3 Positive Quotes From Arcam AB's Q2 Conference Call That Investors Should Not Miss

If you're following Arcam (NASDAQOTH: AMAVF  ) , you may have already read the company's second-quarter 2014 earnings release. The Swedish industrial metals 3-D printing company kicked off the earnings season for the volatile group when it released its results last Friday.

Briefly, Arcam's revenue fell nearly 15% and its net income was down about 95%, largely because it only sold four of its electron beam melting systems in the quarter, compared to seven in the prior-year's quarter. You can read my article about the company's earnings here. Long-term investors, however, know that it's critical to look at the "whys" behind the numbers and focus more on the forward-looking prospects than the rear view picture. So, we're going to supplement the earnings data with some color provided during Arcam's conference call. There were too many valuable nuggets shared during the call to cover them all, but here are three biggies:

1. There were good reasons for the decrease in systems sold

This quote is from CEO Magnus Rene's prepared remarks:

There are actually three reasons behind the somewhat slow shipments. ... We have a lot of customers in China now and some of those customers that should have taken delivery in the second quarter couldn't because of customs formality reasons that are now sorted out, but weren't sorted out by the end of June. The second is planning. We had an unexpectedly strong order intake for the A2X system and we produce on forecast and we didn't forecast that strong of sales, which means that we have A2X orders that we could have shipped, but we couldn't because we hadn't built those machines. And finally ... We decided to delay the shipments of the Q20 systems for a few weeks to finalize quality assurance before we ship the first systems out.

The factors above didn't result in any loss sales, simply a shifting of sales to a future quarter. So, while Arcam took a hit this quarter on a year-over-year comparison basis, this scenario should be a positive in the second half of the year. 

This brings us to the "lumpiness" factor. Placing too much emphasis on any single quarter is particularly short-sighted when we're dealing with a company such as Arcam, which sells a relatively few number of high-priced products. In such cases, even a shifting of one or two orders from one quarter to the next can result in a considerable difference in quarterly results.

Importantly, Arcam's results look OK for the first half of 2014. Revenue increased 21% to 110 million Swedish krona, or about $16.5 million. Net income decreased by almost 49% to 3.9 million Swedish krona, or about $583,600. But excluding the nonrecurring costs of 6 million Swedish krona associated with the acquisition of the AP&C metal powders business, net income rose 23% to 9.9 million Swedish krona, or about $1.48 million. Earnings per share dropped 56% to 0.21 Swedish krona, or about $0.03. Excluding acquisition costs, however, EPS increased 13% to 0.54 Swedish krona, or about $0.08.

Source: Arcam

Before we move along, investors should be familiar with the Q20 system. This system is based on Arcam's third-generation tech, and was just launched in December. It was designed for series production applications in the aerospace industry. The system's new features include increased productivity, higher resolution, and a camera-based monitoring system for part quality verification.

Given this is a new system, it's a big positive that Arcam took extra time on the QA end. Additionally, I think it's very likely that the Q20 was a big reason for the company's shrinking margin in the second quarter, though none of the analysts asked about this. Whenever a company launches a new product, there are increased costs involved, so the first few new products are costlier to produce than future products. Further, in the second quarter, Arcam was incurring the cost of producing its first several Q20s, but wasn't collecting the revenue from them, given that it held up shipments for QA reasons. So, I don't think investors need to concern themselves with the shrinking margin in the quarter. That said, if this situation doesn't right itself over the next couple quarters, there could be cause for concern.

2. The average selling price for systems was down due to the mix of systems sold

This quote is from Rene in response to an analyst's question:

The average selling price (for the first quarter) was extremely high ... and we said that you shouldn't take for granted that it should be that high always. I would say that if we look at the average selling price for the six months we are at, say, a normal level. So, it was higher in the first quarter and lower in the second quarter, and that's purely because of product mix.

This topic was a tad unclear. Rene did say that the average selling price was down "purely" because of the product mix, but he was referring to a comparison with Q1. I'd be interested to know if that "purely" holds true when we're talking about a year-over-year comparison with Q2 of 2013. Nonetheless, this is positive news; we just can't sure how positive. As to the mix, Arcam primarily shipped Q10 systems in the second quarter, whereas it heavily shipped A2X and A2XX (the precursor to the Q20) systems in the first quarter. 

3. Arcam expects to ship "almost all" of its backlog in the second half of 2014

This quote is from Rene in response to an analyst's question as to whether the company expected to ship all of the backlog in the second half of the year: "Not all, but almost all." 

Rene provided more information about this topic later in the call. Arcam doesn't expect delays in shipments due to any other reason than a customer might not want a system delivered right away. 

The record backlog of 17 at the time of the conference call (backlog at the end of the quarter was 16) bodes well for Arcam's second half results. And given Rene stated elsewhere in the call that systems generally ship within three months of an order, there is more potential upside for shipments in the second half. Systems ordered in the third quarter should be able to be delivered in the fourth quarter unless, of course, a customer doesn't want the system delivered right away.

Foolish final thoughts
There seemed to be good reasons behind Arcam's weak second-quarter results. Additionally, it's important to use a wider time frame lens when looking at a company such as Arcam, and the six month picture looks OK.

Positively, Arcam is growing relatively moderately, and occupies an attractive niche (metal printing). Further, very early indications are that the aerospace industry is embracing Arcam's new Q20 platform. Given this is a higher-end system, this should bode well for future results.

Investors and potential investors need to remain focused on two factors: the order intake numbers and margins. A slowing in orders received could signal that one or both of Arcam's two markets (orthopedic implants and aerospace) are favoring other metals 3-D printing technologies over Arcam's EBM technology. And shrinking margins would likely indicate a loss of pricing power due to increased competition. 

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Note: Quotes were obtained by reviewing the call's recording, as a written transcript was not yet published. They should be very accurate, though a noncritical word or two may be off. 


Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2014, at 11:52 AM, warreneng wrote:

    Great take on the ER. I hadn't listened to the call and was considering selling out of my position, but this gives me the confidence to hold. Keep up the good work, Beth!

  • Report this Comment On July 21, 2014, at 3:15 PM, hldboo wrote:

    "Investors and potential investors need to remain focused on two factors: the order intake numbers and margins."Will you keep us updated?

  • Report this Comment On July 21, 2014, at 6:24 PM, thiswillchange wrote:

    Your point regarding the costs incurred to build the Q20 had an adverse effect on margins doesn't ring true to me. Those costs should have had no impact on margins since they would be considered part of the inventory value at the end of the quarter, not part of cost of sales. No sales...no cost of sales. Some of those costs could be in SG and A expenses...R&D, etc. and they would impact net income.

    It may be that I am not certain of what you mean by the term "margins". I interpret it as the gross profit margin (sales less cost of sales) but you may be using it more broadly as the percentage of net income to sales.

  • Report this Comment On July 21, 2014, at 10:09 PM, TMFMcKenna wrote:

    @warreneng,

    Glad you found it useful. I'd also encourage you to listen to the call at your leisure. A recording will be on Arcam's website through Oct. 17 (approx. date of next call).

    @hldboo,

    You can continue to expect my quarterly takes on Arcam. That said, I'd encourage you to review the numbers yourself, and listen to the conf. calls, at least occasionally. I know many people think listening calls is as dry as the Sahara, but you can learn so much and they really can be quite interesting. I love listening to the calls on the companies I follow, and I know other Fools do, too.

    @thiswillchange,

    You're absolutely right, and I was too loose with my "margin" terminology, in an effort to try to summarize things. My bottom line opinion holds true, but let me clarify a bit here.

    As you know, though all readers might not know, gross income = revenue - cost of goods sold. "Gross margin" = gross income/revenue. "Operating margin" = operating income/revenue. And operating income is calculated by subtracting R&D and SG&A (selling, general, and admin) expenses from gross income. Then we move further down to "profit margin," though we don't need to go there now.

    So, you are correct that "gross margin" would not take into account any expenses other than the cost of producing the products actually sold (delivered) in q2. However, "operating margin" and the bottom-line "profit margin" are affected by R&D and SG&A. Arcam beefed up R&D and SG&A spending big time in q2 (and in the first half of the yr. for that matter) compared q2 of last yr (and the forst half of last yr). Surely a good chunk of this was due to development costs and staffing for the sales efforts, etc., related to the new Q20 system.

    The reasons for the decrease in "gross margin" appears to be volume-related (fewer systems sold in q2), and product mix related (products lower in profitability sold). As you noted, there is a big increase in inventory on the balance sheet in q2 -- that's surely due to the Q20 systems that were made, yet not shipped.

    I know the full financial release is hard to find. Here's link: http://mb.cision.com/Main/5885/9618474/268111.pdf

    Thanks for the comments!

    Beth McKenna

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