Karen Howard - Investor Relations Jim McCarley - Chief Executive Officer Brian Smith - Chief Financial Officer and Treasurer.

Saliq Khan - Imperial Capital Daniel Drawbaugh - FBR Capital Markets.

Greetings and welcome to The ExOne Company's Third Quarter 2016 Financial Results. At this time, all participants are in a listen-only mode. A brief 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, Ms.

Karen Howard, Investor Relations for the ExOne Company. Ms. Howard, you may now begin..

Thank you, Rob, and good morning, everyone. We appreciate your time today for our third quarter and nine months year-to-date 2016 financial results conference call. On the line with me today are Jim McCarley, our Chief Executive Officer and Brian Smith, our Chief Financial Officer and Treasurer.

Jim 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 two is our Safe Harbor statement. As you may be aware, we will make some forward-looking statements during this presentation 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 our website or at www.sec.gov.

I also want to point out that during today’s call, we will 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 and 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. Jim will get started with some general observations about the business and key highlights of the quarter.

Brian will go through the detailed review of the financial results and then we will turn it back to Jim to offer perspective on our outlook before we open up the line for questions-and-answers. And with that, I'll turn it over to you to begin Jim..

Thank you, Karen and good morning everybody. So this is my first earnings teleconference with ExOne and some of you may not have been able to join us for our introductory teleconference in August. Let me start with telling you some of my initial observations on the business, as well as a recap of my background.

First, I want to say how pleased I am to be part of the ExOne team. Since I joined in August, I had visited all of our major locations globally and have had one-on-one conversations with approximately 85% of our employees.

I discovered a very knowledgeable employee base who are very interested in seeing our ExOne Binder Jetting technology succeed in the marketplace. They express the commit to being held accountable to meeting challenging objectives as well as willingness to make a change in our business, to better meet the advance and advance the 3D technology.

Finally and most importantly, I was met with the high level of energy and dedication and a team that knows our company’s success depends on exceeding our customer expectations and driving shareholder value. I am convinced that we are all committed to seeing this company move forward in a very progressive and effective way.

I also met with customers in most of our geographic marketplaces to understand their perspectives and needs. These customer meetings were balanced in content which both highlighted areas of success on the part of ExOne as well as areas of improvements that we would need to look at.

As is often the case with customer interactions, these meetings were very helpful in identifying potential areas of improvements that will aid ExOne and accelerate the adoption rate of our Binder Jetting technology for industrial customers. Moving on to my personal background, here is a quick recap. I have over 28 years of experience in manufacturing.

My market emphasis has always been in the performance material business, primarily performance metals. I have work experience ranging from basic equipment design all the way through total P&L and business management with a broad exposure to industries in aerospace, energy, general industrial and defense, all of which are key markets for ExOne.

The customer bases I dealt with included very sophisticated large OEMs. In each of the prior assignments that I’ve had, my businesses had significant contracts with global enterprises such as Boeing, Airbus, General Electric, Shell, and others along those lines.

In many instances, we were significant partners with those organizations and involved in strategic discussions on a regular basis. I’ve planned to leverage those relationships as we move forward with ExOne. Lastly, I want to emphasize that I was a consumer of 3D prints.

One of the last acquisitions that we made at RTI was a company that did 3D printing for the aerospace market. So I have a really good sense of what customers expect from the 3D printing machine and what it’s going to take for those machines to be able to produce products in a demanding marketplace like automotive, or aerospace or oil and gas.

So, over the last 75 plus days, I have learned a lot about this business. I’ve listened our employees, customers and other industry experts. These interactions have both identified areas of success as well as areas of opportunity.

I expect this investment of time upfront will pay off in terms of improved decision-making and an increased probability of success. With that introduction, please turn to Slide 5 where I will provide an update on our markets and the actions we are taking to be responsive to our customers.

Starting on the left side of the page, as you know, the indirect side of our business refers to 3D printing, a molder core tooling used in casting metal components.

In my participation in industry conferences and trade shows as well as direct discussions with customers, I was pleased to see our S-Max machine platform consistently referred to as a stable, reliable, and productive machine.

In fact, it is my observation that the S-Max and the S-Max Plus machines are setting the standard for 3D printing equipment within the casting sand market. Year-to-date totals of six units shipped and six units sold is a validation that the S-Max platform is demonstrating both market acceptance and market appeal.

Likewise, we are seeing the S-Max technology being considered as the backbone 3D printing technology in OEM strategic projects. That can capitalize on printing capability in global supply chain strategies.

Regarding our Exerial, the world’s largest capacity mass production sand 3D printer, we continue to advance the application and machine performance. Over the last nine months, our German team has made good progress developing benchmark parts on our in-house Exerial machine systems.

This work on processes and products is expected to streamline the commissioning of our two global OEM Exerial projects. One that is shipping this quarter and the other that is presently – and in the installation phase and the other that is expected to be commissioned in 2017.

Additionally, we are leveraging what we’ve learned relative to the Exerial and reviewing how we can apply those technical features to other platforms as part of an ongoing continuing advancement of our machines. Moving to our 3D printing business, our direct 3D printing business, we have been very hard at work advancing our technology.

In early October, we announced that our Innovent machine is now capable of printing fine powders including qualification of stainless steel 316L.

This opens new doors for us facilitating further expansion into the metal injection molding or MIM industry where we expect our technology to complement traditional MIM processes, particularly in the prototyping area of that market.

Finally, this fine powder capability opens opportunities to print and qualify new materials and products that can be printed on the Innovent platform. We fully expect this innovation to both expand our addressable markets, but also serve as a building block, so the development of a larger format direct printing machine.

We believe that as applications broaden, addressable markets for our use of Binder Jet technology will grow. Turning to Slide 6, I have a few more specifics on our business progress. There are three key points to make.

First, you will notice consistent revenue recognition occurring within our indirect machines over the last – over the past couple of quarters and Brian will review those totals for you. What we are seeing is, that the market has favorably received our product offerings and this is a key factor that has driven our growth.

We are also developing new binders and sand combinations in response to our customer needs and see that type of development as a key element for future market share growth. With respect to our direct machines, ExOne rolled out a stainless steel 316L material. But behind the scenes, we did much more than that in the third quarter.

During this period, our engineering and development team built the framework for accelerating additional material developments. Every new material helps to open up more addressable markets to our products. The third point I would like to make is on technology development.

ExOne’s future growth depends on making thoughtful and strategic decisions on how we invest in R&D. Whether we choose to do projects with our customers or make investments on our own, we know we have to carefully balance our technology advancement with our spending. Please turn to Slide 7.

We included this slide to give you an example of a couple customer applications and their justification for utilizing our Binder Jetting technology. Mahle König, one of our German customers introduced 3D printing in serial production of their engines and components.

They did so because their customers are demanding customized products that combine high performance with very cost-effective engines.

They stated that powerful 3D printing is one of the key technologies to retain production in high wage countries such as Germany that it offers enormous potential when innovation both in technology and automation as well as serial production.

To summarize, they stated that ExOne is the only supplier offering a marketable solution for production and processing of sand cores with a modern, environmentally neutral binders. You can view the entire interview with their comments by clicking on the link provided on the slide.

As you might imagine, we think this type of customer commitment is great validation of the ExOne technology. With that, let me turn it over to Brian to review our financial results.

Brian?.

Okay, thanks, Jim. I’d like to first turn to Slide 9 and briefly talk about our 2016 priorities and progress. First, we’ve been taking – all year we’ve been talking about actions to accelerate the adoption rate of our Binder Jetting technology. And Jim talked about those earlier.

Importantly, it’s about broadening market opportunities and also reducing the cost of ownership for our customers.

We continue to work on reducing the pricing of our consumables through our supply chain efforts, which not only to lower the cost of ownership to our customers for our own machines, but for their machines, but also improve our own manufacturing cost as we print in our PSCs. Our next priority is to evaluate our business model.

Earlier this year, we were talking about increasing facility utilization within our PSCs. Since Jim joined in August, we are taking a more comprehensive look at our business model including potential further consolidation, elimination, addition, or other modification to our existing machine manufacturing, PSC or other operations.

We expect to report more on that initiative on our next call. Finally, we’ve been focusing on profitable growth and on improving working capital. This includes scaling and evolving our business toward profitable growth.

In addition to growing our revenue and reducing our direct manufacturing input cost, we are adding more discipline to our spending on R&D as well as G&A and you can see those efforts in our reported cost over the past couple quarters.

With regards to working capital we focused efforts on standardizing customer contracts where possible resulting in scheduled customer deposits on machine sales improving ARs and our processes, our current efforts and future efforts will be more focused on inventory management, control, supply chain and turning our backlog more quickly, all of which will improve our investment in working capital.

So now let’s move on to a review of our financial performance, please turn to Slide 10. On an year-to-date basis, revenue was up 37% to $33.2 million as shown here with non-machine comprising of nearly 60% and machine sales approximately 40%. For the quarter, our revenue was up 47% to $13 million with a balanced mix of machine and non-machine.

An increase in our larger higher priced indirect printing machines is a key driver of that growth and I’ll go over that in the next slide. If you’ll turn now to Slide 11, you will see our nine months of shipments and revenue recorded in units by machine type.

Ten machine units were shipped in the third quarter, eleven were recorded in revenue and we didn’t incur any new – enter into any new leases. So you can see that shipping activity has been robust over the past couple of quarters.

Regarding those for which we have recognized as revenue in the third quarter and note that six of the eleven are larger indirect printing machines. Those have been the key drivers of revenue growth. Year-to-date, we shipped 27 machines, recognized revenue on 21 and recorded leases on six.

Many of you have asked about when the machine shipments and revenue recognition begin to balance out and we are seeing that in the current quarter. Now let’s look at the backlog trend on Slide 12, we finished the quarter at $19.9 million. We increased sequentially over the past couple quarters.

To remind you, that number includes machine, our non-machine customer orders received and not yet shipped as well as machines which have been shipped to our customer sites and they are in some stage of installation, commissioning and acceptance.

As of the end of the third quarter, backlog includes the four Exerial machines shipped last year, which we received a 100% payment last year. As of last week, we had a bond guarantee that expired relative to that contract and we have no notice of any claims on that bond guarantee.

We are taking additional steps to confirm that our obligations under the contract are complete and are continuing to evaluate revenue recognition under the contract. Backlog also includes orders for contractual services like our missile defense agency contract and operating leases that are non-cancellable.

On Slide 13, on a year-to-date basis, you can see that our machine sales are up 128% to $13.5 million. This year’s period includes revenue recognition on 21 machines compared to 14 last year. You can also see that our third quarter machine sales are up 174% to $6.5 million.

That reflects those eleven machines translate into the revenue dollars in the current quarter as well as the operating leases that we have outstanding. In Q3 2015, we recognized revenue on five machines.

As I previously indicated, and as you can see by the chart by machine type, recognition of our revenue on our larger indirect machines has driven much of the growth. Turning to Slide 14, non-machine revenue, you can see is flat $6.5 million from the third quarter 2016 and third quarter 2015.

As we previously talked while not as lumpy as our machines and as we do experience some lumpiness in our non-machine product line, due to the timing of customer projects and the evolution of our customers who purchased parts of our PSCs to purchasing their own machine.

Additionally, our consumables revenue is infected by reducing our consumer pricing and the timing of the offset of those by higher volumes. We also have started to recognize revenue on our missile defense agency contract announced in July and that revenue is expected to ramp up in future period.

Year-to-date, you can see that our non-machine revenue was up 8% to $19.7 million. If we could turn to Slide 15, where we talk about gross profit and margins.

We’ve previously said, we need volume to grow our margin percentage to offset our fixed cost and as you can see, the translation of the higher gross margin percentage with a higher volume has been realized in the current quarter.

Also worth noting is that last year’s quarter included inefficiencies associated with the transition into our new and expanded facilities in Germany and here at North Huntingdon, as well as the deployment of our ERP system in Germany. Now that those are behind us, we have improvements in those operations.

While not shown here, I want to comment on the third quarter 2016 margin, which is a bit lower than the sequential second quarter of 2016. We reported in the second quarter results that we sold our laser inventory which we had previously reserved when we wound down on a pursuit of that technology and product line.

This positively impacted second quarter 2016 margin by about $0.5 million. Let’s turn to Slide 16 and talk about SG&A. As you can see, this slide shows our ongoing results of our cost discipline that we began last year. Our cost of $5.2 million for this quarter were up modestly from our sequential second quarter than last year’s third quarter.

We did incur approximately $0.5 million of cost this quarter associated with our management succession changes. That includes approximately $300,000 of non-cash stock comp to our cost. On Slide 17, R&D continues to be a largely fixed cost for us which is largely our people cost.

And as we have said, this has remained entirely flat on a sequential basis for a number of quarters. However, our comparison to last year includes the impact of material cost for projects that we would have going on.

This includes projects related to the advancement of our machines including our Innovent to accommodate Binder powders as well as expanding binder sets for our Exerial and other indirect printing machines. Let’s turn to Slide 18 to talk about CapEx.

As you can see, and consistent with what we said before, our 2016 spending has been very modest less than half of 2015 on a year-to-date basis and significantly lower when looking at specifically at the immediate cash position.

The non-cash portion, just to clarify what we said in the past, pertains to transfers of machines into PP&E for our own use or for customer leases that we have previously manufactured for our inventory. For the fourth quarter, we are currently expecting less than $1 million in additional CapEx for 2016.

And finally, we do not foresee our CapEx numbers to trickle up significantly in the future to support our growth plans. If we turn to Slide 19, you will see a water flow of our year-to-date cash flows. As a reminder, the $13 million of capital transactions was related to our first quarter raise and we have not had any capital transactions since then.

We have had cash, CapEx as I said before of about $700,000 that is noted on the last slide, working capital provided us about $4.7 million of cash mainly due to AR collections and customer deposits and our net loss, net of non-cash items and other use was about $6.5 million. So all in all, our cash usage to support our growth has been modest.

We ended the quarter with about $29.8 million in cash, which we believe is sufficient to support our current operating plans. If you turn to Slide 17, you will see our $29.8 million in cash and you will see that we virtually have no debt on our balance sheet and that’s been relatively stable since our raise, Q1 raise.

With that, I’ll turn it back to Jim..

Okay, let’s move now to Slide 22. We are in the home stretch of 2016 and we look forward to finishing out the year with solid revenue growth.

As we think further out, knowing what we have in our backlog and our order pipeline, we are working hard to build on the strong progress we have seen in 2016 and continue to advance our product and product offering in 2017. From an operational standpoint, as Brian indicated, we’ve broadened our efforts in the evaluation of our business model.

So you can expect to hear more on that topic as we move forward. In every case, our focus will be on how to improve how we invest in the business, where we focus our resources, and how we can better serve our customers.

Finally, although we will not breakeven at an adjusted EBITDA level for the second half of 2016, we will continue to focus on taking steps to reach a breakeven or better adjusted EBITDA in Q4 and continue our evaluation towards sustainable adjustable EBITDA, positive EBITDA in 2017.

Balanced with this focus on growth and profitability, we continue to make good investments that support accelerating adoption of our Binder Jetting technology and growing our addressable markets. So with that, let us start the Q&A..

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

Hi, good morning guys. .

Good morning. .

Good morning, Saliq. .

It’s a good quarter for you and it looks like you guys are trending in the right direction. And I just have a couple of follow-up questions for you as well.

The first one being is, as you take a look at the consumable pricing that you had talked about earlier, how much was the pricing reduced to help you grow the overall volume and to increase the adoption?.

We don’t have a number for you on that, Saliq. It’s a mix, as you can imagine, we have a number of different consumables and they are really moving with the efforts relative to our supply chain. So I don’t have an average pricing change, because that would also give you a mix of the sales during each period.

So it’s kind of a moving target, but I can tell you that they have been relatively significant. There is also a geographical factor, some of our materials are a little heavier than others. And so, you are looking for different material sets in different geographies too. So, it is a blend, but we know it has – well, I can’t give you any exact numbers.

We know it has impacted us..

Understandable. Do you think, and I was thinking about is, Brian had talked about the fact that you guys are doing more valuation and more in depth valuation regarding the consolidation over the potential consolidation of the facilities.

Can you talk about the criteria that you are using to go about this? And what areas are you targeting? Will it be mostly in the US or are we looking at some of the operations that you have abroad?.

Okay, so let me start with, we are really not bound to any general geographic location in terms of what we are looking at. We are looking at the whole picture and it’s really – in most cases, we are looking at what’s the investments and what kind of return are we getting back on that investment.

And so, that doesn’t necessarily lead to any solid conclusions until you’ve had a chance to look at the whole picture. So, really it’s a return on investment in my mind.

We know where our cash position is and we know going forward that we’d got to be very, very clear and focused on how we use cash and so, I am basically almost doing a cash evaluation on every business to see how well that cash investment is going to return to us. .

Okay. And then, lastly, that I was thinking about is, in the prior call, you had talked about the partnership that you have with Lowe’s, could you give us an update on that partnership, since you are aware, customers have the ability to order online or walk into a Lowe’s and order it from the Kiosk.

I know there is a pilot program that you are working on in New York as well?.

Yes, that is the pilot program in New York is what we are really talking about here and this is still very early stages for that. Our timeline doesn’t have that necessarily showing up in the first six months. It’s out beyond that before we would really expect to see the kind of traction on that.

So, I think that’s one to – more to come as that matures and evolves. .

Right, thank you guys..

You bet..

Our next question is from the line of Christopher Van Horn with FBR Capital Markets. Please go ahead with your questions..

Good morning. This is Dan Drawbaugh on the line for Chris. So I just wanted to ask a couple of questions.

When you are looking for this breakeven adjusted EBITDA, and I know you are not quite there yet, but what specifically are you guys doing within the business? Like right now, maybe looking into 2017, what are the levers that you are pulling? And how confident are you in 2017 as far as that breakeven level goes?.

Let me take this in a couple of steps for you, because I don’t want to diminish the fact, guys, we are still in an emerging business here.

So we have to make good investments in R&D and as we look at where we are right now, I think, as a general rule, you know that we’ve got a lot of seasonality in how our sales look, but as we look at the second and third quarter, we start to look at that as sort of a base on the machine selling side of things and I think we’ve got a history now that you could look at also in the second and third quarter that kind of shows what kind of gap that would produce.

As we go forward, we are basically going to have to just evaluate where is that investment, because that’s how I look at what that number is and how well is that investment turning into something that’s going to be useful in the future.

And so, I really can only kind of give you the magnitude of what we think the gap is, but in terms of how we closed it, you are going to have to give us some time, we will roll that out in the future – in future calls..

All right. Understood. Thank you. I also wanted to talk about this backlog it’s been growing steadily over the last couple of quarters.

As far as the main end-markets that you guys address, sort of aerospace, automotive, heavy equipment, energy, oil and gas, is there any one particular space where you are seeing upsize growth contributing to that backlog?.

Well, I think energy has been slow, I think energy has been slow for everybody. So that’s not a big contributor. I think it’s broadly across all of our geographic locations. One thing we had mentioned was, we did get a multi-machine order there in this quarter, which will play out into 2017.

It’s three machines, a global manufacturer and so, we feel good. That’s an OEM. We feel good about kind of a broad growth, albeit it – I think that, as I said, energy is a little slower. I can’t really pick out anything else. That’s probably the most significant of that backlog number. .

Okay, understood. Thank you guys. I’ll just go ahead and jump back in queue. .

Thanks..

You bet..

Our next question is from the line of [Indiscernible] with Green Capital. Please go ahead with your question..

Hey, guys. Thanks for taking my question. I have two.

The first one maybe a little forward, but what’s the – and potential policy, is there anything that you guys particularly watch out for that could affect you and bring you opportunities and risk whether it will be manufacturing vertical industry adoption policies or trade or taxes or anything that you guys pay attention to? Thanks. .

I’ll take that, and the answer is, I don’t really think we know how to look at into the future and really play that particular element in our business at this point in time. So, no, I think our answer is, we don’t really see how it’s going to – regardless of how things turned out, we kind of see the future it’s very similar for us, so..

The second question is a follow-up on the previous question, so I know you guys talk about the gap between sort of – within EBITDA neutral right now, but as you envision EBITDA neutral a possibility for clearly 2017, do you still see a strong December quarter to balance out the rest of – the losses from the rest of the year or do you think the mass model will be more smoothed out?.

I would not eliminate any that sort of profile that you become adjusted to. We are not telling you the change how that looks.

What I am really trying to do is, emphasize that when you think about what we need to do in order to reach profitability, I was trying to give you a base number that sort of help should target what – where the real financial gap is.

But let me say this, as we look at the organization, we are going to be adding some talent into the organization, make no mistake about it, growing the top-line, growing that non-machine or that machine selling side in particular is going to be a key focus and I’ll be bringing somebody on staff who will be singularly focused on help on us improve the efficiency of that process as well as the success.

So, that’s really where I think, when we think about how to close the gap, that most obvious place is how can you drive that number up. But I also have to realize that you got to think about what is the base number you can start from that you feel like you can trust going forward and that’s what we are trying to give you some color on..

Got it, very helpful. Thank you guys. Good luck..

[Operator Instructions] The next question comes from the line of Ben Hearnsberger with Stephens. Please go ahead with your questions..

Yes, good morning guys. Thanks for taking my question. This is Hugh on for Ben, actually. I wanted to start with these finer powders.

What type of applications these finer powders open up for you? And are we at a point where we should see shift to more direct printers?.

Well, I think, first off, the kind of market that’s going to open up is really small, low volume product that would have typically than a MIM type of application. So it’s really not bound by any industry although there are certainly specific industries that rely on MIM.

But it’s into both the prototyping space for the MIM industry, so it’s really everything they do on that front. But, in some cases, there is low volume levels that fit within our box size and that’s probably the other part of the market that we’ll see.

We are doing a lot of work with various customers, but we can’t really share the applications, because, in most cases that’s something they would like us to withhold from disclosing. .

Sure, now that’s helpful.

And just one follow-up from me, how much growth did you see in consumable volumes?.

Again, I don’t have, because, it’s a mix. And remember if I was talking about consumables, we are talking about the sand and our binder agents, our cleaner, our replacement parts. There is a number of different things. So, I can’t – again, because there is our mix matter and because those are a lot of different parts.

So I don’t have that exact number for you. But I can tell you that, as we sell more machines, we will see increased volume of those consumables and again, that increased volume has to offset the efforts we are making to make that more efficient for our customers.

It’s all cost equation and so the more efficient we can make our machine, we believe that will drive more adoption of the products. So we think, it’s all good, but it doesn’t impact that top-line. And we are not looking to give up margin in those. .

So, thank you guys..

At least from a percentage basis, okay, obviously the numbers, the gross numbers will flow..

Yes, now that’s great. Thank you..

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

All right, well, thank you again for the participation this morning. I want to let you know that I am certainly proud to have the opportunity to lead what I think is an outstanding team here at ExOne. And you can all know that this team is committed to advancing our innovation and creating value for our customers, our employees and our shareholders.

So, thank you again. Good day..

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