Karen Howard - Investor Relations Kent Rockwell - Chairman and Chief Executive Officer Brian Smith - Chief Financial Officer and Treasurer.

Saliq Khan - Imperial Capital Jon DeCourcey - Canaccord Genuity John Michael - Stifel Ben Hearnsberger - Stephens.

Greetings and welcome to The ExOne Company Second Quarter 2016 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Karen Howard, Investor Relations for The ExOne Company. Thank you, Ms. Howard. You may begin..

Thank you, Rob and good morning everyone. We appreciate your time today for our second quarter and first half year 2016 financial results conference call. On the line with me today are Kent Rockwell, our Chairman and Chief Executive Officer and Brian Smith, our Chief Financial Officer and Treasurer.

Kent and Brian will be reviewing the results that were published in the press release distributed after yesterday’s market close. If you don’t have that release, it’s available on our website at www.exone.com. The slides that will accompany our discussion today are also posted on the website.

Referring to the slide deck, on Slide 2 is our Safe Harbor Statement. As you maybe aware, we will make some forward-looking statements during this discussion and may also do so 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 materially 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 at the company’s website or at www.sec.gov.

Kent will get started with highlights of the quarter, Brian will go through the detailed review of the financial results, and then we will turn it back to Kent to close before we open up the line for questions and answers. And with that, I will turn it over to you, Kent..

Thank you, Karen and good morning everybody. Thank you for joining us on this hottest [ph] day. As you have already seen, if you have, I assume, read the reports, the second quarter revenue was up 38% to $11.8 million and our first half revenue was up 32% to $20.2 million. So, we had some fairly good growth in the first six months.

That growth was driven by sales of indirect printing machines primarily 2 S-Maxes and 2 S-Prints. And we are looking at shifting more of these as we go through the balance of the year. So, the indirect printing business is turning on pretty well. We had achieved a second quarter and a first half record revenue volume on the aforementioned numbers.

We do continue to advance the adoption rate of binder jetting. This is something that’s very important to us. Witness to that, there is an SFF Conference today. It’s a 27th conference down in Austin, Texas, where 3 years ago, when we first attended it, there was one presentation on binder jetting.

Today, at this conference over the next 3 days, there will be 13 presentations on binder jetting. And so you can see the influence not just by what we are doing, but by others who have binder jetting compatible technologies and the significance of it.

And again, the effect of this binder jetting is a very good cost effective, high quality alternative to some of the laser and e-beam processes.

We continue to make investments in machine productivity enhancements and other developments on our machines and to continue to cost reduce our operating costs, we are constantly looking for ways to lower the material sets that go into our various printing applications in both direct and indirect and that seems to be moving fairly well.

During this quarter, we secured additional customer programs, where the customers are now paying us to do analytical work on their material sets to get them qualified to be able to print on our machines.

This is particularly significant in direct more than indirect, because there is just a greater variety in the direct printing categories of materials and the binder sets are much more variable as well. But the amount of work that we are doing there is very extensive. We are continuing to try and lower our breakeven point.

Brian is going to discuss all the things about the cash flow and operating leverage, so I am not going to spend any time on that now. So, I will move to the next slide, which is a quick discussion of our indirect printing advancements. Our largest production machine is known as the Exerial machine.

It’s actually two storeys high and has the most productive output of any machine in the world in printing, sand molds and cores. We are pleased with the progress that we are making there, where we presently have 4 machines that are out of new 4 beta machines that we delivered to a Chinese customer.

We have additional machines that are planned to be delivered this year to automotive customers, and this machine in its current form, is most likely to be adopted for series production in the automotive sector. And we are having an awful lot of discussion about that with current automotive manufacturers in Germany.

The auto production is something that will take couple of years to bring on and they are having to bring in systems integrators now to start to determine how these will be employed, because when they are, the machines will be setup in series production and almost each of the automotive customers has a different process that they want to try and utilize within their specific manufacturing lines and so each one requires a bit of an integration capability.

Binder systems is an interesting subject. Binder systems are the various adhesive processes that we have developed to print and to make quality cores and molds for making castings. We originally started with a primary binder called PURON [ph] and PURON has been widely accepted across the world. We moved from PURON to called hardening phenolic.

The cold hardening phenolic is more particular to making some very, very finer types of casting components for production. And now more recently, there has been an increasing demand by our customers to move to a new binder called sodium silicate.

And the sodium silicate solutions address the environmental requirements of some of our customers in various global locations. It’s something that we think we are going to see increasing acceptance of as we move through future years.

The environmental impact is going to become more varied in certain of the environmental releases that come from some of the binders when they are used. So, we are pleased that we are making good progress with the binders in that regard.

Moving to the next slide about direct printing, in direct printing, we have to consider that there is two major factors that are important to our customers.

First is the kind of materials that they can print and where we have been printing to initially just matrix materials which is a material that is combined with infiltrated second material such as a bronze or a copper or some other material. And they want to move from matrix to monolithic materials in some cases.

And so we are moving into more metals that are specific to the needs for our customers. And in addition to that, they want to go to finer and finer powders. But we originally were started printing in direct metal we were printing 60-micron powder. We have improved to 30 micron powder on all of our machines now.

But in the new Innovent and in the new M-Flex, we are actually moving down to the 5 micron to 10 micron and by doing that, we are able to print to a much, much higher quality and much better sharpness and better finishes, which is important in the industrial sector. So we are making good progress there along a multiple fronts of materials.

And this is something that is driven us to get customer development agreements for some of the customers that have their own proprietary metal powders. We will be discussing more of that later, but some of our customers have proprietary metals that we have now qualified for them.

We will start to be printing product for them and ultimately helping them move into production themselves. And so getting these agreements in place and getting the customers to be paying for what we initially had to pay for and through our own R&D efforts, this is important and a step in the right direction for us.

The MIM industry is an important industry for us because as you move through these finer powders, which is essential for MIM production, we have now gotten our capabilities down to where we are attracting a lot of MIM players.

And we expect to be able to see a lot of sales start to move with the newer coders that we just brought in that could handle these fine powders and some of the other things that we are doing to make our machines more responsible to the MIM industry. And so that’s moving quite positively as well.

Looking at the next slide, one other things that we have been awarded is the $1.5 million contract with the U.S. Missile Defense Agency. This in itself is always good to get a little diversity and to get some government contracting in place. What’s significant about this isn’t that we are building rockets or something large.

Actually the piece we are making is classified, but it’s a smaller piece. But it’s all about taking weight out of things and that’s one of the big things that 3D printing does, it reduces weight by using lighter materials in various applications.

To me, what’s significant about this opportunity is that there is a follow-on contract for $4 million or $5 million additionally that we expect to start to negotiate as we move into ‘17. And that this is reflective of a lot of other opportunities where we see BAAs and some SBIR opportunities that we are looking at for military applications.

So we are doing a little bit more in this area. This particular ones in silicon carbide, which is again, a ceramic that is a new diversification in a material platform for us and there are other commercial applications in silicon carbide ceramics that we are working on as well.

Finally, there is a new venture that we have with Lowe’s and we are – I find this to be particularly interesting.

Just as you see in the world today, the shift, because of the Internet sales of some malls that are being – starting to struggle to survive because Internet sales are taking over going to the mall, in certain of the big operations like Lowe’s or Home Depot or Walmart [indiscernible].

Lowe’s has put in place, in conjunction with an agreement with us, a front end kiosk in a test store that will offer customers the opportunity to come in and make a variety of products that they could see or even scan something that they want to make and replace.

I think that one of these is going to someplace hit home and hit home significantly and you are going to see very, very large move in this direction of people being able to go someplace and scan.

Amazon has had an interest in doing this and we have been working with them, but there is going to be I think a real movement to this kind of retail application. Lowe’s is at the forefront of this with us and we are happy about that.

But this represents the opportunity for a lot of additional business in our non-machine sector, where we get the order and process and just the way we do the shaping new order [ph]. So there is a lot of opportunities still developing for us. We had a good quarter.

I will let Brian take you through the financials and I will make a couple of closing comments. Thank you..

Okay. Thanks Kent. I would like to turn to Slide 10 and briefly talk about our 2016 priorities and the progress that we have made on those thus far. Kent had mentioned, accelerating adoption rate of binder jetting technology, that’s all about costs and flexibility, broader opportunities as well as reducing the cost of manufacturing using our machines.

We have been – as we have said before working on reducing the costs or the pricing of our consumables through other supply chain efforts. Those types of endeavors have helped us on our cost front relative to our cost of goods sold or sales, because we use our consumables.

So we are able to reduce our costs that transfers to a positive for our bottom line relative to our own production. Increasing facility utilization, we have said before that we were combining our Auburn facility into our Las Vegas facility. There were two machines in Auburn.

Both of them have been transferred over to inventory and one has been shift out, the other has been quoted. So and that happened mid to late quarter, more than halfway through the quarter, but we feel that went back to us going forward.

Lower breakeven point, we talked about the lower consumable costs as well as improved manufacturing costs and focused R&D and discipline in our G&A efforts and we have made some progress in that regard. Enhancing working capital, we have done a reasonably good job with our accounts receivable.

And some of that is – has also been translated into lower bad debts. In fact, we have a net collection in the quarter, net benefit in the quarter. The backlog build helps us relative as well as contract discipline helps us with our customer deposits. So we are all working.

We have made some progress on inventory and we are working on inventory turns as well as supply chain and more progress to be made there. How did that reflect in the numbers, if you will flip to our revenue and backlog, Slide 11, the mix of our sales have increased relative to the machine versus non-machine.

The growth in machine is mainly attributable to that, up to $4.8 million. Our backlog, we said that we have – in the last call we said that we have significant POs received thus far in Q2 when we did our Q1 call in early May.

That translated into growth in our backlog from 12/31/15 to 6/30/2016 as well as improved sales volume during the quarter and we are pleased with that. If we go to Slide 12, you will see our first half shipments, 12 machines shipped in the quarter, 9 reported in revenue and 2 leased.

That leaves 10 machines that have not been recognized in revenue cumulatively that have been shipped. All of those are our larger indirect machines and are all in our backlog. Slide 13, quarterly machine sales, as I said, up to $4.8 million, close to double our Q2 ‘15.

Those are those 9 machines translated to revenue as well as the leases we had outstanding, the operating leases we have outstanding. We also said that we felt that we would swing to a positive in our TTMs. Last quarter, we mentioned that and you will see that we have gotten deposit of TTMs relative to machine sales at Q2 ‘16 from Q2 ‘15.

Slide 14, our non-machine revenue has increased 15% in the current quarter. About $475,000 of that was driven through a sale of the remaining spare parts of our laser product line. We felt that was good execution to get out of that product line and we were finally able to execute on that and get that done this quarter.

There, as Kent said, related to our couple of larger contracts, MDA is not in this quarter, those revenues will begin probably late Q3 or into Q4. We mentioned FARDS in our previews calls. We did have a good quarter with FARDS this quarter and however, some of that will trickle into Q3.

That’s just the case that customer and we are stepping right along with them. So, we – that project is going well. And that translates into 15% TTM growth Q2 ‘15 to Q2 ‘16 up to $26.3 million.

We do feel – we like this growth, however, we recognized that we have some headwinds if you lower the pricing of your consumables, you do need higher volume to be able to offset that lower pricing and so that does create a little bit of headwind for us relative to our non-machine revenue. Slide 15, gross profit and margin.

We said we need volume to grow our margin percentage to offset our fixed costs.

And so you can see that the translation of that into a higher margin percentage with higher volume, included in that gross margin is the reversal of the reserve we had that we took back at the end of ‘14 relative to our laser spare parts and the sale of those in the current quarter. Included in here are Auburn exit costs.

And as I said, we leased that facility in June of ‘15, so the costs are largely June 15 of ‘16, excuse me, are largely in this quarter and those won’t recur going forward, that fixed costs for Auburn. Slide 16, G&A shows some of our G&A discipline that we have really started back in ‘15.

We were impacted in the current quarter relative to some of our processes and accounts receivable and lowering our bad debt expense and in fact, getting a benefit in bad debt of about $300,000. We did have some higher costs relative to some of our cost initiatives, in particular, our Auburn exit and severance.

Slide 17, in R&D, R&D is largely a fixed cost for our team. Our people cost and our team, however, it is impacted quarterly by material costs for the efforts that they have.

And as Kent said, some of the efforts around our Exerial and our binder set developments and improvements for our machines impacted the current quarter as it did in the first quarter of ‘16.

Capital expenditures, we said from ‘14 to ‘15 we would significantly lower capital expenditures and we also said from ‘15 to ‘16 we would significantly lower our capital expenditures and we have done that.

The anticipated $1 million to $2 million of CapEx for the remainder of ‘16 is really some specific items that we are looking at to improve our operations and for specific customer applications that we feel will benefit us. And we did move the Auburn machines from fixed assets into inventory.

So, that non-cash item is reflected if you look at our cash flows at the bottom of our cash flow statement. Page 19, our year-to-date cash flows, the cash from capital transactions of $13 million was our Q1 raise. There was no raise at all in Q2.

CapEx of $300,000 and then our working capital and our net loss and other cash items largely offset the non-cash items largely offset each other showing some of the improvements that we made relative to working capital ending with $31.9 million in cash at the end of the quarter.

That, if you turn to Slide 20, you will see that, that did leave us with an increase of cash after CapEx and our debt payments, up about $600,000 from March 31 ‘16 to June 30, ‘16 and we virtually have no debt on our balance sheet. We have the one mortgage for the – mainly the one mortgage for the facility here.

We are proud of some of the things that we have accomplished so far to-date. We have a lot of work to go and we are proud of our team and the efforts they have made. Kent, I would like to turn it back to you for closing comments..

Okay. The 2016 outlook, when we last discussed this, we were using the words of cautious optimism. If we were going to say anything about it, I think we would say that we are moving to promising cautious optimism.

We do not provide guidance per se, but I wanted to provide some of the goals that we have for the company and that management is trying to achieve.

And I think, the first one I would highlight would be that our first half growth rate again was about 32% and we believe that with the momentum we have from our building backlog and the basic market emphasis that we can maintain that second half growth rate supported by the backlog and other order activities received.

We do traditionally have more revenue in the second half than we do in the first half. More importantly, Brian said that we have experienced some “headwinds” in the non-machine sector. And the headwinds are not really in the development of the machine – the non-machine business. When we change pricing the way we have, it slows down.

And so our pricing, while we are selling more real output, the pricing does reflected in increased revenues and so that headwind is focused on trying to get us to a more substantial EBITDA.

We are more focused right now on – we will take a little less growth in that sector to see that we have got quality performance and improvement and then try and grow the business from the standpoint of profitability as opposed to investing too much in some ambitious growth plans.

So, we see good growth occurring and we believe that we will be positive EBITDA in the second half collectively and that the business is moving in a positive manner. I used the word paradigm shifts sometimes I think that’s over years, but I really believe that in the case of what we are doing, we do not see any resistance.

We see a growing momentum in the direct side. Even though energy markets are still slow, we have had some benefit with all of the ups and down in Europe and the global economy. There seems to be some stability in spending in Europe. China still is erratic, but growing.

And – so we are enthusiastic about our future and believe that it’s coming maybe a year later than what we anticipated, but it’s coming along fairly well.

So with that, I think we can – anything else we need to do, Karen?.

Well, I would like to open up the lines for Q&A. Thanks, Kent..

Alright. Before we go to the Q&A – yes, okay, go ahead..

Go ahead, Brad..

Thank you. [Operator Instructions] Our first question is from the line of Saliq Khan with Imperial Capital. Please proceed with your question..

Hey, good morning Kent and Brian..

Good morning..

Good morning Saliq..

Yes. So, two real quick questions, first of all, very good quarter that you guys have had and you have the momentum that we have been looking for the past couple of quarters, so great job on that.

When you are talking about the partnership that you have now with Lowe’s, how big this opportunity has become, are you seeing some interest as well from some other home improvement stores?.

First this is – Lowe’s has initiated this in one store in New York. This is an alpha test for them. And they have stated that they have had a positive reception to it in its initial phases. But there will always be a period of time between the time when people walk up to a machine and then they actually start placing orders.

And it just doesn’t happen instantly. It’s like the first time you approach an ATM machine and wonder how this is even work.

But my point about that is that this concept of how sales are going to migrate to new platforms is very, very real and it’s not – whether it those moves to 50 stores or other stores is that’s certainly that is something that we will have over longer period of time.

It may take more testing, it may be program that they take back and have to completely restart. But I believe that you are going to see this happen in many places, because we have had – every other major retailer come to us to talk about the concept.

And this is the first time that we have actually got it on the ground and running and there will always be ways that it’s going to have to be adjusted to the demands of the population. But I think you are going to see this happen broadly over a large spectrum of retail activity. And for us, it’s very good margin business.

We are pleased to be working with Lowe’s in this regard. Second part here, Saliq, the second part of your question….

If there are others…?.

Yes. We have others that we are working with and just like everybody else, they sign NDAs and they don’t you to talk about it..

Got it. And the only thing I was thinking about that was, you were talking about for $1.5 million contract with the U.S.

Missile Defense Agency, how do you think about the revenue recognition from that and certainly this is an area which I believe that seem to become a much more meaningful part of the overall industry, are you seeing similar trends in your end and how do you view the case of the overall growth in that market?.

I will let Brian address the issue of how we recognize revenue and I will make a comment about the market..

Yes. Saliq that revenue is going to be – it will be lumpy, it will be on project milestones and awards and it is a 3-year program, it’s a 3-year commitment. And so I don’t think that it will be real impactful in any quarter, but there will be lumps coming in, in various quarters going forward.

And we really have to get into the customer’s cadence on the movement of that to get more specifics. So we are working with them on that now..

And I might point out, we have continuously bid on government projects and some of them have been quite large. We unfortunately did what we were told we did not win fairly enthusiastic about recently. But it wasn’t because our technology wasn’t deferred and it’s of course any of these things have a little bit of politics involved in it.

But the need in the government adaptation of this technology going forward is going to be very, very real and very profound because it’s cost saving. And our government is very focused in theory on trying to get cost savings in any of the production centers that they have.

So we see a lot of opportunities, but they do take a long, long time to get generated. Government has never done anything expeditiously except go to war. And so we are enthusiastic that the opportunities will develop for us as we move along..

Yes. Just one last on my end and then I will hop back in the queue.

As I take a look at the private [ph] customers in the most recent quarter, they represented roughly 30% to 35% of the total revenue, however that was up from the same period last year, which was roughly around 25% or so, what are the types of things that you are engaging now to improve the customer concentration that you have?.

Yes. I think you are talking about concentration in our footnote relative to revenue. And so that’s largely driven by machine sales and the size of machine sales in any specific period. And so we would hope that we would have some real lumpiness with that, because we would hope we have multiple machine orders from single customers in a single period.

But at this point in time, with our size and the size of our machine, that number is going to fluctuate with some of the – particularly some of the large indirect machine sales, that’s really where that number is driven..

I think the main point you have to recognize is that the adaptation process has been slower than we would have anticipated because the customer is taking longer to evaluate the end use in a variety of different applications.

But what we are now seeing is that they have come to accept that this technology is a preferred technology that works for them and it’s now more about how can they get it adopted into their process. We have a lot of customers that have bought one machine, but are now talking – coming back and talking about two or three.

And when they do that, they will put them in place more rapidly than they did in the initial machine, where they had to do their evaluations. So we expect to see, because of the follow-on nature of this one customer, I just talked to, has one machine for a year and a half now and they have said they want five machines over the next 18 months.

So we will see more and more of that as we move forward..

Great. Thank you, Kent and Brian..

Thanks Saliq..

Our next question is from the line of Bobby Burleson with Canaccord Genuity. Please proceed with your question..

Hi guys. This is actually Jon DeCourcey on for Bobby.

Just a question on the improved operation – operating expenses and the efficiencies that you guys have achieved so far this year, how should we consider that going forward for the remainder of the year, do you expect that kind of improvement to continue or do you kind of think that that’s low hanging fruit that’s been taken out of the – not necessarily low hanging fruit, but cost savings that have been taken out of the model?.

Yes. I think it’s a combination of both. If you look at the current quarter, we were impacted by the collection, the lower bad debts and the collection of some previously reserved amount.

Some of the efforts that were taken – that took place in ‘15 and early ‘16 are really impacting us in Q2 ‘16, but the efforts we made in Q2 ‘16 are actually increasing our costs. So we continue to focus on reducing our overall G&A spend and discipline. And so and Q3 is traditionally one of our lower quarters.

Q4 and Q1, typically have some of the costs associated with our year end and in our reporting, in our audit, everything else. So our trend is going the right way and we hope to continue it..

I would like to highlight one point, that is that the R&D spend, we believe we are going to have to maintain a good R&D rate. We feel privileged that we haven’t had a lot of a challenge to our technology and that we have got a lot of patents and that protects us.

But there are new players that are coming in the indirect side and we are seeing a lot of different types of applications on the direct side. I think we are making extra progress in both areas. But R&D spending is going to have to stay at a high level for us to get the market penetration that we want in fold and maintain over time. Okay..

Thank you. Our next question is from the line of [indiscernible] from Brean Capital. Please proceed with your question..

Hi, guys. This is [indiscernible] for Nanda [ph].

Just a follow-up on R&D, do you feel like that’s at the $1.9 million per quarter is sort of the optimal level that you have now or you think you should tick higher just to stay competitive?.

R&D spending for us has a lot of material costs in it, which makes it go up and down it could be lumpy depending on what kind of materials we have to buy and what quarter to sustain the ongoing R&D function. And so it’s going to be lumpy, but we are expecting revenues to grow and I am not going to say that it’s just going to be stable.

There are so many opportunities we see for growth with high profitability that we have got to continue to be aggressive as we get to EBITDA and CAT sustainability. We have still got to be very aggressive that we spend the monies to get a true market penetration in the markets that we serve..

Got it. Understood. Thanks for the color.

And I just want to clarify, is PSC impact mostly through – completely through on both operating expense and the COGS level?.

It’s principally COGS. PSCs are principally COGS, the largest piece of it. I mean, the G&A piece, it’s a smaller piece, because it’s primarily a production facility. We can add a machine and the other thing you are going to add is depreciation. You can run a second or a third machine without even having to add additional labor in our PSC.

So, where we see the need to add capacity that comes only with depreciation really not any other operating expenses..

Understood. Thanks.

And on the cash level, I believe your goals if there is operating cash breakeven, is that tracking any things that you guys try doing that for this year given this quarter’s cash performance? Is that tracking better than your internal expectations on both the cash from operating activities and working capital management perspective?.

I think our expectation is where we would have a little dip in cash in Q2, I think we will have a dip in cash in Q3 as opposed to Q2. We had a very good quarter in cash, nearly better than we thought.

And we do have to build machines for some of these opportunities we have that are sitting in backlog and opportunities we are working on and so we will spend a little bit of money in Q3 on that effort, but we do feel good about recovering that in Q4, so…..

Okay, got it. Thanks. Last question for me, could you just comment sort of a little – give us a little more color on the global industrials demand at the end of your prepared remarks you said building it Europe and you said erratic growing in China and then I think, the last quarter you mentioned America was still soft.

Just any updates on that would be wonderful? Thanks..

Alright. I will try to reiterate again as I look at our global perspective, just two-thirds of our sales come from outside the U.S.

And again, the non-machine part is growing a little slower because of pricing, but to the extent that it’s slower, the intent there is to stimulate machine sales to higher levels, because you are making your machines more portable to operate by customers.

So, we expect to see that continue, but we expect to see some real growth in the non-machine sector as we get more machines out there, because they do need more consumables.

Ultimately, we are moving to a globalization strategy by providing consumables for the indirect machines from global sourcing, because transportation is so expensive for the – seeing in the other materials that the large machines provide.

China is of course a huge market with tremendous opportunity, but China can be highly erratic, because the government may tell the business sectors to turn on or turn off for a variety of reasons very quickly. And so we tend to be a little hesitant there.

Russia, which has been a good market for us, the currency in Russia is up 20% and we believe that, that’s going to positively affect us as we look at the future, because there is some pent-up demand that was deferred by the fact that the ruble was in such a low level. And so perhaps, we will see some more demand there.

Europe, across Europe, you have got a variety of different circumstances, but I think what happens is that the machines we are selling are adding to the productivity of our customers and now that our customers understand productivity, they are not quite as sensitive to trying to figure out what’s the IRR for an investment.

And so they are more willing to make the investment, because they see where it’s being used across the board.

The U.S., I think is still a little slower than what we would expect and I think that, that principally comes on the fact that the energy markets here, which is – the pump and compressor business is very largely dependent on energy, but we are seeing some new applications now with our non-energy markets and we are starting to move into that.

And as our direct machine start to move more into MIM, more into ceramics, that’s a whole new opportunity and we are seeing increasing revenues in that regard..

Got it. Thanks. Congratulations on the quarter..

Thank you..

The next question is from the line of Patrick Newton with Stifel. Please proceed with your question..

Hey, it’s John Michael on for Patrick Newton.

On Exerial, I am just wondering if you had any color to offer on just when we could think about revenue recognition for the 4 bed beta systems?.

We can’t provide any additional color at this time. We are just as a team in China trying to work on the install and they were deferred because of some customs issues. And so we are hoping that will come by. We would like to see it get done this year. We believe it will and there is not a lot of margin in those machines and we are fully paid for them.

We do have a 5% bond up on. It’s the only liability we have on it. So, we are working with that customer as best we can and it’s government money that brought the machines. And so we are really subject to a lot of different forces from that different particular part of the world.

We do have demand for Exerial in other places, particularly in Germany in the automotive sector and now we are seeing some demand in new applications and certain high volume applications for different [indiscernible]..

And on the automotive for – what do you expect the timing to look like there when we would actually start to see revenue generated from that vertical?.

Yes. The plans these automotive guys – they have to plan 4 and 5 years out when they are making these decisions. One of our largest customers is looking at taking machine this year is talking about wanting to have 10 of these in place by 2020 was their original evaluation. One of the other automotive guys is looking at a fewer, but sooner.

And we have deliveries planned there this year, but because of the nature of the – and it’s a very sophisticated system, of which our printer is a major component, but we are not the systems provider and the systems integrator and so the systems integrators have to all get together with the automotive sectors and decide how it gets integrated.

This can be a couple of years and – no, what’s happening is that the automotive guys will buy a machine and test it, qualify it independently and those machines, the onesies and twosies will get accepted sooner. But seeing the price we can’t that’s going to come probably after ‘17 at the earliest..

Perfect, that’s helpful. That’s it for me. Thank you..

Thank you..

Our next question is from the line of Ben Hearnsberger with Stephens. Please proceed with your question..

Hi. Thanks for taking my question.

I wanted to dig into adoption of your indirect technology because clearly that’s where you see bigger revenue dollars and that’s what can really drive the model, so if we look back at ‘13 in the first half of the year, I think you delivered seven or so indirect printers, ‘14 delivered six and then last year, we didn’t deliver any, and it seems like this year, we have regained momentum, can you kind of walk through what drove the slowdown last year, was it primarily macro and what’s different now?.

Ben, Brian may choose to give you a little additional highlight, I will give you my additional responses to your question.

What surprised us, what caught us off-guard was the enthusiasm that we originally saw – this goes back from the ‘13 period, where there was almost euphoria about what 3D printing was going to do for the world of the large foundry suppliers that are primarily the users of indirect printers making castings for a whole host of situation and that market was initially very enthusiastic at the OEM level, but not at the foundry level.

And the OEMs were buying these from the foundries and it took the OEMs to push the foundries to be able to adopt this technology, because the foundries weren’t really receptive to it using their money to do that.

But I think, what happened is that the foundries now have more or less seen – first of all they are not found industry grade capital intensive, not a real high return industry and so they intend to be very slow to make capital decision. And so it took the momentum of the OEMs to drive them to making this decision.

And now that they have made the decisions and they are starting to see how effective it is in the futures of their operating conditions and to the necessity of it, they are moving more proactively to acquire additional machines. And so we are seeing some of that. And I think that we are getting recognition for our position in that marketplace.

We have other competitors, but I don’t think there is anybody that’s touching nearly the market penetration that we are and our S-Max has been a real fine operating product. The S-Print is a small version of the S-Max. Reliability of that was good.

We did see last year secondly, that – and this is one of the reasons we have slowed down was that the demand by the foundries was they made their commitment that they wanted to print in a different binder set, which was the cold hardening phenolic, rather than just Furan. Furan’s was been an easy one for us. We still sell a lot of Furan machines.

But they are moving through the cold hardening furan was CHP, because of it’s higher quality printing resolution, much, much smaller parts and so we – we have had to take some time to get a CHP solution. It was a little bit more complex than we planed. But we have got this solution, the customers are not accepting it.

We just have one this past week in China where we have got a very rapid acceptance of a CHP solution with that Chinese customer.

But the solutions vary depending on whether you are printing a large please or a small piece and how you have to process it by size, so there is an awful lot of [indiscernible] to go in and it’s just taking longer for the customers to come to finally understand that and even for us to be able to understand to give the customer the most proper solution for their particular need.

But what’s happening is the information is starting to be shared by other customers and they see the wisdom of making the investment. So we are seeing that growth in indirect. And I think that we will get a continuing momentum from that on a global basis. It’s not just one area of the world that this is occurring..

Okay, that’s really helpful.

And I think the next question would be as we continue to see momentum, we should start to see some multiunit orders and I know you mentioned that earlier Kent, do you think we see a multiunit order sometime this year or is that still a longer term prospect?.

We have customers now that are buying their second and third machines and we have one customer that says they want five. We have had another customer that says they want 8. And this is even true also in direct. Direct designation is that business is and it is long as it’s taken for it to mature.

The opportunity is to sell 10 units and 15 units in direct. It’s going to come fairly rapidly now that we are printing in these fine powders. These 5 micron to 10 micron levels is going to move us into the MIM industry and we have a couple of customers.

We have one customer that came in within the last two weeks and said that they want to move to production next year of about $40 million of product. And to do that, they have to probably put in seven to eight machines. And so – it’s all just starting to mature.

And it’s because there is an awful lot of technical resolution that has to occur when you are making an industrial piece in terms of the final qualifications so that the customers and users will accept the product..

Okay.

And my last question, I know you described the environment as maybe promising now, in the first half of the year, I think in the first quarter, I think you guys said that you expected 1Q growth to be the low point, I know quarterly it’s very difficult to forecast, but is that still a fair way to think about the back half of the year, growing off of what we have seen in the first half or growing at a similar or better rate?.

Ben, this is Brian. The way I would look at that is we say that our first quarter is our slowest quarter. Again it’s historically our slowest quarter. So we saw good growth in Q1. Now, we have seen what we consider to be a good growth in Q2. The hurdles are higher in Q3 and Q4 because those historically have been our higher quarters.

We expect those quarters to be our higher quarters.

We continue to expect them to be our higher quarters as history has dictated, did that make sense?.

Yes. Okay.

Maybe one last question, how much revenue can you generate on your current fixed cost base?.

I haven’t put a total capacity to it Ben, but it’s substantial. And I think, as Kent mentioned in some of our – all of our PSEs the ability for us to add a machine or in an instance where for example, in Gersthofen, where we are installing our own Exerial machine internally and Exerial has a much higher output than an S-Max or an S-Print.

And so we are also able to change machines and configurations and get higher volumes too. So the numbers are – they are substantial. I can’t put an accurate number on it. There would be additional – potentially additional depreciation costs.

But we don’t need to increase our footprint at this point in time unless we looked at a opportunity that would open up a new marketplace for us or a new geography for us where we want to enter into a facility..

I would be a little more blunt than Brian, we are nowhere near capacity in machine production. We have the ability to put out a lot more if the demand ramps up..

Okay, that’s really helpful. Thank you very much..

Thank you. At this time, I will turn the floor back to management for closing remarks..

Okay. Thank you again for sharing some time with us and for listening to us this morning. As I mentioned earlier, we have a very positive feeling about the rest of the year and we believe that we are really differentiating ourselves at ExOne with the 3D printing for the industrial applications of binder jetting and the binder jetting technology.

I want to thank all of our associates around the globe who have been helping us make this happen. It takes a lot of work to get something like this off the ground. We are still an emerging growth company.

And emerging growth means that we are going to be bringing on more people and more applications and all of that seems to be moving in the right direction for us. So, we are pleased with the second quarter. We look forward to discussing the third quarter in November. And with that, thank you for your attention today..

Thank you. This concludes today’s conference. Thank you for your participation. You may now disconnect your lines at this time..