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

Chris Van Horn - B. Riley FBR Bobby Burleson - Canaccord Genuity Greetings, and welcome to the ExOne Company Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Karen Howard, Investor Relations for The ExOne Company. Thank you. You may begin..

Thank you, Melisa, and good morning everyone. We appreciate your time today for our third quarter and year-to-date 2017 financial results conference call. Referring to our slide deck, as noted on 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 three is our Safe Harbor statement.

As you may be aware, we will make some forward-looking statements during this presentation, and may also during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ from where we are today.

These risks and uncertainties and other factors are provided in the earnings release, as well as 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 with a brief operational update and reaffirmation of our expectations for 2017. 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 and development roadmap 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. I want to begin today by reaffirming our 2017 guidance. As you see on this slide, we continue to expect our team to achieve 20% to 25% sales growth in 2017 versus 2016. We also expect to see operating leverage in Q4 that should result in positive adjusted EBITDA.

And finally, we expect our year-end cash balance to exceed $20 million. Let’s turn now to page six. Operationally, we’re on track to meet our internal development goals for improving our machine technology, particularly our ability to spread fine powder. We continue to expand on material offerings for both our direct and indirect machines.

And most importantly, we continue to cultivate repeat customers that purchase multiple machine platforms using this equipment for industrial applications. Shifting now, let’s talk about our actual Q3 results. Here are some of the accomplishments. First, we continue to see positive momentum in our M-Flex and S-Max printing systems.

A particular note is the number of customers that have come back to ExOne for repeat systems. We also saw in Q4 the conversion of an exterior machine lease to a machine sale. Second, our Innovent platform was successfully upgraded so that we can now offer a fine powder dispensing system and standard equipment.

We will begin accepting orders in January of 2018 for that unit. We will continue to rollout additional fine powder materials, such as our 17-4 Stainless Steel material that’s available for sale in our production centers and expect to continue to expand that product offering.

As with the M-Flex and S-Max platforms, we continue to see good market support for our Innovent machines as both shipments and new orders continue to grow in the third quarter. Third, our focus on strategic technology advancements continues to accelerate.

Month-by-month, our teams have expanded their understanding of how to capitalize on the virtues of Binder Jet printing. Our long-term success depends on how quickly we leverage our knowhow and experience into usable technology and products for our customers.

Finally, Q4 has started strong with machine orders that provide good support for both our Q4 revenue plan and our year-end backlog. Now, I’ll turn it over to Brian who will talk about some of our Q3 financial results..

Thanks, Jim, good morning everyone. If you could please turn to slide eight, we’ll start with revenue. Revenue was up 22% to $15.9 million in Q3 ’17 compared to ’16. I want to point out that last year’s quarter had about $400,000 of revenue from a product line we had exited, our specialty machining products line that we sold in Q2.

Absent that revenue, our revenue increased 26% compared with last year. With the strong growth in machine revenue, our machine revenue contributed more than half or about 54% of revenue in the quarter. Year-to-date, our revenue was up 13% over the year ago period to $37.6 million. Again, when adjusted for the exited product lines, revenue was up 18%.

Now, if we could turn to slide nine. Here you’ll see shipments and revenue recorded in units by machine type for the first three quarters and year-to-date ’17. We recorded 12 machines in revenue this quarter, 25 during the first nine months of ’17. 14 of the 25 machines sold year-to-date were indirect machines.

Of the machine sales in the quarter, nine were to repeat machine customers and three were to customers without any prior machine purchases. We have recognized the four Exerial machines we discussed last quarter as revenue in Q3. For the other indirect machines, we shift two S-Max units and recognized one.

We recognized revenue on one S-Max plus and two S-Print units, and we leased an S-Print to a customer who already operates multiple machines of ours. On the direct machines, we shift and recognize two M-Flex units and two Innovent units. These machines went to research and healthcare industry customers.

At September 30th, there are four of our indirect machines that were shipped and are in transit or are in the process of being installed and accepted by our customers and therefore, yet to be recorded in revenue. There continues to be variability in certain instances that will result in lags between shipment and revenue recognition.

These can happen for a number of reasons, including contract terms, performance obligations or oversea shipments. Having said that, we have told you before that we have targeted efforts to reduce the overall time to convert a PO to recorded revenue transaction.

We believe we are making good progress in this area, driven by the investments we have made in our commercial team and changes in processes, particularly around customer management, supply chain and contract terms review, all of which is facilitated by the enabling properties associated with our expanded use of sales force.

Now, if you could turn to slide 10. We finished the quarter with a backlog of $20.9 million, up 6% from year-end ’16 and down 20% sequentially. I mentioned in the previous calls that four of our arterial machines recognized in this quarter have been in backlog the past few years.

These machines, as well as the timing of customer orders, impacted our current quarter-end backlog.

I want to point out, as Jim mentioned subsequent to the end of the quarter and through November 9th, we received machine purchase orders or are in final negotiations with new and repeat customers for approximately $8.9 million in future machine sales, spread across our machine platforms.

Along with our efforts to reduce the PO to revenue timeframe, some of these machines, as well some machines in our September 30 backlog will be recognized revenue in ’17 with the remainder expected to be recorded in ’18. These new orders include the purchase of an exterior machine off of a lease that we currently expect to recognize in Q4.

To remind you, backlog includes firm orders received from our machine and non-machine customers that have not been shipped or goods in transit, including the four units in transit that I’ve mentioned earlier; as well as machines that are in some form of installation or commission and acceptance; and our machine service contracts, as well as operating leases that are non-cancellable.

Backlog also includes orders from our contractual services or orders for other contractual services, like our missile defense agency contract for which funding for another year was just approved in September.

On slide 11, you can see that our third quarter machine sales were up 32% to $8.6 million compared with 16 -- third quarter there was one more machine sold in the ’17 third quarter.

In addition, there were two more indirect machines sold in this quarter versus ’16, resulting in a more favorable product mix as indirect printers generally bear a higher average selling price than direct printers.

Referring to the year-to-date revenue chart on the right side of the slide, you can see that machine revenue was up 27% to $17.1 million over the prior year period. Now, let’s turn to slide 12. Non-machine revenue was $7.3 million in the third quarter of 2017 and $20.5 million year-to-date.

The revenue percentage growth in the third quarter reached double digits, driven by sales increases in our direct metal PSC, principally for industrial parts, as well as service and other component part revenue for the growing install base of our machines.

On a comparable basis, after eliminating the revenue for product lines that we have exited, it was up 21% over the 2016 third period and up 11% over the 2016 year-to-date period. Turning to slide 13, we’ll talk about gross profit margin. Gross profit was $4.1 million, resulting in 25.8% gross profit for the third quarter.

This quarter was impacted by the $2.8 million of revenue recorded on the four Exerial machines, which yielded a breakeven margin, which we talked about last quarter. Absent that revenue and associated cost, the margin will be much closer to what we would expect at this sales volume.

As we discussed in prior quarters, the year-to-date gross profit and margin were impacted by significant actions we took to realign our organization and businesses for the year. In prior quarters, we called out individual net amounts totaling about $1.9 million for asset write-downs net of a gain on the sale of our Las Vegas facility.

Please turn to slide 14, and we’ll discuss SG&A. Comparing the third quarter of ’17 to ’16, our SG&A expenses were up about $0.9 million. The increase was driven by investments we’re making in our organization, in particular, our commercial team and external support to drive adoption of our technology globally, in particular, patent and legal cost.

Additionally, we incurred about $0.5 million of one-time employee separation costs during the quarter that we are not expected to recur. As we think about future periods, we will likely remain at the current run rate in terms of cash expenses, but we will leverage those costs better as we grow our sales.

Additionally, we will see some quarterly movement as typically both Q4 and Q1 are impacted by higher year-end costs and Q4 this year will be impacted by higher sales commissions with the expected higher sales volumes.

On slide 15, you can see that we increased our investments in R&D this quarter, reflecting about $1 million increase over the prior year quarter. Investments were on our internal talent, as well as external resources engaged in machine and materials developments that Jim has mentioned.

As with the SG&A costs, we expect this cash run rate to continue as we reinvest into improvements for our Binder Jetting technology and printing machines. However, we expect to leverage these costs to drive revenue, going forward. Now, let’s turn to slide 16 and review CapEx.

Our third quarter cash spending continues to be very modest, about $0.2 million of cash, resulting in slightly less than $1 million for the nine months of 2017. The non-cash portion of CapEx, just to remind you, pertains to transfers of machines from inventory into PP&E for our own use or for customer leases.

If we turn to slide 17, this is a waterfall of our first nine months 2017 cash flows. I mentioned cash CapEx already. Additionally, we had working capital outflows of about $3.4 million year-to-date, driven by inventory build of machines needed to meet the expected Q4 sales, as well as the timing of receipts from customers.

The property and equipment sales transactions that were completed in second quarter provided us around $3.7 million of cash. Our net loss, net of non-cash and other items, used about $8.8 million of cash in the nine month period ‘17. We ended the quarter with $18.8 million in total cash.

We continue to expect greater than $20 million of cash at year-end, driven by the positive adjusted EBITDA expected in Q4. If you’ll turn to slide 18, you’ll see that we have virtually no debt on our balance sheet. That concludes my prepared comments, and I’ll turn it back to Jim..

Thanks, Brian. As we reflect on the past nine months of 2015, we are confident that good work has been done to advance adoption of our technology.

We are equally confident that over the past -- that as we move past 2017 and set our site on 2018 and beyond, ExOne can achieve rapid technology development and a consistent acceleration of new product capabilities and product offerings. Now with that said, let’s turn to page 20.

Let’s switch gears and talk about where ExOne is headed between now and 2020. We continue to see our overall 3D market space in excess of $21 billion by 2020. At ExOne, we believe our focus on industrial applications sets us up well to have access to this huge market. The question is how can we best exploit this market.

In order to answer that, please turn to slide 21. And let me provide you with a view into how our printers are used in the market. At the end of the day, 3D Binder Jet printing has a very logical break in marketplace, based on particle size of the material we print. This particle size is greater than 20 microns we consider this to be coarse powder.

Presently, ExOne’s largest marketplaces are in the coarse powder application; notably, our sand and molten core businesses, our infiltrated metal matrix tooling component and filter material. As of today, it is our belief that ExOne is the market leader in coarse powder printing with binder jetting technology.

Now, let’s talk about materials and particle sizes less than 20 microns. We consider this fine powder and this constitutes the marketplaces of metal injection moulding, investment casting and other traditional powder metallurgical products.

I should note here that it is the fine powder 3D market that many of the new entrants are focusing their efforts on. And based on some of the recent data they have shared with the market, they also see this as a very large place for 3D printing equipment.

Although, ExOne does not have the same level of penetration in the fine powder binder jet printing markets as we do in the coarse powder market, it's important to note that our Innovent machine is one of the few commercially available machines and has the highest install base of any fine powder binder jet printing machine.

ExOne is certainly a market leader in printing products, in both coarse and fine powders and our goal is to maintain that leadership position. Now, let’s turn to page 22 and let’s discuss what our team sees as ExOne’s machine market potential in 2020.

The data reflects the output of a reoccurring meeting where our team gets together and they look through a number of things. They look into the future and develop a machine market pipeline. This data relies on customer input, future technology roadmaps and intelligence our commercial team harvest from the marketplace.

As you can see, we believe that as of today, this is approximately $200 million market potential for coarse and fine printing machines in 2020. The first graph on the left side of the page is broken down by market segment. We are using the same market segment breakdowns as we have used in the past for our direct and indirect printing adoption charts.

This breakdown shows that oil and gas, general industry, automotive, aerospace and metal injection moulding are the primary market segments in both coarse and fine powders that have the highest growth potential for Xone. Looking at the graph on the right, you can see that there is nearly an even split between coarse and fine powders.

Given our market leading and almost exclusive position in coarse powder printing, we believe our ability to capture this future coarse powder market opportunity is very high.

Correspondingly, with such a high potential in the fine powder area and the expected improvements we are planning to roll out in our printing equipment, we believe we are uniquely positioned to capture a significant amount of this market opportunity.

Although, other entrants are targeting this fine powder market, we believe their efforts to produce products into this market will actually expand the materials and applications that can utilize ExOne’s technology.

But more important than the existence of this market or the potential threats from others in this market is the need for ExOne to accelerate our development of fine powder printing machines and fine powder production process. That leaves me next to slide 23.

Please note we are using this slide to help bridge the relationship between our indirect and direct printing equipment, the associated powder types that each can print today or will print in the future, the basic price range for the platform and finally, a summary of the development plans and relative investment ExOne expects to make in these machines during 2018.

In reviewing this table, you can see that today we are officially designating the Innovent machine as our first fine powder platform.

Although, we have offered the ability to print materials less than 20 microns on specially designed machines, we are now offering the Innovent as a configurable machine with fine powder as a default configuration and coarse powder printing as an option.

This may seem like a modest change, but it is the success we’ve made in developing this fine powder printing system that will enable us to rapidly extend fine powder printing capabilities to our M-Flex and M-Print machines.

Finally, in order to round out the 2018 development plans, we will continue to invest in our coarse powder printing systems but shift the focus from machine technology advancements to a more industrialized machine system that can improve operating costs for our customers and increase their productivity, as well as creating a wider range of material and binder applications.

Now, let’s wrap-up our outlook with slide 24. I am pleased to announce our primary 2018 printer development program. Based on strong customer interest and feedback received on the performance of our other metal printing systems, we have launched development of the next generation M-Print system.

Specifically, the ExOne company will commercialize a large format metal binder jet printing capable of producing components that meet stringent end used applications and technically demanding engineering specifications across diverse industry segments.

This project will allow ExOne to leverage functionality from our M-Flex and M-Print machine platform technologies into a new fine powder machine. We trust the underlying technology that we have deployed and our ability to engineering it, and are confident that we can deliver this machine successfully in 2018.

And with that, let’s open the lines up for questions..

Thank you. At this time, I’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Chris Van Horn with B. Riley FBR. Please proceed with your question..

I was hoping, you could just give us some perspective on the pipeline heading into 2018. And you gave us a lot of detail on 4Q.

But I’m just curious, when you look out to 2018, what the pipeline looks like and the opportunity set you have there?.

Well, Chris, give me a little bit more clarity when you say the pipeline. Are you asking me what markets that we see our products going into, what kind of machine platforms are leading it? I want to make sure I give you a good answer. So give me a little more clarity what kind of color you’re looking for..

Yes, sure. And actually my follow-on question was what your end-market mix or maybe even your regional mix was for the quarter and where you see that, going forward.

So I guess, generally speaking, when you look out into the future, is there an end market you’re really excited about? Is there a region that you’re really excited about that you’re seeing success in? And I’m sure you’ve got some sales pipeline of like certain machines or certain end markets again that you want to address that you’re seeing a lot of good traction in?.

So I can start-off by saying, we still see a lot of good traction in our molten core business around our sand printing. That’s a workhorse -- that will be a workhorse in 2018. We see some opportunities expanding in North America relative to what we’ve seen in the past.

We’ve also expect to see some good growth in that business in China as we move into 2018. And we’re going to see -- start to break into some markets, expect some additional work in India, as an example. I know that we’ve got some stuff on the docket for that.

But I would say that if we talked about that particular element, there is a pretty robust opportunity in North America and China on the molten core sand printing side. On the metal printing side, a lot more North American focused that anything else, really across a number of diverse industrial -- I’m going to call it, broadly industrial.

But that would include some automotive interest. We’ve got some people in here interested on the automotive side. And in particular, things that feed into small batch opportunities continue to look like opportunities out there.

So I’ll say the last part is we feel like we had a really good success in the university and research area, getting the Innovent machines rolled out. And we know that, that underpins long-term growth for us. So we expect to see some work or some good results getting some of those lab based machines, continue to see some growth there.

And then clearly we wouldn’t be rolling out some of these other platforms on the fine powder printing side if we didn’t expect that there is a market there. And we see some opportunities in North America for that machine in the near-term..

And then I got -- we have to ask how is the competitive marketplace looking? Is pricing getting competitive or are there a lot of -- there seem to be a lot of new entrants from a material standpoint.

Just some commentary on what you’re seeing out there competitively?.

So I’m going to talk about that in two halfs. If I talked about our coarse powders and that’s again -- the sand molten coarse infiltrated metal metrics products. The pricing pressure isn’t around competition, it's around getting a good return on investment for the customer.

So there isn’t -- we’re not going head-to-head with somebody and we’re racing to the bottom on price. That said, it isn’t set our price and we get it. You have to really match it up with a good rate of return and we really appreciate that fact.

And so most of the -- so we’re not at the same price level today that we were three years ago on some of that equipment. But it's because we recognize that the return on investment won’t be there if we don’t put that into the market at the right place. That carries over on the sand molten core and to the consumable market.

We know that a more cost effective approach there is necessary. And so we’ve seen serious price change on the consumable market in ’17. And as we go into ’18, I think that’s maybe where there’s some pricing pressures on the material piece. So that’s on the coarse powder printing side.

On the fine powder printing side, we’re really the only people out there doing anything in that space today with equipment. And there is -- we are very aware of and want to be in front of any technology that comes out of some of these new entrants. But it takes the process and a machine to make product in that space.

And I’m really focusing the team on let’s make sure we’re delivering both of those, because that’s really what is going to take to sell machines and the fine powder printing space is that machine and a process, not just a machine..

And then final from me, when we think about CapEx going forward, you’re obviously making investments on the R&D side. And I just was curious.

Do you see a lot of growth CapEx that you need going forward to expand these platforms?.

No, we really don’t. We’ll put some additional machines next year into some of our EACs. But we only see maintenance level of CapEx right now. We don’t see any significant growth in new facilities or anything else. So that will stay likely at the low level that it’s been here for the last year and half or so..

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

So just curious on the growth rate this year. It sounds like you guys are feeling good about hitting that 20% to 25%.

I’m wondering as you look out into 2018, whether or not you expect similar growth rates or for that to accelerate or how would you handicap things that’s -- under your momentum back?.

Yes. I think we’re right in the middle of our process of building out our 2018 plan. I think that we’re not changing our long-term growth powder. And if you look out at the opportunity that we presented for machine in 2020, we’ve got to have some pretty solid growth to be able to penetrate that market to a considerable amount.

So I wouldn’t see any diminution in that at this point in time from what we’ve said before. But more to come and we’ll rollout our ‘18 plan in our next call..

And then just in terms of this development program large format fine powder. You mentioned demanding product application.

Could you work with specific customers developing this? And are you working with customers developing this currently? And what applications really are you targeting here?.

Yes. So we’ve got non-disclosures in place around anything we do with customers across any matter. So I won’t be able to talk about end use -- that’s always. Everybody no matter who he talk to, doesn’t want to know -- who doesn’t want their end use disclosed for the most part. So I have side step that one.

But what I would say is this is absolutely based on customer feedback and it’s multiple customer feedback. It’s also what we know works and needs to be in the marketplace across a broad range of customers. But make no mistake about it. There is definitely some very specific specifications that we’re aware of that we’ll be working to with this.

So this is not a built-in enabled comp..

And 2018 launches, is it something you’d want to be around formnext or rapid, or its first half or second half that you’re thinking?.

That’s actually -- it’s going to be as rapidly as we can get it into the market and that’s really a work-in process at this point. It’s going to happen in 2018 that I’m confident of and it’s going to happen as soon as we can feel good about where the product is. I should try to make sure these things happen around some of those other events.

So we could get a media splash. But to tell you the truth, the demand for this is going to be so valuable. It’s really more important that we match-up with what we think the application needs are and deliver to that. So it's going to be as fast as we can get it into the marketplace. It will not happen in the first quarter.

I can at least tell you that it’s a mid-year to end of the year probably relative to what it rolls out..

And then I don’t know if I missed this, but your 2020 market mix that you guys came up with.

Where are you now in terms of market mix and which of these segments do you need to accelerate in order to -- if you’re going to look at all like this pie chart?.

So that pie chart pegs in both our coarse and fine powder. And so if I went into detail and look a little different but I can tell you the tooling, ceramics, mill injection moulding or growth ops for us to a big extent the automotive and aerospace as a growth op just because of their size.

And certainly we’ve got a pretty good position on our coarse powder and the automotive and the oil and gas piece. Opening that up to our fine powder printing is what we see as a growth op. But I will tell you that we are confident that improving our machine technology on our fine powder printing is a major underpinning for our growth in ‘20.

If we’re going to realize that $200 million there is $100 million of it out there approximately that fine powder machine opportunities. And today we really only have an Innovent and that’s not the machine that’s going to be feeding that type of market. So that’s one of the reasons we’re making clear what our machine technology focus is..

And then just lastly from me just asked in the competitive front, I know there’s some private companies making some noise. And it sounds like from your comments earlier that you don’t really see machine out there shipping at machine and materials. They don’t really see it as actual current competition.

I’m wondering just in terms of the GE roll up of the couple of companies, whether or not your customers are coming to you.

And wondering if they have better technology, but nevertheless, one thing a partner or supplier that’s not a competitor? Are you seeing any dynamics there where that’s helping you as agnostic potential supplier with some big industrial companies?.

I guess, I’d have to go back to the sales team that gives you a definite answer. That’s not been -- that’s not risen to the level of a conversation where somebody has been with us because they’re concerned about what GE is doing in the market.

I think GE’s commitment to 3D has really caused people to take a good look at it and say why aren’t we doing this. So it's actually been sort of the lead generator as opposed to somebody coming in seeing them as a competitive threat. So from where I stand, Bobby, I’m just not seeing it from that angle.

I’m really happy that GE is committed to the 3D spaces there are, I think that’s a good thing..

Actually to clarify, what I meant was customers of GE, companies they’ve rolled up might not be happy that GE is supplying them given that they compete with GE. So I am just wondering if you’re benefitting as someone that’s not a competitor, or that’s essential supplier, does that generate industry earnings in any way..

I don’t see that. At this point, I don’t think we’re seen something that correlates to that..

Thank you. Ladies and gentlemen, we have come to the end of our questions. I’ll turn the floor back to management for any final remarks..

Okay. Well, I appreciate everybody’s time today. We certainly look forward to being back with you at the beginning of the New Year. Hope everyone has a great holiday season, and we look forward to seeing again in 2018. Thank you..

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