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Q4 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Greetings and welcome to The ExOne Company Fourth Quarter and Full Year 2016 Financial Results 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. It is now my pleasure to introduce your host, Ms. Karen Howard, Investor Relations for ExOne. Thank you, please go ahead.

[Karen Howard:]

Thank you, Janna, and good morning, everyone. We appreciate your time today for our Fourth Quarter and 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 2 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 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 website 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 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 observations about the business and directional changes. 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.

[Jim McCarley:]

Thank you, Karen, and good morning, everybody. I want to start the discussion today taking a minute to state the approach we have taken to evaluate the business. First off, there are three business principles I expect from myself and the rest of the organization

[Brian Smith:]

Thanks, Jim. Good morning, everyone. If you could please turn to Slide 12, we'll start with our revenue results. We finished the year at $48.7 million, up 18% over '15. Non-machine at 56% and machine at 44%. We continue to emphasize that our revenue can be a bit lumpy due to the individual size of our indirect machine orders and 4Q 2016 show some of that lumpiness as some customer projects pushed out into '17. To help you understand the machine activity impacting us, please turn to Slide 13. You'll see our shipments and revenue recorded in units by machine type for each quarter and the full year '16. Nine machine units were shipped in the fourth quarter, 12 were recorded in revenue -- both weighted heavily towards our S-Max platform. As I've said last quarter, we'd continue to improve on our ability to ship and record revenue on our machines in a shorter time frame. Having said that, there are still some variability in certain instances that will result in lags in between shipment and revenue for any number of reasons -- for instance contract terms of performance obligations or overseas shipment -- just to name a few. For the year, 18 of the 33 machines recognized as revenue were from our larger indirect printing platforms. In terms of customers, roughly one-third of the machines recorded in revenue in the quarter and just under 30% for the year were to repeat machine customers. This demonstrates the stickiness of the technology with customers as they begin to use the technology in broader applications or locations within their business. Leasing is still an option for our customers to begin to engage in the technology, albeit new leases have slowed in the last two quarters. Having said that we have entered into contracts to deliver machines on leases in 2017 as this is still a good alternative for our customers to adopt our technology. Now if we could turn to Slide 14, we finished the year at $19.7 million, backlog from the December 15 backlog of $16.5 million and virtually flat on the last couple of trailing quarters. To remind you, backlog includes firm orders received from our machine and non-machine customers not yet shipped or 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. Backlog also includes firm orders for contractual services like our missile defense agency contract and operating leases that are non-cancellable. The largest portion of backlog is our machines and represent customers in a variety of industries including automotive, foundry, heavy equipment, tooling, aviation, in the pump industry for water and other fluids. The 2016 year-end backlog shown here includes the four Exterial machines shipped in May of 2015 and we are fully paid for those machines. I will refer you to our discussion in '15 to our financial statements in our Form 10-K for further information. On Slide 15, you can see our machine sales are up 36% to $21 million. As I mentioned earlier, this year included revenue on 33 machines compared with 26 last year. You could also see that our fourth quarter sales are down 21% to $7.5 million. This is against the strong 2015 fourth quarter where we recorded over 60% of our machine revenue during that quarter for the year. The 2016 and 2015's fourth quarters each reflect 12 machines sold where the mix toward the higher priced indirect machines in our 2015 quarter over 2016. Turning to Slide 16. Non-machine revenue, you can see it's up 8% to $26.8 million for 2016 and also up 7% to $7.1 million in the fourth quarter of '16. While not shown here, the fourth quarter of 2016 non-machine revenue is up 9% over the trailing third quarter, demonstrating the steady increase in adoption of our Binder Jetting technology. We have said that non-machine revenue is not as lumpy, although it does have some unevenness to it and we're pleased to see steady increases in this area as our install base of machines grows. Turning to Slide 17, we talk about gross profit and margin. We previously said we need volume to grow our margin percentage to offset our fixed cost and as you can see, the higher gross margin percentage with higher sales volume is realized during the 2016 year. For the quarter, our 2016 margin percentage was slightly lower and the strong margin percentage driven by sales in 2015. Also worth noting is that the 2015 year results include inefficiencies associated with the transition to our new and expanded facilities in Gersthofen 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 improved efficiencies in those operations reflected in 2016. Let's turn to Slide 18 to talk about SG&A. Comparing '16 to '15, you can see the results of our cost discipline that we began last year. Our fourth quarter and first quarter cost are typically higher than the other quarters within the year due to the activities around year end. Last year's fourth quarter benefited from net bad debt recoveries that we called out last year and as one would expect, that situation did not recur this year. On Slide 19, R&D continues to be largely a fixed cost for us, which is our people cost. As we have said, this has remained fairly flat on a sequential basis for a number of quarters. The 2016 fourth quarter is comparable to 2015. The sequential quarter increase is primarily due to the materials used in machine development as well as materials used in development of our new binder sets in our indirect printing machines. As we move to the first half of 2017, I want to give you a heads up that we will incur restructuring charges and other cost associated with our exit from our machine emission specialty machining operation in Michigan. The same holds true for the restructuring of our U.S. PSCs into EACs and the related combining of our Las Vegas PFC into our Troy and Houston locations. We are currently on phase to have these activities completed in the second quarter including liquidation of the assets. The restructuring charges are currently estimated between $1.1 million and $1.6 million, of which $1 million to $1.3 million will be non-cash for these activities and with the remainder consisting of employee, termination cost and other exit cost. We also expect to have some other inefficiencies in business transition related expenses in Q1 and Q2 as we move toward our new model and make changes within the organization. These items as well as the fact that our first quarter is typically one of our lower volume quarters will weigh heavily on our first quarter gross margin and overall profitability. Now, let's turn to Slide 20 to talk about CapEx. As you can see and consistent with what we have been saying all year, our 2016 spending has been very modest -- less than half of 2015. Our cash portion of CapEx was $1.3 million versus $4.9 million in 2015. The non-cash portion just to remind you pertains to transfers of machines from inventory into PPNE for our own use or for customer leases. With most of our CapEx needs behind us for the foreseeable future, 2017 cash CapEx will remain low at between $1 million to $2 million. Additionally during 2017, we expect about $2.5 million to $3.5 million of net cash proceeds from the sale of property and equipment in connection with the restructuring activities I mentioned above. If we turn to Slide 21, you'll see a waterfall of our 2016 cash flows. As a reminder, the $13 million from capital transactions was related to our first quarter raise and we have not had any capital transactions since the first quarter. We had cash CapEx as I said before of about $1.3 million. Our initiative we discussed with you during the year around working capital management provided us with about $4.8 million of cash, mainly due to improved AR collections, higher customer deposits, as well as reductions in inventory. Our net loss, net of non-cash items and other use about $8 million. We entered the year with $27.8 million in cash which we believe is sufficient to support our current operating plan. If you'll turn to Slide 22, you'll see that $27.8 million in cash and you'll also see that we still have virtually no debt on our balance sheet. With that, I will turn it back to Jim.

[Jim McCarley:]

Okay. Let's move now to Slide 24. I'd like to spend a few minutes talking about where we're headed. As I mentioned in the beginning of this presentation, our customers in markets are at varying phases of adopting our technology. Therefore, we have created some structures to help us guide them through the adoption cycle. I'll start with our indirect technology, which is our most mature product. As noted here, we believe that several of our markets -- namely automotive, heavy equipment, and oil and gas/general industry -- are well-beyond the value seeking phase and are in fact on the cost of moving into the value creation stage. It is this level adoption that gives us confidence that we can achieve growth in 2017. Additionally, although not as advanced as the prior markets, we see other markets listed as good opportunities for growth. Now, please turn to Slide 25 where we'll take a similar look at the adoption of our direct printing technology. As shown here, our direct printing technology is not at the same level of adoption as our indirect business. This is also consistent with our outlook for growth in these markets we served today. However, the entire market for direct printing non-weldable and fine powdered materials is still in the early phases of adoption and as such, its lower adoption rate is explainable. The positive thing this chart tells us is that ExOne is much more advanced than the adoption of our technology in the universities and academia, as well as industrial R&D departments and governmental laboratories. Since these are the incubators of an innovation for direct printed products, we believe this level of adoption bodes well for ExOne and will continue to be an area in which we can expand our market share. Finally, there are other applications like oil and gas, metal injection molding and general tooling that we believe can be advanced in the near term with focused material developments and core machine technology improvement in two of our existing machine base. It is also clear to us that a continued focus on increasing customer adoption rate across the entire direct printed market place is how we can expand ExOne's direct printer addressable market. To underwrite this focused effort, please turn to Slide 26, where I'll get a bit more specific on our commercial initiatives to expand adoption. Now this list is really blocking and tackling type items, but here is the quick look at what we're doing. We hold formal regularly scheduled pipeline in process reviews to keep our team on the same page and identify priorities. This also assist in our forecasting of general management. We've instituted a focused coordination of our technical development road map with our near-term and long-term customer needs. And finally, we have established a key account structure to ensure we maintain good alignment with our markets and what it takes to advance the adoption of our technology. Now let's turn to Slide 27 where I'll summarize our current outlook and vision. Our outlook remains positive but pragmatic. We aren't providing definitive guidance for 2017, but I will be providing some directional guidance for you. Although we will continue to have fluctuations in quarter-to-quarter revenue and profitability comparison between consecutive quarters and year-over-year, we expect at least 25% growth in annual sales in 2017, compared to 2016. Although we also expect to achieve operating leverage, stable cash flow and positive adjusted EBITDA by year end, as mentioned by Brian earlier, we will experience significant profitability headwind in the first half of the year. Looking beyond 2017, we believe that continuing our investment and equipment capability of material qualification, coupled with applying our enhanced commercial management and tools, we can achieve, sustain year-over-year revenue growth rates that exceed 25%. With that, let's open up the lines for questions-and-answers.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Christopher Van Horn of FBR. Please proceed with your question.

[Daniel Drawbaugh:]

Good morning. This is Dan Drawbaugh on the line for Chris. Thanks for taking my questions. So I want to start if I could -- I want to start on the Exerial machine. I was wondering if you could give us a sense of where you are with contract? I believe you said it was supposed to play out in 2017 and I was kind of wondering if you could update the scope of demand you're seeing, how a conversation is going with other potential customers there?

[Jim McCarley:]

Yes, sure. You know what, let me just talk about the Exerial generally for you and sort of lay that out for you. We're very confident in that platform and how we see it performing. As you'll recall, we've got an Exerial inside of our organization where we've done product development. So we've got a much stronger understanding of what that machine is able to do and how it can perform. Additionally, we've got some equipment that's going to be rolling out. It's already in the final stages of installation at one customer and we have a second customer that the equipment is rolling on to their site late this month and we'll be coming up to speed. So we're going to have some more data points and actual application to evaluate that equipment. Overall, we're very positive. Let me tell you about what we're seeing on demand. We actually are getting a lot of interest from a lot of different places, primarily because of the volumetric size of this machine and also the production rates. But I'll also tell you that we're working with the customers to make sure that we match this equipment. This isn't a piece of equipment that's going to necessarily serve everybody. We think that there may be a need to possibly make enhancements to our S-Max platform and get some speeds up with it and that might in fact mitigate a little bit of the Exerial interest. But overall, I would say we've got several interested parties and at least three or four machines that are in discussions with customers.

[Daniel Drawbaugh:]

Great. Thank you for the color. Then moving on, I guess a bit more of a numbers question. When you're thinking about your at least 25% sales growth guidance, how are you looking at the materials, PSC services line versus the machine line? In the past your machines grew quite a bit faster. Is that something we expect? Is there any kind of color you can give around the machines revenue growth number?

[Brian Smith:]

Yes. That 25% is going to be largely driven by machine growth. I think that non-machine side will continue a steady path as it has because it just doesn't have those bounces that the machines do, but principally, that growth is machine-revenue growth.

[Daniel Drawbaugh:]

Okay, got it. Thanks. And then on the ExOne adoption centers. I was wondering if you could just give us some background on how that decision came about and how that plays into your guidance for the coming year and beyond? What does this contribute to that 25% sales growth number?

[Brian Smith:]

I think that really the adoption center underwrite the sale of equipment when it's all said and done. I think the shift is when I went and looked at what we were doing across our business, it was clear to me that we didn't have some of our latest and greatest technology inside some of those areas. I think that represented a meaningful gap. Some of the new capabilities that we're initiating inside of our equipment. We need the ability for our customer to experience that. That's really how we look at the adoption centers. Now with time as the install base goes up in different regions, we think there's opportunities to expand our training that we do and sort of more advanced type of training work with people, certainly localizing some of our service support by adding some people into those adoption centers that can support the equipment in the field, as well as process development. We really believe process development a material and a binder combination blended the match with the customer requirement, maybe yet another way that we would initiate interest in the machines. It's not just one single approach, it's really kind of across the board.

[Daniel Drawbaugh:]

Great. Thank you, guys, for all the color. I'll go ahead and jump back in queue.

[Jim McCarley:]

Thank you.

[Operator:]

[Operator Instructions] Our next question is coming from Saliq Khan of Imperial Capital. Please proceed with your question.

[Saliq Khan:]

Good morning, Brian, good morning, Jim.

[Brian Smith:]

Good morning.

[Jim McCarley:]

Hi, Saliq. How are you?

[Saliq Khan:]

Good, guys. Just a few questions on my end. The first one being is that you've talked about this right now, Jim, but if you look at the amount of Exerials on the S-Max that were shipped last year versus this year, I understand that you're actually working with -- it seems to me you're working with the customers as a much longer sales cycle. But if you take a larger look at the customer base, on potential customer base, what are some of the biggest headwinds that you are facing right now when it comes to both the Exerial, but also the S-Max -- both of which by the way are different price points?

[Jim McCarley:]

The headwinds, I don't think the right way to characterize what I think dictates how those machines are adopted. It really comes down to the material combinations that we put in place and meeting capability needs of customers. My view is that our biggest obstacle to growth is only driving usable capability into that equipment as quickly as possible and in some cases for this to happen, we're going to have to do a little bit of customization to the machine. One size fits all, probably at some point has a diminishing value in the marketplace. There's slight customizations, something needs to be slightly different with one machine versus another -- those types of things. I wouldn't call them headwinds, I would call them new variety or new things that we have to consider as we have to see this technology move into the market as something that matches better with specific customer needs. That's how I would view it, Saliq.

[Saliq Khan:]

Got it. Jim, if I think about your time at RTI and all the operating work that you have done there. Actually you transit that over to X-1. What are some of the processes that you can improve from both the sales strategy, but also from an adoption rate to increasing amount of machines that are sold and to hopefully bring to bout more visibility. It's not quarter-by-quarter on machine sales, they made more visibility when we look at it from every six months perspective.

[Jim McCarley:]

Saliq, I'd point you to two things. First off, one of the things I have really great leadership or a good example to look at was how we worked with the customer at the CEO-level. We really did emphasize at RTI, what does the customer want? How do we bring value to them? And really carry that customer focus. In some cases, that wasn't saying yes to things that we couldn't do, it was saying yes, but finding out how to blend it with what the organization could actually accomplish. So there's a little bit of that. I think a much stronger customer orientation is always a good thing. You can never have strong enough connections to what the marketplace wants. I think that's less operational and more around the commercial side, but that's a very important element here. The other thing that I think we can do to drive adoption is we're starting now to put not just the customer or a market, but even regions into where are these places in the adoption cycle? What do they need to see in order to become more confident and take the step to bring on the technology? And really focus-wise, customer-by-customer, application-by-application, really understand that so we can go fill in those bubbles. If we go to those charts that I was shoring you, Saliq, in my view if we can make that chart green through all of the first six stages across every one of those markets, we'd have an unbelievable growth pattern that would come as a result of that. My experience at RTI was bring the methodology into the organization, stay true to it and then do some discipline work around, always bringing it back in front of the team.

[Saliq Khan:]

Great. And then just one last question on my end. If I take a look at the balance sheet, if I start thinking about the $28 million of cash that you guys have said and which is up from last year, what are some of the best use case for that cash for you?

[Jim McCarley:]

Best use cases?

[Saliq Khan:]

Right. Is there such a technology that are out there that you're thinking that could be able to better-augment what you have right now? Or is there a better way to incentivize or compensate? Not being sales people either within the organization or externally, it brings them over, or to be able to put that money to better use to increase the amount of -- I shouldn't say the types of machines, but it's actually the materials that are being utilized within the machines -- any one of those things, or something?

[Jim McCarley:]

Yes, Saliq. I'll be really straightforward here. One of the things that I want to make sure is clear is that we've got to invest in this machine core capability and material types. When I say invest, I mean we're going to have to in some cases apply real cash towards that type of work. As well as we're seeing that things that surround our equipment, items like how you de-powder our boxes, things that support the productivity of that machine, have importance to the customer, I can see us having to invest in bringing some of those types of product lines on board. If we find some special areas where we can really enhance our overall core capability with acquisition, that's something that I certainly think would make sense. But to answer your question as straightforwardly as possible, every dollar that we can invest into expanding that machine capability or material selection, that's just doing nothing, but I think doubling, tripling, or quadrupling our dollars over the long haul.

[Saliq Khan:]

That's great color, Jim. Really appreciate it, guys.

[Brian Smith:]

Thanks, Saliq.

[Operator:]

Thank you. Our next question is coming from Bobby Burleson of Canaccord Genuity. Please proceed with your question.

[Jon DeCourcey:]

Hi, guys. This is actually John Jon DeCourcey on for Bobby. I have my other questions answered, so just wanted to see if you guys could provide a little bit more color on the scale of revenues that were pushed out on customer orders that were pushed into 2017? Just a little more color on that and when do you think the orders will be recognized? Whether it's first half or second half? Just total dope [ph].

[Jim McCarley:]

Again, I'd point you to our footnotes that I mentioned before, but that's certainly a piece of it and there's probably one to two machines more than that that will get recognized. Certainly those one to two machines, further than that will get recognized in Q1-Q2 type timing. I think we were believing we were pretty close to what people were expecting. It's in that neighborhood.

[Jon DeCourcey:]

Okay. Thank you.

[Operator:]

Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments.

[Jim McCarley:]

Okay. Well, thank you, everyone. Appreciate your time today. We are having a lot of fun here at ExOne and I'm proud to be part of the team here and we look forward to moving into 2017. Thanks again.

[Operator:]

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