Q4 2024 3D Systems Corp Earnings Call
Speaker Change: Greetings, and welcome to the 3D Systems 4th Quarter and Fiscal Year 2024 Earnings Conference calling webcasts at this time all participants are listening only mode. If they don't want to require operator assistance please press star zero when your telephone keypad.
A question and answer session will follow the following presentation.
Speaker Change: He may be placing the question to you at any time by pressing star 1 on your telephone keypad.
As a reminder, this conference is being recorded
Speaker Change: It's not my pleasure to trungle clover to Mick McCloskey by his President and Invest Relations. Mick, please go ahead.
Nick McCloskey: Hello and welcome to 3D Systems 4th quarter and so year 2024 conference call.
With me on today's call are Dr. Jeffrey Graves,
President and CEO J. Oat,
and Jeff Creech, EVP and CFL.
Nick McCloskey: The webcast portion of this call contains the 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.
Speaker Change: The following discussion and responses to your questions reflect management views as of today only and will include forward-looking statements
Speaker Change: As described on this slide, actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our latest press release and our filings with the SEC.
Speaker Change: included on our most recent annual report on Form 10K and quarterly reports on Form 10Q.
Speaker Change: During this call, we will discuss certain non-GAAP financial measures in our press release and slides accompanying this webcast.
Speaker Change: With that, I'll turn the call over to our CEO Jeff Graves for opening remarks.
Jeff Graves: Thank you, Mick, and good morning everyone. We're pleased to have you with us today to discuss our 2024 results and our view of 2025.
Jeff Graves: Well, we'll go into more financial detail in a moment. It's important to highlight at the outset, but our fourth quarter results reflected the change in accounting estimates for our regenerative medicine program.
Jeff Graves: This change in estimate was driven by the refining of our technical acceptance criteria for the program milestones.
Jeff Graves: This resulted from a change in testing methodology for 3D printed human lungs which are the focus of this program.
Jeff Graves: If you followed our, let me give you a little more color on what that means in layman terms.
Jeff Graves: If you followed our company for the last several years, you'll remember that since 2018 3D Systems has been in a terrific partnership with United Therapeutics.
Jeff Graves: with a goal of developing the world's first 3D printed biocompatible human lung.
Jeff Graves: The program is made with markable progress since inception, and as we now move closer to our goal of manufacturing human lungs for transplantation, the scientific requirements will be actively refined as a result of our advanced research and testing.
Jeff Graves: This refinement may be in a more challenging technical direction, or in some cases an easier one. But in any case, these milestones will be periodically updated to reflect the experience we gain each day in the development process.
Thank you.
Jeff Graves: In the fourth quarter, a key element of consideration was an update in the testing methodology for the lung.
Jeff Graves: In short, the program now contemplates the incorporation of what's called in vivo human-decented testing.
Jeff Graves: which has recently been successfully demonstrated by our partner, United Therapeutics, for Kidney Transplants.
Jeff Graves: And the earlier this information is available, the sooner this technology can be introduced for the thousands of patients that are in desperate need of lung transplants around the world.
Jeff Graves: From an accounting standpoint, the update of milestone criteria related to this testing methodology required a corresponding change in revenue recognition .
Jeff Graves: which in this case resulted in a $99 million reduction to revenue and gross margin in Q4. This revenue will obviously be available to us in the future as updated criteria achieved.
Jeff Graves: Given this accounting change was not anticipated in our 2024 guidance, I was pleased that our core business still delivered within the four-year revenue range that was communicated in our prior forecast.
Jeff Graves: and that the in-market showed welcome signs of strengthening in the fourth quarter.
Jeff Graves: Thank you for allowing me to start with this highly technical item. For simplicity through the remainder of this morning's call, we'll simply refer to this item as a change in accounting estimate.
Jeff Graves: So, assuming you're not all exhausted with that explanation behind us, I'll start today's call with a recap of 2024. I'll then shift focus to some of our key markets in our progress on new products.
Jeff Graves: Finally, I'll finish my remarks by narrowing them on specific actions we're taking in the near term to drive improved profitability and enhance shareholder value in 2025.
Speaker Change: Then our CFO , Jeff Creech, will provide more details on our financials and we'll then open the line for Q&A
Let's move to slide 5.
Speaker Change: 2024 as a whole proved to be a challenging year for top line performance across our industry.
Speaker Change: While our four-year sales were clearly impacted by the broad weakness in customer cap expanding, our fourth quarter performance reflected for the first time in several quarters, stabilization and even a degree of strengthening and customer demand for new capacity.
Speaker Change: The performance reliability and economics of three D printing continuously accelerates customer interest in production applications continues to rise unabated.
Speaker Change: In fact for three D systems, the level of customer exploration and engagement in our additive technology has never been higher as reflected in our application innovation group activity, which was up 18% for the year.
Speaker Change: This increased interest was punctuated by several exciting customer announcements throughout the year as customers incorporate a three D printing into their future fulfillment plants.
Speaker Change: Examples include our collaboration with Daimler truck, which described is spelled spare part fulfillment model that integrates digital rights management.
Speaker Change: Regionalized on demand print capabilities linked together with the okta and software platform to address an additive automotive market for spare parts are expected to reach nearly $8 billion by 2027.
In another example, our strategic partnership with precision resources, advancing metal component manufacturing and high reliability markets like automotive aerospace and medical devices. These high reliability markets over a growing importance to our company and an area, where we have a strong focus moving forward.
Speaker Change: Over the course of our quarterly earnings releases through the coming year, we plan to expand on these markets for you, including the size potential and strategy on how we win.
Speaker Change: And just a few moments I'll begin this series by diving more into our dental business for this call.
Speaker Change: Given the rapid pace of additive technology evolution for both health care and industrial applications, we have great confidence in our longer term growth prospects, but in the near term. We also acknowledged the need for more aggressive cost actions given the current economic environment.
Speaker Change: Scribe these new cost actions in a moment, but it's worth mentioning some of the actions taken previously that will bear fruit in 2025.
Speaker Change: One of the most important changes in the company over the last two years has been the in sourcing of our manufacturing operations and supply chain management. This.
Speaker Change: This transformation was designed to give us full control over our new product introduction process, our manufacturing cost delivery schedules and product quality.
Speaker Change: I believe these changes our long term competitive advantages that set us apart from others in this industry.
Speaker Change: While sales volumes were weak in 2024. This insourcing initiative, which is now largely complete we will pay dividends as our new products are introduced and volumes rise in the future.
Speaker Change: In addition, 2024 also saw significant investments in our back office operations in parallel with the change in company auditors all of which increased our opex spend in the short term, but will yield continued improvements in our operating efficiency and performance as we expand our global operations moving forward.
Speaker Change: Fortunately, we were in a position to support these investments.
Speaker Change: In addition to our ongoing R&D activities, given the strength of our balance sheet and we can now build upon these efforts with new actions moving forward.
Speaker Change: Now to slide six.
Speaker Change: The three D systems were driven by relentless curiosity and our legacy as the pioneers of three D printing.
Speaker Change: Delivering the highest value application driven solutions to empower our customers to innovate without limitations, our new mantra is transforming manufacturing for a better future.
Speaker Change: This core objective is why today, we offer the broadest range of additive technologies in the entire industry, bringing together metal and polymer hardware platforms and an exceptional materials portfolio with intelligent cloud based software to deliver application solutions to key customers around the world.
Speaker Change: It's also why our installed fleet of production printers is responsible for over 1 million customers come on as per day more than the rest of this industry combined.
Speaker Change: Well organized into two distinct business segments health care and industrial with a structure that allows us to develop targeted strategies for our core end markets for.
Speaker Change: The three D systems, we leverage our unmatched application engineering expertise and depth breadth of technology and our global footprint to focus on strategic industries, such as the one shown on this slide.
Speaker Change: These range from advanced rockets, and satellites systems to rapidly expanding AI infrastructure to personalize human applications for dental and orthopedic patients.
Speaker Change: Yeah.
Speaker Change: Let's turn to slide seven.
Speaker Change: To delve deeper into the one of the most significant and immediate strategic growth opportunities in front of us today, which is the dental market.
Speaker Change: For our company and dental applications reside in four key pillars, which we categorize as straighten protect.
Speaker Change: Pear and replace.
Speaker Change: These four areas are all converting to a large extent to three D printing technology with the lowest cost improves performance and shortens lead times from the patient.
Speaker Change: What you'll see on this slide is our estimates for the first time that we've shared publicly for the addressable market size for each of the four areas by 2029.
Speaker Change: Two important items to note. These figures are specific to three D. Printing companies that are active in the broader dental markets and they are only the U S opportunity, which represents roughly one third of the global total.
Speaker Change: The straightened market comprises products such as indirect of liners today and the potential of indirect printing.
Speaker Change: Direct printing of liners in the future.
Speaker Change: Well, it's the most relevant for current off with operations and we are the dominant supplier to these customers today. It's important to note that it's also the smallest of the four opportunities in the longer term with an expected addressable market size of $125 million in the U S.
Speaker Change: Our significant position in the aligner market today gives us a strong foundation to build upon.
Speaker Change: At one customer alone we've deployed fleets of production printers totaling over 600, good operating simultaneously across three continents globally, each day and have the ability to print over 1 million custom parts per day.
Speaker Change: Our expertise in this domain was evidenced in the landmark contract, we announced last summer with a leader in the clear aligner space valued at a quarter billion dollars to support the production of clear aligner is over five years.
Speaker Change: With the emergence of technology to direct parental lighters, we anticipate further expansion of this market in the coming years, and we plan to lead the way.
Speaker Change: Our protect product strategy will be centered on night guards, which are rapidly expanding in both their dental and sleep apnea applications.
Speaker Change: While repair encompasses crowds and British market, we participated in through our Nextgen materials brand for many many years.
Speaker Change: Each of these markets represents an additional opportunity of approximately $150 million in the future.
Speaker Change: And again those are U S numbers alone.
Speaker Change: Lastly, we're place the largest is the largest opportunity by far estimated at around $600 million in the United States with.
Speaker Change: With recent announcements regarding our monolithic multi material jet adventures and five 10-K clearance from the FDA in hand, I believe were better positioned than anyone to secure a dominant share of this market and the road ahead.
Speaker Change: Our combination of product beauty and toughness.
Speaker Change: Match and the operating efficiencies we offer through our new printer platform that is scheduled for release. This summer is compelling for both large and small dental labs alike.
Speaker Change: Taken together the dental opportunity we have in front of US is estimated at over $1 billion in the United States alone and we are targeting.
Speaker Change: But again, it's one of the largest company priorities going forward.
Speaker Change: So a key question you might ask is why do we win in this market for.
Speaker Change: From my standpoint, its very simple.
Speaker Change: Our legacy and current leadership in the well established a wider market is undeniable.
Speaker Change: Our reputation for quality reliability of our next day materials further strengthens our brand in the market each day.
Speaker Change: Across the entirety of our health care segment, we have the experience and proven track record to bring customized patient solutions to the market and we haven't proven ability to navigate complex regulatory markets haven't been granted over 100, FDA cleared and CE mark devices across our portfolio.
Speaker Change: Supported by our tenacious approach to innovation I believe we're best positioned by far to capitalize on this $1 billion market opportunity as dentistry quickly pivots to three D printing technology for the future.
Speaker Change: Continuing this theme, let's turn to slide eight.
Speaker Change: 'twenty 'twenty four was a historic year of innovation for our team despite challenges in the broader macro our approach to R&D has been sustained over this period and highly disciplined yielding dozens of new printers materials software and product enhancements to the market in order to capitalize on increased customer interest and embrace.
Speaker Change: <unk> of the new technologies for production applications.
Speaker Change: While our innovation engines or certainly not slowing down. We're also equally focused on commercializing. These recent advancements we cover the full range of polymer in metal printing platforms, the broadest range of technologies and our industry.
Speaker Change: By way of example, just a few weeks ago, we launched our next Gen 300 printer.
Speaker Change: Conference called L. M T Lab day in Chicago, which is the largest north American dental trade show each year.
Speaker Change: Printer is central to both night guard and Janet jet adventure production.
Speaker Change: On display a lab day was not only the beauty and notably the durability of our printed dentures if customers were actually encouraged to drop samples of our adventures into a porcelain sink to show the toughness of the product in a common customer environment.
Speaker Change: And a flawless demonstration of their strength, our jet adventures were dropped and even thrown from a distance without a single fracture to their integrity as the Atlanta and the chick cost.
Speaker Change: Customer response was strong and we closed multiple preorders for the next 10 300 itself.
Speaker Change: At the upcoming rapid TCT trade show, which is the annual additive manufacturing show, which will be held in Detroit next month, we'll be demonstrating our ability to drastically reduce costs and amplify throughput for customers as we showcase our new figure for 135 solution.
Speaker Change: The immediate focus for printer platform as high mix low volume polymer parts.
Speaker Change: Let's see a broad range of applications, including importantly, electrical connectors a market. We currently estimated over $90 billion. Three D. Printing is targeted at the enormous tale of the curve, meaning complex low volume high mix part types or injection molding tooling often presents a prohibited.
Speaker Change: An investment for the Oems.
Speaker Change: Serve these markets a solution needs to include not only a reliable print platform, but also specialty materials and a software solution for the full workflow, which gives US an advantage of meeting these application challenges.
Speaker Change: These are just a few examples of the new printers and applications. We're excited about for the coming year and we'll update you regularly on our progress.
However in order to maintain support for innovation at this pace, we recognize the additional actions we must take to improve overall profitability.
Speaker Change: Now turning to slide nine.
Speaker Change: Last evening, we announced cost reduction and restructuring actions targeted at over $50 million of annualized savings through actions, we will take through the middle of 2026.
Speaker Change: These actions are designed to improve our gross margins through a reduction in cost of goods goods sold and to reduce operating expenses.
Speaker Change: These actions will expand upon the benefits from previous actions described earlier and will lead to significant improvements in EBITDA performance and cash flow throughout the year.
Speaker Change: To support this objective we've created a dedicated transformation office the leader of which reports directly to me and is responsible for managing the large number of actions that are underway tracking their completion and effectiveness and ensuring a clear tie out through our financial results.
Speaker Change: In the first quarter, we've already executed for site closures and a global head count reduction among other items, which will result in approximately $5 million in annualized savings tied to our plan.
Speaker Change: From a cash perspective in addition to the cash on our balance sheet, which totaled over $170 million at the end of last year, we announced the announced the divestiture of our Geo Magic software platform for $123 million.
Speaker Change: This transaction is expected to close shortly having now received all the necessary regulatory approvals over recent days.
Speaker Change: Given our strong R&D potential that will fuel organic growth our priority for cash usage as investment in our operational improvements and support to our organic growth initiatives to.
Speaker Change: To be very clear, we have no need for high risk acquisitions to fuel our growth with our scale, we simply need to drive ongoing efficiency programs invest in our technology platforms and over time expand our sales and service network to ensure we continue to serve our growing customer base.
Speaker Change: In other words, our priorities are to focus strongly execute well and simply run a good business.
Speaker Change: To give you a little more color on our cost plans, let me offer the following.
Speaker Change: And real estate when I arrived the three D systems in the summer of 2020, our global footprint and a roughly 50 locations five zero.
Speaker Change: As a result of a long history of acquisitions with little consolidation.
Speaker Change: Between the actions we've taken over the last two years and the ones that will take in the coming months, we will reduce this number by over 50%, resulting in millions of dollars in annualized savings.
Speaker Change: For manufacturing with our in sourcing activities virtually complete we expect to realize incremental benefits from our sourcing initiatives involving raw materials and other expenses.
Speaker Change: A leaner footprint and operating model will also yield greater efficiencies for logistics factory utilization and inventory control through our lean and six Sigma implementations all of which is expected to contribute to gross margin improvement.
Speaker Change: Indirect procurement consolidation and overall reduction in vendor spend are expected to yield over $20 million of annual savings driven by the investments made within our teams to replace contractors and other external support with internal talent.
Speaker Change: From a timing standpoint, we anticipate these actions will materially ramp in the second and third quarters of this year.
Speaker Change: Alongside this will be the review of our back office functions incremental to actions already taken in an effort to streamline costs and efficiency across the organization.
Speaker Change: It's 10% of the $50 million target already implemented in early 2025, we plan to provide regular updates on our progress in the quarters ahead.
Speaker Change: Now turning to slide 10.
Speaker Change: Well I'll ask Jeff to discuss our formal 2025 guidance at the end of this morning's call.
Speaker Change: Let me start at a high level given continued uncertainty in the macroeconomic climate, we're expecting revenues normalized for our planned divestiture of Geo magic in the in the year over year comparisons to range from essentially flat to modest growth.
Speaker Change: However, with the cost actions I just referenced we expect a dramatic profitability improvement during 2025, even in a flattish sales environment.
Speaker Change: This translates to three things expansion of gross margins. Despite the loss of an accretive Geo magic business, which was included in our 2024 results.
Speaker Change: Year over year operating expense improvement in every quarter with the most significant impacts being beginning in the second half of the year.
Speaker Change: The meaningful adjusted EBITDA improvements in every quarter, culminating with breakeven or better EBITDA by the end of the year.
Speaker Change: We believe these improvements taken in combination with a significantly enhanced balance sheet. Following our asset divestiture placed the company on an exceptional footing for meaningful shareholder value creation going forward.
Speaker Change: And with that I'll, now turn things over to Jeff Creech, Jeff.
Jeff Creech: Jeff. Thank you and good morning, everyone I'll begin with our revenue summary on slide 12.
Jeff Creech: For the fourth quarter, we reported consolidated revenues of $111 million declining 3% from prior year.
Jeff Creech: This was primarily driven by a $9 million decrease associated with the change in accounting estimate that's somewhat offset by strong services revenues across the company and a healthy finish to the year with respect to industrial printers.
Jeff Creech: Within our segments industrial solutions grew 11% in the fourth quarter with revenues of $71 million, primarily related to strengthen printer system sales and services.
Jeff Creech: Revenues for the quarter were up across nearly all major industrial end markets with the most significant contribution from aerospace and defense.
Jeff Creech: Health care solutions reported fourth quarter revenues of $40 million down 21% from prior year.
Jeff Creech: This includes the $9 million impact from our change in accounting estimate in addition to softness in printers and yearend inventory management across the dental customers with respect to materials.
Jeff Creech: Shifting to the full year on slide 13.
Jeff Creech: We reported consolidated revenues of $440 million down 10% from the prior year, primarily impacted by broader macro pressure on current ourselves.
Jeff Creech: As Jeff mentioned earlier revenues ended within our full year guidance range, even when considering the $9 million unexpected headwind related to a change in accounting estimate that was not originally contemplated in our expectations.
Jeff Creech: Revenues for industrial solutions of $250 million declined 9% from prior year within their end markets growth in critical focus areas, such as aerospace and defense energy and AI infrastructure were offset by weaknesses in most other industrial markets health.
Jeff Creech: Health care solutions delivered a full year revenue of $190 million and declined by approximately 11% primarily related to printer sales and our change in accounting estimate, but were partially offset by double digit growth in dental materials.
Jeff Creech: In addition, full year revenues for our personalized health care business grew nearly 12% from prior year, which represents yet another full year of impressive double digit growth.
Jeff Creech: Now to gross margins on slide 14.
Jeff Creech: Specific to the fourth quarter non-GAAP gross margin was 31, 3% down.
Jeff Creech: Down from 39, 8% for the prior year period, primarily driven by our change in accounting estimate.
Jeff Creech: Full year 'twenty four we reported non-GAAP gross profit margin of 37, 4% compared to 46% in the prior year.
Jeff Creech: The decline from prior year was primarily driven by our end of year change in accounting estimate an increase in inventory reserves and lower volumes.
Jeff Creech: Excluding the impact of the referenced accounting change non-GAAP gross profit margins were 36, 3% for Q4 and 38, 7% for the full year 'twenty for offering a perspective on our core health care and industrial business performance.
Jeff Creech: Turning to slide 15 for operating expense.
Jeff Creech: non-GAAP operating expense for the fourth quarter was $58 $4 million in line with our expectations, representing both sequential and year over year improvements.
Jeff Creech: When viewed at their peak in the first quarter of 2020 for our most recent quarter represents an 8 million dollar run rate improvement.
Jeff Creech: Operating expenses benefited from our previously announced cost reduction initiatives.
Jeff Creech: And as just mentioned present, a significant opportunity for further reduction in the quarters ahead.
Jeff Creech: On a full year basis operating expense was $250 million compared to $246 million in the prior year.
Jeff Creech: The increase was mostly driven by professional services spend and partially offset by our cost initiatives during the year.
Jeff Creech: Turning now to slide 16 to finish up the P&L.
Jeff Creech: So the fourth quarter adjusted EBITDA was negative $19 1 million decline from the prior year by $5 million, primarily driven by lower revenues and gross margin.
Jeff Creech: For the fourth quarter, we reported fully diluted loss per share of 25 cents compared to $2.25 in the prior year.
Jeff Creech: non-GAAP loss per share was <unk> 19 cents compared to a loss per share of <unk> 13 cents.
Jeff Creech: For the full year 2024, adjusted EBITDA of negative $66 4 million declined from the prior year by $40 million driven by headwinds just discussed for revenue margin and operating expense.
Jeff Creech: For earnings per share full year 2024 resulted in a fully diluted loss per share of $1.94 compared to a loss per share of $2 79 for 2023, and non-GAAP loss per share of 62 cents compared to 28 cents for the prior year.
Jeff Creech: Turning now to slide 17 for our balance sheet.
Jeff Creech: We closed the year with $171 million of cash and cash equivalents on our balance sheet compared to 332 million at the end of the prior year.
Jeff Creech: Largest use of cash during the year was $87 million used to repurchase $111 million of debt in March this repurchase in combination with the previous repurchase of $135 million in debt in late 'twenty three opportunistically reduced our original November 2026 convertible note.
Jeff Creech: Charities outstanding balance by more than 50%.
Jeff Creech: Both transactions were also executed at a highly attractive discount in comparison to the current market value, which is now trading significantly closer to par.
Jeff Creech: As a result of these prudent liability management exercises.
Jeff Creech: On the expected closing of our Geo magic divestiture in the near future, which we expect to bring back approximately $100 million of cash to our balance sheet. After taxes. The company will be in an overall net cash positive position.
Jeff Creech: Cash used in operations during the year, which roughly $45 million, representing nearly $36 million of improvement when compared to the prior year. Much of this improvement is attributed to a reduction in working capital with the largest driver being reduction in inventories to more normalized levels now that are in <unk>.
Jeff Creech: Actions are complete.
Jeff Creech: Looking forward in tandem with broader profitability improvement plans for the new year. We would also expect an overall improvement in cash usage for the company. However, I would point out that the calendar innovation and this will be most significant in the second half of the year.
Jeff Creech: Yeah.
Jeff Creech: Finishing on slide 18.
Jeff Creech: Assuming no material change in current macroeconomic conditions and the expected divestiture of the G O magic business to occur during Q2 dollars 25.
Jeff Creech: We are providing the following full year 2025 outlook.
Jeff Creech: Revenue within the range of $420 million to $435 million, representing essentially flat to modest growth after excluding <unk> magic revenue in.
Jeff Creech: In Qs two through Q4 of 2024.
Jeff Creech: We expect revenues to be flattish from prior year for the first quarter.
Jeff Creech: With a modest increase in the second and third quarters, resulting in the most significant growth in the fourth quarter.
Jeff Creech: As more of our recent innovations in the market ramp up over time.
Jeff Creech: Additionally, I would also note that our dental orthodontics business was particularly strong in 2024.
Jeff Creech: Our long term purchase commitment provides for a strong foundation for share leadership, we also acknowledge that year over year inventory management of consumables by our customer may create short term volatility.
Jeff Creech: non-GAAP gross profit margin within the range of 37% to 39% and non-GAAP operating expense with the range of $200 million to $220 million, both of which will have a significant contribution from this mornings cost reduction plans.
Jeff Creech: But we'll also be expected to benefit further in 2026 and the remainder of our planned actions are concluded.
Jeff Creech: Finally, as a result of these items, we would expect an improvement to adjusted EBITDA in every single quarter of 2025, and the degree of annual improvements should continue to grow throughout the year with the expectation that we will achieve breakeven or better adjusted EBITDA by the fourth quarter.
Jeff Creech: We thank you for your time and continued support of <unk> systems, and we will now open the line for questions operator.
Speaker Change: Thank you will 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.
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Speaker Change: One moment, please while we poll for questions.
Speaker Change: Our first question today is coming from Jim Ricchiuti from Needham <unk> Company. Your line is now live.
Jim Ricchiuti: Hi, Thanks, good morning.
Jim Ricchiuti: Question, just on the industrial vertical.
Jim Ricchiuti: Proved meant that you saw in <unk>.
Jim Ricchiuti: Revenue it sounds like that was more on the on the system side, you alluded to the strength in the aerospace and defense market being one of the drivers.
Speaker Change: Just wondering what you can say about that vertical in Q1, and I know, it's a seasonally weaker quarter, but maybe just some color on a year over year basis, how we should think about that.
Jim Ricchiuti: Yeah.
Jim Ricchiuti: Yes, good morning, Jim Thanks for the question.
Jeff Graves: You you know Jim it's a it was really encouraging in Q4 to see the uptick in new printer sales into the industrial market and as I believe we mentioned that it was driven by those high reliability markets you know rocketry space satellites.
Jim Ricchiuti: A little bit of automotive, especially some of the more luxury automotive.
And I would expect again Q1 is normally a little bit weaker.
Jim Ricchiuti: But I think the big overhang, Jim. It's just these these tariff the tariff situation and our customers clearly are struggling to figure out where they should be spending their capex there their demand profile is growing.
Jim Ricchiuti: They see more customer demand out there right now even in an uncertain market. The question is you know if you're for example, automotive is probably the best example, here a big automotive company, Yeah factories, all over the World, where do you put your new capacity, where do you put it when they put that capacity in I think three D printing will play a nice role and I am So certainly industries that are completely can.
Jim Ricchiuti: Within the United States, whether it's big growth like we love Rocketry, We love satellites defense Aerospace that's good because it's within the country. Those guys have more stable plans if you will.
Jim Ricchiuti: It's the it's the it's the multi multi continent global players that are you know just hesitant to spend a lot of capex. So if you add all that up Jim I think you know well, we'll probably follow a more normal seasonality pattern. This year is my best guess quarter to quarter.
Speaker Change: As we said in our guidance I think it'll be all everything else being equal I see no reason why it just wouldn't be a flattish to slightly positive year I think overall capacity utilizations up so they're going to need some more printers and their plans include for capacity include three D printing, which is terrific. We just want to see.
Jim Ricchiuti: That capex at least they all have strong balance sheets.
Speaker Change: Say all virtually all of the majors have strong balance sheets and are ready to invest the question is where do they invest for growth I mean, clearly with most of our operations and focus being United States. The more they bring that into the U S and expand here the better it is for US we have a better cost position, obviously, it's USB.
Jim Ricchiuti: <unk> technology, and we design and manufacture here.
Speaker Change: With our in sourcing complete that's really magnified. So we were in a position to benefit from that but I think it's just such a darn volatile environment right now that they are struggling to know where to spend money. So I net that out Jim to say you know, it's probably going to follow a normal seasonality pattern. This year and the overall trend is going to be flat to slightly.
Jim Ricchiuti: Yep Yep.
Jim Ricchiuti: Could be I hope I'm wrong and that this capacity utilization leads to a higher capex spend I hope I'm wrong in that direction, but we're really that's why we're really making sure we're focused on our cost and execution plan.
Jim Ricchiuti: Well, let the macro work its way through.
Speaker Change: Got it thanks for that Jeff just a quick question just on dental is it fair to say that the bulk of dental and twenty-five continues to be a more on the the aligner side of the business I guess, what I'm trying to get to is the other three segments, which certainly looking.
Speaker Change: Our attractive from a growth standpoint longer term.
Speaker Change: She she meaningful revenues for that.
Speaker Change: And more towards 26.
Speaker Change: Yeah, it'd be realistically, Jim I think it'll be a 26 ramp up but but a lot of the investments will start being made here in 'twenty, five and especially I think the denture I. It's it's all flipping to certainly it's all flipping to digital a lot of the new capacity is slipping to three actions three D printing.
Speaker Change: As I mentioned I think we're well positioned for that in terms of sequencing of liners has already gone there clearly the indirect printing method for a liners.
Speaker Change: Focused on three D printing for years now and we're a very big player. There the direct printing of the liners is probably going to ramp over the next couple of years, it's probably two years out the night Guard productions nearer term as is the denture production indentures by far it's three to four times.
Speaker Change: The size of the other markets individually and I'm Super excited about that I think once you see momentum building there than a lot of the new spend will be in that area for printers, and and then consumables as they ramp up.
Speaker Change: Which is why it's right at the front of our parade right now.
Speaker Change: So some of it I guess I can be clear Jim some of it will hit 25, I think the bigger impact obviously will be in 26 and beyond Okay got it. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.
Troy Jensen: Hey, gentlemen, good morning, and thanks for taking my questions.
Troy Jensen: Jeff maybe to start with you I'd love to get an update on our the cost cut side of it and I always think about bio printing I think about system on a chip I think about you know segments that you guys that aren't generating revenues, but I know there are huge growth opportunities. So can you just talk about where you are now on our spending for those kind of categories.
Troy Jensen: And if that you're sure it's all of the cost cuts.
Troy Jensen: Yes, no you got it and it's a it's a very thoughtful question and good morning, I Hope I hope the weather is improving in Minneapolis.
Troy Jensen: It is.
Troy Jensen: So so very thoughtful question.
Troy Jensen: I go back if I could put it in historical context, we had developed so much new technology in the N and bio printing over the over the last several years, but certainly about two years ago. It really started becoming clearer we have something novel. There. So we went through a heavy exploration phase. The last couple of years is through org.
Troy Jensen: On a chip in the printing of human tissue for wound repair and breast reconstruction from us that to me is all what we did a lot of exploratory work to see what the potential is for that technology and what we were able to do Troy has kind of put a timeline on it it's all really interesting and I'm sure. It will all.
Troy Jensen: Come to pass at some point in the future. The question becomes for a company our size how long can we carry that development how far should we carry as you know we have a good IP position, we have done a lot of pioneering work. There. The question then becomes in a in a down market like we have right now in a in a macro sense last year. So how long do we care.
Troy Jensen: The R&D spend for that.
Troy Jensen: And so the natural thing as we look for okay. How do we focus it what should we be doing versus others, who we bring in partners all in that area or should we just pause in some of the areas in and you know what time go on until the rest of the of the market comes back. So if you add all that up Troy, what I would say is.
Troy Jensen: We are we are looking really hard at how much we spend on bio printing right now outside of the human lung the human law Unclearly as is is.
Troy Jensen: He is an enormous activity for assets is supported with this partnership we have in United Therapeutics is magnificent and it spins off a lot of technology, where we can use in these other areas. We realistically Troy, we will slow slow some of them down some we may hold for a while and put on the shelf and in other cases, we may look for partners to pick them up.
Troy Jensen: That are better positioned to number one support the R&D, but also take the product to market. We always knew we need some partners to go to market with that so we may just accelerate that so where you know you can put all of that in the in the heavy focusing area make sure we get cost out of that because some of the longer term activities were just <unk>.
Troy Jensen: You have to slow down or curtail.
Troy Jensen: Alright, perfect now maybe a question for Jeff creates here can you just talk a little bit about Q1 seasonality and we've kind of deep into the quarter here. So I'm pretty sure you get good visibility, but couple that with I'm, assuming you're going to get one quarter of deal Magic sales and then T O probably falls off in Q2.
Troy Jensen: So just kind of help us with you know the first half kind of revenue thoughts.
Troy Jensen: Sure and good morning, you've got it exactly right choice are what our modeling indicates and frankly, what our actions will result in is that after the first quarter of this year revenues associated with G M Magic falloff or.
Troy Jensen: Expectations for the year, which I just mentioned a few minutes ago contemplate that fact, right and so what we'll see as we move through the balance of the year is.
Troy Jensen: Is a revenue number that of course excludes those geo magic revenues and really provides what you might describe as more of a uh huh.
Troy Jensen: Or look at our business for industrial and health care all of these comparisons and then.
Troy Jensen: Essentially taken out of our forecasts are that we're going to be able to present to.
Troy Jensen: To the street and to all of you guys going forward a picture of that essentially excludes Geo magic bugs from the numbers and from the conversation.
Troy Jensen: Okay. So therefore 20 to 40 35. This is kind of all organic X M. G. L. But you may get some revenues here in Q1 from that so alright.
Troy Jensen: We liked it.
Troy Jensen: And then just I guess, a quick kind of gross margins at that Ah I was impressed I guess that that is going to be worse.
Troy Jensen: Given you're selling the geo business, because if I remember last year I think you guys guided for 38% to 40% gross margins.
Troy Jensen: Now you've taken out of the house Alfred components. So is that just all cost cuts that have driven you know.
Troy Jensen: Kind of almost stability in gross margins, despite the exclusion of that deal.
Troy Jensen: Yeah, it's a it's it's a bit of cost cuts Troy and it's it's much more of the efficiency gains from the in sourcing activity. It's so you're starting to see that show up now in our gross margins even at these reduced volumes.
Speaker Change: We've got you know an excellent geographic position down here in South Carolina with a great workforce, they're able to drive productivity and you know we took responsibility for supply chain management all of that the last couple of years. So we run a better supply chain, we do a more efficient assembly operation of our plants and I'm thrilled with the prospect side and I think you'll.
Speaker Change: We really see that as volumes pick up in the future, but even see a bit of that coming into the year end results as you pointed out is.
Speaker Change: So I'm really happy with that lift and most of that is really through that in sourcing initiative.
Speaker Change: Yeah, Awesome, alright, guys, well good luck and I'll see you in Detroit.
Speaker Change: Thanks, so much thank you.
Greg Palm: Thank you next question is coming from Greg Palm from Craig Hallum Capital Group. Your line is now live.
Speaker Change: Yeah.
Greg Palm: Yeah. Good morning. Thanks. It sounds like you were you know X. This accounting change that impacted the revenue profile in Q4. It sounds like you were you know maybe pleased with just how the year ended I'm I'm curious outside of kind of normal seasonality what is the tone from the customer base as we sit.
Speaker Change: Here, you know almost done with Q1.
Speaker Change: Just because it has it changed at all versus kind of what you saw at year end.
Speaker Change: So here's the question Troy, we've been you know trudging through the desert as an industry. The last four to six quarters from a sales standpoint, we hit a bit of an oasis in Q4 it was great.
Speaker Change: Okay.
Speaker Change: Take a drink of water and save US this feels good.
Speaker Change: The question is is it.
Speaker Change: Isolated oasis or is there are we are we land on the other side of the desert here.
Speaker Change: Customers are really excited about where three D. Printing has come in the last couple of years for production environment. So I would say that broadly it's not just for three D systems.
Speaker Change: As to our some of our competitors I think I think you know the industry has gotten costs down and reliability up and.
Ben throughput up and then parts you can make your amazing obviously, so there's there's a bolt growing backlog of people that are interested in investing in the technology for their plants.
Speaker Change: What's holding them back right now, Greg and I and I, you know you get a real sense of this year in the new year is.
Speaker Change: Whats happening in the in the macro environment the geopolitical situation.
Speaker Change: It's still volatile you know, maybe it's callable there's still volatile.
Speaker Change: The macro economic environment with tariffs is still wildly fluctuating and I think you know customers need to think through where they're going to spend their capex. How much is here in the states. How much is elsewhere because a lot of our customers are global players they've got plants in every on every continent and every major content, where they do business.
Speaker Change: Yeah, they've got to decide where they spend their money. So we definitely see a hesitation on their side you know what I'm, saying.
Speaker Change: Do we really need to place the first sort of this quarter can I wait a quarter.
Speaker Change: Demand is building so you know it's it's.
Speaker Change: It's good to see that so I feel good about that are our applications. Here's a very busy. The question is timing and I wish I could I could help you more I I really believe everything else being equal and again you saw it in the press. This morning, the situations very ball, but everything else being equal if they just you know it maintains this.
Speaker Change: Level of volatility and maybe ratchet down a little bit.
Speaker Change: And then in the in the in the tariff and macroeconomic suite scene, I think you'll see demand starting to rise, but as it sits right now today, we're saying, let's plan for a flattish environment, let's focus on costs be it cost out of our business improved gross margins improve our opex position, which we're in a position to do.
Speaker Change: And then the topline will take care of itself I you know if if we get stronger growth great. If it's flattish or even if there were additional headwinds.
Speaker Change: We are well positioned with our new product pipeline, we can focus on costs now and just get you know get more efficiency in the business. So I don't I can't tell you if it's going to be a protracted.
Speaker Change: Rebound or not the volatility still exists out there.
Speaker Change: Yeah, Okay. That's helpful.
Speaker Change: As it relates to the to the cost cuts that you announced here or what is the expected or potential revenue impact of those whether it's I don't know discontinuing certain initiatives halting and I'm just curious.
Speaker Change: Of the 50 million that you talked about you know how much of that is permanent I guess, it's a little bit unclear on how much is you know you're permanently halting versus some of the stuff you're pausing in and might start back up at some point.
Speaker Change: Oh, Yeah, Greg that the vast majority is permanent and theirs.
Speaker Change: And I expect very little revenue impact from the cuts we're making are in is.
Speaker Change: It's really focused on efficiency improvements and when we layer those in and it's things like site consolidation things like that that are permanent changes.
Speaker Change: As we change our footprint and introduce more efficiency initiatives those are permanent changes and so I will say the zero impact on revenue, but extremely small very immaterial. It's much more you know and again, because we've gotten a lot of new products out and Theres a lot based on the funding that we've maintained over the last couple of years a lot.
Speaker Change: Common still we can really focus down on efficiency and leverage the in sourcing you know focus on a lot of our back office operations that still need improvements or can benefit from improvements in efficiency through basically through integrating acquisitions that were done years ago, and getting getting costs out of the business.
Speaker Change: So I put that in the permanent category right I don't I don't think I don't think many of these things are just volume driven and youll see cost popping back okay yep okay.
Speaker Change: Then lastly, just on cash flow expectations for you know kind of the year and then you know as we look to sort of that bridge from EBITDA breakeven I'm just curious if you've got a specific quarter.
Speaker Change: And mine likely in fiscal 'twenty six when cash flow turns turns positive based on what you know today.
Greg Palm: Greg I wish I had I wish I had an ability to predict that really accurately I clearly that's our goal we're driving to be EBITDA positive.
Speaker Change: Late this year.
Speaker Change: We want to continue that trend in 'twenty six because some of our cost savings are backend loaded. So we clearly we expect that to flip positive from year next year and continue to improve with that obviously comes cash flow I don't think we have any extraordinary capex spending plan. So you know hopefully we will get into it.
Speaker Change: Quickly an operating cash flow positive positive situation and then beyond that a free cash flow positive situation will it happen in 26 or beyond is somewhat demand dependent and also the timing on some of those cost Takeouts. We have we'll do late in the year and in early 'twenty six.
Speaker Change: And those would relate to the some of the more complex consolidations and and you know deeper changes in in our back office systems. If you will those will be backend loaded and that'll that'll all affect the timing and 'twenty six so.
Speaker Change: I just can't give you I can't give you an outlook, but I think the trend is certainly very clear in our goal I can say very clearly our goal is to flip to operating cash flow positivity and then free cash flow positivity in 2006, that's our goal now we'll see how the timing is on the cost takeouts and all of that.
And what happens to volume what happens to demand that those will certainly impact the timing of that.
Speaker Change: Jeff is okay is that some are entirely consistent with our expectation guys, sorry, I couldn't have said it better myself or our expectation. Our goal is for 26 positivity in free cash flow as well as operating cash flow, but a lot of it will be dependent on how well, we execute our cost takeouts and as Jeff said previously.
Speaker Change: On demand so we've got a very focused perspective on the issue.
Speaker Change: Okay great.
Speaker Change: Great look forward to seeing you guys a couple of weeks in Detroit.
Speaker Change: Great. Thanks, so much Greg.
Speaker Change: Thank you next question is coming from <unk> from William Blair. Your line is now live.
Speaker Change: Hey, this is Trevor on for Brian Drab. This morning, Thanks for taking the question just one for me.
Speaker Change: It was great to see some of the detail you provided in the slide on the dental growth strategy.
Speaker Change: I guess just from a high level could you help us understand a little bit more.
Speaker Change: So in the U S market kind of how penetrated you are specifically on the on the replace the larger side of that the dental market. What the opportunity is here in the near term in 2025, and then also internationally.
Speaker Change: You know kind of the larger opportunity set internationally right.
Speaker Change: How the how you expect to penetrate that market and maybe.
Speaker Change: Hi mine, if it's near term or if it's over the next couple of years.
Speaker Change: Yes, Trevor all good questions. So in terms of the penetration profile in those different verticals clearly aligner reserve are you know.
Speaker Change: Entire virtually entirely dependent today on three D. Printing. So those are great. The indirect printing the liners and we're a big supplier into that market. The direct printing will come along in a couple of years and I don't I mean personally my personal opinion is I don't believe it'll supplants. The indirect method I think it'll add to it I think it'll be incremental and you'll see some upside there.
Speaker Change: On the overall market, but that's that's just Jeff graves fueled Wi Fi I think the direct printing opens up many options.
Speaker Change: Or more in a more aggressive teeth repositioning and youll see that continue to grow versus the.
Speaker Change: Traditional wire braces for people, but that we will see how that technology works out it's still a couple of years out indirect printer liners. I think are here, they're taken off theyre taken off in the U S Europe and in Asia, and the biggest player in that market well positioned for the others are following suit so overall that'll be a.
Speaker Change: Growth markets worldwide, the indirect printing of the liners worldwide.
Speaker Change: In terms of the other market verticals dentures I really believe Trevor are gonna flipped pretty fast now will that translate to a lot of revenue and 25, probably not because people have to buy machines get them installed and improve them out.
Speaker Change: We've got an FDA approval in the United States for our denture product.
Speaker Change: So thats in hand, what is needed in Europe, which nobody has or is the is the is the approval for a prolonged use in the human body for dentures. It's is very similar to the FDA approval process.
Speaker Change: It takes longer nobody's there yet we were well on our way and we would expect approval in the you know over the coming.
Speaker Change: Year.
Speaker Change: But the rate at which things are approved in Europe right now for those for medical devices, which this is and I'm not talking about the level of approval, where you can put them in for 30 minutes or you know something.
Speaker Change: Suddenly.
Speaker Change: I'm talking about the the full approval equivalent to an FDA equivalent in slides 10-K that approval.
Speaker Change: That takes an extended period of time when that happens, which will be late this year I believe travelers to be clear.
Speaker Change: I think then you'll see Europe following in the.
Speaker Change: The footsteps of the U S and it'll double that market size. So remember that 600 million Prudentius is what we think three D printing can address today in the United States, Okay that market's opening up with our FDA approvals, Okay, and we launched the printer for that this summer Europe.
Speaker Change: It is.
Speaker Change: Some of the air it's about the same size, but with the same needs for people that are all you know our our aging like the United States and the demand is there once a European approvals granted I think that whole market opens up and the market doubles, so you'll see an uptick in you'll see it you'll see the beginnings of purchases for this year.
Speaker Change: Youll see more aggressive purchases in any introduction of production in 2006, and then I think Europe will just lag of that nominally 12 months. Okay. So you'll see an uptick in investment in 2006, you will see a ramp in revenue in 2007. So I think ditches are strongly on that path. When you look at how their manufacturing today.
Speaker Change: It is forever by any measure and I know you guys are William Blair have done a nice job of doing background work in this market. It's it's archaic I mean buying by modern manufacturing methods three D printing brings it into the into right up to the cutting edge of technology, It's fast it's inexpensive.
Speaker Change: Turnaround times a magnificent.
Speaker Change: So I think the patient benefit is clear the demands out there we just need to get the technology to market. So long winded way to say I think in the U S. It will start happening this year.
Speaker Change: I'm not over advertising revenue benefit it'll it'll trend in the right direction 26, I think it would be a much stronger year for dentures in United States and I think Europe will be about a year behind that night guards are really interesting because night guards you know in the past have been viewed as a pretty inexpensive protection media for the mouth.
Speaker Change: We with three D printing.
Speaker Change: You talked about before with you guys you know the ability for us to use dual materials soft around the gums hard on the surface of the T. So the more flexible materials compositions the ability in the future to even embed instrumentation to monitor the health of somebody wearing them.
Speaker Change: Outstanding potential so I really like the the night guard markets and I'm, hoping we can add to and even displace some of the technology today in you know over the next 12 months.
Speaker Change: It's also interesting that doctors are looking at them more and more for sleep apnea applications. If youre wearing a night guard for cheap protection can it help us sleep apnea, So I love those dynamics and I think again three D printing is excellent for that and broadly and I think we're well positioned to capture part of that market. So needless to say I'm bullish on the market I loved it.
Speaker Change: Four pillars, so we're going after and it is a very high priority for this company.
Speaker Change: Yeah, that's great. Thanks, so much for the detail I'll pass it on.
Speaker Change: Okay. Thanks, so much Trevor thanks for spending time with US the lab day, it was great to see it.
Speaker Change: Thank you we reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Speaker Change: Thanks, Kevin just to thanks to the audience for tuning in today for going with us on our year end wrap up we will look forward to updating you again in short order here on Q1, and then the following quarters, we will try to provide color on these end markets that help you understand where a three D printing is going and where our company is headed as well.
Speaker Change: As updating you on our progress on our on our cost reduction and efficiency programs. Thank you again for joining US we'll look forward to talking to you again soon.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Speaker Change: Yeah.