3D Systems Corporation (DDD) Earnings Call Transcript & Summary

Hi. Good afternoon, and good morning. Welcome back to our afternoon session on day 2 of the BofA Tech Conference. I'm Wamsi Mohan. I cover IT, hardware and supply chain for the bank here. I'm delighted to welcome 3D Systems' management team to our tech conference today. From 3D Systems, we have Dr. Jeff Graves, who's the CEO; Jagtar Narula, CFO, who will be answering the questions today. Delighted to have you gentlemen here today with us. And John -- we have John Nypaver as well.

I'm happy that you could join us today. It's been a few years since we've had 3D Systems at our conference. Lots of things have changed since the last time. We had a different management team over here. So maybe to start off at the very highest level, Jeff, could you maybe talk about, from the time you became CEO, what are some of the initiatives that you have focused on? What are some of the changes you have brought? And sort of what was the state of affairs when you joined and currently, how are they?

Happy to, Wamsi, and thank you, again, for having us. It's a pleasure to be with you and everyone joining us online. So I joined 3D Systems just over a year ago right now. I joined last May at the kind of the height of COVID actually. It was an interesting time to come into a company. I'm an engineer by education. I spent most of my career -- early career at General Electric growing up and then have run public companies since and so a real technologist at heart. And my educational background is very much aligned with material science. So part of the reason that I joined 3D Systems was it's a very high-tech company and material science is integral to our performance and success. So I love being here. I love the nature of what we do. The company was founded back in the late '80s as the inventor of additive manufacturing. And like many companies that started out then, it broadened very quickly into many avenues of digital manufacturing. Additive, it was a part of it. Machining, digital machining was another part because people were really not knowing, at that point, where it was all going. So my charter coming in a year ago was really pick a strong focus for the company, decide what we're going to stop doing and what we're really going to double down on. And what that evolved to be was a very clear purpose statement very early on, so last June, July, that we were going to focus on additive manufacturing exclusively, and we were really going to double down on our technology, take a strong application focus and really drive the adoption of industrial additive manufacturing across the industry. With that, we laid out a 4-phase plan. The first was to reorganize the company. We reorganized from a company that was focused on printers, materials and software and a variety of other technologies, to being one that was organized by 2 business units. We created a health care business and an industrial business, again, exclusively focused on additive manufacturing in both cases. With that, we laid out a restructuring plan to streamline our sales and marketing activity and our overhead structure. We took -- laid out a 2-year goal of getting $100 million out of the business and inefficiencies. We hit our first milestone on that $60 million in cost takeout by year-end, which we are very proud of, and we continue along that path here in 2021 with -- and in parallel, the third phase was to divest noncore assets, meaning things that were not related to additive manufacturing. So we got that underway very quickly. We began divesting some machining-oriented software for companies late last year, early this year, and we most recently announced the sale of our on-demand parts business, which again was heavily involved in machining operations. So we're taking that cash. We paid off our debt very quickly and then added cash to the balance sheet. So we've worked our way through reorganization very nicely. We've restructured the business. We continue to drive the efficiencies there. We've divested noncore assets. And we're entering now into our real investment phase for growth. What I was happiest about was in the face of large-scale restructuring and reorganization, we were able to get the company on a strong growth trajectory by year-end. So Q4 was actually starting to climb for us, and then Q1 was climbing quite nicely. So we're in a period now of strong top line growth. We're profitable. We're generating strong operating cash flow. And we're building a cash reserve on the balance sheet for investment for the future. So I feel very good about the progress we've made. We've got some really good growth traction on the top line, and our margins continue to expand. So we're very bullish on the future, Wamsi.

Yes. No, thank you for that introduction. That's super helpful. And yes, you've built out on -- brought about tremendous change that seems to be resonating well with the investment community. So let me maybe ask you, within those initiatives, when you think about restructuring the business into these 2 vertical groups, why did you decide on these 2 vertical groups? What is it about health care, in particular, that you see as differentiated in what you're able to do and deliver?

Yes, Wamsi. So the reason for the reorganization was the way additive manufacturing is being adopted, it's market by market, application by application. So it's not as effective to talk about making and selling printers broadly or software or materials. It's really about taking those technologies and bringing them together for applications in specific markets. And when you think broadly, there's 2 distinct types of markets. There's health care and there's industrial, and each one has embedded verticals. But health care has in common a very high-quality standard, often FDA-approved processes and infrastructure required. We were fortunate to have the critical mass in our health care verticals to really have a true health care business. And so we created that business unit. We've created the infrastructure to reinforce it, that's needed from a quality and process control perspective and delivery perspective that those customers expect. And it's -- you see it in the results. The traction we're getting now in terms of top line organic growth is fantastic, very strong double-digit growth at a higher gross margin, frankly, than the industrial segments will support these days. And that's strictly, Wamsi, because health care can truly leverage the benefits of additive manufacturing because everybody's body is different than everyone else's, be it their teeth, their skeletal structure, all of the internals and the illnesses they suffer from. Everybody is unique. And when you think of additive manufacturing, you can customize the product rapidly, cost effectively and in a unique way to bring about benefits to patients that allow these health care businesses to be successful. So we particularly focus heavily on orthopedics, on dentistry, on verticals that really are very rapid adopters of additive manufacturing. And nicely, it's in its infancy. We have good growth trajectory ahead of us organically. And as we add on more applications, we expect that to accelerate. On the industrial side, you see rapid adoption in the aerospace community, and that's now leading into electric vehicles and high-end automotive applications that are very exciting and have very much commonality between them. So that was the logic in the 2 business-unit structure, and our technologies individually feed those business units.

Okay. That's helpful context. So maybe just to double-click on each of these, right, how diversified -- industrial, I think, in general, usually is pretty diversified but -- for most companies. But how would you say the diversification is across your customer base across both of these 2 business units?

So great question. So in the health care business, we're nicely split between dentistry and what we call broadly medical devices. It really is the devices that are implanted in your body, so ranging from heart defibrillators to other electronic devices that are there for health and safety. And between that vertical and the skeletal system repairs, to the -- to broken bones, to damaged infrastructure in your body, we make tools, customize tools for surgeons to repair that damage, and then we make implants to basically repair the damage to bones, if you will, and your skeleton. So those are all distinct verticals for us. On the dentistry side, it relates heavily to teeth straightening, so the orthodontic area, if you will. And some of the newest technologies for teeth straightening that are very popular these days, we were instrumental in the forming of that technology. It's been a great growth driver for us and more and more, the development of denture products and partial implants, other health devices for your teeth or replacement for your teeth that again are all customized patient-by-patient. So we're excited about both dentistry and the broad health care area. As we extend now into the future, we're looking increasingly at the actual printing of biological parts for your body. So it's broadly called regenerative medicine. We're moving now into the printing of replacement arteries, replacement skin, replacement soft tissue, and that will evolve eventually through other partnerships into replacement organs for the human body. So we like our long-term outlook for health care. We see it as an exciting growth and profit driver for the company and bringing large-scale benefit to patients. The industrial side, we tend to focus onto the high-end markets. So the very most demanding markets, it's kind of embedded in our culture, which again is rocketry, aerospace, propulsion systems and very difficult parts of an automobile. So those kind of markets lend themselves very nicely to our technology and our culture.

Yes. No, that's helpful context. So maybe if we could step back, Jeff. We saw there was a lot of excitement around 3D printing companies back in, call it, the beginning of 2013 through at least the end of 2013. And we're sort of seeing a similar resurgence in interest again here, about 8 years later. What do you think is maybe similar and different from what happened the last time around? I know that investors got pretty cautious and jaded in some ways with the industry, given the big volatility in share prices that they experienced, but it seems like things are somewhat different now. And so I was hoping maybe you could shed some light on what you think were some of the similarities and differences.

Yes. Wamsi, it's a great question. It's good to have a historical perspective. Part of the reason I was really excited about coming to 3D Systems is I really believe we're entering a new phase now of 3D printing or additive manufacturing, which is different from the past. So to your point, 3D printing was invented in the late '80s. In the '90s, it evolved. And it was primarily a prototyping technology. So you could take a computer model that a designer did and turn it into a plastic part. And that was useful to see it in 3 dimensions, to hold it in your hand. But I think the investment community particularly jumped from that concept to really where we're at today, saying, "Boy, this could be a broad, widespread industrial process for a lot of things." Well, a lot of things needed to change in that time. So you saw a spike in interest, a spike in many of the stock prices as the prototyping business took off. And that business, obviously, has -- is still around, it's matured, it's fine. But the follow-on industrialization of additive manufacturing took some further development. So we needed to move from small scale kind of lightweight technology, small machines, just having a few materials of printing, to heavy, robust industrial-skilled platforms with a multitude of materials that can be printed that were suitable for industrial applications. So for example, in the body, you need to make titanium parts, you need to make very specific biologically compatible polymer parts. Those materials for printing have only really recently been developed in the last decade. So beginning in the later 2000s here, you've seen the equipment become more robust and suitable for the factory floor or for industrial use in health care. And importantly, you've seen the evolution of the materials that could be printed for those actual applications, either in the body or in a complex machine. So when you bring that together -- and one more important point, the culture of the customer base, you've now got young engineers that have been -- that are comfortable with additive manufacturing as a design concept from inception. You've got those folks in the industry now for over a decade, and they've been promoted in the managerial roles, where they're controlling the future of selection of designs and manufacturing methods. So those folks are very comfortable with the idea of additive manufacturing. So you see a pull from the customer base. At the same time, you see the technology being mature enough to use now, and that's really what's leading to this new acceleration of additive manufacturing.

Yes. No, that's super interesting. Maybe, Jeff, you could talk a little bit about the competitive landscape, just sort of there's been a lot more start-ups in this space. There's also some pretty large companies, GE, HP, others that seem to be investing reasonably hard into the space. So how do you see the landscape evolving? And where do you think your competitive advantages reside?

So any market where there's increasing demand, rapidly increasing demand, you're going to see new people entering that market. It's a great feature of capitalism, right? Folks come forward with a new idea and get capital behind them. The easiest way to enter the market is with a new printer type itself, a new printing technology, an evolution of that because they're based on electronic componentry, and those advance pretty quickly. The issue with that being the only approach though is you need the materials of construction, you need the printing materials, and you need the software that controls it all and fits into the manufacturing process for customers. That takes a certain depth of technical knowledge to develop the technology and then the application knowledge to apply it. And then you have to have scale to service these customers in a serious manner. So the -- it's -- so you see a plethora of new entrants coming in with new printing types. And that's fine, that's good, that keeps us current on printing technology. But it needs to be combined with materials and software to be truly effective, and you have to have the scale to deliver it. So in terms of the competitiveness, yes, it's increasing, particularly on the printing technology itself. And that's a good thing for us and our customers. It's a good thing for everyone. You see the materials portfolio is growing quickly. We're investing heavily in materials, and we're trying to mature the software to make it industrially compatible. So I feel very good about our technology position as well as our scale to deliver these solutions. So the companies you mentioned, the larger companies, certainly can bring scale and mass to the solution. There's a lot of technical know-how they're still developing, but it makes it a little more difficult for smaller folks to really penetrate quickly. A lot of them have come to market through SPACs and you see cash behind them to try to grow their mass so they get bigger. And so that's going to lead to some new competitors in the marketplace with scale undoubtedly. But I think it's facing a rapidly expanding market. So that scale can be absorbed. That competitiveness can be absorbed. And I think demand will continue to outstrip supply in many, many cases.

How do you think about sort of the evolution of -- you alluded to aerospace, for instance, as an area where you bring substantial expertise and capability. There are other smaller firms that are saying that they have presence, whether it be at SpaceX or Blue Origin or whatever, with their parts and some sort of unique metal technology that can be used in those applications. So 2 questions there for you, Jeff. One is where exactly do you participate? What is it that you're really finding as customers view as differentiated in your products? And the second question is, when you think about metals versus polymers, how do you think the evolution of that is going to happen? And do you have a view on which one is going to grow faster or what's going to be more material for 3D Systems?

Yes. Both are good questions, Wamsi. So let me take them both. The -- on the aerospace side, we're very pleased and proud to service all of the rocket companies. The -- I'm amazed at the -- this competitive landscape these days among the rocket companies for getting men and women in space. It's really, really exciting to watch. It's exciting to be a part of. So with our newest metal printers, we can make large-scale titanium, very high-quality titanium product, and those are great for flying systems, particularly rockets. So those customers are very reluctant to let anyone use their name. So unfortunately, I can't talk about many specifics, but it's wonderful to be flying in their systems. We're very proud of that. And we do everything we can to support it. That technology is the same type of technology we use in health care for titanium implants and for titanium in other flying systems, aircraft and other flying systems. So it's great to have a common technology platform that you can apply to these different verticals at a scale that these customers want and a seriousness of service and support. If you're putting human beings in space, you want a company that has a proven product that can stand behind and service and make sure it's reliable. So we take great pride in doing that. As to your second question on polymers versus metals, it's a great one. I think they will both experience exciting growth. So you see some companies that are starting to try to specialize in either metals or plastics. And they will find a home. They will find a niche. There's room for companies that specialize like that. Looking -- we're trying to focus on market verticals and specific customers and meeting their needs. They -- most of our customers really don't want to be limited to either plastic or metal. Virtually, all of them have needs for both. And they want as concentrated a supply base as they can and still have competition. So we think it's a great competitive advantage to have both metals and plastics. We plan to continue that. It spreads our investment requirements a little broadly, but we're staying on top of it and we've got some great technology we're fielding. That's why it's important to be at scale. We have to -- I'm proud of the scale we have. We need to continue to expand that in order to support these various platforms. But that's what our customers want us to be. If we're going to be important to them and remain important, we have to have both technologies fundamentally. I think both are going to experience terrific growth. It's a bet about which one will grow faster than the other. Frankly speaking, I probably spent half the week thinking polymers will grow more quickly and half thinking metals will. But they will both, I really believe, be in exciting double-digit growth rates.

No. That's great. Maybe one for Jagtar. When we rewind the clock here, right, there's a lot of M&A that was done many years ago, some of which were not necessarily 3D printing-related assets, which goes to Jeff's point earlier about divesting some of those. The balance sheet was, call it, a year ago not in as good a shape. You guys put in an ATM. You really didn't have to push that very hard, then you sold the business, and immediately, after your sale, you raised a lot of capital from that. Since then, revenue is coming back, the economy is coming back, and you're on a much more positive flywheel. And now you have done this divestiture, what's the optimal state for the balance sheet for this company? Do you feel that you want to get back into a track? I mean you've done some smaller M&A, so to speak, now more recently. How are you thinking about: a, M&A; b, potential for increased divestitures? And then, lastly, maybe the financial impact that's from your latest divestiture that you just announced on the parts business, if you could go through those, that would be helpful.

Yes. Sure, Wamsi. So when I -- when we think about the balance sheet, we roughly, at the end of the quarter, had a little north of $130 million on the balance sheet, cash, no debt, generating positive cash flow. We generated, I think, about $28 million in operating cash, Q1, and that was after paying taxes related to our divestiture that counted under operating cash. So a very, very strong result. We feel pretty good about where we are from a cash perspective and a cash generation perspective for cash needed to run the business, right? So our CapEx requirements are fairly minimal. We've sort of talked about 4% to 5% of revenue. And we think that, on an ongoing basis, cash from operations is sufficient to cover that. And as the business scales, the cash generation should improve. So we will have some additional cash from the divestiture of the ODM business that we have announced. And so when we think about sort of uses of cash going forward beyond sort of CapEx and growth of the business, we will evaluate M&A opportunities. We've announced, as you said, a couple here within the last month. We think we have a very strong portfolio. We think we have a lot of great opportunity ahead of us. But we are looking at areas where we add to the portfolio in the areas of software and materials and applications and bioprinting, certain very specific areas of the portfolio. And we think we'll have the capital to do that. With regards to future divestitures, we think we've pruned the portfolio down pretty good to really core additive manufacturing. We'll -- I would say the things that we would consider sort of nominally noncore are probably less, with the ODM divestiture, less than 10% of revenue now. We'll evaluate opportunities there, but I think we're getting down to a point on the business where we're really down to the core and plan to grow pretty substantially from here. You had asked me about what the financial impact to the P&L is from the ODM divestiture. We'll talk more about that in our next earnings call. So we'll give an update on that next time when we get to the August earnings.

Okay. Okay. That's fair. I appreciate that. So if I step back again a little bit, Jeff, there are different business models, right, fundamentally, when it comes to 3D printing. And you articulated sort of this almost end-to-end approach, right? So you -- it's not just about selling a printer or the materials on top but how you understand what that vertical truly needs and then satisfy that from hardware, software, materials, everything down -- up and down the stack. Do you anticipate the need for increased vertical integration capabilities to support that beyond what you have today? Is there any places in the supply chain that you think that 3D Systems needs to invest more to be more tightly vertically integrated?

Well, it's an interesting question, Wamsi. I think we're well suited as we sit today but we're constantly looking for how to reinforce that. So as -- Jagtar touched on this briefly, but if you look at the 3 technologies you bring together for different applications in a vertical, it's printing technology, it's software and it's materials. We have those well covered today but they need to evolve. They continue to need to evolve. So each vertical develops kind of its own unique workflows. Whether it's a dental laboratory or it's a shop making rocket components, they have their own workflows, making sure we have, number one, the right materials for that printing operation so that they can print. If there's a way -- we'll be under constant pressure to expand our portfolio of materials. So if there's -- it's always a make-versus-buy decision. If we can develop it ourselves, great, in the time frame the customers need. If we can acquire it and then fold it into our portfolio, great. We'll look at that now that we have the flexibility to do that. And I would tell you the same with software. I think you're going to see a maturing of the software by market vertical for those that study it. So it may generically look the same, but it will be customized by market vertical and then applied broadly in that vertical. So we want to be the leader in that. We want to be the leader in truly industrializing the software component as well and use that to drop into customer requirements. If you look at our model very simply, customers in a known vertical will come to us with application questions. Can they make a certain component? And if so, what do the economics look like? We can demonstrate that for them. We can define the workflow. We can define the economics so that they know what they're getting into. And then if they say that looks interesting, can you now demonstrate it for me at scale. We have the advanced manufacturing capability and capacity to make those parts, up to the tune of tens or hundreds or even a few thousand. And if that's -- in some cases that are unique, that's all they need, then -- and they -- we can support that forever. In many cases, they say, that looks great, now will you sell me the ingredients to scale it myself. And we do that for them, either in their own shop or in a third party. And that's really our business model, Wamsi. We want to be experts by vertical, and we want to facilitate the adoption of additive manufacturing. So that's how we're running the business, and we have more demand than ever in running it that way.

So I just want to follow up, Jeff, on your comment on sort of build versus buy, right? I mean the third option would be partner. I mean when you think about the level of investments that maybe some of these chemical companies and materials companies like Dow or DuPont or something can make, they clearly have a lot of resources to spin up material faster, but they don't have access to an installed base of printers that might make it worth their while to obviously do that. Is there a way for you to collaborate with these companies to accelerate the development in such a way that maybe it's not completely a closed-system approach? Do you think that there is a future in 3D where you would be opening up as opposed to keeping it a fully closed system?

Yes. It's an ongoing question, Wamsi. And it's a really nice idea to partner with large chemical companies on creating principal plastics or even metals, in some cases, that are very useful for our customers. The -- a little bit of the problem that you run into in practice is it works for a while, and then when the chemical companies get very busy, it doesn't work any longer. You don't command enough attention from them because as big as this market is going to get at, and it's growing, it's kind of dwarfed by the commodity chemical market, right? So you have big chemical players that are on again, off again in terms of interest. So what we like to do is partner with them on a generic basis for raw material input, if you will, and then add value to that for customers. So in the case of photopolymers, you buy the raw materials, you add the ingredients needed to make it highly principal in that form and then sell it to customers. So there's a high degree of partnership and cooperation, which you have, but it's not as simple as taking an off-the-shelf commodity plastic and being able to print it very well. Often, there's an intermediate step required, and that step we find, more often than not, we have to serve. So if the chemical companies are interested in consistent, it's certainly possible to expand partnerships to do that. And frankly speaking, Wamsi, it looks great on paper, it's terrific. The problem is they're very, very big companies that like high-volume commodity production, and keeping their attention on a consistent basis for our customers is a challenge always.

Interesting. I want to ask you just around how much more cost there can be that can come out of 3D Systems. I know you alluded to your $100 million sort of target. You're through $60 million. You're making some more progress. Do you think, with these divestitures, that the cost base shrinks even more? And what's the opportunity there?

Yes. Maybe I'll start off and then Jagtar can supplement. But I -- the first $60 million, Wamsi, was redundancy. We took out -- that we had redundant sales teams. We had some redundant organizations. When we simplified the business model, we were able to really take out that redundancy and get to $60 million -- the first $60 million very rapidly. And it's always a challenge, and you definitely want to go about it the right way. But it was a pretty straightforward strategic analysis of what's redundant. Beyond that, this year, there's a lot more driving incremental efficiencies, automating, streamlining processes. There are still some redundancies we can eliminate, but it's really more grinding out efficiencies and processes and automation. So we felt good about -- we felt very good about the first $60 million. We had line of sight to that from last summer, and we executed that by December of last year. The following $40 million became $20 million when we started divesting businesses, so some of the costs that we were going to take out went with the divestitures. So the remaining $40 million went down to $20 million with the divestitures. And I would tell you, that $20 million, we will get the offset to that, in part that we consider each day, is what incremental investment should we be making for growth now because the end market is undoubtedly growing. It's growing aggressively, and we want to be positioned to meet that. So we take cost out with one hand. We add some back with the other in selected areas to drive growth. So net-net, we will continue to drive efficiencies, and we'll certainly get volume leverage, which is part of our margin improvement plan. But there is some offsetting factor now as we turn to top line growth and gross margin expansion.

So Jagtar, is there anything you wanted to add...

Yes. I think you said it perfectly, Jeff. I think and I look forward, Wamsi. For me, it's you've got a company now that is maturing, and part of maturing is a constant drive to efficiency improvement, right? We constantly need to be reallocating our resources to areas that drive growth for the business, not just running the business. So it's been constant process improvement, constant cost reduction, but reallocating investments to growth areas.

No. That's great. I don't know if this was a short session, and we're almost out of time here. But maybe, Jeff, in closing, I want to give you a chance to address the investors on the call and talk maybe about why you're excited about the future for 3D and why they should be, too.

Well, for 2 reasons fundamentally. Number one, I think it's a growth industry. I think the companies that run themselves well in this industry right now are going to go into a nice growth phase driven by industrialization of additive manufacturing. I trust we'll be one of those well-run companies, and we'll garner our share or more of that growth. Why I'm excited about 3D specifically is I think we've got the right organizational structure now and the right technology base to really participate fully in that growth. So what you'll see from us, Wamsi, and for those online, is consistent top line double-digit growth and I think very nicely supported by market expansion and probably some share gain along the way through execution. You'll see gross margin expansion. We're in the low 40% today. Our goal is to drive that over 50% over time, again by volume leverage, by business mix. Health care is going to grow a bit faster than industrial and then by aftermarket sales and service support for consumables. And then you're going to see EBITDA margins. Our goal is to drive them up to 20% and better, up from the 13% today.

That's fantastic. Well, we're excited to track the progress here. Jeff, I know this was a short session. We would love to invite you to come join the CEO call series that I do. I would love to hear, at a longer session, more details from you as well. But thank you so much, Jeff, Jagtar, John, all of you. Thank you for taking the time today.

Thanks very much, Wamsi. Appreciate it.

Thank you.