Earnings Call Transcript - DDD Q1 2023

Operator, Operator

Hello, and welcome to the 3D Systems Q1 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, Treasurer and Vice President of Investor Relations, Mick McCloskey. Please go ahead, sir.

Mick McCloskey, Treasurer and Vice President of Investor Relations

Good morning, and welcome to 3D Systems' First Quarter 2023 Conference Call. With me on today's call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Michael Turner, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President, Chief Corporate Development Officer and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to post questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in last night's press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2022. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Jeffrey Graves, CEO

Thank you, Mick, and good morning, everyone. I'll begin this morning with some comments on the major drivers of our first quarter performance and how we anticipate the rest of the year unfolding at this point. I'll include progress we've made against some key strategic objectives, including partnerships and initiatives that we've previously announced. After that, I'll hand the call over to our CFO, Michael Turner, for a more detailed discussion of our first quarter financial results and our updated guidance for 2023. With that, let me turn to Slide 5 and start with a quick recap of the quarter. In describing our current market dynamics, we can best be characterized as being strongly bifurcated with one specific market being soft and the remainder being strong. I'll begin with the negative and that being the dental orthodontics or more specifically, the cleared intel aligners business. As most of you know, we have a particularly strong position in this market. As we've said for the last few quarters, demand has been severely impacted by reduced consumer discretionary spending as inflation has forced many consumers to focus on meeting life necessities such as food, gas, and rent. While we're pleased that this market seems to be stabilizing, it has yet to return to growth. Compounding the economic impact on the actual market demand has been our customers' desire to reduce inventory levels, which had grown significantly during the COVID period. We expect this pressure to continue through midyear and then moderate as supply and demand come back into balance in the second half. This assumption is reflected in our guidance for the year. Looking ahead, provided a deep recession can be avoided as inflation now moderates, we would anticipate this market returning to growth in 2024. Turning then to the orthopedic half of our health care business. The story becomes very positive. This market continues to be robust, which in Q1 translated again into strong double-digit revenue growth. As many of you are aware, 3D Systems was a pioneer in this field, beginning with the creation of customized medical models in the early 2000s and since that time, expanding significantly into human musculoskeletal applications based on our rapidly growing orthopedic expertise. This transition from simple medical models into applications within the human body was a titanic undertaking for our company spanning many years with success requiring not only the development of compelling technologies, with the establishment of world-class process disciplines and quality practices, accompanied by the required regulatory approvals that are the price of entry for any company that wishes to participate in this market. Fast forward to today, we're a recognized leader in craniomaxillofacial and spinal orthopedic applications. And over the last few years, we've expanded our focus to include many additional indications in the human skeletal system. This expansion in our Orthopedic business is a key element of our strategic growth plan for the future. Success in these new orthopedic indications requires first that we continue to advance our printing hardware and material systems, which now fully encompass both metal and polymer platforms, and to do so with increasing software integration that incorporates AI and machine learning to optimize the full medical workflow from receipt of the patient's digital imaging data through the surgical planning process with the patient's surgeon and then to the printing and finishing operations, which provide patient-specific medical implants. We can produce these implants within days of the initial request and do so while manufacturing custom surgical instrumentation and cutting guides to aid the surgeon in the OR. To date, we have used this process to bring life-changing orthopedic repairs to well over 150,000 individual patients, and the number grows daily. Often an example is helpful in fully conveying the nature of what we do. If you look at the left-hand side of Slide #5, you'll see an actual digital image of a patient suffering from a cancerous tumor in their leg and pelvic region. Traditionally, this type of tumor would have been removed by amputation of much of the surrounding bone structure, which in this case would have cost the patient one of their limbs and part of their pelvis. Through the use of our dicot print and free-form software, our engineers working with the patient surgical team were able to design and print the needed high-precision cutting guides and surgical instrumentation that allow the tumor to be carefully removed. Then in the same operation, install a custom patient-specific tri-flange titanium implant to reinforce the remaining bone structure, thereby avoiding amputation of the limb. This complex implant was manufactured using our Oqton 3D expert printing software in combination with our DMP 350 metal printing system. This entire process, from first interaction with the patient data to the completed medical device, was done in days, allowing the patient to receive the treatment they so badly needed shortly after the first diagnosis. While the technology itself is remarkable, the speed and economics of this entire orthopedic workflow has now improved to the point of large-scale adoption. Even with this progress, we continue to challenge ourselves to push even further on capability and cost efficiency. For example, this year, we moved from a single laser metal printing platform to a dual laser system with dramatically improved production throughput, and we've recently expanded from a focus on titanium materials, which are preferred for many applications in the human body, to a special cobalt chrome material that's needed for use in articulating joint repair and replacement such as the human knee. We're the first to do this through 3D printing, which opens the door for a much greater degree of economic customization and joint replacement, which is becoming a common need in an active but aging population. Moving to our Industrial Solutions Group. We're also seeing continued strong demand, driven largely by automotive, electronics, and military aviation and space markets. In the electronics market, I would specifically call out electrical connectors as a leading application for additive manufacturing, which can be attributed to a very high number of part types that are geometrically complex and produced at lower volumes or on a very regular basis. These types of applications benefit greatly from the avoidance of hard tooling and dedicated injection molding capacity for their manufacturer. While our development efforts for connectors have been progressing behind the scenes for some time, in the first quarter, we were pleased to announce publicly our collaboration with TE Connectivity, a world leader in connectors and sensors. Our joint program focuses on developing an additive manufacturing solution to produce electrical connectors that meet stringent UL regulatory requirements at scale for use within our partner's global factory network. The production solution illustrated on the right-hand side of Slide 5 comprises a modified Figure 4 modular printing platform, unique polymeric materials that have been the first known to pass the UL standards for flame retardancy, our 3D Sprint software, and our global services capability. Instrumental to this success has been a newly developed photopolymer that we engineered specifically to meet connectivity's requirements for performance and cost, and in parallel, the hardware performance to produce the precision and speeds at an industrial scale. This is a great example of how we're partnering with industry leaders in key markets to accelerate innovation and build competitive advantage through additive manufacturing solutions. We believe TE Connectivity has the potential to become a significant customer for us, and we're honored to be their partner. As 2022 was an investment year, I'm pleased to address the progress we're making on some of our recent acquisitions. Moving to Slide 6. Last quarter, we shared the achievement of a major milestone for our Healthcare Solutions group when a surgical team at Austria's University Hospital in Salzburg executed the first clinical implantation of the 3D printed cranial plate manufactured from medical-grade PEEK polymeric material using a Kumovis printer. This printer was specifically developed for precision printing of medical-grade high-performance polymers. They received early approval by the European regulators for this procedure, and a similar process is underway in the U.S. with the FDA. Using a Kumovis printer installed at the point of care inside the hospital, the surgical team customized and printed a cranial implant to precisely match the patient's specific anatomical profile and related physiological needs. A few months after the procedure was performed, we're thrilled at Mr. Turner and for Mr. Turner and the relief that this has brought to him. We are deeply indebted to the talented surgeons and staff at Salzburg University Hospital we brought together for the first time our unique software, hardware and materials technologies in a point-of-care hospital setting to address the specific needs. We believe that this success provides a real-life demonstration of the potential for enhancing orthopedic outcomes through the use of comprehensive digital manufacturing technology within a hospital setting. Our focus on point-of-care implementation of these integrated technologies is a key priority for our company and one that we believe will bring significant benefits to patients around the world in the years ahead. Here's a picture of Mr. Tremor several weeks after the surgery, showing his recovery is progressing well. Now moving to the next topic, I want to provide an update on our software division, Oqton, which we acquired in 2021. Oqton offers a unique cloud-based AI-enabled manufacturing operating system designed to speed up deployment and automation in digital manufacturing and production settings, enhancing efficiencies and lowering costs. Recently, Oqton reported significant adoption of this system in the dental market. To date, several hundred dental labs worldwide have adopted Oqton's manufacturing system within the first 18 months of its launch. Many are now quickly transitioning to the Oqton platform to streamline their operations. Customer feedback has been very positive, evidenced by churn rates between negative 20% to negative 30%, indicating that customers are not only renewing their licenses but are also quickly increasing the number of licenses used at their sites. Production efficiency improvements surpassed 50% in the first year of use, and the lifetime value to customer acquisition cost ratio of over 5 reflects the value generated during adoption. Now, I’d like to share some latest updates on our R&D initiatives. Last year, we emphasized investments in regenerative medicine, and we announced the creation of Systemic Bio, a wholly owned start-up leveraging our expertise in vascularized tissue printing to develop and manufacture unique organ-on-a-chip technology called hVIOS for pharmaceutical drug discovery and development. Systemic Bio will work directly with major pharmaceutical partners to create hVIOS chips tailored to specific organ and disease functions and market these directly to companies engaged in drug discovery. I’m pleased to announce that we have signed our first contract with a major pharmaceutical company to apply our hVIOS chip technology. While we cannot disclose the company's name yet, this program will involve creating a bio-printed vascularized tumor model for drug discovery and development in oncology. Given development timelines in the industry, our efforts will seek to accelerate the development of new patient-specific therapies using these tumor models. This will be a multiyear collaboration to test the response of a patient's tumor through a variety of anticancer therapies through the use of our hVIOS technology. We're extremely excited about the potential for the widespread adoption of our hVIOS chip technology and view this initial contract as early validation of our approach to reducing the development cycle for new drug therapies. Turning then to Slide 9. As we've stated before, a key point regarding our ongoing investment initiatives is that we are only pursuing R&D programs and new additions to our product portfolio that we believe offer attractive returns and are consistent with our company mission to provide application-focused additive manufacturing solutions to high-value, high-growth industrial and health care end markets. As you saw in our announcement last week, we are very excited to enhance our selective laser centering our SLS offering with the planned acquisition of Wematter. With their gravity essential and essential plus an enterprise line of SLS printers, Wematter brings affordable turnkey, closed-loop solutions that make SLS accessible for smaller production environments, enabling a broader population of potential customers whose manufacturing space is limited. In addition, their portfolio of over 20 SLS material types enables them to address a wide range of applications for industrial, medical device and academic research markets. Importantly, Wematter emphasizes a new standard for customer ease of installation and use and a focus on environmental sustainability with its unique integrated powder handling and recycling system. While having a robust internal development program can meet most of our emerging customer needs, we've used strategic bolt-on acquisitions such as Wematter with their unique printing technology to play a smaller but important role in our continued expansion into new customer-specific applications across our two business units. We expect to close the Wematter transaction in early July. Shifting to our internal development efforts, I'm pleased to share that our announcement late last year of the revolutionary SLA 750 Dual, the world's first synchronous dual laser SLA printer, continues to garner excitement and remains on track for a release. As a reminder, the trailblazing SLA dual delivers twice the speed and three times the throughput of competing platforms, dramatically improving productivity and cost efficiency. This industrial printing system, confirmed through our extensive beta testing with select customers, will be the industry leader in print size, speed, accuracy of resolution, delivering parts with unmatched surface finish and mechanical performance. When leveraged with the Oqton manufacturing platform, it unlocks the true power of seamless integration on the factory floor. We believe that this system will become a mainstay in industries such as transportation, motorsports, consumer technology, durable goods, manufacturing services, aerospace, and health care for many years to follow. In addition to introducing our newest growth initiatives, I believe it's good discipline to provide an update on some of our previous announcements, particularly if there's a directional change to note. Along these lines, in February of 2021, we announced a collaboration with Jabil Corporation, a longtime customer and partner for the development of the product we called Roadrunner. Using extrusion technology, this product aims to offer several benefits to industrial markets, including increased speed, high-temperature material capability, a larger build area, and enhanced precision. The intent with Roadrunner was that customers would use a standard film and input material, much of which Jabil was capable of supplying. However, as this program got underway, we continued studying alternatives, including moving to a pellet extrusion technology, which offered the potential for a much lower material cost. As we dug further, we discovered a small company in Colorado called Titan Robotics that has developed such a printing platform. In short order, we elected to acquire Titan and integrate it into the 3D Systems family of printing platforms and operating systems. The net result was a quicker path to market for a machine that had many of the attributes we were looking for in the Roadrunner system. Today, the Titan platform is in full production and is rapidly gaining customer acceptance across several significant industrial markets. Since acquiring this talented group of engineers, we've continued to build on the Titan platform, reinforced with technology that we've developed and gleaned from our subsequent acquisition of Kumovis, which has a novel extrusion technology for high-performance medical and aerospace-grade polymers. Both the Kumovis and Titan platforms are now being integrated and expanded upon through our internal investments to continue our move into the broader extrusion market. Stay tuned for future developments in this area, as there may be a sign of Roadrunner in the offing. The second initiative that we'd like to update you on is the partnership we announced in June of 2021, which focused on the bio-printed regenerative soft tissue matrix for use in breast reconstruction. While the initial exploratory efforts of our partners' results were promising, as the program progressed, material scientists in our laboratories independently developed alternative materials, which we believe were better suited for both breast reconstruction and other soft tissue applications. As such, earlier this year, we decided to pursue these applications by ourselves and have continued our efforts in printing vascularized soft tissue using our unique materials and printing technology. We detailed this effort in the release we made in February of this year. This human tissue program has shown great promise in the large animal studies that we've completed to date, as we have announced. We remain excited about this effort in the rapidly increasing number of human applications that continue to emerge from this program. And finally, regarding our acquisition of the high-speed rotary printing platform, BP Polar. We're moving along quite well with the first beta phase units that we'll launch with select strategic customers in key industrial and healthcare growth markets. We expect the first of these units to be installed in late summer and more to follow in the fall. These units are specifically designed for high-speed printing of high-volume, high-mix polymer components. We'll update you once again as we gain customer feedback from this initial trial launch. Now moving to Slide 10. Before turning the call over to Michael, I'd like to update you on our outlook for 2023 and beyond. Let me make a very clear statement of our operating philosophy. As a leader in our industry, we believe it's important to demonstrate that we can deliver both exciting growth and profitability levels sufficient to support the ongoing investment requirements that are needed in order to meet rapidly expanding customer applications. As such, earlier this year, we announced a restructuring initiative to improve our 2023 profit profile by better aligning our European engineering and manufacturing operations for our three metals platforms, streamlining our software organization, which is now consolidated under Oqton, and focusing our product portfolio on platforms that bring the highest long-term value to the market. We're progressing very well on this front. And as we announced last night, we've now expanded our restructuring efforts to reduce headcount by approximately 6% across all functions of the company. We feel it's necessary to prudently manage our cost structure and stay in step with the uncertainties associated with the broader macroeconomic environment. Most importantly, our previous investments in productivity are now allowing us to harvest more cost efficiencies as the year progresses. As Michael will detail for you later, we have increased our guidance to deliver $2 million or more in adjusted EBITDA in 2023, with no change to our outlook for revenue, non-GAAP gross profit margin, and free cash flow. In closing, I'd like to address a question that's arisen from some of our analysts who follow the company regarding our historic core health care and industrial businesses and the additional investments that we're choosing to make in regenerative medicine, which is not generating material revenue for us today. Very specifically, we're being asked why, particularly in these challenging times, are we choosing to make these investments. First, let me be as clear as possible about the magnitude of our investment, including within our full year 2023 guidance, is a plan to invest between $10 million and $12 million in Systemic Bio and our other regenerative medicine initiatives related to human non-organ tissue development. In addition to this, we're also receiving significant external support for our human organ development efforts from our partner, United Therapeutics. To state the obvious, if we were not committed to this effort, our EBITDA performance would be much greater this year. The reason that we're making these investments is very simple. We have an incredibly unique and exciting opportunity to drive unprecedented change in the field of medicine and in tens of thousands of people's lives who can benefit from this technology. It's an opportunity we are uniquely positioned to unlock with a series of highly strategic investments that have the potential to drive significant change for the future of the company and, more importantly, a life-changing impact on society. The benefit for all stakeholders, including our shareholders, our employees, and importantly, the people's lives that we will impact, will be exceptional. As to our time frame, I'll remind you of the goal that our partner, United Therapeutics CEO, Martine Rothblatt, stated at last summer's C&M sponsored life itself event that within 5 years, we'll have a printed organ in human clinical trials. Today, we're a year closer to making this goal a reality. You can expect more announcements related to our human and pharmaceutical efforts in the future. Until then, our core businesses are thriving. We're making the progress needed in each key market to ensure that we retain our leadership position. And with that, let me turn the discussion over to Michael for more detail on our financial performance and our outlook.

Michael Turner, CFO

Thanks, Jeff. Before I start, I'd like to make a few comments regarding seasonality and year-over-year comparisons as an important backdrop to today's discussion on Slide 12. As I commented during our last call, it has been typical for 3D Systems to begin each year with a relatively lower first quarter, then go through somewhat higher second and third quarters, and finish the year with a strong Q4 with customers plus our annual budget of stocking up on inventories for the coming year. 2022 did not follow the same trend primarily due to a shift in demand patterns in the dental market. Therefore, we would expect the distribution of quarterly revenue for 2023 to be more in line with the distribution of quarterly revenues in 2021 as opposed to what we saw in 2022. I stage a bit more, let's turn now to our first quarter revenue summary on Slide 13. Our results in Q1 came in largely as expected, with dental softness impacting our growth on a year-over-year basis. Excluding the expected decline in sales to our dental customers, we experienced solid growth across our businesses, demonstrating consistent growth in demand for the rest of the end markets served by our Industrial and Healthcare Solutions segments, which I'll detail for you shortly. Q1 revenue of $121 million decreased 8.8% compared to the same period last year. Q1 revenue on a constant currency basis decreased 6.5%, reflecting the anticipated weakness in the dental orthodontics market. Q1 revenue from our nondental markets increased 12% on a constant currency basis compared to the same period last year. Specific to our segments, Healthcare Solutions revenue decreased 24.3% to $48.7 million compared to the same period last year. Healthcare Solutions revenue on a constant currency basis decreased 23.4% versus the prior year due to continued softness in our dental orthodontic market, which was down approximately 46% versus the same period in the prior year. Our dental orthodontic market had a particularly strong first half of 2022, followed by a significant decline in the second half of 2022, broadly due to adverse macroeconomic conditions. In our last earnings call, we mentioned that we expected this market to be down approximately 35% in 2023, and that view remains unchanged today. For the remainder of our Healthcare Solutions business, revenue from our nondental markets was up by more than 22% on a constant currency basis versus the same period last year, and we continue to expect double-digit growth in this business, driven by strength in both the orthopedic market and the CMS space on the basis of increased market adoption and technical advancements. Turning now to our Industrial Solutions segment, where revenues increased 5.6% to $72.5 million compared to the same period a year ago. As we noted in the past, our Industrial Solutions segment is more exposed to FX rate movements than our Healthcare Solutions business. Excluding the impact of FX, Industrial Solutions revenue increased by over 9% versus the prior year, driven by strong performances in consumer auto and OEM, academic and research, and electronics and connectors. Jewelry and service bureaus continue to be key markets for Industrial Solutions. Moving now to gross profit on Slide 14. Gross profit margin in the first quarter of 2023 was 39% compared to 40% in the same period last year. Non-GAAP gross profit margin was 39% compared to 41% in the same period last year. The decrease was primarily due to lower overall sales volumes resulting in reduced fixed cost leverage, unfavorable sales mix, and input cost inflation. On a sequential basis, non-GAAP gross profit margins were down by approximately 200 basis points due to normal seasonal trends with the lower volumes driving lower fixed cost leverage. We maintain our view that full year gross profit margins will be between 40% and 42% for the year. I'll speak more on seasonal impacts to gross profit margin shortly. Moving now to Slide 15. Adjusted EBITDA decreased by $12 million to negative $10 million in the first quarter of 2023 compared to the same period in the prior year. The decrease in adjusted EBITDA primarily reflects lower sales volumes in our dental orthodontics market and inflationary impacts on our input costs, as well as spending in targeted areas that support future growth, including expenses from acquired businesses, research and development costs, and investments in regenerative medicine and corporate infrastructure. A net loss of $29.4 million resulted in a diluted loss per share of $0.23 and a diluted non-GAAP loss per share of $0.09. The year-over-year EPS decline reflects all the factors that we previously discussed. Turning now to Slide 16 for an update on our balance sheet. We ended the quarter with approximately $530 million of cash and short-term investments on hand, which is down $39 million from year-end levels. The decrease resulted primarily from normal seasonal use of cash from operations of $28 million, capital expenditures of $9 million, and taxes paid to net share settlement of equity awards of $2 million. We continue to have a strong balance sheet with sufficient cash to support organic growth and our investments in our pre-commercial businesses, and we maintain our view that we will achieve breakeven or better free cash flow during 2023. I'll conclude my remarks on Slide 17 with an update on our restructuring efforts and our updated full year 2023 guidance. Last night, we announced the next phase of our restructuring initiative to improve operating efficiencies throughout the organization in order to drive long-term value creation. The next evolution of this restructuring initiative will target a reduction in headcount by approximately 6% of our workforce, which is being enabled by prior investments made to improve business processes, operational efficiencies gains, and continued integration of acquisitions completed over the last 2 years. We expect this initiative to reduce operating expenses by approximately $4 million to $6 million in 2023 and provide annualized savings of $9 million to $11 million beginning in 2024. This is in addition to the restructuring initiative that we announced earlier this year, which we continue to expect will deliver savings of $2.5 million to $3.5 million in 2023 and $5.5 million to $7 million in 2024 and beyond. We expect the combined impact of both initiatives to deliver $6.5 million to $9.5 million of savings in 2023 and $14.5 million to $18 million in 2024 and beyond. As a result of this most recent phase of our restructuring initiative and our unchanged views on the fundamental drivers of demand growth, we are raising our full year 2023 adjusted EBITDA guidance to $2 million or better and reaffirming our guidance for revenues, which we continue to believe will be in the range of $545 million to $575 million; non-GAAP gross profit margins, which we continue to expect to be in the range of 40% to 42%, and free cash flow, which we expect to be breakeven or better in 2023. I'd also like to note, as Jeff mentioned earlier, this guidance includes expected investments of $10 million to $12 million in Systemic Bio and our regenerative tissue program this year. Before I conclude my prepared remarks, I'd like to talk briefly again about our expected pacing of revenues throughout the year, where I'll point you to my seasonality comments from earlier this morning as well as from our last earnings call. The short message is that if you apply our full year sales guidance to the distribution of 2021 actual sales by quarter, it should provide an indicative view of how we would expect 2023 to unfold. This will also have an impact on our quarterly gross profit margins due to volume impacts on fixed cost leverage, resulting in lower margins in the first half of the year and higher margins in the second half of the year. We believe that the prudent actions we continue to take are necessary and demonstrate our ability to harvest productivity gains and efficiencies, drive organic growth, and deliver on our commitments to profitability and enhancing long-term value creation for our future.

Operator, Operator

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

Troy Jensen, Analyst

Maybe quick first for you, Jeff. The strength in industrials, is it primarily DMLS or what technologies are most upside in that vertical?

Jeffrey Graves, CEO

So Troy, first of all, thanks for the question and also the prior questions that you've asked. That's part of the response that we included in the script this morning. Are you asking about what technologies are driving the growth, Troy?

Troy Jensen, Analyst

Yes. I just see there's been a lot of strength in metals is what I'm getting to. If you look at a couple of your competitors have pointed to. And I'm just wondering if that's the specific technology that's been in the most in industrials.

Jeffrey Graves, CEO

No. Encouragingly, Troy, it's pretty broad-based. I mean, metals have done well this year, and metals clearly, additive for metals is being adopted more widely now, and we're benefiting from that. I would also tell you though our polymer platforms are doing quite well. And that's full spectrum from SLA and DLP doing quite well, and our new extrusion platform with Titan is doing well. So across the MJP platform, it is in big demand as well. So it's very broad-based, both from a technology standpoint and from an end market standpoint.

Troy Jensen, Analyst

I'm glad to hear that. Regarding your Q1 performance, it seems to have been a bit softer than expected, yet you're maintaining your full year guidance. Can you discuss your visibility for the second half? Additionally, Mike, if I calculate a 22% figure for Q1 based on your published data, that suggests a revenue figure of around 5.50%. Is this what you're specifically confirming or what should we take away from this call?

Michael Turner, CFO

To discuss our revenues for the year, Troy, consider our previously provided guidance range of $5.45 to $5.75. You can choose any point within that range and compare it to the 2021 distribution of quarterly revenues. That's essentially how we believe it would play out. Using the midpoint, you can do the calculations and take into account the seasonal trends as well.

Troy Jensen, Analyst

The visibility, though, in the second half to...

Jeffrey Graves, CEO

Yes, I was about to mention that, Troy. As you know, it's a challenging environment right now, but we see no reason to alter our outlook that things will proceed as planned. We've particularly monitored the clear aligner market because it significantly impacts us. We've incorporated our expectations for that market, and we will strive to be transparent during the call about those expectations. For the rest of the market, we anticipate that it will generally continue to operate as it has been. It appears inflation is easing a bit, and we hope that interest rate increases will moderate. We are not anticipating a booming economy or a significant downturn, but rather projecting steady growth. We expect to have more clarity after the second quarter. I believe our current estimates are quite reasonable considering the global context, and they do not rely on any extraordinary economic performance from any country or region.

Troy Jensen, Analyst

Very perfect. And thank you for that $10 million to $12 million regenerative investment. I think that's important to know.

Operator, Operator

Next question is coming from Jim Ricchiuti from Needham & Company.

Chris Grenga, Analyst

This is actually Chris Grenga on for Jim. Are you seeing any difference in demand trends across geographies, any relative strength or weaknesses that are worth considering there?

Jeffrey Graves, CEO

No, we sell primarily into U.S. and European markets. I would say it's fairly uniform across both. I think they're both experiencing similar economic ups and downs and are exposed to the same geopolitical risks. There has been no significant difference between them. We're seeing strength, again outside of dental orthodontics, across the board in both economies for our technologies.

Chris Grenga, Analyst

And if you could, what rate of decline in dental did you see excluding the largest customer?

Michael Turner, CFO

We don't typically break it out like that. I mean, on the slide of the presentation, you can see that we've lumped all of dental together, and it was down. We quoted 46%, and we maintain our view that we'll be down 35% for the full year. Just given my comments earlier that the dental had a particularly strong first half of 2022, followed by a weaker second half.

Jeffrey Graves, CEO

The comparisons in the first half will be slightly more negative than in the second half. To provide more detail, our dental business, and the additive dental sector as a whole, is currently heavily influenced by orthodontics. However, this trend will change in the coming years as printing technology significantly impacts the industry, especially in areas like dentures, partial dentures, and other dental implants that are just starting to develop. We anticipate that this will become a strong growth driver in the next few years, and the technology is progressing well. At present, as Michael noted, the focus is primarily on orthodontics.

Chris Grenga, Analyst

Great. And just to confirm, the cost savings in connection with the restructuring initiative, those are all in operating expenses, correct?

Jeffrey Graves, CEO

No. I would estimate that about 15% will be included in gross profit, with the remainder in operating expenses.

Paul Chung, Analyst

So can you expand on how to think about the TE Connectivity partnership? What the ramp there is, how material can be given the kind of very strong revenues in COGS CTE? Was this partnership kind of embedded in the initial guide given last quarter, or kind of incremental, or too early to tell?

Jeffrey Graves, CEO

Yes, I would say it's integrated. It's still in the early stages of development and widespread adoption. We are really excited about it for a couple of reasons. First, the fundamental logic behind transitioning to additive manufacturing for connectors and what I call the tail end of their curve regarding part types. They produce millions of different connector types, but there’s a long tail of lower volume, high mix, complex polymer connectors that additive manufacturing excels at, and the economics are very favorable. The main challenge has been the throughput of the machines, which has improved significantly. Additionally, material development and processing are crucial; the printed components must be of very high precision and reproducibility, and they need to use special materials that meet flame retardancy and other standards certified by Underwriters Laboratories (UL). So getting all of that correct has taken some time. And we're very close to having all of that finished up and really moving into basically scaling development now with them as a partner. So that's why we jointly went public with our cooperative agreement. The ultimate potential for connectors is enormous. It could easily become a dominant revenue stream for us over the coming years. The pace of adoption will take a few years to ramp, and they have factories all over the world to accommodate, which gets back to the reliability and robustness of fleets of printers. So the direction we're headed as a company is to address those markets where you're installing tens or hundreds of printers. You link them together with intelligent software, and you put a high-value material through those printers to deliver value to the customer. Those are the three legs of the stool that you have to get right. We've been working with TE for a number of years now, and it's gotten to the point of maturity where we both wanted to be very public about it. We believe that's a great trend for the future.

Paul Chung, Analyst

Great. And then on Wematter, can you expand on some of the details there, how that decision came about, where you're looking to gain share, who the main competitors are in your view, and how you're positioned for the project in the U.S. Any details on the installed base?

Jeffrey Graves, CEO

Yes, go ahead. I'm sorry, Paul, go ahead and finish your question.

Paul Chung, Analyst

Just a comment on the revenue margin profile and any other details.

Jeffrey Graves, CEO

Yes, any market we enter has a long-term goal of achieving 50% gross margins. We believe that Wematter can meet this goal because their machine is quite innovative. It has a compact design, allowing it to fit into factories of various sizes. You can sell multiple units to larger factories while also reaching smaller ones. It is designed to be self-contained and features excellent recycling capabilities, which are quite unique in the industry. Additionally, it has three times the build volume of other competing products available, and there are very few products on the market that offer this footprint and volume. We can sell it at a price point similar to the leading competitor, which allows us access to the same customer base. Therefore, we are very optimistic about this technology. And it's always a choice of make or buy in terms of spending our R&D money. This came along and we initially signed a selling agreement with them to market the product, and it was so popular with our channel partners that we said this is a technology we really want to own and run fast with. So we like it a lot. It's an excellent group of engineers up in Sweden, very smart guys that have done a really good job of getting this unit designed and built. And again, we can give you some more metrics on the machine itself as we publish them. But it's small, fast, and yet it's got a very big printing footprint, and the recycling capability is unmatched. So it's really clever. So I'm very bullish on that entire value proposition. We've gotten the approvals we need, or they have got the approvals they needed in Europe to sell it. We're still working our way through the approvals in North America. That's a matter of timing. So we'll get all those in hand. The deal closed in July, and our objective is to be in the market as quickly as we can.

Paul Chung, Analyst

Great. And then lastly, on free cash flow, where can we expect inventories to kind of shake out as we exit the year? Are there any kind of risk to write-downs there? And given the kind of heavy investments in working cap last year, what are some levers to kind of drive some upside to guidance there and CapEx as well would be helpful?

Michael Turner, CFO

Yes. So thank you for the question. Free cash flow, obviously, we have the build of inventory, the heavy investment inventory in the second half of last year as we in-source into our Rockville, South Carolina facility. We had to purchase some inventory related to that. So obviously, we've got a pretty big lever to pull there as we work down through that inventory. I don't see a significant risk of any inventory write-offs. I mean, we're constantly evaluating our inventory; the age of that inventory is not a real significant issue there. But yes, that is going to be a big number that we pull as we work down inventories, and we have a dedicated team working on that effort. So we feel pretty good about.

Jeffrey Graves, CEO

Paul, a big motivator to in-source that manufacturing was we just believe we can manage that supply chain much better ourselves. So the inventory we had to buy when we did that transaction was large, and we're going to burn our way through it this year. I think we've got a good plan to do that and free up cash from inventory. To Michael's point, it's all good inventory. It's virtually all good inventory. We expect very few write-offs, and we'll just convert it to cash over time.

Operator, Operator

Next question is coming from Brian Drab from William Blair.

Brian Drab, Analyst

I've had a really choppy signal for some reason, so I hope you can hear me. Can you discuss, especially with the new agreement that you have signed or have in the works, when you think this will become a revenue-generating business? Are you gaining more visibility on that?

Jeffrey Graves, CEO

Yes, Brian. And by the way, you're coming through just fine. Yes, I was thrilled to get our first contract from a major pharmaceutical company, and it's one that everybody worldwide is very aware of. It's a great endorsement of the technology, and we look forward to that collaboration. It will stretch out for several years now. And the way those companies work, the first one is hard to land. There's a lot of bureaucracy, as you might imagine. So you work your way through that, and it's taken some time. We have several more in the pipeline that we're working hard on now. I'd be disappointed if we didn't have a couple more contracts this year. And along with that, I wish we could announce names and sizes. Hopefully, we'll be able to do that more in the future. All in all, clearly, we mentioned the investment we're making in that business and in our soft tissue business this year of $10 million to $12 million. We expect to start generating revenue next year in Systemic Bio, to start generating revenue next year. The revenue generated this year, we really haven't factored into our guidance, so there may be some positive upside on that one. But we're mainly targeting it to next year. And then I think you'll see a fairly rapid climb to be cash flow breakeven and then growing from there. That's the game plan.

Brian Drab, Analyst

Okay. And I know you answered some questions on Wematter, but I'm just not very familiar with the company. And I don't know if I missed it, but did you say what their installed base is? And is there any way you could comment even like with the range, how much that acquisition cost or do we have to wait, I guess, maybe for the second quarter 10-Q?

Jeffrey Graves, CEO

We don't anticipate any significant revenue from them this year. We closed the deal in July and are still navigating the approval process in the U.S. Once we finalize the deal, the investment will be relatively small and resembles a mature R&D type of engagement. The feedback from their customers and our channel partners has been very positive, even though they currently don't have a large installed base. However, we are optimistic about their competitive position in a growing market for small footprint SLS industrial applications. We believe there is ample opportunity for other players as well. Although they don’t have a large installed base at the moment, they have an excellent product along with additional offerings on the way, which we find exciting. The expenditure associated with this investment has been modest, and we've achieved our results more efficiently than we would have on our own.

Operator, Operator

Next question today is coming from Shannon Cross from Credit Suisse.

Ashley Ellis, Analyst

This is Ashley Ellis for Shannon this morning. First, could I just clarify the restructuring savings targets? Are those net or gross?

Jeffrey Graves, CEO

Are you asking if those figures are net of any severance or exit costs, Ashley?

Ashley Ellis, Analyst

So are you expecting the majority to fall through to the bottom line?

Michael Turner, CFO

Yes. Yes. The $4 million to $6 million range that we set for 2023, yes, we expect that to fall straight through to EBITDA.

Ashley Ellis, Analyst

Okay. With the decision to manufacture more metal systems in-house, is that due to the success you've witnessed in Rock Hill, or is it related to a different transaction? How should we approach CapEx and inventory for that?

Jeffrey Graves, CEO

It's a different location. We have brought our metal production in-house, manufacturing our metal printers in Europe. We are now producing our small and mid-frame metal systems at an existing plant in Riom, France. Our large metal printing system will still be outsourced to Belgium. This move should result in savings and give us greater control over our supply chain. Overall, I believe it is a positive decision. We anticipate only modest inventory changes as we are transitioning from a reliable manufacturer, so it shouldn't significantly impact our inventories like the previous insourcing did in Rock Hill.

Ashley Ellis, Analyst

Okay. And then I just wanted to better understand the kind of the puts and takes for gross margin through the year. I know you pointed to 2021. But if I look at 1Q '21 and what you did for the full year, it was a step down and maybe that was due to some divestitures and stranded costs. But could you kind of help me bridge that, from 39 to 42?

Jeffrey Graves, CEO

Yes, that's a good question, Ashley. You're correct that the last two years have been marked by uncertainty regarding gross profit as we adapted to changing macroeconomic conditions and made some divestitures. Generally, you should consider our gross profit margins as having a fixed component. As we grow our revenue, we will gain some leverage in that margin. To answer your question directly, the gross profit margin we reported in Q1 aligned with our expectations. We anticipate it will gradually increase through Q2, Q3, and Q4, stabilizing between 40% and 42% for the entire year. I agree that analyzing past years for trends can be challenging, but that's the outlook for this year.

Operator, Operator

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

Greg Palm, Analyst

I appreciate the quarterly color this time around. I'm just curious if you think back to Q4, when you reported and you didn't give this color, how did the quarter shake up relative to internal expectations? And I guess, have you seen anything different these last couple of months from customer behavior that gives you any sort of concern for the rest of the year?

Michael Turner, CFO

Yes, that's a great question. I'll start out and I'll let Jeff kind of fill in some blanks here. But we did mention in the earnings call and in our kind of prepared remarks last time that we would expect the unfolding of 2023 revenue by quarter to be very similar to 2021 revenue by quarter. But to answer your question, if you were just kind of to do the math and you took, say, the midpoint of our guidance range and applied it to that 2021 distribution. Yes, I think it's fair to say we fell towards the bottom end of the range, but still above the bottom end of the range. Just that's just normal puts and takes in quarterly distribution. But as we commented, it came in roughly as expected. So no real surprises internally for us.

Jeffrey Graves, CEO

Yes, Greg, based on our internal estimates, the year is progressing as we anticipated. I understand it's challenging to accurately predict quarterly results from an external perspective, but we weren’t surprised by our Q1 performance. It’s reassuring to see a level of normalcy in the usual fluctuations that occur within a quarter. If anything emerged from the quarter, it remains part of our plans and is being addressed. People seem cautious, which is reflected in purchasing behaviors and slightly delayed spending on capital expenditures. The positive aspect is that they have the funds available, which indicates a genuine need to invest. However, there’s an underlying nervousness about the global economic situation. We expect the year to proceed as we projected during our fourth quarter earnings release. We will provide another update by midyear, but for now, we feel confident about our guidance range for both revenue and EBITDA.

Greg Palm, Analyst

Yes, okay. I appreciate that. And then just last one, just a clarification on the adjusted EBITDA guide. Is that based on sort of the midpoint of the guide for the year? Or do you think you can achieve that even towards the lower end?

Michael Turner, CFO

It's a great question. So let me just kind of walk you through it a little bit. We'll start at the midpoint. If you just take the midpoint of our guidance range and you again, apply that 2021 distribution of revenue and then you just kind of assume our Q1 OpEx and just on a non-GAAP basis, just for clarity, that's roughly $6.5 million. If you just assume that, that runs out, and then we've got a steady depreciation add-back of a little over $5 million, and then you drop in the midpoint of our savings range of $5 million, I mean that would get you in a range of, call it $4 million to $6 million of EBITDA just at the midpoint. So if you do that same math at the lower end of the range, you're going to be in and around breakeven EBITDA. We still have plenty of levers left to pull if we go that direction. We're absolutely committed to hitting that $2 million number. And I think we've just added more certainty to that with the actions that we've taken with the restructuring.

Alek Valero, Analyst

So my question is, so given the current cost savings program that you guys announced last and how should we think about the right cost structure for the current revenue run rate? Are you guys there now? And additionally, if this is the appropriate cost structure, can you guys maybe provide some context or some color around how we could think about operating leverage potential over the next few years?

Jeffrey Graves, CEO

Yes, it's a great question, and thanks for asking, Alex. So I think the way I would answer that question is there's certainly a component of volume scale, and we've got the balance sheet to kind of weather the storm right now. And so we're preparing to see some steel growth over the next few years, which will get our operating expenses more in line with our target percentage of revenue. So I think right now, we're a little higher than we want to be. The restructuring efforts we just took that were enabled by some of the optimizations that we put throughout the business. I think they'll help with that. So I think we're in the right ballpark, but certainly, volume scale is a strong component of it as we move forward.

Michael Turner, CFO

M&A for us is quite modest and opportunistic. We have a robust internal development activity and allocate a suitable amount of resources toward hardware, software, and materials, which is central to our investment strategy. We possess most of the assets we need. Occasionally, opportunities arise, like Wematter, that fit well into a market niche and provide a quick return on investment. However, we are increasingly capable of handling these developments internally. The industry is undergoing considerable changes, so I cannot predict larger trends. However, I am confident about our financial position; we have over $0.5 billion in cash on the balance sheet, we expect to be EBITDA positive this year, and we anticipate being at least cash flow breakeven. We feel very good about our financial situation should an appealing opportunity present itself. Overall, we are in a strong position.

Operator, Operator

We've 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.

Jeffrey Graves, CEO

Thanks, Kevin. So just a quick thanks to everybody for joining us this quarter. We look forward to updating you again after next quarter's results. Until then, be well and thanks for calling in.

Operator, Operator

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.