
All the while boosting customer satisfaction through shorter lead times increase product support and process customization.
As we look to the future we see the potential for improved asset management and resource utilization that are anticipated to reduce our total inventories significantly in 2024.
With this mindset and internal focus I'd point, you to our strong gross margin performance and EBITDA performance delivered during the quarter.
As it relates to the performance these performance these metrics.
We're extremely encouraged by the progress we've made to date.
With the operational initiatives, we undertook this year much of which has only recently been completed.
Even now starting to witness the benefits of what we've already implemented and where our newest wave initiative initiatives will continue to drive our future.
With a new wave of initiatives, we've kicked off will continue to drive that.
Drive to in source operations into our key manufacturing locations and further optimize our supply chain, which we expect to favorably impact our cost of goods and operating efficiencies. These will continue to have a positive impact on gross margins providing supports even in a weaker external environment.
I want to offer a sincere thanks to our operations team for their outstanding performance. They truly have delivered for us.
While our gross margins were greatly impacted by our operational execution. It's important to note that both margin and EBITDA performance. We're also impacted by our technical progress.
Which were more extraordinary in nature and need to be called out separately in this vein one of the drivers behind our revenue and revenue margin and EBITDA performance relates to the outstanding progress made by our regenerative medicine team.
As many of you know we view regenerative medicine is perhaps the most exciting element of our long term growth portfolio and I believe that our work in this field is the most innovative and the entire industry. It has enormous potential to unlock significant value for our shareholders, helping to advance medicine and improve the lives of millions of people around the world.
<unk>.
We began this journey in 2017, when we partnered with United Therapeutics to embark on the task of printing the human lung.
Complex structure ever three D printed.
With a target for human trials by 2026.
As I referenced in our public discussion in late June we've been on track to achieve many clear cut milestones with several critical inflection points in sight.
Today, I am pleased to share the amazing progress towards some of these milestones, which relate directly to the precision and accuracy of our bio printers in combination with extraordinary bio materials needed to successfully printing human lung.
This enabled us to recognize the benefits of our consolidated performance in the quarter.
While the irregular in timing it provides tangible evidence of our progress in partnership with United Therapeutics and continues to bolster our confidence in this new extraordinary markets in the future.
Andrew will take you through more of the specifics related to our margin and EBITDA performance for the quarter in a few moments, but let me end on a very clear notes. We're extremely encouraged by the progress. We've made to date, where we will continue to drive our future operating efficiencies and our path to sustained profitability with this we can weather the headwinds that we may face.
As we enter 2024 and emerge a stronger company well positioned for a lot of exciting long term growth.
Now with that let's turn to slide seven for a deeper dive into our industrial solutions segment.
While the overall economic environment may have muted performance in the industrial solutions the business delivered growth from prior year, our transportation and Motorsports market drove the bulk of the growth during the quarter.
Other stronger performing vertical such as academic and research and service bureaus commercial aviation and defense were offset by weakness in other markets more broadly.
I'd also like to call out a few announcements over the last few months. The highlight why we are so passionate about our future and the industrial markets.
Our EXE tightened pellet <unk> printer continues to build momentum as mentioned on our prior call. We've seen strong momentum in the U S market and we're now expanding into Canadian markets in earnest with our most recent announcement of icon technologies limited purchase of the first <unk> 12, 70 in Canada.
<unk> provides innovative custom thermoform solutions to its OEM customers for applications, such as recreational vehicles building products and HVAC systems.
Given the <unk> tightened platform offers up to 88% raw material cost savings and up to 65% lead time reduction as compared to machine metal or cast ceramic alternatives. It.
It makes it an exceptional match for efficiency focused manufacturers like icon that are interested in a direct production of thermal forming molds.
In addition to North America, and Europe, India, and Japan are now opening as well with our <unk> 10, 70 pellet printer receiving exciting reception in recent weeks.
Having the broadest range of technologies in the industry I'd be remiss, if I Didnt mentioned two of our more exciting metal printer announcements from the third quarter as well.
In July we were pleased to share our continued collaboration with Oerlikon AAM, who purchase their fourth DNP factory 500 system to further scale metal additive manufacturing for their customers.
Binding both organizations deep process and applications expertise with our E&P factory 500, and <unk> service engineering capabilities enables a faster path to market for applications in high criticality industries, such as semiconductor and aerospace.
And in late September we were awarded a $10 8 million contract from the United States Air Force for a large format metal <unk> printer advanced technology demonstrator the.
Contract supports the development of large scale hypersonic relevant additive manufacturing print capabilities with work being performed in Rock Hill, South Carolina in San Diego, California.
The expected contract completion date of September 29, 2025.
This work allows us to then commercialize the technology in support of the U S defense needs for the future the key areas targeted for growth and our future of our company.
All are exciting examples of our exceptional ability to deliver metal in polymer solutions to a wide variety of industrial applications.
And turning to health care solutions on slide eight.
As mentioned earlier this morning within health care solutions.
We contended with both consumer related and broader economic factors that drove an 18% decline in revenues from prior year. This was predominantly driven by an expected decline in our dental business and.
Additionally, outside of dental printer sales were also softer than anticipated. However, these effects were partially offset by our technical milestone progress and regenerative medicine business had another quarter of growth in personalized health care solutions.
Keeping on that theme I'd like to shed some incremental insight regarding our personalized healthcare solution business.
Earlier this year, we shared with you the Toughing story of the first three D printed cranial implant Houston surgery at the Salisbury University Hospital in Austria that was.
Produced on our <unk> to 'twenty med extrusion printer platform with peak material peak as a medical grade high performance polymer material.
And in spectacular fashion once again, we recently shared another instance of the <unk> printer combined with peak delivering a life changing outcome leveraging our technology platform. A cranial implant was created by the team at the University hospital in basal.
Used to successfully replace a section of disintegrating skull and a 46 year old male who is experiencing complications from a stroke in 2019.
Both of these recent announcements are prime examples of the way that additive manufacturing is changing the future of health care.
And as a cranial implant market is anticipated to reach more than $2 billion by 2030, we're highly encouraged by the opportunities that lie ahead of us.
Turning to slide nine for more on our recently announced restructuring initiative.
From what you've heard from me already this morning, I hope the takeaway is clear we're incredibly focused on delivering sustainable profitability and improved margins for the company.
As our near term demand environment has softened, we're responding with swift and decisive action to rightsize, our cost structure, while preserving the critical investments that will drive our future growth.
In order to accomplish this we're targeting an incremental wave of restructuring actions expected to deliver between 45 and $55 million in annualized savings.
By the end of 2020 for the.
The initiative will focus on optimizing our operations and incremental head count reduction of up to 10% cost reduction with third party contracts and the rationalization of geographic locations across all facets of the company.
While these actions are never taken lightly they are necessary for our business and will focus on three very specific goals. The continued reduction of operating costs improve customer quality and delivery reliability and.
And the essential support in R&D that will drive our future growth.
Moving then to slide 10, it's impossible for me to speak to our technology roadmap without first taking a step back.
Just over 35 years ago. It was our co founder and Chief Technology Officer, Chuck halls, curiosity and desire to improve the way products were designed and manufactured this served as the spark of innovation that ignited the three D printing industry and <unk> systems as a company.
Since then that same spur continues to fuel <unk> systems innovation as the company worked side by side with its customers to change the way products are manufactured and health care is delivered.
And only a few weeks ago I had the great honor of attending a ceremony at the White House, where Chuckhole received the national medal of technology and innovation.
The United States highest honor for technological achievement.
Awarded personally by President <unk>.
Simply stated Chuck's impact and <unk> systems innovation engine arent slowing down.
Accelerated by the pipeline of technologies that we're sharing this week a form next.
What we have on the horizon for 2024.
Over the last few years, we focused intensely on acceleration of our new product introductions changing the way in which we identified and executed these programs while.
While the first of these new products enter production this year the acceleration moving forward will be dramatic.
In short we plan to release a record number of new products between now and the end of 2024. These include a tripling in the launch of new printing platforms in 2024 versus 2023.
Significant system enhancements to our current fleet of.
A record number of new materials and applications and several post prints accessories that are key to our customers need for their production environments.
To highlight a few examples of our new products, we're launching new high temperature polymer and metal materials. The greatly expand the number of customer applications. These new materials bring high temperature performance to vast new levels as well as providing outstanding heat transfer and environmental resistance for applications ranging from rockets to day.
The centers to consumer products and even shipbuilding.
As a result of our recent we matter acquisition, which closed in early July we're formally introducing the SLS 300. This closed loop system is designed to operate in a smaller footprint and production environments, where even outside of our manufacturing floor, such as an office material research lab or workshop, making SLS.
Available to a broader range of customers with a high reliability affordable solution for production end use parts.
With the SLS 300, it's possible to accelerate product development and in house volume production with increased flexibility lower risk and reduce manufacturing and development costs.
And just this week a form next we'll debut the latest configuration of our DNP Flex III 50 platform that flex deal with.
Flex $3 50 triple.
This compact three laser system offers a larger build capacity on the same machine footprint to produce parts with seamless surface quality.
It is compatible with a host of materials to widen the breath of applications and industries, such as aerospace medical devices and implants consumer goods petrochemicals food and pharmaceuticals.
When our new product development pipeline is viewed in tandem with our manufacturing and sourcing efforts you can now see the culmination of our strategy to accelerate new product introduction, while reducing our product costs to greatly enhance value to our customers and create value to our shareholders alike.
While these are only but a glimpse of what's to come I hope we have not only demonstrated our passion to accelerate the adoption of additive manufacturing through technology innovation in the markets. We serve but also the surgical precision in execution will apply to the path of achieving sustainable profitability and significantly enhance shareholder value.
<unk> ahead.
Before turning the call over to Andy Johnson I want to publicly offer my sincere appreciation for Andy stepping into the interim CFO role several weeks ago, and you've done a terrific job for us not missing a beat in any facet of your responsibilities, thanks, and very well done so with that I'll turn the call over to you Andy.
Thanks, Jeff and good morning, everyone.
I'm now moving to slide 12.
Third quarter sales of $123 $8 million decreased 6% from the prior year, primarily reflecting the previously discussed and expected impact in our dental orthodontics business as Jeff mentioned earlier, a tighter capital spending environment also led to softer than expected revenue.
Solids more broadly across the company related to printer sales.
Specific to our segments industrial solutions delivered revenues of $71 $4 million growing nearly 5% from the prior year.
While printers and software grew from the prior year. It was partially offset by a decline in materials and overall performance softer than anticipated from our last call.
Health care solutions revenues of $52 $4 million declined 18% as.
As mentioned this was primarily driven by the decline in our dental orthodontics business of 39% relatively in line with what we had assumed coming into this year.
Additionally, softer printer sales throughout the remainder of health care solutions segment also declined from the prior year. Although this was somewhat offset by the technical milestone progress and our regenerative medicine business totaling approximately $4 5 million.
Lastly, as Jeff mentioned, we continue to make solid progress in the personalized healthcare solutions business with growth of approximately 7% in the third quarter.
As we look forward, we continue to expect many of these broader macro demand issues tied to capital investment to persist into 2024 and while the company has historically benefited from fourth quarter ramp in revenues, we are expecting a more modest revenue improvement in the upcoming quarter and specific.
To our dental business, we are continuing to expect an annual full year decline in revenue of approximately 35%.
Turning to our gross margin performance now on slide 13.
non-GAAP gross profit margin in the third quarter of 2023 was 44, 8% an improvement of approximately 490 basis points from prior year and approximately 590 basis points sequentially.
As youll find in the chart below.
A significant driver in the improved margin performance relates to technical milestones progress in regenerative medicine.
Specific items contributed approximately $4 $5 million of revenue recognized at 100% margin is the result of a multi year effort and our regenerative medicine program and validation of the intense focus applied by our internal team in partnership with United Therapeutics.
Normalizing for this non-GAAP gross margins for the third quarter were approximately 42, 7% a 380 basis point improvement from the second quarter of 2023 as headwinds associated with the sequential drop in volume were more than offset by continued efficiencies and cost optimization and.
Favorable mix given lower printer sales.
While Jeff touched on it it's important to reiterate that our operational efficiencies are starting to deliver a tangible impact evidenced in our current results.
As such we believe it's reasonable to expect a year over year improvement in gross margin performance for the fourth quarter. However, we would also expect product mix to be a sequential headwind.
Additionally, regenerative medicine related milestones are tied to specific technological progress and are not expected to have this level of impact on a regular basis.
Moving to slide 14.
Adjusted EBITDA was $4 7 million for the third quarter of 2023. This represents an improvement of $5 1 million from the prior year and $11 6 million from the prior quarter.
Our strong adjusted EBITDA performance was primarily driven by our cost optimization and efficiency initiatives progress and regenerative medicine, and partially offset by lower sales volume.
Adjusted EBITDA also includes an approximately $2 million benefit associated with reduced incentive compensation expense.
While we expect continued progress and momentum on all aspects of restructuring initiatives to have a positive impact on profitability given the one time benefits of the regenerative medicine and incentive compensation items discussed we would expect adjusted EBITDA to be approaching break breakeven for the fourth quarter.
Given the expectation of a modest sequential revenue improvement with less favorable mix.
Net loss for the quarter was $11 $7 million.
Primarily driven by the factors noted in addition to a reduction in earn out liability associated with the previous acquisition and impairment on intangible assets. This resulted in a diluted loss per share of <unk> and.
And diluted non-GAAP income per share of <unk>.
Now turning to slide 15 for an update on our balance sheet.
We ended the quarter with approximately $446 million of cash and short term investments on hand.
The decrease in cash throughout the first three quarters of the year was due to cash used in operations of $72 million capital expenditures of $21 million in acquisitions and other investments of $29 million looking forward, we see a sizable opportunity to drive improvement in free cash flow given our.
Current inventory position, which has been inflated due to the foundation laid by our multiple in sourcing actions over the last two years as the benefits of our in sourcing actions will start to gain traction we are targeting a reduction of over 20% and inventories in 2024 as an important.
And driver for cash flow.
Now, finishing up on slide 16, responding directly to the current environment, we announced an additional restructuring initiatives expected to deliver $45 million to $55 million in savings by the end of 2024.
This effort is incremental to the approximately $7 million, we executed on following our previous announcement in May.
As Jeff previewed. These costs will include continued actions to augment efficiencies throughout our operations and supply chain organizations head count reductions across functions of up to 10% of our current employee and contractor population and intense focus on reducing third party costs through renegotiation and termination.
Certain identified contracts and run rate spend and an intense focus on optimization of our geographic footprint.
These actions will commence this quarter and we expect a significant majority of them to be executed on by the end of the first quarter 2024.
With respect to operations and supply chain efficiencies. We are very pleased with the progress achieved over the last few quarters as evidenced by our gross profit margin improvement.
As we look towards 2024, we expect to begin to realize the savings of our in sourcing efforts over the past two years, which coupled with newly initiated supply chain cost down projects will contribute materially to the success of our restructuring efforts.
Geographic optimization continues to present, a significant cost savings opportunity for us as the world settles into a post COVID-19 hybrid work environment, New normal we are focused on bringing our teams together and sites, where they can best collaborate and innovate within the office the lab on the manufacturing floor.
During 2024, we plan to integrate our sites across the globe to better align our human technological and production resources. Our plans include a consolidation of sites by at least one third from our current footprint.
As it relates to overall head count our restructuring efforts will include reductions of up to 10% of employees and consultants and most spread across the entire organization.
I'd like to reiterate Jeff's earlier sentiments that these decisions are very difficult and not to be taken lightly.
We expect restructuring severance cash cost to be in the range of $4 million to $6 million.
In totality, our restructuring actions will improve both our cost of goods sold and our operating expenses. We currently expect approximately two thirds of the cost takeouts to reduce opex and the remaining third to drive improved gross profit margins.
We look forward to updating you on our execution progress in future quarters as we further position <unk> systems for near term profitability and critical investments in innovation that will drive sustained long term profitable growth.
I'll close by noting that while our expectations may have changed over the past few months, we've approached our business with a consistent philosophy throughout this year and we believe our third quarter results. Despite some one time benefits are a progressive step in that direction.
We are adamantly focused on positioning the company to deliver sustainable profit profitability and to protect our mission critical investments that drive future growth.
Thank you all for joining us today, operator, we're now happy to open the line for questions.
Thank you well now be conducting a question and answer session. We ask you. Please limit yourselves to one question and one follow up then return to the queue, if you'd like to be placed in the question queue. Please press star one on your telephone keypad. One moment. Please while we poll for questions. Our first question today is coming from Greg Palm from Craig Hallum Capital Group. Your line is now.
All right.
Hey, this is Danny <unk> on for Greg today, Thanks for taking the questions guys.
I think just touching on profitability first here.
Obviously, some good progress in the quarter.
We expect to approach breakeven in Q4, how should we.
Think about fiscal year 'twenty for maybe your confidence in being able to sustain that profitability profitability and maybe if there is a level.
That makes you more confident in being able to achieve and sustain that.
Yes, Thanks, Ken.
Good morning, Dani, it's good to hear your voice.
Well there's two.
Number one we're not going to give 24 guidance today and quite frankly, the world just too volatile out there the difficulty really predicting top line performance.
Yes.
As I see it right now as you gave through the fog. There's no reason that we would change our assumption on headwinds in terms of revenue performance and we're introducing a lot of new products. So how that will that adoption will be offset or will be offsetting.
Headwinds from the economy is yet to be determined so we'll talk more about that when we talk about 24 after the next quarter.
I can tell you, though we are focused on controlling what we can control in terms of cost and Thats why we launched this restructuring initiative.
We're moving out under the assumption that we need to get more cost out of the organization, we've targeted $45 million to $55 million were moving out aggressively in this quarter.
And as Andy ran through we'll execute a large portion of that by end of year and then certainly by the end of Q1. So we're focused on controlling our business running at well getting costs down.
Be in a position to begin driving inventories down with our in sourcing initiative kind of reaching its peak and we've got more to do but we've done a lot of the heavy lifting already in terms of bringing materials in that you do within sourcing. So we've got a good availability of inventory and generate cash we've got a strong focus on operating costs.
Youll hit both our Cogs and our Opex. So we're looking to drive gross margin and EBITDA performance in 2000 and for the top line performance will be largely dependent on just the overall economy and how it goes.
You've got economic concerns and geopolitical concerns, which right now just make it too hard to actually predict so.
<unk> will focus on what we can control internally drive cost down drive inventories down to release more cash.
With the strength of our balance sheet, we're confident we'll make it through that uncertain period, we'll give you more input as we close out Q4 and looking at the end of 2024 in detail.
Got it.
Helpful.
And then maybe just touching on maybe this new product cycle, something a lot of a lot of exciting stuff coming here in the upcoming year.
Maybe just in terms of what Youre really seeing is is there any emphasis on targeting certain end markets applications and then maybe how should we think about the rollout throughout the year and what kind of contribution be expecting.
I guess a lot of that is macro dependent but just maybe your thoughts there.
Yes.
We will give you some idea on the time phasing too and they have been.
Initial impact on revenue performance, but I am really excited we're refreshing our entire product line. This was an initiative we started.
A year and a half to two years ago is it takes about three years to from start to finish to get new platforms in place and we're going through that and we're going through a refresh of our entire portfolio. So what youll see next year is a tripling of our printing platform releases.
Releases versus versus 2023, those span our photo polymers, many many SLA and DLP, there's a convergence and that technology, which is really exciting in terms of ramping up precision and speed to production scale for factories. So I'm really excited about.
<unk>.
How 'bout, SLA and DLP technologies, and the convergence of those in the new year.
Extrusion technology with pellet extrusion is really starting to get legs, and we've got some new products on that front that will release and of course, we have upgrades on our metal printing platforms. So it's clearly as I described very broad based we have a host of new materials engineering materials that are being released with those platforms for customer use.
Those are engineering plastics, particularly high temperature plastics and flame retardants low emissions plastics, if you will.
Let's move us more heavily into both aerospace and automotive applications.
Temperature and flame resistance are extremely important there so we're actually pushing hard on UL certification.
Moving some of these materials through that have never been done before through you. All certification. So many of those hit the market throughout 2024, and then of course continued evolution of our software platforms. So it's very broad based it addresses virtually all of our industrial markets.
Got some some very exciting jetting technology coming out for both small caf things like the jewelry market that will hit the market in 2024.
Those will phase in Q1, Q2, Q3 will step up in terms of the product releases.
Start to peak in Q3, as we look at it right now and kind of level off in Q4 at a high level. So historically very high triple the number in total of of printing.
So we did in 2003 and addresses markets broadly.
Customer interest in those is extremely high.
Fortunate thing right now for us and for the entire industry. I believe is capex spending is down so I think youll see the emergence of a lot more customers.
And then as the economy improves those will get traction in and really drive growth in 'twenty five so obviously time dependent.
On the economy, but will launch at least launch a lot of new products and 24 that we see is really driving growth in that 25 to 2007 timeframe.
You never know yet hopefully the world certainly becomes more peaceful and the economy settled down a bit in 'twenty four.
To be determined so we're certainly not advertising.
Broad based declines or things of that nature.
I, just don't want to be overly optimistic.
So many factors in play here as we as we head towards the end of the year. So we're just trying to not get out over our skis in terms of growth projections drive cost as much as we can and.
Be well positioned to either either sustain.
The answer or B.
Be there with a strong balance sheet and investment when the growth does come back.
Yeah.
Makes total sense looking forward to seeing all the new stuff this year.
I'll leave it.
Thanks Danny.
Thank you. Your next question today is coming from Brian Drab from William Blair. Your line is ally.
Hey, good morning, Brian.
Hey, this is Tyler on for Brian I appreciate you taking my questions.
Sure Tyler.
You mentioned, new production printers coming out for your metal platform could you just elaborate on what makes 30 systems unique in metal solutions, how do you fit in within the competitive landscape and are you more focused on building that out organically.
Sure, let me comment on that.
We've got an exciting organic growth program.
With significant investment as we look forward.
And along those lines, we were honored and pleased to receive this contract in the U S government for development of the next generation machine.
Yes.
So we have an intermediate size platform in a large platform today are $3 50, and our 500, we will continue to add power to those systems with more lasers in place, but it's not just about the number of lasers you have in the system Tyler it's about thermal management of the platform and it's about.
Fluid flow across the powder bed to make sure you can eliminate smoke if you will from the powder bed to make sure you have high integrity parks.
Our focus historically has been on health care and very high end industrial automotive another demanding industrial applications.
That will remain our focus although I have to tell you some of the exciting new materials that are coming out are are moving rapidly into other industrial products like shipbuilding.
We can do some unique things with with metal printing of.
The nickel based copper based materials copper nickel alloys, others that are required for demanding either thermal or environmental conditions, and that's really where we're going to focus is on those those markets that are most demanding of quality and performance.
Parts, we make are extremely high density there, obviously suitable for human application and for demanding industrial application, that's really where we're going to focus.
Once you are there and you have the materials, it's all about throughput.
Some customers want single large parts others want multiple small parks, we're designing systems that are application specific in that range of products healthcare is often a large number of smaller parts for embedding in the human body.
Things like shipbuilding and in aerospace can often be single run large parts.
Indeed extremely good environmental control I would tell you environmental control is probably our number one attribute right now we can produce the highest purity highest density parts I believe in the industry and we are scaling that with our organic investment.
Tyler on the on the on the investment front, we've got so much runway, we've got a whole we've got a nice hole in both polymer and metal technology basis today, we're <unk>.
Driving synergies across those so we can get where we need to be organically through through internal R&D investment and obviously, we're not we're not oblivious to the external environment.
There are other companies in the industry with interesting technologies, but we can get where we want to be with internal investment in both metals and polymers and then anything on top of that as icing on the cake.
Thanks, Matt Yeah, It sounds great and just a follow up pretty.
Pretty smart question with the restructuring would that create any new challenges for your new product introductions do you see that having any impact and we feel installations or adoption can you just elaborate on how you are handling that.
Yes, thanks for asking that Tyler I would tell you. We've we've protected certain areas of the company heavily to make sure we can drive.
Efficiency in our back office operations I would tell you just just those efficiencies are very important so we preserve some of those particularly around things like that cyber security are there. Other areas that are just are essential to running the business. We've also taken great pains to preserve the predominance of our R&D investment because that's critical to the new product launch.
And then obviously, we have a very large sales and service teams. The service teams are essential to not only serving our installed base which is.
One of the largest if not the largest in the industry, but also the installation of new products. So those areas of the company. We've heavily protected we found efficiencies in other areas and certainly by reducing our number of sites and the in sourcing of manufacturing and supply chain operations that gives us a really nice bump in term.
A cost or the cost takeout that impacts Cogs and even even somewhat on opex. So we're very focused we're very proud of our gross margin performance quite frankly, even if you take out the one time benefits of regenerative medicine, we stepped up from 39% and change to 42.
7%, Andy this quarter operationally.
And that reflects really efficiencies in supply chain and dry and driving some of that early earlier restructuring that we did in the year.
Without slowing down our R&D.
Execution.
We're really proud of that on top of that we are thrilled to have the technical progress on regenerative medicine that boosted gross margins, even further but to move from 39 to $42 seven.
Operationally, we were extremely proud of in the quarter and we see.
Further upside as we go forward.
You have to be a little careful quarter by quarter, depending on revenue fluctuations, but we see continual improvements in our gross margin capability as we move through the new year.
Alright, I appreciate all that I'll pass it on.
Thanks Tyler.
Thank you next question is coming from Jacobs Stefan from Lake Street Capital. Your line is now live.
Hey, guys. Thanks for taking my questions.
Maybe just.
Just on the restructuring initiatives could you talk about kind of the breakdown.
How you see these costs coming out of the model I.
I know, the 45 million to $55 million range, but.
By Q1, and does that mean, 60% of kind of the.
Full value quarterly or 90%.
Maybe you could help us think about that.
Yes, I'm happy to do that Jack this is Andy so.
And with kind of how you range. It in terms of actual impact in 'twenty four our plan is.
This last phase this current phase somewhere between $45 55 to actually be realized in 'twenty, four and Thats our goal youll start to see that.
Execution this quarter as Jeff mentioned and I mentioned in my comments.
You will see I think your estimation of somewhere north of 50% by the end of <unk>.
Q1, 'twenty four is accurate.
Scribed. It is significant majority so I think thats right in that area and.
Obviously, when you are talking about head count reductions those those different geographies can be phased differently, but we will start on that work. This quarter. You also have opex benefits around prioritization and integration of geographic.
Footprint.
Much of which will be action in the call. It the first five months of <unk>.
The phase there are certain decisions around third party spend that we can unilaterally decide and take benefit heading into the new year, others that require some negotiation and could be phased throughout the year and you have continued cogs improvement we've already seen that in our gross profit margin validates the work that was done earlier this year.
<unk> has started to take hold and we will continue to see on an annualized basis even improved.
Results from earlier phased Cogs efforts, but there is continued supply chain optimization and.
And work on the Cogs side that that will happen as early as this quarter and into early next year. So when you add that up as I mentioned it may have been.
Buried in my comments, but you've got some.
We're around two thirds of that total number benefiting opex with the remaining third in Cogs and.
And definitely we believe youll see over 50% of that is actually coming out on the next call it quarter and a half two quarters Max So youll see the benefit of that for most of 'twenty four.
And that goes back to Jeff's comments and the first question that Danny raised about profitability next year, we're going to control we can in the P&L and when you look at costs, both on the Cogs and Opex side. Those are areas. We can control even in this revenue environment. So we're not going to wait around this isn't a December 24, annualize takeout exercise Jacob this is.
Action now action over the next several months Youll start to see a real benefit we believe to the P&L.
In Q1 of 'twenty four.
Great that was really helpful. Thanks, maybe just touching on the milestone payments from United Therapeutics.
Obviously this is a 100% gross margin revenue but.
Could you just remind us on kind of when these earn outs.
The milestone payments are.
Set too.
Take place.
Yes.
I'll take a shot at answering that Jacob and then Andy can.
Supplement as well so there they are geared towards technical accomplishment and obviously, we drive to a schedule on those but we are advancing we plowed a lot of new ground and that the the human lung is the most complicated object ever printed by mankind.
I don't say that lightly we are driving to levels of precision and speed that have clearly never been done before with materials that are that are extremely new biological materials that are very new.
So it's impossible to predict the schedule exactly we've got goals and we realized payments over time.
So we're proud that we've achieved some of the milestones we're driving hard on that schedule, because we want to we want to see United therapeutics be able to bring that product to market as soon as possible.
You will help millions of people around the world.
But it's going by definition to be a bit lumpy over time, and we won't be able to give you a lot of warning I will tell you, it's not going to be.
Material, it's not going to be.
Grocery material numbers as they flow through.
But as they hit there may be a certain bump so Andy do you want to comment.
Off of that slightly Jacob so think of it. This way we've got a handful of call. It up to 10 milestones related to long progress. If you go back a couple of years, you'll note that we reflected in our revenue and at that margin level I had 100% obtained in achievement of of a mile.
Millstone and a portion of our second milestone, but the way. These are recognized as via progress. So even if a milestone isn't even 100% achieved once it becomes probable and its deemed probable at a certain threshold you start to account for it based on the progress so for milestone is.
For example, 60% achieved in its probable he may not have the milestone paid out yet because youre not at 100%, but you do have recognition of the milestone and that's exactly what happened in this quarter and it's why Jeff's comment that youre not going to see this as material to any particular quarter is spot on because these things get <unk>.
Ignite as progress is made so it's not they're not binary where theyre just hit in one quarter and they're gone the next but as you deem progress you'll begin to account for this particular quarter, we had contribution from three different milestones.
Huge validation of the technical progress in printing in the human lung and Youll continue to see progress on those milestones and others over the next several years, so not material to any particular quarter from a revenue and margin standpoint, but as Jeff said periodic perhaps lumpy, but at the end of the day absolute validation that we're more.
Progress in partnership with United Therapeutics.
And Jacob one last comment because it would not be obvious from what we're looking at from the outside is the technological synergies that we're finding between our biological work on human organs, and even our industrial printers. The level of precision, we're now able to attain and speed of printing we can directly transfer.
With minor modifications now to some of our industrial printers and that work is just underway, but it's really exciting because it will drive the next generation of printing technology on the industrial side as well. So we're not just dependent on these incur.
Incredible implantable organs being approved by the FDA and getting into production there will be spinoff benefits to our other industrial and even healthcare printer and brake systems.
And materials knowledge as we go through the next few years so were we.
We feel very blessed are very excited about this entire body of work.
Yes, awesome certainly excited to see what the.
And what happens there.
Best of luck going forward you guys. Thanks.
Thanks Jacob.
Thank you next question is coming from Troy Jensen from Cantor Fitzgerald Your line is ally.
Hey, gentlemen, thanks for taking my question and congrats on the nice margin performance here.
Thanks, Jeff I just wanted to you you're very welcome I wanted to just drill down a little bit on that healthcare ex dental.
European competitor had a very strong quarter there.
13% year over year.
And there are parts of those printers, but can you just talk about the services business from Littleton versus the printer sales and assuming this is like SLS and metal printers that are really crazy, but just some more color there would be helpful.
Yes, sure you put your finger on it it was really reflects a.
Basically a buildup of inventory at our customer base with some of the implantable devices, so that that the greater our printer sales in the quarter and it really was exclusively that so so both the production of implants and the sale of printers into that space was depressed the personalized healthcare all health care side.
Up very nicely I was up 7% and again, it's driven by specific applications within the orthopedic space. So.
The specific 510-Ks, we have for different joined to the body. If you will those kind of things demand strong personalized health care. We're very excited about is delivering consistent year over year growth with very strong margins. So.
Im very glad we are in that space, what hurt us in the quarter Troy outside of Orthodontics. The dental was the sale of printers and in part the sale of parts into the med device space, where there was a buildup of inventory and I have to say their husband, the cash as well and watching their capex spend again given that they've got some.
Tori available so I expect it to be short term, but it was a real headwind in the quarter and I'd also add Trey This is Andy that.
You mentioned the competitor and their performance.
You actually do an apples to apples in terms of the same the same sort of business were right in line with their low double digits growth. Our personalized healthcare include some other things in there, but when you look at it comparatively we're right in that same growth profile.
Thanks Troy.
I know you follow this closely that anything in that whole space is the key.
Cost of <unk>.
Customizing implants or near custom implants for People's coming down so nicely that that marketplace has really continued to normally expand its.
Great. So brings a better solution to patients.
Faster at better delivery in lower cost implants for people. So it's opening up nice market space I really expect that trend to continue for years to come.
Yes, I'd love to hear that and did I hear you guys say in the prepared remarks that your material business was weak harrier down and I'm guessing that might have to do with kind of inventory levels at the bigger epidemics.
Alright.
Yes, yes, that's right Troy, Yes, that's exactly right that's exactly right. It was predominantly driven by that that market vertical.
Okay, Hi, gentlemen, good luck going forward and I'll see in a few hours.
Okay. Thanks.
Good to hear your voice.
Thank you we've reached end of our question and answer session I'd like to turn floor back over for any further or closing comments.
So let me just close by wishing everybody well. Thank you for calling in today and we look forward to updating you again next quarter on the year and outlook for the new year, Thanks and have a great day.
Thank you. This 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.