1 Must-Watch Interview for ExOne Co. Investors

In the following video, 3D printing specialist Steve Heller interviews ExOne's (XONE) global head of sales, David Burns, during the Inside 3D Printing Conference held in New York City last month. ExOne is an industrials-focused 3D printing company that specializes in producing metal objects either by first 3D printing a sand mold, which then is used to cast a metal object, or directly printing metal objects from metal powders.

During the segment, the pair discuss:

• ExOne's ExCast strategy
• The 3D-printing casting market opportunity for ExOne
• ExCast's greatest challenges
• ExOne's 3D printing partnership with defense contractor Sikorsky, a United Technologies company
• How ExCast differentiates ExOne from the competition
• How investors should think about ExCast relative to the rest of ExOne's business.

A full transcript follows the video.

Steve Heller: Hey, Fools, Steve Heller, here. I'm joined today with David Burns. He's the global head of sales at ExOne. ExOne is an industrial-focused 3D printing company, primarily in the sand-casting and direct-metal 3D printing market.

Thank you so much for being here today, David. I really appreciate your time. I really want to talk more about the specifics of ExCast in particular. This is a program that you guys have started. What is this all about, on a high level?

David Burns: Steve, welcome back to ExOne. We've interfaced a lot in the past.

At its highest level, ExCast is a strategy that ExOne is using to help diffuse our support for the casting industry more deeply into the casting industry in the United States. We recognized early on that people may struggle to use 3D printing as an element of the casting process, since the fully integrated [casting] process may not support it.

We've taken on the responsibility to integrate a series of steps, really going from the beginning of a casting process and its design, all the way to its finished machine configuration, to try to help support our customers who need that sort of help.

Heller: [ExOne is] like a project manager, for helping a customer along that wants to create a very complicated casting application?

Burns: Sure. If you think about it, we begin with the first step, which is design. We want a design that's supportive of a 3D printing process for its mold, so we help on the front end with the design.

We of course execute the 3D printing of the mold, and again what we've discovered over time is many OEMs find it helpful if we make sure that we interface with foundries that are supportive of 3D printing. We can locate them, and in a sense "certify" them as part of the process -- and machine shops and X-ray and inspection, all the way down to final certification of the part.

Not all customers, but there's certainly a cadre of customers who feel that integrated approach to project management is helpful in their business.

Heller: I see. In terms of what motivated ExOne to get involved with ExCast in this vertically integrated project management solution in the first place, what was the incentive to get involved with this market?

Burns: Like most things that we do, it starts with a customer focus.

There was a group of customers that were supporting, especially aerospace and the defense industry, where there's a lot of legacy work -- castings that, for whatever reason, perhaps had become obsolete over time and needed to be replaced.

As they went out into the marketplace to try to find sourcing for those, they struggled some. I don't think that's hard to understand, since over time a lot of the raw production of castings has gravitated offshore from the United States, so I understand why they might have struggled with that.

We were pushed early on by some of our customers with pretty complex stuff, largely aerospace and defense, although now we've expanded our notion for how we can support customers into really any complex casting for oil and gas, off-road-vehicle construction, that kind of stuff.

Heller: The casting market is obviously complicated. There are a lot of different applications, there are a lot of different types of castings. With ExCast, what spread of the market are you guys targeting?

Burns: Our technology is particularly well suited for aluminum casting, cast iron, and steel castings. In those material sets, again, that drives us largely to places like aerospace, oil and gas transmission, and that kind of stuff.

Heller: How do you think ExCast could actually change the U.S. foundry industry? Right now I know it's a very fragmented industry [in the U.S.]. I was wondering if you could touch on what your thoughts on how this ExCast vertically integrated solution maybe has the potential to change the way businesses [casting users] operate?

Burns: Well, Steve, I think it would be pretty pretentious of me to think that we, as little ExOne, can change the foundry industry. What I do think is that 3D printing can have a profound effect on the foundry process. That's abundantly clear to me.

The idea that you can begin to create models for how to make castings, and those models are digitally based and completely transferrable all over the world [and can be 3D printed], is a very, very powerful notion for a lot of OEMs.

In addition to that, since we don't use wooden patterns anymore we create complete portability of the pattern design itself, the mold design itself. And of course it's stored digitally forever, so there's no deterioration or maintenance or any of those kinds of things. That can be a very powerful driver in how you recognize that you want to be a global supplier of equipment.

The dynamic that we struggle with a little bit is that over the last 20-30 years there's been a significant shift in actual foundry capacity to create castings. A lot of that has shifted overseas, and it's a real conundrum for some of our customers to figure out.

If you want to use 3D printing, it's sort of a local technology. You want to deploy it on site, on time, exactly when you need it. And yet, if your castings are being made continents away, figuring out how to create a paradigm that really works can be a little bit challenging. We're of course interested in being in the middle of that discussion.

Heller: It sounds like there's a potentially large growth opportunity here in terms of ExCast and ExOne's role within the casting industry. Is there a way you could put it into context, into terms that maybe are easy to digest?

Burns: Well, I can cite figures that I think are commonly known. The overall casting industry in the world, the aggregation of it, is measured in many tens of billions of dollars. The front end support, the mold side or the pattern side of that, of course is measured in billions of dollars.

I'm not sure I could exactly quantify the size of the addressable market, but it clearly is measured in billions and not millions. For a company like ours, that's growing, we see tremendous opportunity not only in the U.S., but certainly worldwide.

Heller: Of course, no opportunity is free from challenges. I know you touched on it a little bit. What are some of the biggest challenges you see associated with ExCast at this point?

Burns: The use of 3D printing to make molds for castings allows castings to be designed differently, but also implies a different manufacturing stream.

The implication of how castings even get poured may be different if you're using a 3D-printed pattern because for whatever reason -- because we have perhaps integrated cores, because our integrated channels are thinner for the passage of molten metal, therefore the heating and chilling elements you need in a pattern may be different....

You need foundries that are adaptive for the idea behind what 3D printing is about and how we can make castings using the 3D printing process.

What we know is that, when it works we can achieve high casting quality, in many cases add casting features you cannot get without 3D printing -- undercuts, thin wall sections -- these are things you can't achieve with traditional methods, and we absolutely can get it with 3D printing.

The price to be paid, then, is how do we integrate downstream from the 3D printing process to ensure that we have a seamless transition of that pattern process to the foundry, and ultimately to machining and end use?

It's a lot of work. You need good partnership and good collaboration between people, and of course that's an investment in time and effort on everybody's part.

Heller: In terms of specifics here with ExCast and its projects, I know you guys have worked with Sikorsky, which is a United Technologies company. They make helicopters for the military.

What was the nature of this project? What was the problem that Sikorsky came to you with and what were you guys trying to solve?

Burns: Sikorsky came to us specifically because they had a casting grouping for a new flight application they were looking at, and the characteristics they wanted in those castings weren't clearly going to be available without 3D printing as an element of the process.

When we began to collaborate, we realized we were working really hard on the front end, on design with them, to be sure that the design itself was going to be printable. Then of course we needed to heavily interface with the foundry to be sure that they could pour the design we created. Suddenly, there was a process chain that was beginning to form up around the entire casting itself.

At some point Sikorsky said, "It would be really helpful -- since you're already at the design phase, the 3D printing phase, and the casting phase, why don't you just take responsibility to then get it machined, X-rayed, and certified, and deliver that to us because we as Sikorsky don't necessarily want to manage that process."

I would say it was evolutionary, and of course as we reported often on our earnings calls, the process was bumpy and hard, and there was a lot of learning to be had. But I think most hard things are like that, and we do feel as if we learned an extraordinary amount.

We are well honed now. We are staffed well and organized well to execute full casting projects, and we're pleased with the progress we've made. While it may have been expensive and it may not, from a timing perspective, have been exactly what we initially hoped for, I think both sides are really pleased and we continue to do a lot of work with Sikorsky and other DOD [Department of Defense] projects.

Heller: From what I've gathered, it cost about $1 million, what came out in the last conference call, so far for Sikorsky and getting ExCast up to speed. I'm not really sure of the revenue figures, but I believe it's probably a nominal amount at this point. I think there were a lot of up-front costs for you guys.

Do you look at that as money well spent at this point, or do you think there's more money to be spent? The return on investment, do you think it's really going to pay off?

Burns: I do, Steve. Of course that's a hard question to answer. The initial project we did with Sikorsky is concluded, for all intents and purposes.

We have launched a secondary project with them, which actually, from a revenue perspective, is going to have more revenue in it than the first project did. Our expected cost pattern against that [second project] will be far lower; we know that.

We have an excellent team in place now to do exactly what we're trying to do. I suppose you can look back retrospectively and say, "We wish we'd known before," but we didn't -- but we do now.

We're very encouraged by what we think is going to happen with Sikorsky next, and beyond that there's a myriad of other opportunities laying out there that, if we choose to execute them, we think are going to be really good for ExOne, and good for our customers.

Heller: It lays the foundation for opening up ExOne into more defense-related contracts, is what I'm gathering.

Burns: I think that's a fair statement, yes.

Heller: In terms of differentiation, how does ExCast differentiate ExOne in this landscape of 3D printing?

Burns: I think there are other companies that would argue, truthfully, that they're also in the business of integrating the need for complicated castings and executing them from design to completion -- and they are, and some of them have 3D printers. Some of them have ExOne 3D printers, so we're not unique or alone in this space.

However, when you begin to think about especially defense-related stuff and ITAR [international traffic in arms regulations], and the restrictions on who can do what on defense projects, the field narrows pretty quickly to who might be able to have both the capability and the presence in the United States to be effective.

We and a few others are in this business, but I think the business itself is out there, and it's large. There's plenty of room for multiple people to be doing pretty much what we're doing. We of course believe 3D printing is the key to it all, and therefore we think we're in a very favorable position, but we think there are lots and lots of opportunities.

Look, Steve, in the end what we're interested in is diffusing 3D printing into the industrial marketplace in an effective way. If this [ExCast] does that, and it should, then the number of opportunities will far outweigh even our ability, from a capacity viewpoint, to execute it.

We're just thrilled when people begin to say, "We want to make a really complicated casting, and we want to start with 3D printing."

Heller: Going forward, thinking about how investors should really frame ExCast relative to ExOne as a business, what perspective would you give an investor right now, that's thinking about investing in ExOne, relative to ExCast?

Burns: I think ExCast is an element of the both strategy and revenue structure we expect going forward. I wouldn't expect it to be preponderant. I don't expect it to be at some point 50%-80% of what we do, but I think it's an effective contributor from a revenue perspective and we certainly feel that we wouldn't have kept going forward if we didn't feel the margins were going to be there. We feel it's there as well.

We don't necessarily break out ExCast from an analytical perspective as clearly a stand-alone thing. It's integrated more into our total non-machine business, and as you may know that business is growing at 30%-40% a year, and ExCast is one of the reasons it's growing.

I think it's an element of strategy and an element of execution for us, and it's one at this point we're pretty happy with.

Heller: Great. Thank you so much for your time today, David.