Karen Howard - IR Jim McCarley - CEO Brian Smith - CFO and Treasurer.

Chris Van Horn - FBR Capital Markets Jon DeCourcey - Canaccord Genuity.

Greetings, and welcome to The ExOne Company Second Quarter 2017 Financial Results Conference Call. 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. It is now my pleasure to introduce your host, Ms.

Karen Howard, Investor Relations for The ExOne Company. Thank you, Ms. Howard, you may begin..

Thank you, Michelle, and good morning everyone. We appreciate your time today for our second quarter and first half-year 2017 financial results conference call. Referring to our slide deck, as slide two, 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 Web site at www.ExOne.com. The slides that will accompany our discussion today are also posted on the Web site. On Slide 3 is our Safe Harbor statement.

As you may be aware, we may 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 from where we are today.

These risks and uncertainties and other factors are provided in the earnings release, as well as in other documents filed by the Company with the Securities and Exchange Commission. These documents can be found on our Web site 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. Jim will get started and summarize the progress in investment we've been making through the second quarter. Brian will go through the detailed review of the financial results.

And then, we'll turn it back to Jim 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, Jim..

Thank you, Karen, and good morning everyone. Let's start with slide five, and begin with a high-level overview of the second quarter. Our second quarter can be summarized with two words, progress and investment.

Although there were several initiatives to enhance ExOne's products that began before Q2, this quarter has resulted in several key advancements that I believe will be transformational to ExOne in the future.

First, revenue for the second quarter was lower than some expectations, at $10.8 million, and just slightly lower than the first quarter of 2017. However, I think it's important to note this is the first time ExOne delivered two consecutive first and second quarters at revenues greater than $10 million.

We also make good progress in growing our backlog and sales pipeline for both our direct and indirect printing equipment. In fact, we have already sold or booked for sale in 2017 more machine revenue than we'd sold in all of 2016. This is obviously encouraging, and we believe supports our guidance.

Second, from a technology standpoint we have invested significantly in both our direct and indirect products. This has been in the form of hiring key talent that strengthens our team, accelerates our development timelines, and creates an environment of innovative [banking] [ph].

We're also engaging engineering services to help us streamline the advancement on our machine capabilities and functionality. Third, during the second quarter we made broad and meaningful progress evaluating our entire product line, and in particular our Exerial, and S-Max, and Innovent platforms.

This evaluation was based on customer input and data surrounding our equipments' operating performance in the field. We coupled these inputs with excellent design ideas, and created a technical roadmap for all of our direct and indirect printers.

These initiatives have energized our product development, and we are confident that they will enable ExOne to better serve existing customers, open new addressable markets, and accelerate the adoption rate of our technologies. Finally, the ExOne team completed many actions associated with the restructuring activity started in Q1.

And converting cash generated from the sale of underperforming assets into meaningful technical improvement that should benefit our company well into the future. Moving to slide six, I want to provide some additional clarity on the Exerial product line. ExOne introduced Exerial into the market in 2015.

Since that introduction, we have sold this equipment to Asian and European markets, and to multiple customers. Each machine was sold as a beta machine, and therefore provided leading edge technology to our customers and a robust learning opportunity for ExOne.

This experience, along with customer feedback has provided valuable insight into how Exerial technology performs, and has allowed us to gain critical reliability and repeatability feedback.

Most importantly, it has helped us learn how we can leverage this technology into existing design that drive the performance of both our direct and indirect printers.

Although the Exerial research and development has had a negative impact on ExOne since 2015, and is in fact the source of a significant write-off in this quarter, this experience has improved our core printer functions.

I'm confident the work our team has done developing this core technology as well as the operational know-how our team has gained will be game-changing when applied to all of the platforms. Switching gears now and moving on to slide seven, I want to talk about what we see happening in the broader Binder Jet printing market.

As many of you may recall, last quarter, we spent some time discussing how ExOne's Binder Jet technology compared with the competition. And my competition I mean other non-binder jetting additive technologies. The answer was binder jetting holds advantages in cost, print speed, and the number of process variables that you have to manage.

This slide is intended to illustrate how binder jetting stacks up to the other technologies from a material application standpoint.

As you can see, binder jetting has the highest number of material applications, five out six traditional material systems can be produced with Binder Jet printing, while the next closest technology is capable of only two of six. Additionally Binder Jet printing is presently the only technology that is capable of printing matrix material combination.

It is clear to us when thinking about all printing technologies; Binder Jet technology demonstrates excellent long-term viability from the standpoint of material type, print speed, process simplicity, and cost. It is these capabilities that the attracting both customers and other players into ExOne's technology space.

To that point, there's been a lot of new lately about new entrant competitors, and we are grateful for the renewed interest and conversation they have brought to Binder Jet printing. Slide eight shows how ExOne view our position relative to new entrants into the non-plastic binder jetting space.

Although not comprehensive, this chart shows the various elements of what we believe are essential skills, knowledge, or services that are needed to provide proper support to customers in this market space. We have varied the shading beside each category to help illustrate our present abilities in each of these areas.

In terms of these skills, we believe we stand alone in both printer capability and printing experience.

Although we recognize that there is more work to do, we believe our experience working with a diverse set of customers and supporting or making a wide range of products from various materials, coupled with accelerated printer development positions our team well against any well-funded by limited field experienced competitor.

Switching gears again, please turn to slide nine. This chart is a simple set of views of our customer base. Each customer counted in this chart represents a customer that either purchased ExOne printers or has an active purchase order in our system waiting for delivery of equipment. Here are some key items I believe are significant.

As of today, ExOne holds or expects to sell or sold or expects to sell over 210 machines to customers across the world. There are 36 customers in 2017, who have bought or will buy more than one machine. And almost half of those will buy three or more.

And finally, we have experienced strong double-digit growth in overall customers between 2015 and 2017. This type of growth in our customer base, and particularly in multi-machine purchases gives us confidence that long-term sustained growth greater than 25% is a realistic expectation for ExOne.

Finally, before I turn it over to Brian to update you on the details of our second quarter, I want to say a few things about our financial performance in the first half of this year. I am keenly aware of the importance of achieving financial results that demonstrate progress towards profitability.

Q1 and Q2 were negatively impacted by lower gross margins and increases in R&D and SG&A costs, which Brian will explain a little later. Likewise, Q3 will be impacted by these same types of investments as well as lower machine margins from Exerial beta machine sales that have completed or will complete in the third quarter.

However, we do believe the third quarter marks the end to heavy investments in the Exerial development.

Although we will continue to invest in our technology and organizational improvements going forward, the fourth quarter is expected to define a turning point in our product line profitability, I remain very confident that ExOne is moving in the right direction technically and financially.

That said, as we look into the second half of the year provided revenue growth comes in as plan, we expect our financial performance on a run rate basis to be much improved in the fourth quarter and as we move into 2018. Now with that, I'll turn it over to Brian..

Thanks, Jim, good morning everyone. If you could please turn to Slide 11, we'll start with our revenue. As Jim said, revenue was down 8% to $10.8 million in Q2 '17 compared with Q2 '16. I want to point out that last year's quarter had about $800,000 of revenue from product lines.

We have exited including our laser inventory which I talked to you about in our last year's second quarter call and our specialty machining product line that we sold in early Q2. So, on a same-store basis, our revenue was slightly down from last year, our non-machine revenue contributed 61% while machine was 39% in this year's quarter.

On a Trailing 12 or TTM basis, our revenue was up 9% over the year ago to $49 million. Now can we turn to slide 12? Here you'll see shipments and revenue recorded in units by machine type for the first two quarters and year-to-date '17, nine machine units were shipped in second quarter '17 with 18 shipped for the first half of the year.

We recorded eight machines in revenue this quarter, 13 during the first half year, you can see that our machine shipments of direct putting machines was higher in this quarter, the two M-Flex is shipped in the quarter and included in revenue went to one customer and represent the second and third machines for that customer.

Machines are to be used for production purposes for a specific industrial application, units we sold into both the research and in the university applications, we also shipped three S-Max units and one S-Max+ in the quarter and one of the S-Max units was reported in revenue.

Additionally, one unit that was in transit from shipping in Q1 was included in revenue in the quarter, if you remember our third quarter call last year, we mentioned we had received an order from a customer in Q3 for three S-Max units, one of those three was shipped in Q1 and recorded revenue this quarter, the other two units have been shipped in the last couple of weeks.

At June 30, there are nine of our indirect units that were shipped and are in transit or in the process of being installed and accepted by our customers and therefore not yet recorded in revenue.

The first half machine shipments in revenue is evidence of what we have been saying in the past quarters, there continues to be variability in certain instances that will result in lags between shipment and revenue recognition, these happen for a number of reasons including contract terms, performance obligations or overseas shipments just to name a few of them.

In addition as you know, our mix of machines can vary considerably from quarter-to-quarter, this quarter had more of our lower priced direct printing machines. Now please turn to Slide 13.

We finished the quarter reaching a record level backlog of $26.3 million up 12% sequentially from $23.5 million at March 31 and up 34% or $6.6 million from the year end '16.

You can also see this steady growth of the year-end backlog levels since 2013, just to remind you backlog includes firm orders received from our machines and non-machine customers that have not been shipped or that are goods in transit as well as machines which have been shipped to our customer sites that are in some stage of installation, commissioning and acceptance including those nine machines I mentioned earlier.

Backlog also includes firm orders for contractual services like our missile defense agency contract, our machine service contracts, operating and operating leases that are non-cancelable; the largest portion in fact greater than 75% of our backlog is for our machines and represents customers in a variety of industries including automotive, heavy equipment, filtering, tooling, aviation, education energy and for the first time in a while the healthcare industry where we expect to deliver machine in the second half of 2017.

On slide 14, you can see that our second quarter machine sales were down 10% to $4.3 million. However, if we have reached settlement on the four Exerial machines a day earlier, our quarterly machine revenue would have been up 48% from the prior year.

One word of caution about those Exerial sales that will be recognized in the third quarter however is that they have been as we've said before they were baby units and those sales have no margin associated with them accordingly they will pressure third quarter 2017 gross margin percentages.

Referring to the TTM revenue chart on the right you can see that the machine revenue was up 19% to $22.5 million over the prior year second quarter TTM emphasizing our growing momentum with machine sales. Now let's turn to slide 15. Non-machine revenue was $6.5 million in the second quarter of 2017 and $26.8 million in the second quarter TTMs.

On a same store basis after eliminating the product lines mentioned about that we have exceed. It was up 5% over the 2016 second quarter and up 6% over the TTM period. Starting to slide 16, we'll talk about gross profit margin.

As we are taking significant actions to realign our organization and businesses are 2017 cost to-date include charges from those actions. The most significant in the quarter is a $1.5 million charge for absolute inventory.

As Jim mentioned, we redesigned certain areas of our Exerial machines a result of what we learned from ongoing production for usage as well as customer use and feedback.

Completion of this quarter redesign in the second quarter led us to an effort to identify components in inventory that will not be used going forward and record them as a charge to cost of goods sold. Gaining such knowledge from product use and our customers use is a valuable part of our product advancement evolution.

Helping us to further advance our technology, in addition to using the changes in our Exerial design we indented incorporate some of these redesign into our other machine platforms in the future. The 2017 second quarter gross profit benefited from a 347,000 gain on the sale of our Las Vegas building.

We are pleased that our restructuring efforts for the two facilities that we are announced in the first quarter were completed with the sale of those facilities early in the second quarter.

It is worth noting also that the 2016 second quarter gross profit benefited by approximately 500,000 from a sale associated with our exited laser product line and those costs have been fully reserved in a prior period and impacted gross profit by 500,000.

The amount was partially offset by about 200,000 of losses on disposal of property equipment when we eliminated our Auburn facility in June of 2016. These factors as well as other charges associated with restructuring activities discussed in prior quarters also impacted the TTM comparison.

We believe the changes that we have undertaken will benefit us going forward from lower period cost from our facilities helping us with operating leverage in future periods. Now if you please turn to slide 17, we will discuss SG&A. Compared to the second quarter of 2017 to 2016 our SG&A expenses were up above $1.3 million.

The increase is driven by investments we're making in our organization in particular our commercial team external support to drive adoption of our technology globally. Happen in legal costs as well as external systems with our supply chain efforts related principally to our consumable and spare part products.

In addition impacting comparability, we had a net change in bad debt of almost 300,000 between Q2 '16 and Q2 '17 driven by bad debt recovery of $275 offsetting our SG&A cost in the 2016 second quarter that we had mentioned you last year. The 2017 TTM period also includes several items that we discussed last quarter.

Including 269,000 for a non-cash intangible asset right off associated with one of our product lines we excited. And 250,000 of incremental non-cash stock comp related principally to some of our new hires.

As we think about future periods we likely will remain at the current run rate in terms of cash expenses but will leverage those costs better as we grow our sales. On slide 18 we also increased our investment in R&D this quarter reflecting about $400,000 increase over the prior year quarter.

Investments we're on our internal talent as well as external resources engaged in machine advancement as with the SG&A we expect this cash run rate to continue as we reinvest into improvements for a Binder Jetting technology in printing machines however we do expect better leverage of these costs going forward.

Now let's turn to slide 19 and review of CapEx. Our second quarter cash spending continues to be very modest about 100,000 of cash, resulting at about $400,000 for the first half of 2017. The non-cash portion, just to remind you, pertains to transfers of machines from inventory into PPNE for our own use or for leases for our customers.

If we turn to slide 20, this is the waterfall of our first-half 2017 cash flows. I mentioned cash CapEx already. Our ongoing working capital initiatives held us relatively steady year-to-date. We have been investing in our inventory of new machines to meet the demand expected in the second half of the year.

This investment has been offset with deposits of cash associated with new machine orders, and I am very proud of our team for our efforts around AR, keeping a very high percentage in current AR. The Property & Equipment sales transactions, I mentioned a moment ago, that were completed in the quarter provided us around $3.7 million of cash.

Our net loss net of non-cash and other items used about $6.5 million of cash in the first half of 2017. We ended the ended the quarter with $25.2 million in total cash, reflecting a net $3 million usage of cash in the first half of 2017.

If you'll turn to slide 21, you'll see our total cash, and you'll continue to see that we virtually have no debt on our balance sheet. So with that, I'll turn it back to Jim..

Thanks, Brian. Let's turn to slide 23. As you see on this slide, we have made some adjustments. Although we remain confident in our project pipeline and our markets' expanding level of adoption, we do believe it's appropriate to revise our overall revenue growth rate to a range between 20% and 25%.

We are also providing more clarity on our expected ending cash position. Our basis for this update stems from the better visibility we have to the full year, and the prospects we see for modest changes in customer purchasing timeframes for readiness.

However, our outlook remains unchanged on other expectations of operating leverage and positive adjusted EBITDA by year-end. So with that, let's open up the line for questions and answers..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris Van Horn with FBR Capital Markets. Please proceed with your question..

Good morning. Thanks for taking my call..

Good morning..

Good morning, Chris..

Just a question on the shift in guidance, and I think you gave some clarity here, I just want to confirm. But it sounds like it might just be around timing of shipments or timing of customer orders.

I just was curious, is it kind of one or two orders, or are you seeing it from multiple customers or multiple machine orders?.

Hi, Chris, this is Jim. Yes, the good news is we've got a pretty healthy pipeline. And really it's just some shifting that we're seeing across several customers. If it was just one or two we probably would have that already inside of how we would normally try to communicate things. But we're just seeing a number of really good activity out there.

But as the general rule, these timings become more clear as you get closer and closer to the end of the year, and we're just trying to make people aware of some modest changes we see..

Okay, great..

I still think [80%] [ph] growth is a pretty strong number. So we feel pretty good about where even out guidance is now..

Absolutely. And then some other folks in the additive manufacturing space have talked about some weakness they've seen in Asia.

And I just was curious if you could comment what you're seeing, and any color commentary there?.

Yes, I'll tell you we're not seeing any weakness relative to our baseline activity there. That's a real opportunity market for us still. So we're not seeing any real softening in that regard.

So from -- whatever it is on the -- on whether it's the metal side or our indirect printing side, we still seem to have a pretty strong baseline there that we're working against..

Okay, got it. And then it seems like you're multiple machines for existing customers. And I just was wondering if you could provide a little more color there in that what's brining the customer back.

Is it their shifting to using more machines for more products or are they moving into more production based concepts? I'm just curious, because you're getting a lot of good traction with your existing customers..

Yes, well we're getting good traction because our equipment is doing what they needed to do, that's one thing. But the answer, and I'm not going to be -- I'll be a little bit more straight, it really is yes and yes to both of the two scenarios.

In one case, we have a very clear sign from a customer who's looking to move an entire product line into mass production around our equipment. And so we're seeing the front end of that. And the front end being they've gone from one to three. And we have visibility to a number that's much higher than three going forward, if -- as this thing expands.

And that's the case where a very clearly sign where a customer is working a higher number of machines because they're building out a serialized production on a product line.

In a number of other places what we're seeing is there's -- the customers are coming back for more machines because they're expanding what type of product that they're working with next. Now those are a few less people there because that's a little higher R&D investment on their part getting in to the new materials.

But we're seeing customers come back because they're shifting to sort of a second product, if you will, from a vision on one. So, from our standpoint there's some authentic underpinnings of some strong pull that we're seeing. And the multi-machine order I think is probably our most significant data point to see if we're moving in the right direction..

Okay, great. And then one last one for me, and slide seven is certainly very helpful, but the question around competition and the effect on pricing, et cetera. It seems like that trend is really ramping in the plastic side of things.

But I was curious if you're seeing it in other places as well?.

I would tell you, look at that chart, look how many different technologies apply to the plastics, first off. So that's a competitive element. And then look at the rest of the chart. I mean, I think there's less of that going on in the places that we see than what's happening on the plastic side.

Chris, the real key for us is matching the materials to the application to our equipment, and making those three things all come together. That's really the market driver for us. And that's really going to be the market driver for anybody that's trying to be in this space.

They've got to be able to take the application, the material, and the machine, and make those three things work together. And that's why we're still bullish about our position in the market place relative to that..

Okay, great. Thanks for the time..

Thank you..

Thanks, Chris..

Thank you. [Operator Instructions] Our next question comes from the line of Bobby Burleson with Canaccord Genuity. Please proceed with your question..

Hi, guys. This is Jon DeCourcey on for Bobby. Just two questions regarding Exerial now that you're exiting the beta phase for the machine. First, if you could just give any more color on kind of the scale of the gross margin drag, kind of just where would that be relative to normalized margins for the third quarter, that would be great.

And then the other question is just, now that you're beyond the beta phase, what type of sales do you anticipate in the upcoming quarters, and even into next year? And how are leads on that front?.

This is Brian. Let me cover the margin question..

Sure..

So that revenue, as we disclosed, $2.8 million. If you think of a normalized margin, and normalized probably varies. I'll give you a wide range, probably 40% to 60%. So you're looking at relatively zero.

And so that's probably about -- if I would look at a $1.4 million kind of drag, and then you take the volume in the third quarter, you take a percentage of that, and you'll probably get pretty close to what drag that'll create. We have one other Exerial machine that we are expecting in the quarter.

And we are expecting to get that here in the third quarter.

And that one also is a beta machine, and we will have a relatively low quarter, but I can't get into a lot of specifics, or lower margin, I can't get into a lot of specifics on that one because we haven't disclosed the same type of thing, but it's a similar type scenario with little higher pricing..

Okay..

Yes. And Jon, to answer your second question, this is Jim; in terms of Exerial, we have got some other interested parties out there that are interested in the Exerial machine. We do not have, as we said right now, we are not in an active phase of negotiation or complete workout of what that machine would look like.

One of the things that I think we've learned from this beta process is there is a customization element on this Exerial application. The applications that arrive for Exerial have a certain level of customization.

So, the fact is on the machine going forward in terms of the buy cycle, they got to be much different than what we have seen in the past from like our S-Max. It's frightening to say there is not a standard design Exerial as we look at things today. So there is Exerial product line, but it's going to have some element of customization.

So that's how we are going to see that from a selling function going forward..

Okay, great. Thank you guys very much..

Thank you..

Okay. Thanks a lot..

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks..

Okay. Well, thank you everyone. We appreciate your time today. And we look forward to updating you again in November. So, have a good day. Bye-bye..

Thank you..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..