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The ExOne Company (NASDAQ:XONE)
Q2 2018 Earnings Conference Call
Aug. 10, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to The ExOne Company's Second Quarter 2018 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Karen Howard, Investor Relations.

Karen Howard -- Investor Relations

Thank you, Sherry, and good morning everyone. We appreciate your time today for our second quarter 2018 financial results conference call.

Referring to our slide deck on slide two, on the line with me today are Kent Rockwell, our Chairman and Chief Executive Officer; Brian Smith, our Senior Vice President of Corporate Development; and Doug Zemba, our Chief Financial Officer and Treasurer. Kent, Brian, and Doug will be reviewing the results that were published in the press release distributed yesterday afternoon. If you don't have that release, it's available on our website at www.exone.com. The slides that accompany our discussion today are also posted on our website.

On slide three is our safe harbor statement. As you may be aware, we will make some forward-looking statements during this presentation and may also during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ from where we are today. These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov.

I also want to point out that during today's call, we may discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release.

Kent will get us started, Brian will provide an operational update and Doug will go through a detailed review of the financial results, and then we'll turn it back to Kent to offer perspective on our outlook before we open up the line for questions-and-answers.

And with that, it's my pleasure to turn the call over to you to begin, Kent.

Kent Rockwell -- Chairman and Chief Executive Officer

Thank you, Karen, and good morning everybody. Welcome to our quarterly review for the second quarter of 2018. ExOne, late in the quarter, instituted several management changes, which we've announced and I'll just go over those quickly again. I have returned to the role of CEO, in addition to being the Chairman. Brian Smith, who was formerly our CFO is now in the role of Senior Vice President for Corporate Development. We've moved Doug Zemba, our former Chief Accounting Officer, has taken the role of CFO and Treasurer. And Jared Helfrich has moved into the commercial office to run that business for us. Additionally, during -- actually after the quarter, we added a new board member, Roger Thiltgen. Roger has a lot of 3D experience and is a technology investor from Texas and we are pleased to have him join us.

Beginning late in Q2, we initiated several cost reduction activities to remove inefficiencies in the cost of goods sold area to slim our G&A and our -- and review our R&D spending. To-date, we've identified $6 million worth of implemented savings and I believe that there is more that we will implement as we go through the year. Brian will touch on those. Our target is to get $10 million of cost out on an annualized basis by the end of the year. That is to help us achieve our goal of profitability with -- and positive cash flow as we hit 2019. Secondary to that goal, of course, is that we want to see a substantial improvement in our second half performance, and you'll hear more about that specifically from my associates here in just a minute.

I'm going to provide a quick, few comments on the strategic focus of the company in the next two slides. IDC recently reported, and I'm just reprinting some of their highlights. That the 3D business by 2022 will be $23 billion in volume. The growth rate for the hardware side of that has a CAGR in excess of 18%. Printers and materials will be two-thirds of that or $7 billion to $8 billion. And the biggest chunk of that is going to be spent in the US, followed by Western Europe where we are co-located.

Moving to the next slide. I want to give you my perspective of The ExOne vision, how we fit within that realm of activity. If the global market is $23 billion from the less than $8 billion that we -- they've reported for 2017. The subset market of binder jetting technology, since this is a very large market, is about 10% to 15% of that, in our estimation, which would be a $2.5 billion to $3 billion market. ExOne is applying its capital and all of our human resources to try and achieve at least 10% to 15% market share. If we can accomplish that in that time frame, that's a $250 million to a $500 million market, and I think that we are well positioned to do that. We're having to spend a great deal of R&D funding in the last few years to be able to bring the new machines that will be robust production machines that will generate all this market activity. So we're having to spend the extraordinary sums in the last two years to be able to get there.

So with that I'm going to just pass this over to Brian Smith who will give you some other highlights.

Brian Smith -- Senior Vice President of Corporate Development

Okay, thanks, Kent. Good morning, everyone. Before I start, I'd like to congratulate Doug on his promotion to CFO and Treasurer. ExOne has benefited greatly from his energy and his experience over the last six and a half years. He is an accomplished professional and is very well prepared for this next opportunity in his career.

If you could please turn to slide nine, I will summarize some of the highlights from the quarter. We finished the quarter with $10.9 million of revenue. Well, this is certainly lower than what we expected. Machine revenue was impacted by the timing of our customers' acceptance of our machines that not being consistent with our expectations of their cadence. We currently have 18 machines shipped to our customers that are awaiting arrival, installation and/or acceptance. We expect an approximately 80% machine revenue weighting in the second half of 2018, as opposed to our general historical weighting, which was much closer to 70%.

Our strong backlog of $26.6 million, including these 18 machines that I mentioned, our pipeline of opportunity, as well as our available inventory of machines and our current understanding of our customers' action plans and timelines tell us that our 20% growth goal is achievable if we execute on the delivery and installation of our machines. Our trailing 12-month revenue growth of 19% is very close to that 2018 annual goal.

Moving to our activities in our direct metal machine development. We shipped and recorded in revenue our first Innovent+ machine in the second quarter. To-date we have received orders for six more Innovent+ machines that we expect to deliver later this year. The Innovent+ includes our brand new patent-pending ultrasonic recoater system. This recoater works extremely well with cohesive powders; that being powders that are difficult to spread evenly, namely finer powders, including those associated with the metal injection molding industry. Printing these MIM powders is important, as they are generally well understood powders that have documented material properties and centering profiles. This knowledge base can speed up the users development of applications and since these powders are more broadly used, they are generally less expensive than many other powders used in 3D printing.

We're also excited about the testing we have done in the second quarter with our recoater on larger build boxes. We currently believe this system is scalable and is planned on both of our new fine powder direct metal machines that are under development. Those machines being our new mid-size build box printer, the M-Flex 2.0, as well as our new large build box printer the M-Pro.

Now please turn to slide 10. Here you will see our direct product road map, slip between machines and some of the materials we are using in the print process. We are making very good progress on the M-FLEX 2.0, as well as the M-Pro. As part of our recent changes, we have created strong interaction between these two development teams, which has allowed us to scale the development of both machines with lower overall expenditures. We expect to release these printers for sale to our customers in 2019. The initial customer reception of the Innovent+ gives us great expectation for the release of these two new printers.

On the materials side, we are working on and we'll be releasing several new metals into the market later in 2018 and in 2019. High density 304 stainless is expected for release this fall. This material is commonly used in the mining and construction Industries. Our 718 nickel alloy is expected in the first half of 2019. This material has properties that make it corrosion and heat-resistant and we'll target applications in the aerospace, energy, medical and nuclear industries. We also expect several new tool steel releases. Because of the distinctive hardness of these materials, they are resistant to abrasion and deformation and therefore, worked very well in tooling for a variety of industries.

In terms of new market opportunities, on slide 11. We are excited with the success in our development of printing carbon materials, principally for plates, molds and specialty graphite applications. We previously announced our partnership with SGL in this area and that is moving forward nicely with the expected delivery of our first S-Print for this purpose in the second half of this year.

Based on our printing success over the last two years under our Missile Defense Agency contract, we were awarded our third year. This award of approximately $500,000 [ph] will be completed by June of 2019. Later in this contract year, we will be pursuing the commercial contract to print commercial products for this important customer. This, as well as our other efforts in the ceramic area, is allowing us to expect to offer machine sales to be used for printing silicon carbide initially for wear parts in tooling in 2019.

In the area of composite tooling, our wash-out tooling process is in the final stages of ISO compliance and we expect it to deliver parts to a commercial customer in the aerospace industry in the second half of 2018. These tools will be used for the production of ductwork on various aircrafts. Our plans are to broaden our commercial efforts for this product to several other partners in 2019.

Now if you'll please turn to slide 12. We're making great progress on our global cost realignment initiative that we announced in late June. Our early efforts have been focused on disciplined spending principles and identification of redundant and overlapping costs. To date, we have reduced or identified for reduction over $6 million of expense, principally in the areas of consulting, excess positions in our employee base and in travel cost. Culturally and process-wise, we have instituted changes to increase communication and coordination across the company. In the second half of 2018, we are focused on asset optimization at each individual facility and opportunities to outsource. Longer-term, we'll have a broader effort around supply chain enhancements for both our machines and our consumables. Our targeted efforts for working capital will be to continue our good progress with our customers on standardizing contract payment terms, shortening our PO to acceptance process, as well as other efforts to turn our inventory more quickly.

With that I would now like to turn it over to Doug to discuss more details around our results.

Doug Zemba -- Chief Financial Officer and Treasurer

Thanks, Brian. Good morning, everyone. If you could please turn to slide 14, we will start with revenue. Revenue was up 1% to $10.9 million in Q2 2018 compared to 2017. For the 2018 trailing 12 months, our revenue was up 19% over 2017. Recall that we had guided to revenue growth in excess of 20% for 2018 and we are still on track for that goal.

Now we'll go to slide 15. Here you can see that our second quarter machine sales were down 25% to $3.2 million as compared to Q2, 2017. There were seven machines sold in the 2018 second quarter. Included in our Q2 sales are one of our S-MAX machines, one S-Print, one M-Flex, our first Innovent+ and three Innovents. So it was a diverse mix of platforms driven by our customers' varying application needs. Four of the seven machines were sold to customers that are already operating our machine and three were to first-time machine customers. Last year in the second quarter, we recognized eight machines. They were more heavily weighted toward our indirect systems, which generally have a higher average selling price, causing lower revenue dollars in this year's second quarter.

Please refer to the table in the back of our release that shows sales by machine type. Industries we sold our machines into during the quarter included automotive, tooling and energy. We also sold machines to a metal powder company's research group and a European research institute, the third such printer acquired by this research institute. Referring to the trailing 12 months revenue chart on the right of this slide, you can see the Q2 2018 machine revenue was up 30% over 2017 to $29.2 million.

Now, if we can turn to slide 16. Here you will see shipments and revenue recorded in units by machine type for the first and second quarters and year-to-date in 2018. We shipped 16 machines during the second quarter, 25 during the first half of 2018. At quarter-end, there were 18 of our machines that were shipped and are either in transit or in the process of being installed and accepted by our customers and therefore yet to be recorded in revenue. That includes nine of our indirect machines and nine of our direct machines. There continues to be variability in certain instances that will result in lags between machine delivery to customers and revenue recognition. This can happen for a number of reasons, including contractual terms, performance obligations or geography.

Now let's turn to slide 17. Non-machine revenue was $7.7 million in the second quarter of 2018 and $29.6 million for the 2018 trailing 12 months. This reflects actual growth rates of 17% and 11%, respectively. The growth was driven by significant increases in demand for our direct printing operations, as well as an increase in aftermarket sales, including maintenance services and ancillary equipment related to our expanding global installed base of machine. These increases were partially offset by a decrease in sales from our indirect printing operation.

Now if you'll turn to slide 18. We finished the quarter with a total backlog of $26.6 million, while also achieving 5% revenue growth over the trailing 12-month period. To remind you, backlog includes firm orders received from our machine and non-machine customers. This includes the 18 units identified as in transit or in some form of installation or acceptance that I mentioned earlier, as well as orders taken on machines that have future delivery dates. It includes our firmly committed machine maintenance contracts, as well as the non-cancellable portion of our operating lease agreements. Backlog also includes orders for our direct and indirect printing operations and other contractual services, such as our Missile Defense Agency contract, where we were recently awarded funding for the third contract year.

The machine portion of our backlog includes customers in the automotive, aviation, education and research, pump and valve, power, metal powder, tooling, energy, and general manufacturing industries. This level of backlog combined with our pipeline of opportunities in our existing machine inventory and supply plan, gives us confidence in our expected revenue growth for 2018.

Turning to slide 19, we'll talk about gross profit and margin. Gross profit was $1.6 million, resulting in a 14.6% gross margin for the second quarter of 2018. For the trailing 12-month period, we experienced a gross profit of $15 million and a gross margin of 25.4%. Our current period margins were impacted by a writedown of our industrial microwave inventories for which we have discontinued future manufacturing. This writedown was less than the impact of our writedown of inventories associated with our Exerial machine platform during the second quarter of 2017. The 2017 second quarter was also favorably impacted by a gain recognized on the sale of our former Las Vegas facility.

Please turn to slide 20, and we'll discuss SG&A. Comparing the second quarter of 2018 to 2017, our SG&A expenses were up about $400,000. The increase was principally cost associated with the actions taken to affect our global cost realignment program and separation cost for our former CEO.

Please turn to slide 21, and we'll discuss our investment in R&D. The 2018 second quarter reflects a $900,000 increase over the 2017 second quarter, as we accelerated development activities for our M-Pro and M-Flex 2.0 projects.

Now let's please turn to slide 22 to review CapEx. Our cash CapEx remains very modest. Our second quarter cash spending was about $300,000 compared to about $100,000 for Q2 2017. We expect this cash CapEx level to continue in 2018 and we estimate spending will be approximately $1.5 million to $2 million for the full year.

The non-cash portion of our CapEx shown here pertains to the transfer of machinery from inventory into PP&E for our own use in our direct and indirect printing operation, for R&D development, or for customer leasing opportunities, as well as transfers from PP&E to inventory, principally to support commercial sales activity with customers.

Turning to slide 23. Please note that we amended the title heading of this slide from our original release yesterday afternoon. This chart represents a waterfall of our first half 2018 cash flows. I mentioned cash CapEx previously. Working capital changes resulted in an increase of about $2.6 million, principally from collections on AR and deposits on customer orders. This is offset by increases to inventory to support our expected revenues in the second half of 2018. Our net loss, net of cash and other items, used about $11 million of cash in the first half of 2018 and we ended the first half at $13 million in cash.

You'll turn to slide -- if you'll turn to slide 24, you'll see we continue to have virtually no debt on our balance sheet.

That concludes my prepared comments, and I'll turn it back to Kent.

Kent Rockwell -- Chairman and Chief Executive Officer

Thank you, Doug. The clear focus for our company going forward is that we maintain a good revenue growth. And I can tell you from examining the backlog, the order rate of activities from our sales force reviews that we do every month that we will be able to sustain or achieve in excess of 20% in the quarter, despite the fact that our -- we were anemic in this quarter, really just had to do with customer-related activities with regards to revenue recognition. But I'm comfortable that the growth rate is positive and that we'll get to our goal.

We've spent $4 million in incremental R&D. We earlier said that we probably will spend a little bit more than that, the spending has been a little bit less and I don't think that we need to spend quite as much as was anticipated in our prior releases. So there is plenty of money to get the two new machine programs accomplished, so that we have these fine powder machines going into -- as we get into 2019. And the demand for those machines looks to be quite positive.

We are expecting cash flow to stabilize and quite possibly improve during the second half of 2018, so that our cash burn is going to ebb to a good degree, along with the revenue increase. The $10 million of cost savings that we've -- both Doug and Brian have discussed are very real. We've gotten well more than half of that already captured and it's just a question of timing to get these other cost savings implemented in order to see that we have a kind of cost structure that we should have for this company to be able to operate profitably in 2019.

Our capital resources are sufficient. We have enough cash. If we hit these plans with this 20% growth rate, we have more than enough cash to be able to meet all of our operating needs and to move into 2019 successfully. And so we have no other plans with regards to raising any capitals at this point in time.

With that, I'll be glad to take any questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question is from Chris Van Horn with B. Riley FBR. Please proceed.

Chris Van Horn -- B. Riley FBR -- Analyst

Good morning, guys, thanks for taking the call.

Kent Rockwell -- Chairman and Chief Executive Officer

Hey, Chris, how are you doing?

Chris Van Horn -- B. Riley FBR -- Analyst

Good. So just starting with the cost savings, thank you for giving some color and some quantification there. Could we just get a sense of -- it sounds like they are starting right now and it looks -- correct me if I'm wrong, but $6 million in 2018 going to $10 million in 2019, how do we think about the cadence of that? And then are there any areas on the income statement that are more out-sized than others, i.e. COGS versus SG&A versus other places?

Kent Rockwell -- Chairman and Chief Executive Officer

Doug will answer that Chris.

Doug Zemba -- Chief Financial Officer and Treasurer

Sure Chris. So just to clarify, we expected in the second half of 2018, actually, with the actions that we've taken that we'll have savings of approximately $2 million to $3 million over the first half. The $6 million that's referenced is the -- of the $10 million that we expect for 2019, we believe we've already targeted or acted on about $6 million of the $10 million. I would say in general that the savings are tipped heavily toward G&A, but it touches all three components. We do believe that the indirect -- our overhead costs can come down substantially for some of our facilities, and as Kent mentioned, we've taken a second look at some of the R&D spending and feel like we can control it a bit better.

Kent Rockwell -- Chairman and Chief Executive Officer

We did have, Chris, some consulting charges that were hitting cost of goods sold, which are -- have been terminated and so that will also help margin.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay, got it. Thanks for that clarification. And then Innovent, obviously, doing very well in the marketplace. I'm just curious what -- if you could give us more visibility in terms of the timing of Innovent and is this a large volume format printer and just what are the really big target markets for this technology?

Brian Smith -- Senior Vice President of Corporate Development

Yes, the Innovent is our smallest printer, so it's got a very small job box. It's really targeted toward the -- both university markets and research labs for many companies. And so, the way we do that Innovent, now the Innovent+, is that's the precursor to companies moving to the new M-Flex 2.0 or the M-Print. They can prove-up printing the powders that they want to print in that Innovent. And then we would look to production out of the next two machines when we release them. So Innovent+ is very -- we think very important. And the response to our release of it, already having one in revenue and six more that we've got orders for is pretty quick.

I think in total we were looking around roughly to sell 25 Innovents for the whole year, in a ballpark number. So that machine growth -- the growth of that machine sale is really -- is good for us, albeit that it's a smaller price point, $150,000 to $200,000 generally. So --

Kent Rockwell -- Chairman and Chief Executive Officer

Anybody that's going to use the large format printers that we're bringing into the market in 2019 is going to take one of these smaller ones through -- if they don't use it through some association with a university, they'll own one themselves, to be able to prove out their materials, so that they know how to move into production effectively. So it's sort of a starting tool for them, but it's been well received and we think that there's going to be a lot of demand for the plus, because it's really the all-event fine powder solution, whereas the straight Innovent uses a larger micron powder size.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay great. Got it. And then just wondering if you could comment on the usage rates at the customers, because you've seen sequential growth in kind of the services and the materials and just want to know if you're seeing any trends there.

Kent Rockwell -- Chairman and Chief Executive Officer

Well, we've seen multiple buying from customers. On the indirect side, we started off slow -- slower than we had anticipated, because there was resistance from our customers in buying indirect machines, because it was primarily the foundry technology. The foundry guys are a lower return, high capital-intensive facilities and they really didn't want to make the transition to this new technology. Their customers drove them to make that transition, and bit by bit it's gotten to the point now where the foundries themselves recognize, hey, we no longer can avoid this, we've got to do that. So we are seeing with certain customers, OEMs, that operate their own machines that they are now moving into their third and fourth machines and -- and we think that there's going to be plenty more of that. The recognition that this technology is profoundly accepted and obsoleting other processes, I think, is now becoming clear in the indirect printing markets.

On the direct side, it's much more nascent [ph], but it's also probably more higher growth (inaudible) in terms of the total opportunity in the market. Sort of what was described in that IDC materials is much more toward metal printing than it is the sand or coarse powder printing. But that too, we believe that that's going to come alive very substantially as you move into 2019. It's all about getting powder size down to the 10 microns to 15 microns, and right now we've got the predominant offering for that in our Innovent and it will move -- it will migrate right to the larger platforms, first to the M-Flex 2.0 and then finally to the M-Pro, which will come online as we get to mid-year of 2019.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Great. And then, obviously, it seems like activity is picking up, especially in the back half of this year and we're hearing from OEMs and others that additive manufacturing is really kind of expanding. So maybe more from a broad strategic point of view, how are you seeing the marketplace and it feels like adoption is really ramping and any -- maybe any comment on competitive -- the competitive nature of the space. I know you guys have a very unique technology and you've got some competitive advantages. But just wondering what you're seeing from a competitive standpoint. And it seems like the market is really building. I just wanted to see what kind of commentary you have around that. Thanks so much.

Kent Rockwell -- Chairman and Chief Executive Officer

Sure. Just in that regard I'll bifurcate it into the two pieces. The indirect market, we believe that we own a dominant market share, and we do not see any strong competitive influences touching that market at this point in time, although we recognize that we need to continue to make enhancements to that technology and we are looking at doing some of that as we move through 2019. But right now it's just about a broader market acceptance of the technology. And as I said, we've got operators that are buying their third and fourth machines and some of these people will be able to use 10 or 12 of them as they get into full swing. So it's, I think, all coming fairly well.

Chris Van Horn -- B. Riley FBR -- Analyst

Great. Okay.

Kent Rockwell -- Chairman and Chief Executive Officer

The direct side is -- it's competitively speaking, there is no one out there that's offering the efficiency of the Innovent+ that we are offering at, but there is obviously large players out there that are viewing this market with a lot of opportunity and none of them are particularly offering product that competes with us yet, but we fully expect to see the HPs, the GEs, the Desktops, they're all going to take a shot at it, there is no question and I'm sure that they will be successful in varying degrees. My own opinion about that market is that demand will exceed supply over the next three to four years, that the opportunity for applications is so diverse and the market is so large that I don't care how much GE or HP could bring online, there will be opportunities for all players, just like in the automotive industry. There is a Kia, and there is a General Motors, and there is a Ford, and I think that all of them are, relatively speaking, healthy. That's what you'll see for the next five years.

Chris Van Horn -- B. Riley FBR -- Analyst

Perfect. Thanks so much guys for taking the time.

Kent Rockwell -- Chairman and Chief Executive Officer

(Multiple Speakers).

Brian Smith -- Senior Vice President of Corporate Development

Okay, thanks.

Operator

(Operator Instructions) There are no more questions at this time. I would like to turn the call back over to management for closing remarks.

Kent Rockwell -- Chairman and Chief Executive Officer

Alright. Thank you for taking the time and we'll keep you advised as we move forward. We're comfortable that we're moving in the right direction and actually pretty excited about what we are going to see over the next 12 to 24 months. Thank you again.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

Duration: 37 minutes

Call participants:

Karen Howard -- Investor Relations

Kent Rockwell -- Chairman and Chief Executive Officer

Brian Smith -- Senior Vice President of Corporate Development

Doug Zemba -- Chief Financial Officer and Treasurer

Chris Van Horn -- B. Riley FBR -- Analyst

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