3D Systems Corporation (NYSE:DDD) Q4 2022 Earnings Call Transcript

3D Systems Corporation (NYSE:DDD) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Hello, and welcome to the 3D Systems Fourth Quarter and Full Year 2022 Conference Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to your host, Russell Johnson, Vice President, Treasury and Investor Relations. Please, go ahead.

Russell Johnson: Good morning, and welcome to 3D Systems’ fourth quarter 2022 conference call. With me on today’s call are Dr. Jeffrey Graves, President and Chief Executive Officer; Michael Turner, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President 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 access to 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 discussions and responses to your questions reflect management 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 2021. With that, I’ll turn the call over to our CEO, Jeff Graves, for opening remarks.

Jeffrey Graves: Thank you, Russell, and good morning, everyone. I’ll begin this morning with some comments on 3D Systems’ performance and achievements during 2022, and then I’ll share my thoughts on the company’s outlook for 2023 and what we’ll be focusing on in the year ahead. After that, I’ll hand the call over to our CFO, Michael Turner, for a more detailed discussion of fourth quarter and full year 2022 financial results as well as our guidance for 2023. So with that, let me turn to slide five and start with a quick recap of last year. I’ll say upfront that while we came in short of our original financial goals set at the beginning of the year, I’m very proud of what our company ultimately achieved, particularly given the headwinds that we encountered during the year, a few of which were common to many companies and one of which was unique to ours.

It’s important that we be as clear as possible about these factors, as they directly relate to our view of the year ahead and actions we’re taking in response to them. First, while COVID driven supply chain issues were nagging problems throughout the year, they were no worse than what we had anticipated and they continued to improve throughout the year as expected. Much more impactful, however, was the rapid rise in inflation, which reduced consumer demand for a variety of elective medical procedures. At 3D Systems, we felt this most acutely as a significant slowdown in our dental orthodontic business, which declined significantly as consumers shifted their spending to more basic necessities such as groceries, clothing and energy for their homes and cars.

This inflation also manifested itself in higher labor and material costs in our products, which created challenges in gross profit margins as our pricing opportunities at times lagged the cost trends. Second, economic uncertainty and recession fears at some of our customers, particularly in the industrial manufacturing space to become more cautious and defer new investments in equipment and inventory. Third, while the COVID situation improved in the United States, economic activity in parts of Asia continue to be disrupted by factory shutdowns and restrictions on daily life. And finally, the tragic war in Ukraine not only led us to halt sales into Russia, but also dampened demand for key European markets in general. Baking into these factors, we updated our external financial guidance and took a number of concrete steps to control costs and drive near-term operational efficiencies.

I want to commend to our entire global 3D Systems team for staying nimble and working hard to manage, you will prove to be a very challenging year. Thanks to their efforts. We had a solid second half of 2022, delivering well on our key customer commitments. One of the most important things to emphasize with regard to 2022 was that it proved to be an extraordinarily productive and strategic year for our company when you consider the foundation we put in place for our company’s future. Last year, we made it clear that 2022 would be an investment year for 3D Systems. And indeed, we invested during the year in a number of key areas, refreshing our product portfolio, continuing to build a world-class regenerative medicine business and improving our corporate and regulatory infrastructure such that it can be leveraged to support future growth.

I’m pleased to say that we’re already harvesting the benefits of some of these investments in the form of important new technologies, new customers and new sources of revenue. Capitalizing on these early wins will be a key focus for us in 2023, and I’ll speak more about that in a moment. It’s also important to note that we invested heavily during 2022 in the highly attractive emerging businesses, such as regenerative medicine. While these efforts are largely pre-commercial today, their future impact will become increasingly apparent over the next two years. And while this investment spending impacted our 2022 results, I’m committed to stay the course in 2023 and beyond, prudently balancing these expenses with efficiency initiatives that are needed in order to assure customers of our ability to support their growth needs over the long-term.

These investments are absolutely the right strategic decision for 3D Systems, given the continued acceleration of additive manufacturing and production environments and the opening of entirely new markets as the cost of adoption continue to fall. We’re at the forefront of this dynamic and well positioned to deliver the value of promises for all of our stakeholders. Moving to Slide 6. During 2022, a crucially important investment focus for us was updating and expanding our industry-leading product portfolio, including hardware, materials and software. In particular, our hardware teams undertook a comprehensive effort to refresh our most critical printer platforms and they’ve already achieved several important milestones on this front. Last year, we launched the SLA 750 and SLA 750 Dual, our fastest-ever stereolithography printer that’s ideal for large format, high-volume polymer applications.

This all-new platform is the largest, fastest and most precise SLA printer on the market, and has enjoyed an enthusiastic reception from our industrial, aerospace and automotive customers. Just last week, we announced the BWT Alpine F1 team has purchased four of our new SLA 750 printing systems after having extensively tested the product during its beta phase. The Alpine F1 team is currently producing 25,000 additively manufactured parts per year using 3D Systems equipment and materials. The team will use our SLA 750 to accelerate their bills of complex aerodynamic parts, for wind tunnel testing as well as small composite tools and high-temperature bonding jigs. The SLA 750 evolution is a perfect illustration of the strategic capability we’re building at 3D systems, the ability to drive growth, through rapid innovation by accelerating new products from the design lab to the customer market.

And two weeks ago, we introduced a major upgrade to our industry-leading jetting printer, the MJP 2500W Plus, which is ideally suited for jewelry and other small precision casting applications. This upgraded platform is specifically designed to produce complex, high-quality pure wax 3D printed jewelry patterns with new levels of speed and precision. It was developed in close collaboration with end users and responded directly to the needs of our customers operating in mass customization production environments. As I noted earlier, a key focus for 2023 will be to harvest the near-term benefits of these technology investments. The SLA 750 and refreshed MJP 2500 are two early examples of the investments we’re making in rapid customer-focused innovation.

We’ll accelerate the cycle of performance upgrades during 2023 with a number of new platforms scheduled for launch throughout the year. Now moving to slide seven. In addition to these organic investments, in our legacy print platforms, in 2022, we further accelerated the expansion of our hardware offerings by acquiring three early-stage production printing platforms, Titan, Kumovis and DP Polar, each of which offer unique advantages in specific markets. We’re very optimistic about the potential for each of these new systems. While still in the early stages of launch, we’re already seeing exciting signs of what these revolutionary technologies can accomplish. Let me take a minute to share one example with you. Just last week, we witnessed 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 a 3D printed cranial plate manufactured from medical-grade PEEK polymeric materials using a Kumovis printer.

This printer was specifically developed for precision printing of medical grade high-performance polymers, such as Polyetheretherketone or PEEK. Using 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. In this incident, it was critically important to not only create a suitable scale plate for protection of the brain. But given the size of the replacement section needed to also lightweight the unusually large cranial plate by 3D printing with a porous honeycomb internal structure, an outcome that would have been impossible using traditional manufacturing techniques. This type of personalized patient-specific point-of-care implant application, which takes advantage of the performance and biocompatible properties on PEEK material, is exactly why we acquired Kumovis and are integrating their platform into our overall portfolio.

As this technology now comes online, we’re uniquely positioned to provide surgeons a full spectrum of printed solution options ranging from titanium and cobalt chrome for joint and bone replacement to advance medical-grade polymeric for spinal, cranial and other targeted orthopedic applications, each of which is customized to precisely match the patient needs using the digital tools and processes that we’ve pioneered over the last decade in our health care business. These solutions provide better, faster and lower cost outcomes to patients in a rapidly growing range of orthopedic applications, which will drive sustained long-term growth in our existing health care business. When combined with our Oqton software platform, which is now in process, the ability to standardize and automate orthopedic workflows will further accelerate the application of this technology for patients around the world.

I’m proud to say we’re the leader in this market, and we’re making the key investments required to remain so. As we move forward with these and other investments in our product portfolio, our goal is clear. 3D Systems will continue to offer the most complete innovative lineup of 3D Print solutions in the industry and we’ll remain the partner of choice for customers wishing to unlock the vast potential of true serial scale additive manufacturing. Moving now to Slide 8. Another strategically important area of investment focus during 2022 was regenerative medicine. As I’ve shared with you previously, I believe that regenerative medicine is the next frontier for additive manufacturing. Moreover, I’m convinced that 3D Systems is uniquely positioned to lead this emerging growth industry.

We combine a set of attributes that no other company can claim, including a 30-year-plus track record of developing high-resolution 3D printing applications, deep propensity in material science, a strong foundation of quality and regulatory expertise to draw upon and hands-on experience in human tissue engineering, gained through both strategic acquisitions and through our multiyear organ partnership with United Therapeutics. Over the last 12 months, our regenerative medicine program has achieved remarkable milestones that offer a preview into the extraordinary growth potential of this emerging business. In 2023 systems in our long-time biotech development partner, United Therapeutics, publicly unveiled a 3D printed lung scaffold that represents the most complex 3D printed object ever manufactured.

This extraordinary engineering achievement has already demonstrated functional gas exchange in animal models. Based upon progress made last year, we believe that our 3D printed lungs could enter human transplantation trials within five years, a significantly accelerated time frame to what we just envisioned back in 2021. Also in 2022, we announced the formation of Systemic Bio, a wholly owned startup company with leveraging our expertise in vascularized tissue printing to develop and manufacture a unique organ-on-a-chip technology called HVIOS for use in drug discovery and development by the pharmaceutical industry. I want to remind everyone that Systemic Bio will not be a traditional vendor of 3D printers and materials instead Systemic Bio will partner directly with major pharmaceutical companies to jointly develop HVIOS chips tailored to a specific organ and disease functions, when marketers ships directly to pharmaceutical and biotech companies engaged in drug discovery.

I’m sure you can all appreciate the substantial increase to our company’s baseline profitability that we would drive by becoming a major supplier of customized high-value biotech products for the pharmaceutical industry as well as the re-rating of our company’s valuation multiple that could result from this change. As we speak, our Systemic Bio team is actively engaged in commercial discussions with potential partners and customers. I look forward to having more news to share with you on this front in the near future. And just two weeks ago, we announced we had another milestone, a new regenerative tissue program that’s a direct outcome of the success we’ve achieved in 3D printing human organs scaffolds. This internal research and development effort is combining bioprinting technology, biocompatible 3D printing materials and patient-derived cells to manufacture vascularized hydrogel scaffolds, the mimic a patient’s anatomy and physiology and can deliver improved outcomes in a variety of surgical applications.

The first 3D printed product that we have under development is regenerative breast tissue. This breakthrough application could offer dramatically improved implant-based reconstruction option for millions of women diagnosed with cancer each year. It could also open up a significant new market opportunity to 3D Systems is uniquely positioned to address. A key point regarding our ongoing investment initiatives is we’re only pursuing R&D programs and new additions to our product portfolio that we believe offer attractive returns and are consistent with our company’s mission to provide application-focused solutions to high-value, high-growth industrial, and health care markets. Given its strategic importance, we maintained our heavy investment focus during 2022 despite macroeconomic and geopolitical headwinds as well as greater-than-expected softness in our key orthodontic market.

Doing so requires us to target our investment spending very carefully, control our operating costs, and utilize our strong balance sheet. I remain convinced that the programs we supported during 2012 and will continue to fund in 2023 are building a solid foundation for future growth and profitability that we’ll be able to leverage for many years to come. Moving now to slide nine. I’d like to highlight several recent internal activities that have already provided us with important performance benefits, and we’ll continue to do so as we move through 2023. Last year, we achieved meaningful success in better aligning our manufacturing and supply chain operations with our company’s operating profile and emerging product portfolio. During the second half of 2022, we completed a major step in this process by in-sourcing a significant amount of our polymer printing platforms into our South Carolina manufacturing operations.

This transition required us to incur some one-time costs as well as to take inventory onto our books ahead of need, which in part explains our elevated inventory levels at the end of the year. The change has already improved our gross margins and positively impacted delivery reliability and product quality for our customers. In 2023, as we accelerate the pace of new product releases that track to our financial performance targets, you have my commitment that we will be laser-focused on driving operational excellence and cost efficiency. Yesterday, we announced an important step in this process, a restructuring initiative that will 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 often and focusing our product portfolio on platforms that bring the highest long-term value to the market.

These actions, which is the culmination of integration activities and optimization planning conducted throughout 2022 will allow us to achieve significant cost synergies in 2023 and beyond, as Michael will detail later for you. Beyond these discrete measures to maximize efficiency, during the fourth quarter of 2022, we laid groundwork for further operational improvements by undertaking a major reorganization of our operations and engineering functions. We’ve now aligned all 3D Systems engineering, design, product management, procurement, manufacturing and logistics and are a single member of my executive team, Dr. Joe Zuiker, who recently joined the company to take on this new role. Under Joe’s leadership, our operations and engineering teams will work together to drive an organization-wide focus on operational excellence.

Their primary mission will be to ensure a seamless progression from product design to full-scale manufacturing for every element in our portfolio. Before handing the call over to Michael, I’d like to provide my broad perspective on our outlook for 2023. In our new full year guidance, which Michael will present to you shortly, we’re prudently assuming that the dental market slowdown that we experienced in the second half of 2022 will persist throughout 2023. Outside of Dental, we see considerable strength in virtually all other markets across our Healthcare and Industrial Solutions segments. Putting this all together, we expect to achieve consolidated revenue growth for 2023 in the mid-single digits, supported by growth rates in the mid-teens for our non-dental markets.

This growth profile plus the operational cost efficiencies that will drive throughout 2023 should allow us to generate positive adjusted EBITDA and free cash flow for the full year, excluding any one-time restructuring costs that we may incur. I want to emphasize that our 2023 guidance fully reflects continued investments in growth areas of our business, including new product development, R&D and creating a world-class regenerative medicine business. All of which are critically important activities designed to support future growth. As we enter the New Year, I’ve never been more excited and confident in our company’s leadership position in the 3D printing industry, particularly given the technology, application expertise and operational foundation we’ve worked so hard to put in place over these last few years.

In 2023, we’re committed to drive financial results in line with our leadership position. Finally, before concluding my remarks, I’d like to note one additional topic. Earlier this week, the US Department of State, Justice and Commerce announced that these agencies have settled their open investigation with 3D Systems into alleged export control violations by 3D Systems that previously took place between 2012 and 2019. We disclosed this matter in our SEC filings for some time now. Under the settlement, 3D Systems will be subject to civil monetary penalties as well as certain remedial compliance measures as a part of our three-year consent agreement. The company is pleased to have reached a settlement with the agency, remains committed to continuing to enhance its export controls program.

Looking forward, I’m very proud of the compliance culture, processes and infrastructure that we’ve now established with 3D Systems and that we’ll continue building upon. We are fully committed to not only meeting all required standards, but being a true leader in what is an essential element of all complex global businesses today. With that, I’d like to turn the call over to Michael Turner, our CFO. Michael?

Michael Turner: Thanks, Jeff. Before I start, I’d like to remind everyone that 3D Systems made three significant divestitures in 2021. The earnings release that we issued last night contained tables with non-GAAP measures relating to our full year 2021 results, from which we exclude the impacts of these divested businesses. Likewise, on today’s call, any reference that I made to our full year 2021 results will be on the same ex-divestiture basis. The point of this adjustment is to make our 2022 results comparable to our 2021 results on an organic basis. However, it’s important to note that we completed our divestiture program during the third quarter of 2021. Therefore, any tables contained in last night’s earnings release relating to our fourth quarter 2021 results — and likewise, any reference that I made to our fourth quarter 2021 results on today’s call do not reflect any adjustments for divestitures.

Turning now to slide 11. I’ll start out with a discussion of full year 2022 results for our consolidated business. As Jeff mentioned, our business encountered a variety of external challenges during 2022 that caused our full year results to come in below what we expected at the beginning of the year. These challenges include FX headwinds, high inflation, recessionary fears and the war in Ukraine. And of course, the biggest headwind we faced during the year was that inflation and economic uncertainty reduced the demand for many elective medical procedures. As a result, we experienced an unexpected and significant decline in dental market revenue during the second half of 2022. This was particularly impactful for 3D Systems because dental sales represent a large percentage of our total business.

However, after making a midyear adjustment to our 2022 revenue guidance to reflect the above factors, we were able to finish out the year by coming in quite close to our revised revenue expectations. Revenue for 2022 was $538 million, a decrease of 12.6% as compared to 2021. Excluding divestitures and the unfavorable impacts of FX, revenue increased by 3.3% compared to the prior year. This top line growth, despite a very challenging operating environment, reflects continued solid demand in most of the end markets served by our Industrial and Healthcare Solutions segments. As previously noted, partially offsetting this growth was our exit from the Russia market in early 2022, as well as weakness in dental market revenues, predominantly in orthodontics, which declined by roughly 10% year-over-year.

Adjusting for these items, our net sales increased by lower double digits year-over-year in 2020. Moving now to quarterly revenue results, which, as noted previously, no longer reflect the impacts of 2021 divestitures on a consolidated basis, firmly for the fourth quarter of 2022, decreased by 12% to $132.7 million compared to the same period in the prior year. Excluding unfavorable impacts of FX, consolidated revenues decreased by 7.6%. The decline in revenue primarily reflects sharply lower fourth quarter dental market sales, partially offset by continued solid product and service demand across other areas of the business. Turning now to slide 12 for a review of segment revenues. For our Healthcare Solutions segment, full year 2022 revenue, excluding divestitures and the unfavorable impacts of FX, decreased 2.9% as compared to 2021 due to a decline in our dental market of approximately 10% started in mid-2022.

Outside of dental, we saw healthy growth during 2022 and some of the other major business lines within our Healthcare Solutions segment, including strong sales to customers that 3D print various types of medical devices, such as orthopedic implants and surgical guides. Additionally, our sales of virtual surgical planning and point-of-care solutions to doctors, surgeons and hospitals grew in the fourth quarter. These two areas of our healthcare business often involve medical procedures that are less elective in nature, and therefore, have been proven resilient even in times of economic uncertainty. For our Industrial Solutions segment, full year 2022 revenue, excluding divestitures and the unfavorable impacts of FX, increased by 9.7% as compared to 2021, driven by continued strength in precision microcasting applications and demand for production machines in energy and commercial space applications.

Moving now to quarterly segment results. For our Healthcare Solutions segment, fourth quarter revenue, excluding unfavorable FX impacts, declined 16.6% year-over-year due primarily to dental market headwinds, partially offset by continued strength in medical devices. For our Industrial Solutions segment, fourth quarter revenue, excluding unfavorable FX impacts, increased 1.1%. Revenue during the quarter benefited from continued strength in precision microcasting applications for jewelry customers, as well as growth in semiconductors and electronics, partially offset by relatively weaker sales to aerospace and motorsports customers, as compared to a very strong fourth quarter in the prior year for both of those end markets. Moving now to gross profit on slide 13.

Gross profit margin for the full year 2022 was 39.8% compared to 42.5% in the prior year. The decrease in margins was due to multiple factors, including 2021 divestitures of non-core assets, inflationary impacts on input costs, freight and unfavorable changes in product mix due to selling more printers and less materials in 2022 than the prior year. This year-over-year mix shift impact was particularly impactful in our key dental market vertical. For the fourth quarter of 2022, gross profit margin was 40.9% and compared to 44.1% for the same quarter last year. The factors driving the year-over-year decline in margin are largely the same as for the full year. For while our margins are down in 2022 versus 2021, we achieved sequential margin improvement in the fourth quarter with a 100 basis point increase from Q3 levels, which followed a similar increase from Q2 to Q3.

We have been able to improve margins despite challenging macroeconomic environment. through a combination of price actions and increased focus on operational excellence, which includes the benefit of bringing some of our outsourced printer production back in-house during the second half of 2022. Turning now to operating expenses on Slide 14. Operating expenses for the year — for the full year 2022 increased 11.6% to $331.3 million compared to the prior year. The higher operating expenses include spending in targeted areas to support future growth, including the expenses from acquired businesses, research and development and investments in personnel and corporate infrastructure partially offset by the assets of expenses from divested businesses.

The higher expense also includes $17.2 million in accrued expenses for legal and other settlement costs that were largely related to the export control investigation, as Jeff mentioned, just a moment ago, we have now settled with the US catering. On a non-GAAP basis, which excludes non-recurring charges and divestitures, full year 2022 operating expenses were $241.1 million, a 22.1% increase from the prior year, which primarily reflects spending to support future growth. For the fourth quarter, operating expenses increased 18% to $82.7, million compared to the same period of prior year ago. On a non-GAAP basis, fourth quarter operating expenses were $64.1 million, an 18.2% increase from the same period a year ago. The increase in non-GAAP operating expenses primarily reflects spending to support future growth, including the expenses from acquired businesses, research and development and investments in personnel and corporate infrastructure.

Moving now to Slide 15. Adjusted EBITDA, which is defined as non-GAAP operating profit plus depreciation was negative $5.8 million for the full year 2022, compared to $56.2 million for 2021. For the fourth quarter of 2022, adjusted EBITDA was negative $4.8 million, compared to $17.9 million for the same period last year. The decline in adjusted EBITDA reflects all the factors that we’ve previously discussed. One point I’d like to remind everyone of as I did on our third quarter call, 3D Systems profitability during 2022 was significantly impacted by a variety of growth investments, which includes SG&A and R&D expenses from businesses that we’ve acquired over the last 1.5 years, including Oqton, Titan, Kumovis and most recently dp polar. It also includes investments we’re making to build our regenerative medicine business, which is still largely in a pre-commercial stage.

We invested on this front in 2022 and will increase our level of investment in 2023. These acquisitions and other investments in emerging businesses are highly strategic to 3D Systems, and we expect them to contribute significantly to our revenue growth over the coming years. However, for the time being, these businesses in aggregate have yet to generate meaningful revenue for us. As such, you should expect our adjusted EBITDA to run below our natural potential for a period of time due to the near-term expense impact of recent acquisitions and investments in pre-commercial businesses. Although, as I will discuss in a moment, we are forecasting a return to breakeven or better adjusted EBITDA in 2023 after a negative year in 2022. And for EPS, full year 2022, we had fully diluted loss per share of $0.96 compared to income per share of $2.55 for 2021 excluding charges for stock-based compensation and other non-recurring items as detailed in the appendix of the earnings release.

Our 2022 non-GAAP loss per share was $0.43 compared to non-GAAP earnings per share of $0.33 in 2021. For the fourth quarter of 2020, we had a fully diluted loss per share of $0.20 as compared to a loss per share of $0.05 in the prior year quarter. On a non-GAAP basis, we had a loss per share of $0.06 in the fourth quarter of 2022 versus $0.09 earnings per share in the prior year quarter. The year-over-year EPS decline reflects all the factors we’ve previously discussed. Now turning to Slide 16 for balance sheet highlights. We ended the quarter with $568.7 million of cash and short-term investments on hand. Our cash and short-term investments declined approximately $220.9 million since the end of 2021, driven primarily by $104.3 million paid for acquisitions and equity investments, cash used in operations of $16.4 million, capital expenditures of $22.5 million and cash used for financing activities of $13.8 million.

We continue to have a strong balance sheet with a sufficient cash to support organic growth and our investments in our pre-commercial businesses. I’ll conclude my remarks on Slide 17 with a discussion of our full year 2023 guidance. We expect revenue to be in the range of $545 million to $575 million. We expect non-GAAP gross profit margin to be in the range of 40% to 42%, and we expect both adjusted EBITDA and free cash flow to be breakeven or better. I want to highlight several points related to this new guidance. First, we are not providing 2023 guidance for non-GAAP operating expenses as we did for 2022. However, we have added 2023 guidance for both adjusted EBITDA and free cash flow. We made this change because we believe that these two metrics, one which addresses profitability and the other, which addresses cash generation are most consistent with how investors will evaluate our overall performance going forward.

Given that we are now guiding to new metrics, I want to make sure that we have a common understanding on definitions. For purposes of this guidance, I define free cash flow as adjusted EBITDA plus changes in trade working capital, less capital expenditures. Also €“ both adjusted EBITDA and free cash flow are meant to exclude any restructuring and/or one-time charges that we may incur during 2023. And lastly, I want to note that our 2023 guidance fully incorporates two known headwinds. It includes increased operating expenses associated with our continued investment in our pre-commercial regenerative medicine business, which we expect to be approximately $9 million higher than in 2022. And it also assumes that our dental orthodontic demand will be down roughly 35% versus 2022, primarily driven by customer supply chain, inventory reduction initiatives.

Offsetting these headwinds are the favorable impacts of the restructuring that Jeff spoke to you earlier and strong growth in our core non-dental markets. The key takeaway here is our guidance for 2023, anticipates breakeven to positive adjusted EBITDA and free cash flow after fully incorporating these own headwinds, which demonstrates that the fundamentals of our core business are sufficiently robust to drive solid overall performance for the company. Finally, although we are not providing quarterly guidance for 2023, I want to make a comment about seasonality. In the past, it’s been difficult for 3D Systems to begin each year with a relatively weaker first quarter and then go through a somewhat higher second and third quarter and then end the year with a strong Q4, as customers stops their annual budgets and stock up on inventories for the coming year.

2022 do not follow the same pattern, leads to the decline in our dental markets in the second half of the year, as well as other macroeconomic challenges. Based on the current forecast upon which our 2023 guidance is based, we are expecting to return to normal seasonal trends, as I just described, which should result in a quarterly split of revenue similar to what we experienced in 2021. That concludes my remarks. Operator, we are now ready to open the line for questions.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.

Troy Jensen: Hey John, thanks for the time here. Congrats on results that I thought were better than feared for the most part. But quick — just for you. To start, Michael, a point of clarification. In your prepared remarks, you right at the end, did you say that health care was down 35%, or are you expecting that to be down in ’23 at that level?

Michael Turner: We expect 2023 dental — our dental markets to be down 35% year-over-year in ’23.

Troy Jensen: Okay, cool. I got you. And then just thoughts on like share loss. Is that just customer adoption stall that much, or just share is obviously an important topic for this customer. So just your thoughts on that, please?

Michael Turner: For that market, specifically, Troy,

Troy Jensen: Yes, yes, obviously, is what

Michael Turner: No, Troy, there’s no share loss. It’s strictly a correction in the supply chain at this point. But if you watch public company announcements, that the impact on that business has kind of moderated now. It’s flattened out. They’ve just got to burn off some inventory. They had built inventory pretty aggressively as they expanded their production capability and they got hit with the consumer discretionary spending drop. So, they’re just clearing inventory. So, we’ve tried to just be very realistic in the year to say, it’s going to take — this consumption rate is going to take a while for them to do well and return to normal levels, but no share loss.

Troy Jensen: Okay. Perfect. And then, Jeff, I mean, you’ve talked historically about just the importance of profitability in this industry, especially from the leaders like you guys and additive. I guess, I was hoping to get your thoughts on what the OpEx is for like bioprinting and regenerative that isn’t generating revenues here. But as Michael pointed out, there’s a lot more than just the regenerative stuff or some of the traditional additive stuff that you brought to that’s kind of pre revenue. So — just thoughts on — I think, Michael, you’re saying was a natural potential of the margin profile. I’d love to know what you think this business could be. Where is it right now if you didn’t have all these aggressive investments?

Jeffrey Graves: Well, I’ll — and it’s a discussion we have actively in , especially coming into the year to set the budget. It’s — for companies that are viewed themselves as growth-oriented companies, it takes no great brainpower to just broad-based cut costs. What we’ve tried to do in ’23 is to really look at our markets and say, what’s really going to drive meaningful shareholder value over the next few years to make sure we funded that. And then, let’s be realistic on top line revenue. And then let’s aggressively take cost out where we can. So it’s that balance of looking out for the next few years on the adoption rate of additive in key markets that are going to drive growth, really valuable growth and balancing that off — those investments off against cutting costs and making sure that we’re profitable.

So, we just put a stake in the ground this year and said, look, we can strike a nice balance, we can have EBITDA profitability, so be profitable on adjusted EBITDA, and we can generate positive free cash flow. And remember, our balance sheet, we still have well over $0.5 billion of cash on the balance sheet. But I think customers, especially right now in uncertain times, they need to see you making money. They need to see it particularly generating cash to know that you’re going to be around and be able to support them, especially we’re selling now into relatively conservative large, older line industrial companies that are adopting additive, they’re conservative in their supply chain design. So, they want to know that we’re going to be around and making money.

So, it’s not enough to have cash on the balance sheet. We got to be adding to that cash. And yes, we still have to be investing significantly for long-term growth because truly the number of applications and production is just exploding. And not only Healthcare, but Industrial applications. So, — now not all of them can you make money at. So, you got to be careful there. But we try to pick it use carefully. So, what you see us giving in guidance is kind of the net result of that is we feel it’s really important that we’re committed to positive EBITDA and positive free cash flow this year. And we have cumulated a lot of inventory last year with the insourcing. So, we’ve got a lot of upside in terms of working capital reductions. We’ve got — we’re being prudent in our efficiency for us to make sure we deliver on those.

And then we’re spending as much as we can still on the growth initiatives, so that we end up with our results. So, — and Regenerative Medicine is taking a meaningful piece of it. But when the returns on that investment become public, I think everyone in retrospect to look back and say, they were great investments. So, we’re kind of pleased with the balance. It was a real challenge this year, particularly because of the weakness in dental is how fast will that come back. So, I think we feel very comfortable with our topline expectations at this point, and we’ll update you if we change. We’re focusing heavily on cost wherever we possibly can and we’re funding key initiatives that we think have real value in the next few years. Michael, do you want to add any more to that in terms–

Michael Turner: No, I think you covered. But yes, Troy, so the — that kind of covers it. Any questions because that’s a really thoughtful question and it’s a subjective answer. I just feel this year, it’s important to show our customers and our shareholders that we’re positive in EBITDA and that we’re going to be positive with free cash flow. And even though we’ve got a great balance sheet, we want to make sure that stays really strong.

Troy Jensen: Perfect answer. One quick question. I’ll just go out there and see the floor, but touch on Industrial, I thought the fact that your guidance for these guys to grow 15% this year, in what could be a recessionary year is to be pretty healthy, right? So, just a thought on that, Jeff, and then I’ll leave in case–

Jeffrey Graves: Yes. Troy, it’s reflective of true production applications starting to really grow. And I — it’s — we were modeling it mid-teens this year. And I think that’s going to be early days when you look over the next few years because there’s so many folks moving it into factories and factory managers are very conservative people — new companies are, but factory management particularly are promoted because they’re conservative generally, and even they’re adopting it and moving it into the floor. And be it at a moderate pace, but it’s remarkable a number of new applications that are coming on the screen every day in both polymers and metals. And customers like dealing with us because we have both and we can support them in the world wherever their needs are. So, I’m really bullish. I looked at that number to and said, well, can we deliver that? And based on our customer back analysis, Troy, it’s very doable, I believe.

Troy Jensen: Awesome. Awesome guys. Well, good luck this year and, yeah, thanks for all the time.

Jeffrey Graves: Thanks, Troy.

Michael Turner: Thanks, Troy. Stay warm.

Operator: Thank you. Your next question is coming from Greg Palm from Craig-Hallum. Your line is now live.

Danny Eggerichs: Yeah. Thanks. This is Danny Eggerichs on for Greg today. Hoping to dig a little bit more into dental here right off of that. Obviously, big year-over-year decrease expected here. I mean, is there anything that could make you more bullish something that could go right in this upcoming year, whether it’s on the systems side or the consumable side where maybe there’s that 35% is kind of a base case and there’s potential upside to that, or you just don’t have really good visibility to that?

Jeffrey Graves: Yeah. It’s a great question. It’s great to hear from everybody in the cold climate, first thing in the morning. No, it’s a great question. So we have a very intimate relationship with the leader in orthodontics today. And I think, if you look at what they state publicly in terms of their business now kind of bottoming, my interpretation, business bottoming and they’re looking at €“ I think €“ my guess is, that’s a culmination of many factors. You’ve got wars going on and inflation, but things seem to be kind of stabilizing. So I would agree. I mean, just as a consumer, I would agree that, that outlook is probably reasonable. And when you factor in the supply chain burn down of inventory that they want to accomplish with us that result’s in our revenue stream.

Is there upside on that? Certainly, I mean it’s I hope everybody looks in the mirror and says their teeth need to be straightened, right, that would be great. If there was increased demand that it would flow through to us very nicely and particularly probably the second half of the year, as inventories are brought in line. But it is really that simple. How much money will people be willing to spend on straightening their teeth, doing that correction because that’s really the driver in the market? And that I think we’ve been very reasonable in our projection right now. So there could always be a downturn in the economy again and things could soften. Inflation, I am hoping it comes under control and people have the money to spend on optional items like that.

But it is really important in people’s lives, and we’re really well positioned, if there is some upside there in demand. But I think we’ve been prudent in our projections right now.

Danny Eggerichs: Got it. And then I guess industrial and non-dental health care, I think that mid-teens growth was better than a lot of us were expecting. Are those €“ you think growing at similar rates, or is one outgrowing the other? And how has that changed in recent months?

Jeffrey Graves: Yeah. Net debt is probably similar rates. I would tell you that, the non-dental half of our health care business, the orthopedics and point-of-care work, that’s fabulous. And I think we’ve gotten the technology to a point now of a broad acceptance and the costs are coming down fairly rapidly, so that orthopedic repairs to the human body are becoming the €“ as I said in the prepared remarks, better faster and cheaper. So you can now have better patient outcomes, faster turnaround times, less hospital time and all the ancillary benefits from that, you can do it at a lower cost and provide a better technology solution. And I think it’s €“ we’re really hitting our stride in orthopedic acceptance. And we work closely with the FDA on approvals of each procedure, and you got to work through that.

It takes a little time. But the economics and the outcomes are in our favor. And I’m very bullish on that. Orthopedics, I think it’s transforming orthopedics, frankly. And there’s ripple effects, less inventory in the supply chain, better patient matching of solutions, all of that you get. The example I gave, I’m just over the moon about with the skill repair. It brings all the benefits of additive manufacturing together in one example, and it’s fabulous. And this is a change in this patient’s life. So it’s great. On the industrial side, again, broad acceptance. I mean when you look at everything from rocketry and satellites to new ground transportation with electric vehicles and even old line manufacturing. Now we’re not going after a lot of high-volume standard components made out of steel and other lower-cost materials.

We generally are in the higher-value markets of titanium and nickel and some of the other high-value materials and applications because that’s the first adopters, if you will, of additive. But especially these younger — I would tell you, these younger companies, where there are fewer design paradigms they love additive. And if you look at the percentage of additive parts in some of these really progressive industries that are moving fast, it’s really high. I mean you’re talking 70%, 75% of components in some modern vehicles that are not ground-based vehicles yet, but the modern flight vehicles for air and space that are made with additive manufacturing and either directly or indirectly through castings. And it is remarkable. So I think your — all of the tides are going in the right direction for adoption.

And the only thing that could really slow it down is a drop in capital spending by companies if they are worried about cash. But our customers generally are in good shape on cash. So they’re willing to make investments to reduce supply chain risk and improve the turn time. So it’s — right now, it’s greenfields ahead. There’s enough to be nervous about in the papers. But unless things get worse, I’m pretty confident in those numbers we put out there.

Danny Eggerichs: Yes. That’s all good stuff. Maybe just sneak in one more quick one on your inventory levels. I mean, a pretty big jump again both year-over-year and sequentially. Just update on your comfort levels there and how we should think about that going forward?

Jeffrey Graves: We’re very comfortable. We’re going to have enough inventory to make product. Yes. it’s — no. When you look at comfort is how much cash do we take on inventory, it is right now outrageous. I mean we in-source manufacturing, we had to take on to our books, and I think it hit us in Q3 and probably a little overlap in Q4. Our inventory levels jumped up a lot because the supplier we were using to make product had just an absurd amount of inventory. So we took on the good inventory. We’ve got it on the shelf now. We’ll be working our way through that. It’s certainly a source of cash in 2023 and it’s an important one to us. So we’re going to be working inventory levels down to a much more respectable level throughout the year.

What I am really pleased about is by taking over that manufacturing, we immediately improve the quality and delivery metrics for our products. And it was critical to our customers and their growth. So we immediately did that. Now we’ll work down inventories. And I just think our type of business is much better suited for many platforms for internal manufacturing. And that’s a trend we’ll probably continue not 100%. But in — for our high €“ our low volume, high mix, complex products. We have a great manufacturing base here in South Carolina. And we’re developing the same in Europe, and you’ll see more of that to come.

Danny Eggerichs: Got it. All right. Thanks, everyone.

Jeffrey Graves: Thanks.

Operator: The next question is coming from Shannon Cross from Credit Suisse. Your line is now live.

Shannon Cross: Thank you very much for taking my question and good morning. I wanted to ask a bit on the COGS — or actually cost side. Your restructuring program is really targeting OpEx. I’m curious about COGS. And — then, I had a, I don’t know, more of a meta-question, I guess, in terms of the biotech opportunity that you have. Could you maybe think about — I mean, you mentioned the lung has the potential to be through — I guess, into maybe human trials in five years. How should we think about the business model morphing over the next few years? I don’t want specifics, but maybe if you can talk in generalities about what kind of revenue growth projections there might be or how to think about comparable margin profiles, just because you really have sort of few separate businesses, and I think it would be really helpful for people to frame what they’re investing in. Thank you.

Jeffrey Graves: Yes. So let me — it’s — on the latter question, there’ll be a lot more that becomes public over the next two years in terms of our projections, because we have to be able to give some estimate on getting through the FDA and when — what the uptick in volumes will be. I’ll come back to that part of your question, Shannon, in just a second. But on the first one in terms of COGS and OpEx, obviously, we thought it was important this year that we really drive cost out of the business, so we drive efficiencies, there would be positive EBITDA performance and positive free cash flow. It’s important. It’s more than symbolic. It’s — because, obviously, we have a big balance sheet. So we’re fine from a stability standpoint.

But it’s important that we show, you can make money in this business and yet still invest for long-term growth. So that was our objective. We — because we’ve insourced part of manufacturing now, that’s about 40% of our polymer platforms. We have a really nice opportunity on COGS and the supply chain is getting a little bit better. So — and as we launch new products, we’re targeting components that are more widely available, things that we can really get some better pricing on from a purchase standpoint. So we’re working COGS really hard. We’re also still working pricing very hard. So we — I know, I wish gross margins were rising faster than they are, but there in upward trend. We’re going to continue that, which is reflected in pricing and COGS.

In terms of OpEx, honestly, Shannon, we could generate a lot higher EBITDA in the short term, if all we cared about was 2023, okay? We’re spending money on refreshing our traditional platforms, because as it’s moving into factories and they want fast productive, cost-effective machinery. So we’ve got a ways to go on that. The SLA 750 is a marvelous example and this new version of our 2500 as a jetting platform, great examples. We’ve got several more to go, and you’ll hear about more of those in 2023. Those are factory grade machinery that will be good in production. We feel it’s important to complete that build-out and refresh of our product line, which will largely happen in 2023. And then on the side, we’ve got this remarkable effort in regenerative medicine.

So I’ll hit that question next. And we are spending millions of dollars on that ourselves and we also have an incredible partner in United Therapeutics who we’re co-developing the organs with. They are, in my opinion, one of the best partners I’ve ever encountered. We are intimately involved with them in developing human organs, which I think will change millions of people’s lives. But because of that, Shannon, that core technology, we’re able now to take our own investments and branch into other areas, which I believe will bring shorter term benefits, like the human tissue work on breast reconstruction, marvelous area, still have to get through FDA approvals and all that, but it’s just one example of dozens of applications in the human body, which will bring midterm — I think of that as kind of midterm benefit.

But then the really, really neat area that we started talking about last year was doing — printing what for us is relatively small, but complex vascularized tissue specimens to sell into the pharmaceutical market. And that’s really neat because you can — there’s a huge payoff for getting better testing of new drugs. If you can take a year or two out of the development cycle of developing a new drug, it’s worth billions of dollars to the company that is doing — participating in that. Obviously, the pharma company gets a lot of benefit from that. We’ll get some benefit from something with the testing. But we will — in that case, we will be selling prepacked, as you can see these on our website, they’re called HBios Organ-on-Chip, where we print vascularized tissue, we implant those scaffolds with human cells, either healthy or diseased.

And the coolest example on the website is on one end, our healthy liver cells all kept alive for — at this point, weeks and months through blood flow through that chip. And on the other end is our cancer cells that they want to test a new drug on. So, when you make this chip, you can pass blood with test drugs through it to look at the effect on the liver cells and on the other end, on the cancer cells in one test. And we can make those specimen, Shannon, by the hundreds and soon to be thousands. We’ll be announcing our new facility down in Houston, which will be the first BioFactory to make those chips in the coming days, okay? We’re in discussions with a large number of pharma companies today and I expect announcements to come out certainly more than one this year about the use of those specimens and drug testing.

So, short-term, I’m incredibly excited about pharma I think and that’s good. And then that doesn’t require direct FDA approval, it’s customer acceptance of the test. We’re screening new drugs. And then the pharma company carries on with more of its traditional screening experiments after that. Mid-term, it’s the human tissue and other human applications and then a longer term is this remarkable opportunity on organs. So, we have a short, medium and long-term focus in Regenerative. But I think we’re ahead of anybody in this industry, particularly in our — through our partnership with United Therapeutics, remarkable, remarkable technology coming out of this so much so that we formed a Medical Advisory Board over the last six months, I’m extremely proud of.

They are remarkable people that are now giving us their insights into our programs and we’re trying to really pave the way for commercialization of these technologies. I think it’s — the benefits to mankind are remarkable and to our shareholders will be equally important. So, I feel great about that work from every side. That may have been more than you wanted to know, but I’ll have to stop myself from talking about it now. I could go on for the rest of the day, Shannon.

Shannon Cross: That’s very helpful. I guess the last thing, if I could just touch on it. I realize this was a prior administration. But just with regard to the settlement agreement, I think it was about a $15 million fine and then you have some more expenditures over the three years. Is there anything else that we should be aware of related to it or that could have any impact on your business just to sort of close the loop on it? Thanks.

Jeffrey Graves: No, Shannon. We’re obviously happy to settle with the government. We’ve done that span in 2012 to — late 2018, early 2019. Since that time, I would tell you, we’ve made tremendous progress in our compliance infrastructure. I’ve personally been involved with it since 2020, and it’s first-class, and we’ll make it even better. The cash payments that we owe the government are spread out over several years. You can see — you’ll see the details in the K and then in the publication. So that — no ongoing impact on the business. And then to top it off, Shannon you go way back in this industry, we exited that the business that was largely the cause of these issues back in 2020. I think we closed the deal in 2021 through the sale of that Quickparts business, that OEM business.

That was machining work we were doing in China as a part of that business. We sold that business and got out of it. It wasn’t the business for us. And we’ve since that time also, in parallel, enhanced our compliance program. So I’m very pleased with our position going forward. I’m pleased to settle with the government, and it’s all behind us.

Shannon Cross: Great. Thank you so much.

Jeffrey Graves: Thanks.

Operator: Thank you. Your next question today is coming from Brian Drab from William Blair. Your line is now live.

Blake Keating: Hi. Good morning. This is Blake Keating on for Brian. I’ll just ask a quick one here since we’re at it’s been an hour. I just wanted to talk about you mentioned in the medium-term, your breast scaffolding and tissue products. I was just looking to dive into that a bit. Is this the application that you’ve partnered with CollPlant on? And then along with that, what do you think is going to differentiate your product versus the others? There are some private companies that are focused on breast scaffolding with 3D bioprinting. What do you think going to differentiate that product versus theirs?

Jeffrey Graves: Blake, thanks for the question. No, this program has nothing to do with CollPlant. And in fact, we developed most of our own materials that we believe are better suited the application, quite frankly, which is why we’ve gone our separate way right now there. And their college of material may find a home in certain applications. I hope it does. We’re not dependent on that at all for our human tissue work. The way to think about the breast tissue work is this one example of large volume tissue applications in the body. So you can think of a lot of trauma examples where someone gets a — have some damage to their body that resulted in large amounts of tissue being removed. And this — the ability to print vascularized scaffolds, that’s really what distinguishes us.

Vascularized scaffolds that you can then embed human cells into in the case of the breast tissue work, and I’d say probably many other parts of the body, you’re actually using the patient’s own fat cells for implanting in the scaffold. So these are 100% biocompatible scaffolds and implanted cells. They’re kept alive, obviously, indefinitely by the vasculature that’s printed into it. And it’s a natural addition back to the human body of their own tissue material basically. So we love the solution. I think it highly differentiates us from anybody else in the market. And it’s just one example of various parts of the body that we’ll end up moving into as we run with this technology.

Blake Keating: Understood. Thank you for the color.

Jeffrey Graves: Maybe one more question, Kevin, and then we’ll cut it off. Okay?

Operator: Certainly. Our final question today is coming from Ananda Baruah from Loop Capital. Your line is now live.

Ananda Baruah: Hey, guys, good morning. Appreciate it. Just real quick. Yes, I’m going to ask one thing just given the time. But just sticking with regenerative and you’ve given a lot of rich context today Jeff, is there anything — I don’t know, if you saw as you’ve seen this, you may have because you’re in the industry now. But end of last year over in the UK, it came out that some base editing technology has been used to cure certain types of cancers. What’s interesting is the technology isn’t yet approved sort of by the managing bodies, but if you’ll find the paperwork and if you can get access, you’re able to use it. And I guess the question is, do you think — yes, do you think before FDA approval, there are certain things that certain of the things that you’re working with in regenerative or even in orthopedics, that could come to market and be used — we could see proof of concept even prior to being FDA approved, that would help people kind of lay a trail of bread comes out to where that witness is going.

Jeffrey Graves: Yes. No. It’s an excellent question, because full and formal FDA approval obviously takes a lot of time, there’s breakthrough designations. There’s the — I’m spacing the term right now, but there’s the sympathetic approvals where a patient is going to die if they don’t get the treatment. There are those categories that the FDA and similar bodies overseas has in order to allow a new technology to get to market faster. Obviously, we go through all of the work to get full FDA approval, but wherever we can get breakthrough designation or early use designation, for example, this hospital in Austria, very early use of this Kumovis technology for an implant or scaling plant, which changes patients’ life. I mean and it was — and really from our perspective of printing, it was very low risk application for us.

And it was great to get it out there and get it used, so, that all helps in getting final regulatory approvals. But to your point, and it’s a good question, is there are pathways you can follow to get early designation if somebody is going to die or for other reasons, if you have breakthrough designation that you can get it in there. Part of the reason I wanted to really form our medical advisory board was to get guidance on that is where do we have an opportunity to go for early approvals for fast-tracking any of the technologies, obviously, balancing risk with patient outcomes to make sure we gather the right data. We’re spending a fair amount of money on animal testing now, which we haven’t talked about much at all publicly, but we’re doing a fair bit of animal testing on a variety of these technologies in order to gather data to know when we’re ready to go to the regulatory bodies and then, what kind of depth we have to go to in discussion.

So, we’re going through all the right steps to get there and hopefully — and we will get them to market as fast and as safe as we possibly can. Again, the first things to market I would expect will be the pharmaceutical applications for drug discovery. What we’re producing in these vascularized chips is remarkable. The ability to keep cells alive for months is an incredible step forward and the ability then to test to develop big statistics on new drugs. So that’s our goal, and it’s soon to be our capability here. That we’ll be talking about. After that, human body applications, either for tissue or to your point, orthopedics, and then beyond that in the future, obviously, organs. That’s where we’re headed. I think it’s a brand-new history and I feel great about our leadership position in it.

Ananda Baruah: All right. Thanks, Jeff. That’s great context. I appreciate it.

Jeffrey Graves: Okay.

Operator: Thank you. We reached end of our Q&A €“

Jeffrey Graves: All right, Kevin, we €“

Operator: Over to you, go ahead, please.

Jeffrey Graves: I’m sorry. We should probably wrap it up. Listen, let me just thank everybody for the call. I appreciate you guys tuning in and asking such good questions. We’ll look forward to updating you each quarter. The world is a very dynamic place. You have our best thinking on 2023, and we’ll update you as we go along each quarter. So thanks.

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