3D Systems Corporation (NYSE:DDD ) Stifel 2022 Cross Sector Insight Conference June 8, 2022 3:35 PM ET

Jeff Graves – President and Chief Executive Officer

All right. Ready? Okay. So hello everyone. My name is Noelle Dilts and I cover advanced manufacturing here at Stifel. The biggest sector within advanced manufacturing is additive manufacturing, and we're here with the leader in the space, 3D Systems. So we're joined by Dr. Jeff Graves, who is President and CEO. He joined 3D Systems in his current role in May of 2020. So it's been here a while now. But so I wanted to start with talking about that. In the past couple of years, you really led a transformation of the company to a leaner, more focused and growing company in additive. So for those who are not like quite as familiar with the changes at 3D Systems, could you give us the brief history of some of what you've done.

Sure, sure. And first of all, thank you for having us. Thank you all for being here. It's a pleasure. It's – 3D printing in general is a great, it's a fun topic to talk about and particularly from a 3D Systems standpoint. 3D Systems, if you don't know our history, we invented 3D printing with our founder, Chuck Hull, back in the early '80s. And the company went through several stages of evolution as it grew over time and today we're one of the biggest in the industry and certainly brought us technologically. The company like many companies as they grew through the '90s and 2000s had gotten involved in a lot of what you'd call digital manufacturing. So at its heart, it was 3D printing, but there was digital machining and moving into CAD modeling and things. So a lot of things outside of 3D printing.

So I came in 2020 and what the board asked to me was look, we need to get the company focused on core competencies and basically decide and take action on what we are not going to do. So divesting some assets and then really focusing down on 3D printing, which we're very excited about. So in – by June of 2020, we laid out a four-phase plan, which we just summarized as reorganize, restructure, divest and invest. The reorganization, we went from being organized by printers, materials, software to an organization structure, which has a healthcare business and an industrial business. Those two end markets are distinctly different, but both of them benefit tremendously by additive manufacturing. So we reorganized with that we eliminated redundancy in the organization, especially in the sales force and some other overlapping back office functions.

So we took some cost out of the business, got it to the right structure and focus. And really from late 2020 on, we've been growing very nicely. We've been growing good, solid double digits. The company has been over time on average have been generating cash, have been profitable. We're choosing this year to invest a lot in foundational activity and R&D, but we feel very good that we're through the first three of our four phases: reorganization, restructuring and divestitures. We put lot of cash on the balance sheet at the end of that activity. By the end of 2020, we had put about $0.5 billion on the balance sheet. We added to that in 2021 through a debt offering as well and when the – which the market timing was good on that one in Q4 of 2020. So today we're – and we've spent some of the money on some acquisitions that we're very pleased with it related to additive, but today we have very strong balance sheet.

We have a cash surplus of about $650 million in cash and we're growing very nicely. Interestingly that if you look at the current situation while we wake up most mornings cursing supply chain issues and all of the hassle that brings in fulfilling demand, that exact same dynamic is driving very intense end market demand for the product. So as customers look to revector, reorganize, move closer to home their supply chains, a lot of times that opens the window for additive and it gives us an opportunity to go and sell product. And so we're – we have very intense customer demand and we struggle like everybody with our own supply chain and try to get that optimized. So a long winded answer to your question, but that that's where we're at today.

That's perfect. So let's talk a little bit about that fourth stage, the investment stage. So, you're making organic investments in the machines. Maybe you could talk about refreshing the product portfolio and kind of what your goals are there. So let's start with organic and then maybe we can move into inorganic.

Sure. It's – additive is expanding so quickly. The way we've approached the market is we're very application focused and underneath that there are three driving technologies. There's the printers and many of the hardware. There is materials and there is software. So we have – we're the broadest in all three of those areas meaning that we have more application flexibility than anybody in the industry in my opinion. So from organic perspective, we've taken clear action to invest in R&D. It's a heavy R&D investment year and that's basically to refresh our printer product lines, both polymer and metal. Our goal is to move from about a two year introduction cycle to a 6 to 12 month introduction cycle for new printers.

Those printer technologies are changing really quickly with advancements in lasers and process control. So we're moving to multi-laser systems, enhanced process control and machine intelligence. So we're doubling down on our hardware investments basically to accelerate innovation. Materials area, we're expanding our – particularly our polymers group, where we do a lot of value added materials. And then in software we've done both organic and inorganic investments to be a leader in software. We are migrating from machine intelligence, if you will, for optimizing the additive process machine by machine to optimizing fleets of printers now as they're brought into factories.

Great. So one of the things I think we've talked about a fair amount is this – is the applications or sort of the solutions based approach. So can you talk about what that means and how that really drives your decision making in the business?

Sure. It – a differentiator for us is what Noelle mentioned, it's the strong applications focus. Most customers these days have heard of additive manufacturing, virtually everybody has heard of additive manufacturing, many have not practiced it. So what they do is they'll come to us often with an advanced component design and say, can you make this with additive. And if you can, what's it cost me, you know, what's it going to cost both from a capital standpoint and the component cost, what's it's going to cost a manufacturer. And so, what we do is we say, let us demonstrate that application for you. It's a part of our sale process. So we have about 80 application engineers, biggest application group in the world that can take a customer design from a CAD file, turn it into a component, either polymer or metal. And these are production components. These are our actual production components.

We can demonstrate the component technology. We can model the workflow and then the economics and say this can be made, here's the properties of it. You can test it yourself and here's the economics behind it. If it passes that hurdle, then they say, can you make it for me in some quantity, so I can really test it in the machine or in the human body and see if it's going to work. So we have a limited production capability to do that. And then if it expands beyond that, we transfer the process to them and sell them the equipment to enable that. So the application focus is key for us and we do it by market vertical. So whether it's dental and orthopedic applications in healthcare or it's rocketry satellites, electric vehicles in the industrial space, we go vertical by vertical application and customer focus.

Great. So shifting over to the inorganic side, you've also invested in a lot of businesses, a number of acquisitions Allevi, Additive Works, Oqton, Volumetric, Titan and Kumovis. So we obviously don't have time to go through each of those, but could you kind of talk about, you know, is there as investors look at the business and look at what you're trying to do through M&A and what you have done through M&A, are there common characteristics you're looking for? What really are you kind of trying to achieve through that – through the M&A strategy?

So our application focus – focus leads us to need expanded technologies. So if we have a customer, a great example on orthopedics, we do a lot of titanium implants for repairing the human skeleton. And we go through channel partners, deliver those to surgeons for repair. We're a leader in titanium applications for that, but increasingly surgeons would like to implant a polymer for a variety of reasons, performance for optics. You can shine X-rays through anything. So we already have the application knowledge. We have the ability to do it in metal. So we acquired a company called Kumovis that brought us, rapidly brought us a printer and material technology that we could fold into our application base. And with that, we went out immediately to the FDA to get approval for the process, which we expect in a couple of months, but we used this application focus to drive our technology.

If we could do it internally ourselves, which we could have done even in that case, would have taken years and that – the return would have been slower. In some cases, you can go out and do an acquisition very, very effectively and fold it right in. Same with software. We've been – we based – basically when COVID lifted a bit in late 2020, we started going to customer factories that wanted to implement 3D printing. And the standard story they told me was Jeff, we love to embrace 3D printing, you guys and your competitors, many, many good machines. We'd like to bring them in quantity, but we don't have this software infrastructure to do it. It doesn't fit in the normal factory SAP, Oracle-based Microsoft system. So we said, well, could we develop it ourselves? And the answer like always is yes, but it's going to take years and a lot of money to hire software people, which aren't easy to find.

Instead, we found this group Oqton that was the leader in the world in doing that and we bought them and we brought them in and we run that as a separate, actually a separate unit, because we said, this will drive additive for everybody if it's successful. So we firewalled it off in that case and said we make this available now to all of our competitors and all the customers that want to embrace additive, they can take this software solution, plug it into their operating system in the factory and use it to bring in fleets of printers, whether it's 3D Systems printers or others, they can bring it in. The third category, I would tell you, is a brand new business unit for us.

And I think it's going to be fabulous over the next half dozen years and it's biologics. We've been good for a long time at printing orthopedics doing medical devices, okay, I'd say repairing human skeletons. It's a natural for 3D printing. We're really good at it. We have a good relationship with the FDA and we're the leader in that field. So the next step in evolution is to print actual human body parts. So – and it sounds like the stuff of science fiction, but we have a wonderful partner in United Therapeutics, who came to us four years ago and said, could you ever print a human lung. And the first answer is no. And then the second answer about a year later was maybe under – with the right amount of money and focus. So they sponsored research with us to develop their capability to print a human lung. And we were very proud to roll it out last week in a CNN sponsored event out in San Diego, the most complex article ever printed by mankind and it was an actual human lung.

And the commitment is within five years it will be in a body, undergoing human trials. So if you can do that, it opens up soft tissue implants for repairing other parts of the body and pharmaceutical applications with printing of vascularized 3D tissue. So we're excited about that. We have not put numbers and timing to it, but since our partner put a stake in the ground saying in five years we'll have lungs, obviously the other applications are easier to do. So you back into shorter timelines and the return on those investments become really interesting. So we'll talk more and more about that in the future, but because of that opportunity, we bought two companies last year. One that sells simple printers, extrusion printers into the research space, Allevi, and one that had deep biological expertise, tissue engineering, because we didn't have that skill set in the company. So we had printer capability, but we needed internal biological expertise. So we bought Volumetric and today we're the leader in the biological space as well. So very happy and excited about that.

Yes, really – yes, and really interesting technology, obviously, if you can look it up online, we had – got to look at some of these technologies that your Investor Day [indiscernible] and I mean it's amazing some of the biological things that they're printing right now.

As exciting as the industrial and healthcare businesses today for orthopedics and industrial applications, the potential for the human body applications is enormous. I – my guess is and in a decade it'll dwarf the opportunity in the other markets, but I always tell investors invest because of the nice opportunity we have in industrial and healthcare today for orthopedics and dental applications, big business for us. And you almost get a free call option on the biologics today. It's really now factored into our thinking yet.

Great. So I just wanted to shift to your healthcare division, you just mentioned it, just because it is so important. So maybe we could start with dental. You obviously have a large customer where you have a good relationship here with a line. But could you talk about a couple of things? So one a question I'm often asked is, folks are looking at a line, their revenues and growth and kind of trying to bring that over to 3D Systems. So when –how would you recommend that investors think about that relation – that relationship? Or really just generally how to think about the growth opportunity there?

Sure. Align [ph] has very interesting case study for us. We helped them start their business years ago and it’s been wildly successful. Their printing technology they use for the Invisalign product is our technology, basically is using their factories. It’s been wildly successful and they’re a great customer. They’ve grown to be a big customer of ours, and they’re very – their growth potential in the future is still enormous. They only have according to their numbers about 10% penetration in the orthodontic space. And they’re a very big player in that space. So they’re a great customer of ours.

It’s a great example of what 3D printing could do to print custom – mass customized aligners for teeth. So everybody’s is different. They alone, according to their numbers that they’ve stated publicly are printing over 700,000 parts a day with our technology. So, we’re really proud, it dwarfs the rest of the industry combined, quite frankly. And we’re really proud of that. We know more, I would say today about fleets of printers and how to make them successful than anybody in the world.

That, it’s a great example. It’s – they’ve gotten big for us and we are now looking at how do we, obviously we want to support their growth. It’s tremendous, but there are many adjacencies that are wonderful. As we develop dentures now, and look at the same exact dynamics, customizing dentures for folks around the world, printing them on demand, great application and dentistry, as well as implants. When you go to the orthopedic side of the business, and our healthcare really is about 60/40 dental to orthopedic to med devices as we call it, which is predominantly orthopedic related.

The potential for orthopedics is even larger, because everybody’s bone structure is different. If you look at it today, if you have a knee replacement, as an example, you have to choose size, whatever it is, A, B or C, you don’t get A, A and a half. You don’t get B, B 0.1, you get A, B or C. What the human body really wants is a customized article for everybody’s body. If you have to have that procedure. The issue has been cost. And so they can put those standard articles on the shelf. And, but we’ve gotten the cost down now to the point where my guess is in the future. All orthopedic surgeries will involve custom printing because it, the economics are such, now that you can print it on demand.

We can turn around a custom jaw bone, for example, for a patient from the time the surgeon calls us and gives us the CAD file. We can turn around a finished implant and customized surgical tooling within five days, anywhere in the country. And we have great channel partners that deliver it, that support the surgeon broadly. We can provide those kind of implants. That’s what the human body wants. And it’ll be an extension of that when we move into biologics, but great business, you have to have a deep understanding, obviously the FDA and quality processes, which we do in our Littleton, Colorado facility, beautiful facility, which be happy to host people through anytime. Great operation and it’s gone very well for us.

Yep. Okay, great. I guess and let’s just quickly, a few things you touched on in bioprinting, but you talked about the long-term goal of printing organs, but that there are these steps along the way. Could you talk about some of those, the opportunities there? In particular, it really does seem like, printing cells for the research market seems pretty simple. Makes sense. So, how should we think about the timing of those opportunities?

So, not to drag you through all the details, but if you look at the long-term goal is human organs. Okay. The shorter term goal is other soft tissue implants. The shortest term goal is pharmaceuticals. And pharmaceutical as they relate to drug discovery. If you look at drug development today, it generally takes about a decade to develop a drug and get it through all the trials. It starts out in the petri dish. Then it moves to animal testing. Then it moves to human testing. It costs billions of dollars to get a drug to market. And the failure rate’s extremely high it’s about one in 10, make it. So the idea is, if you can print a human tissue sample that’s three-dimensional, that has vasculature, so you can flow blood through it. You can more rapidly test drugs. That’s the simple idea.

So, if you can take a year out of that cycle or increase the hit rate by 2X, 3X, the economics become fantastic. So with the printing technology to do human organs, we’re down looking aggressively at moving into the pharmaceutical space to print three-dimensional tissues that are vascularized that can flow blood through in order to test drugs. And we’ll do this in concert with the major pharma companies. And I would expect, I’d be surprised if we didn’t have something to talk about within this calendar year or just beyond in terms of the initiative to do this, because it’s an obvious, quick hit for the technology.

And once you demonstrate it and standardize the test, then you can replicate it across the pharma industry as a standardized test. And that’s really where we want to go with this. It’s worth billions of dollars and the benefits of mankind is enormous. So, I love the direction. We have not put numbers and timing on it quite yet, but it is the shortest term application that we’re pursuing now. And I’m very excited about it.

Great. So just shifting over to industrial, you’ve made it clear, you’re looking to serve markets and customers that really utilize higher end applications, and materials, and applications that demand high reliability products. So stand in contrast to some of your competitors. So, can you talk about why this is the right strategy? And why you think you’re the best? Why you think 3D Systems is well suited to meet these advanced customer needs?

So there’s a couple of branches of industrial 3D printing technology that people are trying to pursue. And there are several companies on each branch. One of them is, is very high volume, fast printing is they, that’s not us. Okay. They’re struggling to get to part quality that’s acceptable, but they’re going for the economics. They’re going for high volumes, right out of the shoot. The Achilles’ heel to that technology is the part quality isn’t where it needs to be. And there’s a lot of part post process optimization. You have to do through heat treatments and other expensive processes.

We have not gone down that path. We’ve taken a path in the industrial space that targets lower volume, high value applications, satellites for example. We’ve launched componentry that are on satellites, which are going into space now by the dozens or hundreds, but not millions. So very high value components, long life that benefit from complex designs, and very high quality processing. Our machines are particularly good with very difficult materials like titanium and other high temperature materials that go into rocket motors. They go into satellite structures, things like this.

Obviously we’re moving in aircraft components, and nicely electric vehicles today are adopting much of the same technology that airplanes went three years ago, which they’re lightweighting the car in order to get more distance out of the battery basically. Well, lightweighting means more exotic designs and materials basically borrowed from the aerospace industry. So additive works very well in that case. And so we have very aggressive programs and aerospace and automotive as it relates to electric vehicles and in, and then subsets of those, a big push for us right now is semiconductor manufacturing equipment.

So people that – companies like Lam Research and Applied Materials, people that make the equipment to make semiconductors, the component that goes in that’s quite complex and extremely demanding for precision and heat transfer, while you can make those designs most effectively with additive. So, we have a nice penetration going right now in the semiconductor machine space, if you will providing the printing technology or sometimes components to those guys to build more semiconductor equipment.

Great. Just in the interest of time, I wanted to shift over to some of your financial goals.

We’re about 20% through your question.

All right. But you’ve let’s start on margins, and supply chain, right? So this year, you’re certainly seeing some headwinds there on the supply chain side. So maybe you could touch on how that’s progressing. And how do we think about going from sort of your gross margin guidance for this year in the low-40%s to 50% plus overtime?

Yes. This, the prior discussion was fun. This was a more challenging. The supply chains are just miserable for everybody right now, and no less so for us. It’s truly a situation for everyone where you’re chasing a mixture of components every day, every week to build. So supply chains are hard. In the first quarter, we reported gross margins of about 41%. I would tell you specifically, supply chain issues cost us two points of margin, absolutely. We left millions of dollars of revenue on the table and it – and the costs are up availability is lower. It cost us about two points of margin. So, you can think of us right now on normalized times at, in the low-40s, 42% to 44% kind of gross margins in normalized times.

As the volume grows, you give volume efficiency. Our goal is to get over 50% on a run rate basis, 50% gross margin, and the way you do it, it’s I can describe the elements to you get some volume efficiency, supply chain’s normalized, but you give volume efficiency, which gives you a bump. You get some mix effects, two-thirds of our revenue. And this is important to understand our company, two-thirds of our revenue is after market revenue. So we sell a printer, two-thirds of the revenue then from that customer will be on replacement materials, and on software, and on the occasional servicing of the equipment, a printer lasts 15 years or more. So, we have the biggest field service team probably in the world, at least arguably the biggest in the world.

So, we, our goal is continue to drive aftermarket support for customers. If they need consumables, if they need software, we – software’s a lovely, a lovely lever in terms of gross margins. So, as you look moving from low-40s to 50%, obviously the business will grow. We’re growing good solid double-digits today. As we increase our printer launch rate, it’s a new opportunity to deliver more value to the customer. Get more pricing, get costs down through good designs. So printer margins should be higher, but the big lever is materials, software and service in the aftermarket. So, we’re spending a lot of time and money on both internally and through acquisition, on materials, software, and software, and then continuing to build out our service team over time. So it, I think it’s a simple model, and it’s proven to be very effective. And I think you’ll see a nice recovery coming out of the difficulties we’re having right now.

Okay. Would you say supply chain is worse than, or tougher than it was at the time of that?

Being the optimist I am. I wake up every day thinking it’s going to be better, but we have, we’ve now gone to weekly operations reviews with me. And I would tell you honestly, it’s about as bad as the beginning of the year. Every day is a different battle. I still think by late in the year, just based on what you guys see in the paper, I see the same thing. I think the world will get better over time. The war hasn’t had a tremendous effect on things for our – in our industry, but in terms of the ripple effects from COVID and shutdowns in China, things like that, it’s still a mess.

And I’m hopeful that by the year end, that that the world will get better, and we’ll figure that out. But because everybody’s working on it really hard across many, many industries. So that’s the story and I would expect this year’s not going to be glamorous. We find our guidance to be like 41% to 43% kind of gross margins. But I think over the next several years you’ll see us live pretty nicely.

Yep. Okay. Great. Any questions?

Questions? Yeah, no, as you, as you walk away, what differentiates us from others really is our application focus supported by the range of technology that we have to really be successful at that you’ve got to have polymers and metals. You have to have both, you have to have a good business model with aftermarket sales in order to drive margins and cash flow. I think we’re of, and you have to have scale. We check all three boxes and if you want to be in healthcare, there’s an added requirement of being familiar with the FDA and the European equivalent and being a good quality producer of technology.

So, I feel great about our position, those basics differentiate us in the marketplace. And we’re sitting on a great balance sheet right now with roughly $650 million of cash, long-term debt at no interest rates. So that’s, it’s a nice position to be in and a net cash position. So it’s an investment year for us. We’ll be investing a fair bit of money in R&D, and back office optimization, G&A related. But that should drop off moving into 2023 and we’re tremendously excited about the future. Additive will carve a niche in the industrial space in production, in production environments. That’s exciting.

Great. Thanks so much for joining us.

Thank you. Thanks for the time guys.