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Q4 2020 Earnings Call Transcript

Published: 12 Mar 2021

[Operator:]

Greetings, and welcome to The ExOne Company's Fourth Quarter and Year-End 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce Monica Gould, Investor Relations for The ExOne Company. Thank you. You may begin.

[Monica Gould:]

Thank you, operator, and good morning, everyone. ExOne released results for the fourth quarter and full year 2020 ended December 31, 2020 yesterday after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investor.exone.com.

[John Hartner:]

Thank you, Monica. Good morning, everyone, and welcome to our fourth quarter and full-year 2020 earnings call. I am pleased to report a solid fourth quarter and full-year performance. We delivered total revenue of $17.4 million in the fourth quarter of 2020 and $59.3 million for the full-year, reflecting year-over-year growth of 11%, double-digit growth in a tough environment, while almost all of our industry peers recorded revenue declines. I really want to thank our team for their efforts towards this achievement. This is so important because based on my many years of experience in industrial technology markets, those that win in a downturn win bigger in a recovery. Winning in the recovery is our road ahead. This year, our revenue performance was driven by strong growth in industrial, government and defense end markets, as well as increased sales of our new metal printing systems. From a geographic perspective, revenue for the full-year was led by a 30% increase in the Americas region, reflecting the secular trend towards reshoring manufacturing and more distributed supply chains. This is a trend that should amplify in the future. Recurring revenue rose 10% sequentially and 11% year-over-year to $7.6 million in Q4, demonstrating success from our strategic initiatives in this area, particularly in new government research contract wins. For the full-year, recurring revenue rose 7% with nice increases in service contracts and consumable capture rates.

[Doug Zemba:]

Thanks John. Good morning everyone. We are pleased to have achieved double digit revenue growth in 2020, including topline growth of more than 20% in the second half of the year. Our execution is particularly impressive, given the disruptions caused by COVID-19 and as John mentioned considering the challenges that other additive manufacturing peers reported over the last year. This performance reflects the strength of our binder jetting solutions and the execution of our entire global team. We ended our fourth quarter with total revenue of $17.4 million which was at the high end of our pre-announced range of $17 million to $17.5 million in early February and compared to $17.5 million in the fourth quarter of 2019. For the full-year 2020, revenue increased 11% to $59.3 million from $53.3 million in 2019. While our total fourth quarter revenue was essentially flat on both a sequential quarter and year-over-year basis, we continue to be encouraged by the growth in our recurring revenue which grew 10% sequentially and 11% year-over-year to $7.6 million.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. . Our first question comes from the line of Noelle Dilts with Stifel. Please proceed with your questions.

[Noelle Dilts:]

Hi, guys, thank you for taking my question and congrats on a solid year in a tough environment. So for my first question, I was just hoping that you could give us a little bit more detail and some thoughts around how we should be thinking about the Rapidia partnership and how the revenue opportunity sort of ramps over the next five years? Thanks.

[John Hartner:]

Sure. Well, thanks, Noelle. We have a really exciting partnership with Rapidia, where we get into a new market segment, the bound metal segment. It's a fantastic on-ramp for customers who are interested in metal printing, but are not yet ready for high-volume production. This office-safe two-step process is one that is differentiated from our competitors and provides faster turnaround time, print today, parts tomorrow. So we see that starting this year. We expect shipments to start in Q2 and then ramp up from there. The market is a good-sized market and we anticipate it being a key part of our direct metal product portfolio.

[Noelle Dilts:]

Okay. And then second, I think you’ve also had some announcements about partnerships in terms of penetrating Asia a bit more. Could you speak to your thoughts around potential for geographic expansion and how that sort of influences how you are thinking about the multi-year growth opportunity? Thanks.

[John Hartner:]

Sure. Yes. As Doug said, we’ve been starting to invest more in our customer-facing resources recently over the last year and continue to do that in 2021 and beyond. So we’ve actually placed resources in geographies where we’ve not had coverage in the past. That's opened up a lot of new opportunities, which are just starting. And again, our sales cycle, these do take time. We expect to have more business in Asia-Pacific from this as well as expanded – more balanced business across all regions. I think it also includes showing the direct metal product line. We had certainly have a great market share in the sand indirect product line globally. But on the direct metal product line, this is something that is very widespread as far as the opportunity and needs better geographic coverage. So as we see our direct product line growing, we think that that is important to have the global footprint to be able to promote it and service those new customers who are looking for it, just like customers across the world, to localize supply chain, bring innovative new designs to parts that they’ve never been able to do before. So we are really excited about the geographic partners we have in these different regions and how we are seeing new opportunities that we never would have seen in the past.

[Noelle Dilts:]

Okay. Thanks. And then just my last question is a little bit more housekeeping related. But just given the gross margin pressures that are kind of here is about in the short-term, is there any way that you could kind of maybe break out some of the elements that are impacting the gross margins sort of parsing our how much of it is COVID-related, how much is related to the launch of the new machines and then I think there were some other kind of one-time sorts of factors? Is there a way to break that down in any more granularity? Thanks.

[Doug Zemba:]

Sure. This is Doug. Good morning. So on the 25Pro, from our perspective, you are looking at probably about three margin points related to lower returns in the near-term versus what you would see generally speaking on other systems related sales. Again, in the prepared remarks, we expect that likely to continue for the first-half and then dissipate in the second-half as we made a few changes internally and think that the next set of production models that we are going to make should bear better returns overall. On the warranty side, you are looking likely at about five points of margin that influence the fourth quarter relative to what we would normally expect sort of in a balanced equation where you are still supporting customers under those existing commitments. Now that warranty expense and experience is a little bit tilted toward the COVID environment. Obviously, the inefficiencies that exist have sort of permeated our business across our manufacturing operations as well as how we had to serve customers in the sort of second-half or last nine months of 2020. And the remainder relates to that broader pool of inefficiencies that's been created. A lot of excess work associated with getting machines prepared for the field, how you manage logistics surrounding that and sort of just other overhead and related charges and expenses that come through from time to time in managing through a difficult environment that we would sort of view as not necessarily a normalized feature of our business.

[Noelle Dilts:]

All right. Thank you. That's very helpful. I appreciate that.

[Operator:]

Thank you. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

[Brian Kinstlinger:]

Great. Thanks so much for taking my questions. In terms of the Ford and ExOne joint announcement, is Ford buying printers to prove out this new aluminum printing? Or are you printing parts for them? And then to be sure, you plan to both sell printers and print parts for customers based on this new patent?

[John Hartner:]

Hi, Brian. So yes, it's a great announcement and really our entry into 6061 aluminum parts. We’ve been working with Ford and Ford has had our machines for a number of years and we expect to continue to grow. And just like our business model shows, our production adoption model, we work with customers on adopting the binder jetting technology with engineering R&D contracts then we work to sell parts and then we move into selling machines. So it's a full approach and we continue to use that approach with this material, as well as other materials. So the automotive opportunities and many other lightweighting opportunities are there for us, both in parts and in machines.

[Brian Kinstlinger:]

And then you mentioned the challenges of the automotive industry as one of the factors of keeping system sales down. With that said, are you seeing inbound calls based on this announcement from prospective customers? Or is it too early for that? And if it is too early, take us through the process of time you expect it's going to take before you see the impact of this announcement on several industries?

[John Hartner:]

Great question. Yes. So I would say, overnight, we’ve seen a number of our boards light up and relevant to new leads, key customers talking to us. But as you said, the production adoption model and adopting binder jetting in volume type applications does take time. Those - that timeframe can be from six months to two years. And so we intend to work with a number of customers to continue to move 6061 into production applications for them over the course of the next two years.

[Brian Kinstlinger:]

Great. And then you talked about the increased investments you are going to make with the capital you have taken on. Can you just kind of prioritize in terms of new machines versus investments in furnaces or sintering? Where are your top priorities versus may be secondary?

[John Hartner:]

Yes. So I will get it started and maybe Doug can add some more. But I think we have a fantastic opportunity in front of us with binder jetting in production applications, particularly with new materials. So we are investing to make sure that we can expand the production adoption model. So that means engineering people. We have a number of new material science Ph.D.'s we are hiring. We have parts production with furnaces and being able to work with customers across multiple regions to produce their parts initially and then working with them to deploy and invest in our product beyond the modularity within the printer and the industrialization of a system, including the automation and post-processing. And as Doug mentioned, materials. These material announcements take research and time and then scaling them to large applications takes investment. And so we are investing across all those vectors to see great growth in the future.

[Brian Kinstlinger:]

Great. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.

[Jed Dorsheimer:]

Hi. Thanks. I guess I would like to just jump into the Ford and the qualification of the 621, if you will. Congratulations, by the way. And so I think the previous question, maybe just rephrase or dig in a bit deeper. You mentioned that Ford has your machine and now they are qualified on 621 aluminum. So with this announcement, I didn't catch it. Is there a specific order? Or will they be retrofitting the machines that they have? If you could just help me better understand that, it would be useful.

[John Hartner:]

Yes. Thanks Jed. I mean it's a great breakthrough. Just to be clear, we are working with Ford in our production adoption model which includes R&D, parts and then machines. Ford has a number of our machines across other applications. And we are not going to go into other specifics on a customer individual application. We see continuing to grow within Ford, as well as with other automotive companies and other customers that really value light-weighting. And as you know, from a sustainability standpoint, the production aluminum being able to use 3D printing is a massive breakthrough. Ford mentioned it in the press release that it is a major breakthrough for automotive parts and we think it's going to be a major breakthrough across a range of industrial applications.

[Jed Dorsheimer:]

Yes. I mean I would agree. It definitely is a major breakthrough. And so I guess, what I and I am guessing other investors are trying to better understand is, if we look at the S-curve of adoption and we look at sort your guide, so far it's been largely linear in terms of sort of that I guess the early phases, you know, Geoffrey Moore would talk about Crossing the Chasm, we are in that qualification period. I am trying to better understand the timing of that need. So why wouldn't -- if this is the primary material that's being manufactured in the EV market, is it sort of just going through that two-year qualification period in terms of the material? Or is there something else that would prompt the sort of logarithmic activity in terms of buying? I am just wondering how that plays into a guide that seems relatively conservative here?

[John Hartner:]

Yes. I would just say that, again we can't talk about specific customers, but what I would say is, again, production adoption model can take up to two years. And then you lay on top of that what the automotive programs of the industry usually are multiyear programs. So I would expect to see accelerated growth in the years ahead. Again, as I have said, binder jetting has a very bright future. But don't count on it next quarter. It continues to grow over the years. And as customers move from single machine to multiple machines, those are the opportunities where you will see that accelerated growth. That, as I have talked about in the past, rends to be in the future years of 2022, 2023, 2024.

[Jed Dorsheimer:]

Got it. And then on the sand side for the casting, is there any deceleration of that business is a function of the direct additive side? Or are you seeing a steady state which the numbers would seem to suggest? I am just curious what the thoughts are around the casting side of the business?

[Doug Zemba:]

Yes. Jed, this is Doug. On the sand side, that was really the piece and Brian was asking that same question related to the sand systems being down as a factor associated with some of the end markets that that product tends to serve. In a lot of instances, the sand product is being utilized in a rapid prototyping environment. And we have certainly seen a drop-off in that level of activity over the last 12 to 18 months, particularly in the post-COVID environment which has put a little bit of pressure on sand as a percentage component of our total output. But the reality is that the metal products really doesn't compete with the sand product. The sand product is geared towards much larger parts and being able to and it serves different applications, whereas the metal product in its current state fills for sort of a smaller part, but certainly more intricate part in the materials that we provide. So we are not seeing, at least in the near term, that you are seeing any level of competition between the two offerings. They really play in different spaces.

[Jed Dorsheimer:]

Got it. One last question and I will jump back in the queue. The turnkey, I don't know what you call it, but you showed in your presentation of basically the printer in a box or container for sort of a FEMA type application or military, will you be providing -- are you just providing the printer or are you providing the other services? Is that turnkey? Or if you could just, it might be obvious, but if you could you talk about what you are providing in that deal? Thanks.

[John Hartner:]

Sure. In that DoD contract, which was $1.6 million, we are the turnkey, we are the leader of the project. We have some other collaborators that are listed in there that are providing some of the other process parts. And the opportunity is to develop this first unit is just a first step. I mean since that press releases gone out, there has been a number of other interested parties and us really productizing this. And as you say, there seems to be needs not just from a standpoint of the frontlines and getting parts closer to the customer changing the supply chain, but the disaster relief is really an interesting one as well.

[Jed Dorsheimer:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Sarkis Sherbetchyan with B. Riley Securities. Please proceed with your question.

[Sarkis Sherbetchyan:]

Good morning and thanks for taking my question here.

[John Hartner:]

Good morning.

[Sarkis Sherbetchyan:]

I just want to touch on the fiscal 2021 sales outlook. I think you reiterated 15% to 25% growth for 2021. Maybe if you can break out your growth expectations between direct and indirect? And then I have a few follow-ons.

[John Hartner:]

So we certainly expect that our metal products, given some of the product launches that we have announced and some of the maturity of the recent product launches are going to make metal a larger component of the business going forward. We started to see that a lot in 2020, including in the fourth quarter. And sort of we expect that to continue. We don't really break out in a lot of our public disclosures specifics related to the split, but certainly that is a leading area for us relative to growth, both on the system side as well as the recurring side, including that funded research and development piece that we have spoken to frequently.

[Sarkis Sherbetchyan:]

Yes. And in that light, regarding kind of the recurring revenue growth, do you expect that bucket to grow at a similar pace to what you have outlined for the annual total growth? Or do you think that grows more in line with what we saw in fiscal 2020?

[John Hartner:]

It's going to grow slower than the systems line, mostly because when you look at the different components that are part of that, the service bureau model, the aftermarket services and the material components represent, let's say, 90% of that basket and they are sort of equally split. The materials and aftermarket groups grow more on an annuity stream that's based on the global installed base of printers which is going to be a little bit slower pace than some of the other lines that have better opportunities. We think that the metal printing services that we offer, particularly in single alloy and some of these emerging materials, represent a high growth area for us where you could see some signs of a break out. And then again in the funded research and development, we saw pretty big gains in 2020 versus 2019. And as we have highlighted in a number of our comments and certainly in a number of representations recently, we have had some strong wins both on the commercial side and on the government side that are sort of loading up the revenues that we would expect to recognize hereof in 2021 and beyond.

[Sarkis Sherbetchyan:]

Yes. Thanks for that. That's great color there. And I think you mentioned OpEx growth of 20% to 25% this year. It seems like you are investing in the business to accelerate that growth rate. So I guess, to that point when would you expect the business to be able to generate leverage on operating leverage, just kind of given 15% to 25% topline growth?

[John Hartner:]

Yes. So a couple things that are playing a role there. First off, that certainly the company's capital position has changed dramatically over the last year, including with the success of the offering that we completed earlier here this quarter in February. That gives us the opportunity to sort of look at the operating model longer term and make some strategic decisions as to how we want to dedicate capital. One of those areas that we highlighted in the call is putting more money near term into OpEx. You are not necessarily going to see that splash in terms of a breakeven result for us on an EBITDA basis in 2021. But what you are going to see is that that's going to benefit the growth rate that we anticipate for 2022, 2023, 2024 and beyond. By making those investments today, they really start to bear fruit in those future years and pull forward some opportunities that we would have had a difficult time grabbing and reaching at here in the near term. So that's sort of the thought process. I think we have made comments in the past and we been pretty consistent to say that the mid-70s range or so is EBITDA breakeven on normalized conditions for a company based on our historic operating model. That said, when you go out and attempt to make strategic investments and there is a lag on when the revenues are going to follow, even with the 15% to 25% growth rate that we are pitching, we think it makes a lot of sense to go and spend a little bit of money in 2021 to really jump the growth rates going forward.

[Sarkis Sherbetchyan:]

Great. Thanks for that. And if I did the math right, it seems like for the OpEx perspective, OpEx would increase about $6 million or so year-over-year. I suppose what portion of that would be allocated towards R&D, sales and marketing? And I think you did give CapEx guidance. So I am assuming that OpEx increases has nothing to do with the CapEx one?

[John Hartner:]

Yes. I think that there are still some decision-making and sort of, interestingly enough, I think that it's a fine line when you bridge between, is it going to go into development or is it really fall into a commercial category, you have got a couple different things going on there. Number one, if we invest captively in research and development based on work that we are already seeing in particular materials, that's a conscious decision that we are to make and it could be triggered by some customer experience that we are working on or some other project that we see an opportunity to go after. On the flip side. When you look at the commercial investment, while some of that is clearly going to be selling expense, the S in the traditional SG&A, certain other parts of that I think relate to what we would classify as applications experts that are really bridging from a technical perspective but also have commercial background that can really guide customers through the production adoption model and land them at the right spot relative to the family of products that we sell, whether they ultimately become long term parts customers or whether they become system owners and bring the resources in-house. So it's going to be a combination of the two rather than give a specific on those line items. That's kind of why we targeted to give guidance on the total OpEx because it could be a quick shift either way, depending on what opportunity is the nearest term for us to put the money into.

[Sarkis Sherbetchyan:]

Great. That's all for me. Thank you.

[Operator:]

. Our next question comes from the line of Martin Yang with Oppenheimer. Please proceed with your question.

[Martin Yang:]

Good morning. Thank you for taking my question. Most of my product questions have been asked, so just one more maybe. Can you maybe talk about other segments that you think makes sense for you to be expanding to other than bound metals? And if could maybe address the move to your customers as their current offerings are not sufficiently addressing? Thanks.

[John Hartner:]

Sorry. Just, you were a little bit choppy there. I think what you are asking was other investments outside of bound metal. Is that correct that?

[Martin Yang:]

That's right.

[John Hartner:]

Okay. So I would say, again, primarily we are a binder jetting company, but we have plenty of investments to do in that space and complementary spaces to that. We saw the bound metal being absolutely complementary and again on-ramp for our business in binder jetting. It links up relevant to the sintering of the bound metal product which we do also with binder jetting. So that's the primary place we are investing right now. We are looking at other complementary industrial metal opportunities. But right now, we have a good amount on our plate and we are going to prudently invest in what we have and only look opportunistically outside of that. Martin, did you have any other questions or are you on mute?

[Martin Yang:]

No. That's my only question. Thank you.

[John Hartner:]

All right. Thanks Martin.

[Operator:]

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

[John Hartner:]

Well, everyone, thank you very much for your time this morning and interest in ExOne. We look forward to talking to you next quarter. Take care.

[Operator:]

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.