3D Systems Corp Q2 FY2023 Earnings Call

Hello, and welcome to the 3D Systems Q2 2023 Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host Mick McCloskey. Please go ahead, Mick.

Thanks, Mick, and good morning, everyone. I appreciate you joining us today. To build on Mick's remarks, I encourage you to view the charts available on our website. There are a few that I think will be particularly interesting, and I'll provide commentary as we go through them. Let's begin with Slide 6. This morning, I want to take a step back and discuss what is currently happening in our industry. After that, I’ll update you on our collaboration with Stratasys, share insights about our second quarter performance, and conclude with our outlook for the remainder of the year before passing the call to our CFO, Michael Turner. We'll cover a lot of ground in today's call, but I want to emphasize three key takeaways I hope you take away today. First, the quarterly results across the industry highlight the essential need for scale. Why is this topic gaining attention now? For the first time in our history, customers are looking to transition 3D printing from the lab to real factory production settings. Success in serving these customers requires a global presence, innovative technologies, and a business model that enables profitability for both the customer and the supplier, allowing for sustainable investments and value creation for all stakeholders. As one of the largest pure-play additive manufacturing companies, 3D Systems has a clear path to achieve greater scale through organic growth. However, our proposed partnership with Stratasys, which we have sought amicably for over two years, accelerates this goal, providing faster benefits for our customers and shareholders. This is why we have remained committed to these discussions for so long. The second key takeaway is that, unlike many in our sector, 3D Systems is achieving organic growth rather than relying solely on acquisitions. While our orthodontics business remains prominent, outside this sector, we have grown our revenues organically by approximately 2% in the first half of the year, and our guidance suggests high-single digit to low double-digit growth for the entire year. While these results may not showcase our full capabilities, they validate our long-term growth strategy with our markets becoming increasingly balanced over time. Third, we are fully dedicated to our promising regenerative medicine platform. Our multifaceted strategy is yielding exceptional results that strengthen our confidence in unlocking significant value in this emerging market. Realizing this potential requires ongoing investment, but we believe it is the right course for our shareholders, and this will become more apparent in the future, with further insights to follow later in the presentation. Those are the three main points. Now, let’s dive deeper into them. As I reflect on the progress made in recent months, one dominant theme has surfaced: scale is essential. This seems to be a common understanding among all companies in our industry at this moment. While it’s crucial to remember that our industry is characterized by innovation and growth, we are experiencing a significant shift in the nature of our customer base. There are substantial multiyear growth opportunities across various markets, but accessing these opportunities necessitates addressing the needs of factory managers rather than lab managers or design engineers. Factory managers prioritize not only the precision of the printer but also the economics of its operation within the full factory workflow, emphasizing reliability, reproducibility, and the supplier's capability to service the product throughout its lifecycle, which extends over decades. These demands are quite different from those of lab managers or design engineers, who were primarily our customers until recently. Moreover, many large clients operate multiple factories across different regions of the globe. They desire to deploy 3D printing where it adds the most value without worrying about the availability of local technical support or specialized operator training. These are evolving requirements for most companies in our industry, and successfully meeting them requires scale, which includes a global sales and service network, continually improving operational efficiencies, and a diverse range of printing technologies to cater to various application needs. For the largest players in our sector, we can accomplish this in selected market verticals today, as demonstrated by our strong position in the dental orthodontics market, where we’ve expanded to support numerous large-scale printer fleets across three continents. Our fleet of printers is capable of producing more components in a single day than the rest of the industry combined. In 2021 and early 2022, this exposure helped us disproportionately as everyone in the world seemed to want straight teeth, and inflation had not yet impacted their spending. Then over the last year, inflation effects on discretionary consumer spending have taken a dramatic toll on end demand for orthodontics. And we, as a key supplier, felt this impact acutely. Fortunately, the bottom seems to be now in sight for this market, which will bring us relief. But the longer-term answer is to diversify our market exposure as we're working hard to do. To replicate our orthodontic success in other markets, I reorganized the company by market vertical when I arrived in 2020. For our 2 business units, Healthcare and Industrial, we now target specific high-value market verticals, picking a lead customer to work with intimately on their applications in each. These applications often span both polymer and metal printing technologies, which is why we've aggressively invested to sustain our broad portfolio of hardware, which is the broadest in the industry today. Others are now working to emulate this approach. Our customer success is demonstrated within a market, then we work to scale the optimum processes for their applications and move them into their factories for mass production. This approach is what's driving our positive organic growth in markets outside of orthodontics. Just as we are strong in orthodontics, others in the industry may be strong in other individual market verticals or with specific narrow technology offerings. However, no one is yet positioned to access multiple market opportunities that are now rapidly emerging in front of us, and they're very exciting to say the least. To be very clear, I would not trade our strengths and opportunities at 3D Systems for anyone else's. But the faster any of us can attain scale, the more quickly value can be created for our customers and our shareholders alike. At 3D Systems, we see 2 paths to realize our mission to achieve scale. Right now, there's an immediate path through a combination of Stratasys. Second is through the execution of our stand-alone plan, which is built around securing new customer contracts and high-value market verticals, such as aerospace and defense, semiconductors, electronics, medical devices, and others, commercializing our regenerative medicine business, a return to growth in orthodontics, and the emergence of new significant dental applications. To be very clear, both paths are very sound, highly executable, and will create significant value over time. Because the decision point is right in front of us now, I want to again highlight why we feel strongly about our proposed combination with Stratasys and why we spent so much time and effort pursuing this combination over the last 2 years. This combination presents unmatched value creation potential for all stakeholders in the additive manufacturing industry, creating a leader in the industry with an exceptional financial profile that will provide 3 critical elements to all stakeholders: sustainable profitability, innovation, and value creation. Importantly, as we mentioned 2 weeks ago, we now feel the total value delivered from highly accretive cost synergies is at least $110 million, given redundant investments in R&D, SG&A in addition to COGS efficiencies, all of which we feel can be realized within 18 months of closing, delivering even more value to shareholders than we had originally anticipated. Now I will briefly comment on the ongoing discussions between our 2 companies. After some delays, Stratasys has progressed through an exhaustive diligence process in order to compare the 2 combination options before them, ourselves and desktop metal. They've clearly stated they need scale and technology diversity to be successful, and I believe our deal brings this in an overwhelmingly compelling manner. I'm happy to say that our teams are now rapidly bringing the diligence effort to a close. It's no secret that I had hoped to move faster, and at times it's been very frustrating, given that we're both public companies and the benefits of our specific combinations are so very clear. It's been reinforced by the feedback we've received since submitting our proposal from shareholders of both companies who have been crystal clear that they share their view of the tremendous value creation in this deal. While we had hoped to be in a position to announce a deal with Stratasys today, we're not in a position to do so. However, with the end of the process in sight, we will see it through to its ultimate conclusion. The bottom line is that we're going to do what's right for shareholders, and I'm not going to let near-term noise distract us from the end goal, particularly when success will create so very much short-term and long-term value for all stakeholders. Now, moving on, I'll turn to Slide 7. I'd like to move on to what's become an ever more exciting driver of our long-term growth plan, regenerative medicine. As we've mentioned previously, we're investing heavily in our regenerative medicine business because we truly believe in its transformational potential. The ability to manufacture human organs and other parts of the human body, as well as reproduce human physiology in the lab to speed the development of new drug therapies will enable life-changing health outcomes for people in need around the world while creating significant value for our shareholders. Our innovation engine continues to make great progress in all 3 facets of this new business. For organs, our initial focus has been on 3D printed lungs, the most complex product ever 3D printed through our partnership with United Therapeutics. Since 2017, we've continued to execute on an aggressive 10-year plan, and with the progress that we've made, we're on the precipice of some huge milestones in the years ahead. As a reminder, we've set a goal for human trials in 2026 and have already accomplished much of the heavy lifting related to development. We believe we're tracking well towards this path, which only a short time ago would have seemed like a pipe dream. To put the opportunity in context a bit, in 2021, there were 2,569 lung transplants completed worldwide, according to the U.S. Department of Health and Human Services. At the same time, 3,111 patients were added to the waiting list in the United States alone, a fraction of those that could benefit from this procedure if an adequate supply were available. The number of patients formally audited for the lung transplant waiting list has grown almost 28% compared to the last decade that began in 2010. You can understand our enthusiasm for this opportunity when you put that unmet need against our clear path to commercialization. Moving on to drug development and our opportunities with Systemic Bio. I'd refer you to Slide 8. And if you could take a moment to get there, some of the concepts here are just amazing. h-VIOS, our proprietary organ-on-a-chip platform is a novel application, which allows pharmaceutical companies to test their drugs on a cellularized chip that mimics the response in human organs during trials. While others have attempted to commercialize the organ-on-a-chip concept, driven by the clear benefits in drug development, our technology is unique. Leveraging our breakthrough and the printing of vascularized tissue using our print-to-perfusion technology developed for human organs, Systemic Bio has now demonstrated the 4 core technology advancements needed for success. These elements just working left to right include, first, the creation of very precise computer models for vascularized tissue, where in the vascular network can sustain life in the human cells that will surround them. Next, converting this model into a 3-dimensional scaffold at the precision needed for the intended tissue structure, and then cellularizing the scaffold in order to convert it into living human tissue with desired healthy or diseased cells and then demonstrating, as you'll see in the far right-hand photograph, that this entire 3-dimensional tissue structure supplied with blood and nutrients can sustain that cell life for an extended period of time measured in days and weeks, not minutes. That photograph on the right is a profound breakthrough. It demonstrates the sustainability of life in the laboratory, where it can then be studied on a reproducible basis by new drugs. We believe this will help accelerate the pharmaceutical industry tremendously over time. With the team and facilities established under the leadership of Ms. Taci Pereira, we signed our first contract with a major pharmaceutical company last quarter. This study, which will span several quarters, is the first demonstration of the technology to our pharma customer. We expect another contract award with a second major pharma company later this year, and we have 5 additional programs with other major pharma companies in our pipeline. While it takes time to establish a new technology with these companies, once done, the growth opportunities are significant, and there are an enormous number of variations in the technology that can be pursued. Also of note, earlier this year, this is very important, the FDA announced that animal testing of new therapeutics is no longer a requirement in order to move into human trials. This provides an additive incentive to introduce new, more effective testing methods for new drug therapies. From a value creation standpoint, it's fairly well known that bringing a new drug to market is an enormous cost, with one estimate putting it at $2.3 billion per drug. However, what's more eye-opening for us is that the average return on investment for a new drug is just 1.2%. We believe that our h-VIOS product can significantly reduce both the time and cost for our pharmaceutical partners. We're just in the first inning here with our partners in this space, but much like with our organ business, we've seen incredible pairing of technological breakthrough coupled with incredible demand. And finally, earlier this week, we announced a new partnership with Theradaptive, a protein engineering company. Their product, the Osteo-Adapt, is used primarily for orthopedic regeneration or very simply put, regrowing damaged bone. As shown on Slide 10, through the marriage of our technologies, we will combine the Theradaptive protein material with our 3D printed custom orthopedic implants to yield highly targeted bone regeneration. Initial applications will be for spinal and craniomaxillofacial repair, a market we know well given our extensive history. We believe the value added through these targeted protein treatments can be significant. In terms of technology maturity, Theradaptive has already earned 3 breakthrough medical device designations from the FDA, with human trials targeted for later this year. They estimate that this product alone could address a roughly $4 billion annual market. Now moving to more on the core 3D Systems business and our results through the first half of the year on Slide 11. While we're encouraged to see sequential revenue growth from the prior quarter, and we'll call out that our non-dental business has grown over 3% year-to-date, we also acknowledge what we delivered was below our expectations. To add more color on the second quarter performance, it's important to discuss them in 2 distinct sections as we did on our first call: our dental orthodontics market and our non-dental markets. As many of you may be familiar with, the dental orthodontics market and specifically one customer represents a material portion of our overall business. And as we constantly message, this market went through a period of significant growth in '21 and '22. After broad economic pressure began to impact consumer spending more recently, the business has started into a rapid decline. The pain was compounded by the inventory builds that were completed over the COVID period when the supply chain disruption was a major concern for all companies. This led to a decline in revenue for our business by over $50 million over the last 4 quarters. While we're encouraged by the recent public data that points to that suggests the orthodontic markets may have started to stabilize, it's important to note that customer inventory levels still remain somewhat elevated. We'd expect a slight lag between demand recovery and subsequent impact to our business. Given these factors, in Q2, we again faced a tough comparison to the prior year, and the decline in dental was the primary driver behind the consolidated company's performance. With that said, the dental business continues to be directionally consistent with what we expected at the beginning of the year. We continue to expect our dental business to be down approximately 35% for the full year 2023. Looking to the second half of this year, we expect that our comparisons to the prior year will become more favorable. Turning to our non-dental markets. As the second quarter progressed, we witnessed opportunities within both our industrial and healthcare segments get pushed into future periods. This led to unexpected weakness for the quarter in our non-dental revenues. Fortunately, a significant portion of these opportunities were booked in July, but the point remains as bullish as we are regarding the long-term demand drivers, the near-term environment this year is more uncertain. Customers are continuously reevaluating their capital expenditures in light of rising interest rates, tightening budgets, and a more cautious macroeconomic outlook. And as such, sales cycles in some verticals seem to be elongating. Putting aside those dynamics for a moment, we were encouraged to see growth in some of our underlying verticals that we view as vital to our long-term strategy. Notably, in the personalized health solutions portion of our Healthcare segment, we delivered another strong quarter of double-digit growth. While this is only a portion of our non-health care segment, it's a critical driver to our future performance and one that we believe we are advantageously positioned relative to our competition. Given our broad range of printing technologies and materials base spans both metals and polymers and multiple 510(k) approvals from the FDA, we continue to make great strides in medical applications for the human body. And to just put our advantageous position into context, a typical product design time in this application can span years, only then to go through an average 6 months to achieve FDA approval. Moving on to our Industrial segment, pressure within verticals such as service bureaus and energy were nearly offset by growth in other verticals such as foundries, aerospace and defense, consumer and durable goods, and semiconductors. Within Industrials, we're proud that our unique Titan extrusion printing platform continues to gain traction, evidenced by our recent announcement of our EXT 1070 being selected by Matrix Moon, an additive manufacturing-focused training center and 3D Systems reseller in India and our collaboration with SWANY, an additive manufacturing service provider in Japan. Both are fantastic examples of growing the presence of our Titan platform internationally since its acquisition earlier last year. Now to Slide 12 for an updated view on what we expect for the remainder of 2023. While Michael will go into specific financials in more detail shortly, I would stress the importance of a few key points from this morning's prepared remarks. Dental represents a material portion of our business and is home to our largest customer. We've acknowledged the headwinds in this business would face at the very beginning of the year and has continued to perform largely in line with our expectations. Our dental customers are starting to see signs of stabilization, and we expect year-over-year comps to become more favorable in the second half of the year. While we still feel there's some level of inventory to be worked through in the short term, our position in orthodontics is very strong and will remain a cornerstone of our dental business for years to come. In our non-dental business, as I mentioned previously, we saw a more conservative shift in customers' capital expenditure appetite within the quarter. We expect this trend of elongated sales cycles to continue throughout the rest of the year, which has led us to adjust our full-year expectations now targeting high single-digit to low double-digit percentage revenue growth for the full year outside of orthodontics. While this is prevalent in both non-dental healthcare and industrial, it's not without the bright spots of continued growth that I discussed earlier. So with that, I'll turn things over to Michael.

All right. Great. Thanks, Jeff, and good morning, everyone. Before I go into the normal details of the financial results, I'd like to circle back on 3 important points that Jeff has already made that will underscore most of my prepared remarks at this point. First, on February 28 of this year, we informed you that we expect our dental business to be down by approximately 35% for the year. We further commented that this would be more pronounced in the first half of the year due to the timing of order patterns in the first half of last year, followed by the subsequent decline of demand for dental orthodontics that unfolded in the back half of 2022. Our view on this has not changed, and the year-over-year declines that we've experienced in our dental markets during the first half of the year are very much in line with our original expectations. And our view for the full-year decline of 35% remains unchanged as well. The second point I'd like to make is what has changed is a shift in customer order patterns during the quarter, particularly impacting printer sales that resulted in orders being shifted out of Q2 and into Q3 due to elongated sales cycles as customers began to reevaluate their capital expenditures in light of rising interest rates, tightening budgets, and a more cautious macroeconomic outlook. We are conservatively expecting these elongated sales cycles to continue for the remainder of the year, resulting in a shift of sales demand that will adversely impact our view of full-year 2023 sales attainment. I will circle back to this in more detail shortly. The last thing in the comment I'd like to make pertains to year-to-date sales growth. Excluding the softness in dental sales that will be expected to occur in 2023, and despite a shift in customer order patterns that occurred late in the second quarter, we're very encouraged by the growth we've generated in this difficult environment, particularly as we've seen a contraction in organic revenues for most of the companies in the space so far in 2023. We had important backdrop in place, I'll begin with a summary of revenue for the second quarter on Slide 14. Second quarter revenue of $128 million decreased 8.5% compared to the same period last year, primarily reflecting the expected weakness in our dental markets. Excluding our dental business, second quarter sales decreased by approximately 2% versus the prior year, driven by the shift in customer order patterns as previously discussed. On a year-to-date basis, however, excluding our dental business, revenues have grown by more than 3%. Specific to our segments, second quarter Healthcare Solutions revenue decreased 15% to $61 million compared to the same period last year and was primarily driven by continued softness in our dental market, which was down 23% versus the same period last year and in line with our expectations. For the remainder of our Healthcare Solutions business, revenue declined by approximately 4% versus the same period last year due to the shift in customer order patterns already discussed. On a year-to-date basis, Healthcare Solutions revenue decreased approximately 20% to $110 million due to the expected softness in our dental market, which was down approximately 35% and in line with our expectations. Our non-dental healthcare business was up roughly 7% due to continued strength in Personalized Healthcare Solutions, which is up more than 15%, partially offset by a decline in printer sales due to the shift in customer order patterns discussed earlier. Turning now to Industrial Solutions. Second quarter revenues declined by approximately 1% to $67 million compared to the same period last year due primarily to lower printer sales related to a shift in customer order patterns. On a year-to-date basis, our Industrial segment has grown by approximately 2% to $140 million due to strengthened markets in sectors such as transportation, motorsports, foundries, academic research, and aerospace and defense. We are particularly pleased by the continued momentum that we were able to capitalize on in some of these sectors of the market, which are notoriously difficult to penetrate. Moving on to Slide 15 to talk about gross profit. Gross profit margins in the second quarter of 2023 were 39% compared to 38% in the same period last year and were flat sequentially. This year-over-year increase was primarily due to favorable mix, pricing, and the benefits of our cost optimization exercises to source more manufacturing production. Moving now to Slide 16. Adjusted EBITDA decreased by $4 million to negative $7 million in the second quarter compared to the same period last year. The decrease in adjusted EBITDA was primarily driven by lower dental sales volumes and spending in regenerative medicine, which we remain committed to for all the reasons that Jeff discussed earlier. The decline is due to lower sales volumes in our dental orthodontics market, slightly offset by lower operating expenses and gross margin expansion, primarily due to the benefits of our cost optimization exercises to insource more manufacturing production. Net loss of $29 million resulted in a diluted loss per share of $0.22 and a diluted non-GAAP loss per share of $0.07. This year-over-year decline in EPS reflects all the factors that we have previously discussed. Now turning to Slide 17 for an update on our balance sheet. We ended the quarter with approximately $492 million in cash and short-term investments on hand. The decrease in cash throughout the first half of the year is due to the normal seasonal use of cash from operations of $46 million, capital expenditures of $14 million, and acquisition and other investments of $16 million. Turning now to Slide 18. For the full year 2023, we are providing the following guidance: revenues of $525 million to $545 million, non-GAAP gross margins of 40% to 42%, and we expect to generate positive EBITDA during the fourth quarter of this year, noting that we maintain the expectation to invest $10 million to $12 million associated with our regenerative medicine in the current year. This updated guidance reflects the assumption that the elongated sales cycles that we experienced during Q2 will remain in place throughout the balance of the year. This range of revenue guidance results in growth rates of approximately 7% to 12%, excluding the anticipated 35% decline in our dental orthodontics markets. While this isn't what we had hoped for when entering the year, we're encouraged by the growth we expect to generate in this difficult environment, particularly as we've seen organic revenues for most of the companies in this space contract year-over-year. Before I open up the line for Q&A, I'd like to reiterate a few key points from our remarks this morning. First, excluding the expected decline in our dental orthodontics market and despite the shift in customer order patterns we experienced during Q2, we've generated year-to-date revenue growth of approximately 2% on a purely organic basis, which is encouraging to us given the contraction in the organic revenue that we've seen for many other peers in the space so far this year. And we are now expecting growth rates of approximately 7% to 12% for the full year, excluding the anticipated 35% decline in dental revenues that we've guided to all along. Lastly, I want to underscore our firm belief that many of the challenges that we've experienced this year would be solved by achieving scale in the industry. And while we have plenty of confidence in our ability to accomplish this on a stand-alone basis, a combination with Stratasys would provide for immediate acceleration of scale attainment, which would allow for the combined companies to immediately begin delivering on 3 critically important elements to all stakeholders: sustainable profitability, sustainable innovation, and value creation.

Our first question is coming from Troy Jensen from Lake Street Capital Markets.

So first of all, I guess, the weakness in dental that's been well communicated and kind of in line with expectations. I guess my question would be just positioning the account going forward. Has there been any change in share with this big customer?

No, not at all as far as we know, Troy. It was not a difficult ramp during the COVID period when everyone was concerned about obtaining materials and parts, and there was a high demand for straight teeth since interest rates were low, allowing people to spend. Therefore, we are seeing a combination of both a decrease in demand and reduction of inventories. Directionally, it aligns with our expectations for this year, and we're not aware of any other factors affecting the situation.

Jeff, and for you to remind me, that entering the year, didn't you think Industrial was going to grow about 15%?

Yes, we did see some unexpected disappointment late in the quarter with a delay in purchase orders for some of our high ASP products. My impression then and now is that it’s not due to loss of market share, as most of those purchase orders were fulfilled in early July. I believe customers are still cautious with capital spending due to high interest rates and economic uncertainty, which is prompting them to manage their cash carefully. This aligns with our expectations, although we are experiencing a slower rollout of some of the larger purchase orders. Until proven otherwise, we are assuming this trend will continue throughout the year. I don’t want to get my hopes up for an immediate change, but we are currently expecting this situation to persist as it did in the second quarter.

Sure. All right. So right now, you think Industrial is high single to low double-digit growth this year. Is that the comp…

Yes, it will still grow organically and pretty nicely, but not where we had hoped at the beginning of the year. And again, I think those POs will eventually flow through, and we'll see that recovery or rebound in the growth rate. But this year, that's what we expect, pretty healthy organic growth, not quite what we expected at the beginning of the year.

And then quick one for Michael. And not that I'm asking guidance here at all, but just directionally on gross margins. I know you guys are doing a lot on cost cuts and there's just a lot of mix shifts going forward. And just hypothetically, if you guys did like $600 million in revenue next year, what would gross margins look like for you guys?

Yes, that's a great question. We expect continued margin expansion. We're starting to see the full impact of the cost optimizations we implemented last year in insource manufacturing, as well as the cost reductions we achieved during the quarter. Additionally, we've announced the insourcing of metal production at our Rio and France facility, which we're diligently working on this year. Therefore, we anticipate that margins will continue to increase. I think we're looking at margins in the range of 42% to 43%, possibly even reaching as high as 44% next year.

Your next question is coming from Greg Palm from Craig-Hallum.

This is Danny Eggerichs filling in for Greg today. I wanted to discuss the dental segment. You mentioned earlier that destocking would begin to slow down by midyear. Now that we are in mid-August, how has that progressed in relation to your expectations? You indicated that overall performance is on track. Additionally, how has consumer demand shifted in relation to that mix?

There has been clear communication from the industry leader regarding demand and its evolution. Initially, when inflation spiked, demand dropped significantly. They have now indicated that they view their market in terms of adults and children. The children’s segment appears to be recovering, while the adult segment is still lagging, which aligns with trends in consumer discretionary spending; adults are hesitating to seek teeth straightening. However, the situation has stabilized, and it's encouraging to see the children's segment bounce back. The adult segment will likely follow as there remains a fundamental desire for these services, especially given the global nature of the business. We believe the demand profile is reaching a bottom and should begin to recover. The challenge we are facing is that they built up inventory in the supply chain post-COVID due to concerns about having sufficient raw materials or components. They are now working through that excess inventory, which creates a balance between rising demand and depleting stock. We anticipate that this will reduce our revenue by about 35% this year, and so far, it is tracking as expected. We are not altering our overall annual estimates. There is a possibility we may see an unexpected demand rebound. It's important to note that there is a delay between increasing demand and receiving those signals. Fundamentally, nothing has shifted, and we are encouraged to see the market stabilizing. Once inventories are at manageable levels, we expect to see a notable increase.

Maybe one on the guidance, maybe specifically the EBITDA side, positive EBITDA for the year would imply still a pretty good improvement in the second half here. So I guess, what's your confidence level with what you've done on the cost side so far and maybe assuming a more stagnant environment? Is there any additional levers you'd have to pull to get that? Or do you think that what you've done on that cost side makes you confident?

Yes. So Danny, just to be crystal clear, we expect positive EBITDA in Q4, not necessarily the full year right? While we don't give quarterly guidance, we would expect Q3 to kind of be slightly negative to roughly breakeven and then you can kind of do the math from there. And then on the cost programs, I mean, we're seeing good solid traction there. I mean, actually, we got a little more cost out within the quarter than we had previously anticipated, and we continue to aggressively manage and control costs as necessary. Obviously, we want to not cut too deep, we want to preserve for the future, but we are taking appropriate actions there and seeing good solid traction.

I was curious if you could provide a broader perspective on the bioprinting business. It seems you're experiencing significant improvements in the trial results and overall progress. Does it make sense at some point to operate this as a separate entity? I understand you have United Therapeutics. I’m trying to determine if this could eventually be sold or taken public, as it appears to be a strong aspect of your business based on the results we've observed. Additionally, it seems to attract a different type of investor with a longer time horizon compared to those interested in 3D printing. I’m interested in your thoughts on this as things continue to develop.

That's a great question. Our traditional investor base primarily consists of individuals focused on industrial technology, which is generally what this industry caters to. However, as we advance 3D printing to create human products, we are entering a biotech market, and it was wise to develop this aspect within our R&D program. At some point, I believe it will evolve into a distinct business. There's a significant amount of technology crossover; discoveries made in industrial printing and healthcare can be utilized in regenerative medicine and vice versa. Despite this technological connection, the two markets have different characteristics and likely cater to different types of customers and investors. While I cannot pinpoint the exact timing, I concur that the trajectory you mentioned seems accurate; it will likely become its own business unit. This would give us the flexibility to attract new outside investors if additional capital is needed. We could potentially spin it off if it makes sense. Our aim is to unlock value over time, which aligns with your suggestion about its growth. As we achieve key milestones and clearly demonstrate the potential of this business, the timing may come to establish it as a separate entity, whether through spinning it off or bringing in outside investment. That choice will need further consideration.

On the industrial side, you mentioned that several deals that were delayed have either closed or are in the process of closing, with some closing in July. I'm curious if you're simply experiencing some incremental delays, indicating that this is an ongoing issue within the industry. Is that the reason for your more cautious comments?

Yes, that's correct, Shannon. To put it simply, we experienced delays primarily due to higher average selling price products, particularly in metals and polymers, as our customers have been slower to approve purchase orders for larger capital expenditures. Consequently, the orders that we expected to come in at the end of Q2 mostly arrived in July during Q3. We anticipate this trend will continue throughout the year unless proven otherwise.

Is there any specific industries or are there any highest still we can probably guess. But as we think about…

That's quite broad. Honestly, Shannon, it's very broad across industries. I believe everyone is being cautious with their cash spending. It's not that they lack funds; they have solid financial resources. They simply want to be careful about how quickly they expand their capacity or introduce new capabilities. Moreover, our focus was on our higher expense items, which suggests that people are cautiously managing their capital expenditure. While it wasn't significant, it does impact our outlook for the year, which is why we adjusted our guidance.

And Shannon, just to be clear, this impact to both industrial and healthcare. It was largely on the printer side of our portfolio. So it was literally across all segments of our business kind of formally.

Yes, it impacted printers. That's the area it affected the most. For example, our personalized health service business is performing very well, particularly in relation to medical procedures and hospitals, and assisting individuals in improving their physical health. Everything else that is printer-related experienced the same type of effect.

My question is, so what degree does your desire to combine with Stratasys have to do with accelerating key industry adoption? And if so, how would that adoption look like and where?

If I understood you correctly, you're asking how our goals are influenced by the industry's adoption of 3D printing. Yes, it definitely acts as an accelerator. As an independent company, our current focus is on replicating our successes in orthodontics across different market sectors. Partnering with a large company like Stratasys enhances our capabilities and allows us to progress faster. While it doesn't fundamentally change our direction, it enables us to move more quickly. What excites me about this partnership is that it aligns strategically with our existing path, which I believe Stratasys shares as well. The current opportunity for customers to explore 3D printing in manufacturing is significant. Post-COVID, our customers have faced similar challenges as we have regarding their supply chains. Larger companies tend to have more concerns because their supply chains often span across the globe. Parts are sourced from Asia, and assembly operations can be scattered worldwide. The pandemic highlighted labor and component shortages, prompting businesses to reevaluate their supply chains. This reconsideration leads them to analyze locations, content, and technologies used for part production. With 3D printing, they can achieve better performance and improved cost-efficiency. However, we need to engage with them directly and showcase the technology, as many have never utilized 3D printing in their operations before. That's why I've emphasized that the decision-makers now are factory managers, who are typically very cautious and focused on reliable deliveries. If they are to adopt 3D printing, we need to effectively demonstrate its benefits, including the economic advantages, associated risks, and overall workflow. So what Stratasys combination with us does is it just increases the pace of that capability. And it makes it more robust because again, a broader technology offering gives us a better financial profile for continued investment. The cost synergies are amazing to me, $110 million to the bottom line. So you've got a good, sustainable, profitable business. And that, again, from a customer standpoint, that's what you want to see in a supplier. We have to serve these guys on multiple continents. Most of the big ones where the real volume is at, they're on multiple continents. So you've got to have a footprint where you could support that. And we'll get there on our own market vertical by market vertical, it's fine. But if we can combine with Stratasys, we get there a whole lot faster with a whole lot more efficiency. That's why we've been working at it for 2 years. Honestly, the logic has been there for 2 years since we reorganized this business. So I hope we can make it happen.

This is Tyler Hutin on for Drab. Okay. I just want to touch on the extrusion platform of the table. So you guys mentioned some of the end markets that are getting traction. And can you just dive into that a little more where you're seeing the most traction and just kind of where the opportunity is going?

I'm sorry, I missed part of that. Michael, did you get Tyler's question? So, Tyler, I just want to make sure I heard your question clearly. It was about Titan and specific traction in certain markets and segments. Is that your ultimate question? No, if your question is about Titan, I'm very happy to take it. Titan is an impressive platform. It's a durable large platform that our customers really appreciate. It's establishing a strong presence in the extrusion market, creating a wide range of tooling for various applications now. It was a small U.S. startup company that we acquired just over a year ago, and it's gained significant traction in the United States. We're now starting to see it gain a foothold in Europe and Asia due to its high value proposition. They can produce large parts quickly, and the raw material used is palletized, coming from pellets. This results in a fundamentally lower cost of raw material, providing customers with excellent value. They benefit from speed, size, and reduced raw material costs when adopting Titan. The return on investment for them has been very appealing, and the margins are favorable for us. Thus, from my perspective, it represents a strong sustainable business that I believe will excel in the extrusion market.

And Tyler, one other thing that I think about when we talk about Titan, one very interesting aspect that has in line finishing in kind of post part production or post-production work that can be done right in the machine itself. So that allows for streamlined workloads.

It's pretty cool. The guys that started this company are very bright, energetic young guys. They came out of the CNC milling industry. So this Titan has a rotating head on it that you can move from extrusion to machining very quickly, so you can print a very large part at high speeds, and then you can rotate the head and go back and machine the surface off to make it really smooth. So it's kind of the best of both worlds, all in a self-contained unit and easy to use. So we're really bullish on it and are excited to see it grow.

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

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

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.