ExOne's (XONE) CEO Kent Rockwell on Q2 2014 Results - Earnings Call Transcript

| About: ExOne (XONE)


Q2 2014 Results Earnings Conference Call

August 14, 2014, 08:30 AM ET


Karen Howard – IR

Kent Rockwell – Chairman and CEO

David Burns – President and COO

Brian Smith – CFO


John Baliotti - Janney Capital Markets

Sherri Scribner - Deutsche Bank

Ajay Kejriwal - FBR Capital Markets

Ananda Baruah - Brean Capital

Jason North - Jefferies

Weston Twigg - Pacific Crest Securities


Greetings, and welcome to The ExOne Company's Second Quarter 2014 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.

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

Karen Howard

Thank you, Melisa, and good morning, everyone. We certainly appreciate your time today for our second quarter 2014 conference call. On the call with me this morning are Kent Rockwell, Chairman and Chief Executive Officer; David Burns, President and Chief Operating Officer; and Brian Smith, Chief Financial Officer of the ExOne Company.

We will be reviewing the results for the quarter and first half year that were published in the press release distributed after yesterday’s market close. If you don’t have that release, it is available on our website at www.exone.com. The slides that will accompany our discussion today are posted there as well.

Referring to the slide deck, on Slide 2, is the Safe Harbor statement. As you may be aware, we may make some forward-looking statements during this discussion, as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. Those documents can be found at the company’s website or at www.sec.gov.

We’ll have Kent first provide a strategic overview. David will review our second quarter 2014 progress, revenue and margin results, as well as our revenue look-ahead for the second half of 2014 and then Brian will provide a detailed review of the financial results. Then we’ll turn it back to Kent to discuss our outlook.

And with that, I turn it over to you, Kent.

Kent Rockwell

Thank you, Karen, good morning everybody. Thank you joining us for our call on Q2. We have a couple of slides that I'll address briefly and then David can get into a lot of the detail on our close-up.

The first slide is just to remind you that ExOne is a distinctly positioned company in what we also defined as a very disruptive technology. We are in the 3D printing for the industrial market place. We express specifically, excuse me, in the technology of binder jetting, which is a subset of 3D printing from other technologies such as some of the laser and EVU technologies and we believe that the binder jetting is a unique technology that is applicable in some instances to materials that cannot be printed using laser type technologies and the genesis of the binder jetting is we believe that it will be more cost effective approach for batch and high-volume production as we move into the future and we're getting more and more verifications as we move along.

In materials we are developing materials that are a vast array of metals and other carbon and graphite type materials and that development we are accelerating in certain areas as we move thorough this year.

Our business, I will remind you is two thirds global and one third U.S. market for a small, but high growth company to be operating on a global basis with major offices around the world as real challenges we start to grow and so we've got a fairly high level of SG&A relative to our current revenues, but that's all an expectation with where we believe revenues should go as we move into the later years here.

The next slide I want to highlight that this is a transition year for us for a variety of reasons and I'll just try and cover some of that quickly. First, I think everybody here should recognize that the 3D industrial printing sector is certainly growing very rapidly. There is verifications to that all across the marketplace and any of the publications that you would read.

There is certainly good evidence that the industrial demand is really now starting to accelerate as is some of the applications are maturing. The size of that industrial opportunity on a global basis is certainly well into the billions of dollars and so our opportunity we believe firmly remains with us becoming over a series of years and it is the future here into the 200 million, 300 million, 400 million sector as we penetrate the market successfully with this technology.

Again it's a high growth environment and so when you're managing high growth, you have to recognize that there is constant management change taking place. Anytime a volume doubles you have to look at every process that you got that you're using and question whether or not that process is an effective management process for the future.

We are embedding right now in this year several processes for the future, which are very substantial such as the XRP and some of the other things that you'll hear about from Brian and David, but that high growth is very high demand for us and we have to be very quick on our feet to capture.

We've made substantial capital investments in proprietary technologies. David's going to highlight a little bit more on that, but we've got a whole bunch of new patents there being applied. For right now, we will be done fairly soon here and they are very, very strong patents with regards to new material applications that we've been working on some time and some of them are quite exciting.

And such you got to remember that in an environment like ours with high growth and with all this proprietary change you are in a constant state of evolution. You’ve got to go back every six months and look at your strategies and expand them, narrow them, readdress them in every regard and we're constantly looking at new opportunities and shifting some of these strategies as we move along.

Learning, optimizing successes and failures in any high tech investment area, you are going to naturally make some mistakes as you go along that path and the answer is to make sure that you grab those mistakes and fix them. We had one in this quarter, which David will address, but it's not upsetting to me from the standpoint of we've caught it, we've fixed it and we've learned from it, but we have the solution to go with that. it did in our P&L more than we've anticipated in this past quarter.

We have unpredictable order flow in sort of natural in this business right now. The timing is set by customer's needs. I did got through the order book this morning. This is not backlog, but looking at Q3, our machine sales we have over 20 machines that we are looking at the potential of being able to recognize on sales in Q3, not all those you are going to happen, but the answer is that there is in our problem that we fairly confident with that.

Q4, we have over 30 machines. So we have 50 machines in the second half of this year that we recognize and we have the availability to make delivery on. If we go back to the fourth quarter of this past year, where we missed four machines, all four of those machines have now been delivered. We're not losing sales. We're just seeing these sales move to the right for a variety of customer requirements.

But we only had eight opportunities in the fourth quarter when we lost four of them, which we had anticipated in Q4 of '13 and we have over 50 as we look into Q3 and Q4 of this coming year and so I think we are moving through this transition year and good order and that the opportunities are really starting to solidify.

More importantly, a lot of the technology that we're just finishing on the materials side isn’t being recognized in either revenues in non-machine or machine sales and yet they will impact us dramatically as we move into '15 in addition to some large funded research opportunities with certain government applications and David will address that later.

So with that, I am going to let David talk to the numbers and I'll be back at the end of that.

David Burns

Thank you, Kent and good morning, everyone. As Kent said, we have understood all along that 2014 was going to be a transition year, a year of investment and learning and development. So I want to quickly cover investments in Q2 and then we'll move on to the result and financials.

So on Slide seven, let's take a look at our build-out with people as we continue to say, it's our most significant asset. We just about 250 people in the second quarter and if you look back to pre-IPO where we had about 158 people, of course that's significant growth.

On top of that, if you think about the fact that some of those original 158 have turned over that means that half of our people on Board right now are new since Q1 of 2013, both a tremendous opportunity and a tremendous challenge to teach and frame people to be excellent folks.

In addition to that, our hiring rate has leveled up significantly, so while we built out our sales force and R&D in some other areas we talked about before, you can expect that we are at a level period relative to people today.

Slide 8, our investment in creating greater control for our business planning and execution. We're in the process of rolling out a global quality system ISO 9001. We're in the process of installing the first phase of our global business system, which we expect to go live here right around yearend.

These control systems are absolutely catalyst for us doing business in a fundamentally different way with greater organizational effectivity and of course we've hired a variety of talented people to support these rollouts. You can see our internal symbol for our ERP system, XRP, simple common and global.

Slide 9, we are building out capacity, necessary to sustain us for the coming years. You can see on this picture the build of our new European headquarters near Oxford. You may recall that we are combining five European locations into a single location creating much greater efficiency and radically expanding the capacity we have available to us.

This picture was taken a couple of weeks ago. The facility build-out is on schedule. We expect to begin occupying the offices in September and we expect to have our production moved over by mid November and November. So by yearend, we will be fully occupying our new building.

Slide 10, continues the theme of capacity expansion. In Japan, we in the second quarter closed on the purchase of our Japanese headquarters, a building that we've been occupying since 2006.

In Italy, we built out a new sales center, it's located in Northern Italy and it will help us definitely serve the Italian market to a greater degree than we have so far and in North Huntington we build ground on a newly 10,000 square foot ultra innovation and new build-out.

We took this picture yesterday and we stuck it in here so you get a sense of what's happening here in North Huntington near Pittsburg that will also be complete this year. And so by the end of this year we will significantly have increased our capacity to serve our markets into 2015 and beyond.

I want to pause on Slide 11 to talk a little bit about one of our major investments in the second quarter and that was in the continued development of our ExCast initiative. You may recall that ExCast is a multi-step production process where we take optimized product design and we combine that with 3D printing and we merge it into the traditional world of metal casting.

In Q1, we talked about a major casting program that we received an order for and that we felt during our last call in May, the program had been substantially completed and that its impact on our margins had substantially been realized.

The program about the design of more than 10 separate part numbers and of those we are going to manufacture more than five of each individual component meaning that we needed to deliver more than 50 castings that were made of very advanced materials and in shapes that quite honestly would have been deemed unmanufacturable a few years ago.

Time for our last call, we completed the printing for nearly all of these parts and the casting process has been completed for most of those parts and therefore we felt we were substantially through the program. Following that call, as the parts proceeded through to final machine and testing and certification, we and the customer realized that the toughest of those parts were not going to quality for aerospace certification.

We've done several iterations of redesign and remanufacture of the toughest of those parts since and all of that effort has resulted in the development of both new binds and new print media to try to address the issues that we saw in terms of casting those parts.

This has been a very difficult process for us as a company, but the lessons we've learned here have become a direct bridge to some very, very significant funded research opportunities that we see coming especially for defense and governmental agencies.

So while we have suffered through this some, we have learned a lot of lessons, both we and the customer now understand better some of the limitations of the material set that we were trying to cast, we feel we are much better prepared moving forward and we do think actually this is going to be a significant springboard to some larger opportunities going forward, so major investment in Q2 in the ExCast side of the business.

Slide 12, talking about material development, you may have noted that during the quarter, our investment in material development led to the announcement of commercializing a nickel-based alloy 625 alloy and that's especially targeted for aerospace. We continue to prioritize all of our new material development efforts and as Kent mentioned, based on customer opportunities, we are now pursuing a group of materials that can only be 3D printed using binder jetting.

We are going to file significant IP related to those materials and we expect great commercial opportunities to result all of these efforts that we are undertaking with material development giving us now access to significant additional funded research projects, both governmental and non-governmental. All we can say at this point is they are multiples larger than anything that we have seen to date.

Slide 13, on the machine development side of the business, Q2 saw an acceleration of machine development beyond our original plan. The clear opportunity to meet some customer requirements and customer opportunities causes to accelerate our machine development efforts.

Honestly looking at it, we feel that that acceleration affected all major cost categories, everything from R&D to SG&A, to even machine margins and working capital, but the fact is that we are taking our print platform that we have today that's largely focused on casting applications and we are adapting it for direct printing.

We are introducing right now a new S-Max version that allows us to use both phenolics and inorganic binders more effectively and required a machine design, a significant design change to the S-Max machine.

We are in the process of designing a replacement for our lab platform, which you'll be hearing about later this year and early next year and we've launched significant efforts to produce our first high volume, high production machine for a series production for industrial parts, another project you'll be hearing about toward yearend, but quite honestly the aggregation of all of these efforts are an acceleration of machine development and while in the short term, it's required some investment, in the long-term we see clear opportunities to exploit those new machine designs.

So let's jump to Slide 14, revenue for the second quarter $11.2 million. You can see that machine revenue was a bit above non-machine revenue. We think over time, that's a 50-50 split and we approximated that in the second quarter and the regional split, which we've reflected before we think is about a third, a third, a third between our two regions of the world, came in pretty close to that in Q2.

Slide 15 for the half, you can see that non-machine revenue is a bit ahead of machine revenue for the first half of the year. We expected that because machine revenue is largely skewed to the second half traditionally and this year will be true again and you can see the split by region. Of course the Americas has been the stronger business for us for the first half of the year.

Slide 16, the category of non-machine revenue and I'll remind you that for us non-machine revenue includes our sale of consumables that was used for our machines. The output of our production service centers, the parts that are sold are considered non-machine revenue.

Service and service parts are all included and we have very determinedly tried to grow this side of the business because there is a recurring revenue stream that provides a great foundation upon which we can then execute a machine business, which is a little more volatile and cyclical.

So we've seen great growth in non-machine revenues over the past few years, $5.2 million for the quarter and you can see the annual rates of growth. We are very pleased with the build-out of our non-machine business.

Slide 17, a quick look at machine sales. We sold $6 million worth of machines and the detail of that was in our press release and as I said before, our machine sales are skewed in the second half of the year. I'll talk a little bit more about that later.

Slide 18, in a moment Brian Smith, our CFO is going to give a more thorough guiding of the P&L and the balance sheet, but before that, I just want to pause here, because we as a management team are very cognizant that our gross margins in Q2 were not in line with some expectations.

We believed as we entered the second quarter that we were going to see gross margins that were more in the high 30s than the low 20s. So we probably were 15 points short of where we expected to be. So I explained before about a $1 million in cost is directly attributable to the build-out of ExCast and that ended up being about nine margin points.

So while it was a bit disappointing and it was a struggle to get through the experience, as I've explained we believe that we have now identified how we can term that experience and were positive for the company, but there was certainly an investment in the second quarter of that magnitude.

As well and we began looking at our second quarter, we anticipated one more S-Max machine was going to ship. The shipment of that machine likely would have changed our margins by two to three points. So simply based on mix of machine and non-machine will probably cost us about three points in margin for the quarter and then there is various other things that contributed, absorptions that were probably 200 to 300 basis points below where we expected to be.

Finally on Slide 19 a quick look at the second half because I do realize as we talk about this being an annual business and therefore what happens in the year is probably most important to us. We had said on our last call we expected our revenue split for the year to be 35%, first half 65%, second half. We are roughly in that range.

As you have undoubtedly seen, we are still forecasting that our revenue range is going to be $55 million to $60 million for the year. The non-machine run rate is very positive and if we simply did 4X kind of where we are, we are in $20 million to $21 million range, which is great growth in non-machine and a great foundation for the business.

We see significant and very strong demand from our direct printing machines, we have said publicly we expect to sell 18 machines to outside customers this year and we believe strongly that we will do that. If all of that happened, if the non-machine business came in where we expect, if we get that level of direct printing demand that we expect, we would need only to have about the same level of machine demand for this year that we had last year to achieve our revenue goals and we are clearly in line to do that.

Reflecting back on Kent's comments, there is no doubt that what's in the pipeline is of far greater magnitude and quantity than what we had at this time last year.

With that I would like to turn it over to Brian Smith, our CFO to talk about the financials for the quarter.

Brian Smith

Thanks a lot David. Appreciate it. Good morning, everyone. If you could please turn to Slide 21, we will talk a little bit about margins. If you look at the Q2 '14 margin versus Q2 '13 margin, David had mentioned the ExCast of other cost that are in Q2 '14 as well as we have two more, two new PSCs in Q2 '14 versus Q2 '13 that are still being build out and that was the under absorption he had mentioned.

And if you look at Q2 '13, yes we were over 60% in machines versus non-machine and that was some of the mix comments that David had made all causing the Q2 '14 margins to come in around 22.5. Trailing 12 again impacted by the same ExCast development cost in the trailing '12 and '14.

If you could turn to Slide 22, SG&A, David had mentioned the investments in people to be able to fund the growth, had mentioned the ability to handle the growth that we expect in 2014 and beyond. We're largely build-out in those investments.

Impacting 2013 I want to make sure that it's clear there was a $6.3 million equity charge in that trailing 12 versus $1.1 million in the Q2 '14 and right around $1.1 million is our current run rate relative to our amortization.

If you turn to Slide 23, you can see the growth in R&D particularly in the trailing 12 months. The R&D investments have been in the materials development that we discussed as well as the new machine development. Those costs have been accelerating and as we accelerate our efforts and so we will be revising our guidance on that and you'll hear from that a little bit later.

If you could turn to Slide 24, where we talk about capital available for growth, you will see we had $98 million in cash at the end of 2013 we were at $56 million.

The reconciliation of that is largely the two acquisitions that we made around $10 million as well as about $18 million in total CapEx, which includes amounts that were of our own machines that we were building inventory and moved over into our own PSCs to fund our growth as well as investment in working capital.

I think I commented last quarter that we expected working capital increase particularly through the June 30 period as we build out inventories for anticipated machine sales as well as the moves that we are making in Oxford and in North Huntington so that we would not have any disruption in machine shipments. We are prepared for that.

If you'll turn we have really no changes in our debt, if you'll turn to Slide 25 there, you'll see this is a carbon copy of what we discussed with you last quarter. I will say that we're probably trending towards the low end of that CapEx range at this point in time.

With that I'll turn it over to Kent for comments.

Kent Rockwell

Thank you, Brian.

Looking at 2014 guidance, we still are holding to our 40% to 50% growth rate, 40% to 50% would be $55 million to $60 million. The opportunities to achieve it in non-machine revenues is we are very comfortable with that. it's about machine sales and the case with machine sales as I've identified we have over 50 qualified name discussing on a weekly basis with customers about deliveries through Q3 and Q4, the diversity of that and the richness of it from a standpoint of who these customers are is very good and so we believe that we can get to the revenue expectations in the realm of that 40% to 50% arena.

Obviously we've taken a big impact in gross margin and it's because it's historic that it drops the standard where we are going to be. I have to say that while we would like to think we could have avoided the loss that we took on this one funded project.

The learning that we got from it and the impact of the future opportunity, which is very large as we move into FY'15 on a government basis, that opportunity, the demand that we do everything to make sure that these customers were satisfied with the technology even though it was a great expense to us and so the margins came down and it's just life, it doesn’t bother me because as we move forward, the margins will get back up to our guidance levels and it's all part of being in that transition period.

SG&A is still running about in the same area that's actually higher than where it probably needs to be as we move into '15 because we have some non-recurring expenses in '15, excuse me, in '14 that will start to go away.

R&D is up a little bit because we had some accelerating research efforts involved in certain areas where we see very, very proprietary development and we're actually quite excited about that and something that we don't want to get into too much discussion until the patents get well and we moved into some customer discussions, but we feel comfortable that that's the smart thing to do.

Then if you go to 28, the first bullet point is profitability, after looking at our report for Q1 and Q2, you probably think that's a subject we don't know anything about, but in fact, we are extremely focused on it and it's something that we are well aware that we have to demonstrate profitability. And I'm a Steven Denning guy.

I'm going to -- when the money is out there the opportunities are out there, I am going to spend the money as wisely as we can to create the largest market opportunities we can and I think that we are doing that fairly effectively, but we do understand that at some point you look at your cash and you look at where everything else as you say we have to demonstrate to the market our profitability and so we know that's a big focus for '15, but we also believe that the opportunities that we are generating by the money that we were spending in '14 are going to make that a pretty exciting year for us.

It's coming from machine developments that David addressed four new machines and some enhancements on current machines and it's coming from material developments where we are going to take some of the existing machines that we have and be able to apply them into new markets where we are not yet examining that with customers because frankly it’s technology applications where we would want to share until everything is in black and white on the patent side.

So from that perspective the one thing I would like to say is that we see an increasing validation from our customers. If you look at who our customers and what they are asking us to do, the number of small funded research contracts that we are getting from major U.S. and end of East, I think that that's saying that everybody is starting to recognize the binder jetting has a very important and growing place.

It's not going to be the only game in town and we understand that there is competitors in laser type technologies. They are very confident in certain aspects of it but what we are recognizing, what our customers are recognizing is we do have a cost effective approach to 3D printing and that we have a very unique approach to certain market applications for which we have been increasingly invested.

Just in closing I would like to say that there was a wonderful article if you want to take the time to find it in TC, which is tech something that -- written by Matt Marks from the development center, about taking a wait and see approach with disruptive innovations and this is all about why the big companies take so long to look at innovative technologies like ours before they really start to adapt to them and I thought that this article really hit the nail on the head.

As the big guys wait intentionally and see where you’re going to end up and the big guys are now calling us on a more and more frequent basis and I think we are giving them their money’s worth in their wait and see approach because it has been a little bit slower, it's not like the consumer activities. This is an exponential growth over a lower base, but we are quite pleased with our position despite the fact that our numbers don’t look too exciting.

We are spending our money wisely and we are intelligent about the fact that we are going to get to a profitable position. We have invested very well with these machines and these materials and I think our future is looking quite positive.

Karen Howard

Great. And with that Melisa, we would like to open up the lines for Q&A.

Question-and-Answer Session


Thank you. At this time we'll be conducting a question-and-answer session. (Operator instructions) Our first question comes from the line of John Baliotti with Janney Capital Markets. Please proceed with your question.

John Baliotti - Janney Capital Markets

Good morning. Guys just wondering if you could in light of the color that David and Brian gave us on gross margins, I think you had some similar impacts that you outlined in the first quarter.

Now just thinking beyond the second half of the year if we were thinking about 2015, which Kent described obviously you guys are focused on profitability. Do we think about the ExCast being more of a one-time event, but we also think about the other 400 to 600 basis points.

Are we coming up off of let's say a low 30% gross margin underlying or it is something higher than that. I am just trying to get a sense of how much of those you think you can get behind you in terms of lessons learned and some of the accelerated investments you hadn’t anticipated?

Brian Smith

Good morning, John. I think that we -- well lets go through the whole sort of gross margin story. Average selling prices held up on machines. We were confident and content with that and the gross margins on our consumables, on our PSC were above where we expected.

We continue to absorb build-out costs. As you know we have expanded, we have added 3 PSCs and there is significant cost yet to be absorbed and those are still impacting gross margins and as a volatile business we tend to have things happen that are not necessarily easy to forecast.

So if you are set and said while tell me what’s going to happen? The answer is I am not sure because I am not sure what some of those things might be. Of course things happen with some regularity, but I would say as we expand the revenue base the impact of these unpredictable things is going to become less and less especially on the ExCast side.

We don’t anticipate anything near the kind of magnitude that we saw on this particular program, but I think it would also be naive to say that we don’t think that along the way as we take on new challenges and new projects that are unmanufacturable a year or two ago that we aren’t going get some bumps. I think Kent's point always is address it and get it behind you when you see it and don’t dwell on it and don’t do it a second time.

John Baliotti - Janney Capital Markets

Right and I guess so the way you are looking at ExCast, obviously this was something that you entered and we are obviously hoping for much smoother transition but I guess the lesson learned to degree would imply headwinds for anyone else that tries to do this given that you are going to have IP around it and given the lessons that you have learned.

So it seems theoretically that there is a double positive here that you have business opportunities result of it and then you have reduced headwinds from extra cost that you have incurred this year. Is that better way to characterize that?

Brian Smith

That’s very fair John. In one sentence to be honest even though the impact was strong on the P&L, I’m proud of what we have done. We've done something that I am not sure anybody else in the world could have done and we've been told that by the customer. So on the one hand it's been expensive and difficult and on the other hand we pulled out something that was pretty near impossible and so we are actually pretty positive.

John Baliotti - Janney Capital Markets

Just one more and I’ll jump back in a queue, but David on the R&D the calls help because when you look at the R&D going up a million dollars on both ends absent of the call we don’t really know if it is more expensive or you if you venture new ventures and it appears to be the latter that you’ve got uncovered some opportunities that you want as Kent pointed out, but make the investment now because you see the opportunity so is that a fair way to characterize the adjustment to R&D for the year?

David Burns

Absolutely 100% John. We could have looked at our second quarter financials and said dial everything back because we've got to worry about the P&L. we have done the opposite. We have put foot harder to the metal. We are working harder on machines, we are putting more research on the machine development and we anticipate even six months ago and our material side is pretty frantically working on relatively new opportunities. So, yes, I feel very affirmative and positive about all that stuff.

Brian Smith

I might add very quickly is that what’s happened as some of these developmental things occur and you see the solution you accelerate the investment because its apparent where you need to go and you want to get there quickly.

John Baliotti - Janney Capital Markets

Thanks again.


Thank you our next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed with your question.

Sherri Scribner - Deutsche Bank

Hi thank you. I wanted to just a get a sense of opportunities you see ahead in the second half of the year. I know that you mentioned, I think you said 50 name customers that you are working with and just looking specifically on the metal side with M-flex you reiterated the goal of doing 18 machines this year.

Just wanted to get a sense of how confident can we be of that? What you guys are hearing from customers and also this is a second question but when you expect to start to ship the M-print machine for the customers? Thanks.

Kent Rockwell

Thanks Sherri. In terms of prospects for the M-flex we have extraordinarily high confidence in our whole grouping of orders. I wouldn’t have used the number 18 again unless I was pretty sure we are going to get there and actually we are beginning to offer the machine globally.

So you may know that at the end of last year we are very restrictive about the market we are trying to serve that being the U.S. and early this year we brought in our entire global sales team. We've expanded the reach of the machine itself and opportunities have clearly resulted from that. So we have a lot of confidence and it’s a global thing. It’s not an individual industry or an individual region. The print platform for ’14, I don’t think I want to absolutely make that commitment yet because we’ve got development work yet to do but I feel pretty confident that we’re going to get at least a machine or maybe two this year.

Sherri Scribner - Deutsche Bank

Right. Thank you.


Thank you. Our next question comes from the line of Ajay Kejriwal with FBR Capital Markets. Please proceed with your question.

Ajay Kejriwal – FBR Capital Markets

Thank you. Good morning. It was good color on the gross margin on the call. I appreciate that. Maybe on the guide for the second half kind of implies 40% plus I guess part of that's related to the expenses tapering down, maybe a little bit of color on what’s baked into that second half gross margin ramp beyond expenses not being there.

Brian Smith

Yeah Ajay, it’s Brian. I guess a couple of thoughts on that. We expect significant machine sales in the second half as David said earlier. That’s the normal trend and if you look at non machine we believe we’ll have the same types of rates of growth that we’ve experienced. That’s a pretty steady business. So the mix that David mentioned will be a little richer.

We will have some additional costs associated with the ExCast build out that is in those projected amounts. So it gives you a flavor for what our thinking was on the margin.

Ajay Kejriwal – FBR Capital Markets

Good and then one more from me and I will pass it on. What’s your expectation for gas usage in the second half? I know you have some CapEx plans but beyond that?

Brian Smith

Yeah, we expect to be -- I said last quarter we were targeting $50 million at the end of 2014. We’re in the $45 million to $50 million range, what our expected cash balance will be. Working capital will come down a little bit in the second half as we shift machines and we’ll bring inventory down. We’ll have to bring inventory down a little bit because we’ll moving particularly in Arnsberg and that will disrupt production for some short period of time.

So we’re targeting that $45 million to $50 million range of cash at the year and as I said the low end of the range of CapEx that we’ve given for $31 million to $34 million, okay?

Ajay Kejriwal – FBR Capital Markets

Thank you.


Thank you. Our next question comes from the line of Ananda Baruah with Brean Capital. Please proceed with your question.

Ananda Baruah - Brean Capital

Hi. Good morning guys. Thanks for the taking the question. I guess the first one is could you just clarify the comments about as just view the non-machine revenue for the second half of the year, do you believe you can do and I believe the context was you just need the like flat machine year-on-year basis to hit the revenue guidance or something like that.

Kent Rockwell

I am going to let David answer the question, maybe you didn’t quite understand my answer. This is not about flat machines.

David Burns

No if we just model $55 million to $60 million and we look at it vis-à-vis 2013, we expect and there’s a clearly signal that we’re going to grow our non machine business by let's say $7 million year-over-year.

So if we’re $38 million last year that would take us to $45 million with no change in machine business and we also know that our direct printing machines, the M-Flex category we’re going to ship easily a dozen more machines than we did last year, which should be let’s say $4 million or $5 million to $6 million depending on whether options and furnaces and that kind of stuff. So suddenly you’re in the low 50s with no growth in sand machines.

So I think the comment was significant growth in non-machine, significant growth in direct printing and even if we have relatively flat sand machine volume for the year, we would still be in the low 50s. Targeting $55 million from our perspective is not unreasonable.

Ananda Baruah - Brean Capital

Got it. Makes sense. That’s very helpful and then just with regards to the machine opportunity, Kent, the way that you put context around it for the second half of the year you said there are $20 million in the September quarter and I think you said $30 million in the December quarter so $50 million in total.

What is the -- and clearly it’s accelerating nicely the opportunities that's easy to see. What's the right time set or the appropriate transaction with different context that you guys use around those metrics that are useful? Is there a convert rate that you guys typically look at sort of with regards to new opportunities that help you track how much those make revenue over any given period in time, besides from just looking at the opportunity growth on a year-on-year sequential basis?

Kent Rockwell

No. When I did that, all I am looking at is the order book and saying, okay, how many of these customers are saying that they will take a machine in a certain quarter and when we look at say there’s 20 in Q3 and we’re -- can we get 10 or 12 of those and some of those will push into Q4 and some of the Q4 prospects will probably push out. That just seems to be the nature of the stuff moving to the right.

What we are seeing is now customers coming in that are ordering multiple machines over a period of time for delivery where we’ve got customers that want three or four machines and so that’s a good verification that we’re going in the right direction. The piece that’s not in here is the fact that we have some new technology that’s going to apply to different industries and different industrial applications for which we’re very reluctant to even tell people where we’re going with that and that’s all going to hit ’15.

Ananda Baruah - Brean Capital

Yes, that was the material for which you’ve filed the patents for.

Kent Rockwell


Ananda Baruah - Brean Capital

Got it. Thanks a lot.

Kent Rockwell



Thank you. Our next question comes from the line of Jason North with Jefferies. Please proceed with your question.

Jason North – Jefferies

I was sort of looking for ASPs here, could you just talk a bit in terms of M-Flex versus S-Max and S trends and then when you launch the M prints what will that mean for ASPs as well. Thanks.

David Burns

Jason, we’ve used all along for the lab platform a number of about 100,000 to 125, 000 for the flex platform, four hundred-ish for the print platform as it exists about I think 850,000 to 900,000 as an ASP and I think 1.2 million for the Max platform.

The print platform will be when adapted for direct printing will be a bit higher. It won’t be the same number but it won’t be 50% and so you could probably figure 9 to 950 as our price book number and I would say that if you simply took the volumes that you saw in the press release and you multiplied times those ASPs you get a number that looks a lot like our machine revenue for the quarter.

Now the one difference was we did ship a Russian machine, which we said last quarter would go and that selling price was a choke higher. That was more -- closer to $2 million than it was $1.5 million.

Jason North – Jefferies

Okay. Great, and I think previously you talked about a second ExCast project with your lead customer there that was coming – ramping in Q2. Can you given any indication of how that of how that went, how that's going, any sense of a potential follow-on.

David Burns

Yes, we have a second committed project. We’re in the design phase. As you might expect, the lessons learned from the first project are being applied and we would expect a much better outcome from a margin perspective.

Jason North – Jefferies

Okay. And last question here for all of 2014 for your non-machine revenues and a general sense of what percent of that will be ExCast and where that number could potentially go for 2015?

David Burns

Yeah in 2014 of the $20 million to $25 million, I won’t say the number is de minimis, but it certainly isn’t significant percentage. Most of what it is, is consumables, service, and some output from other PSCs. 2015, the ExCast revenues that we’re expecting now maybe more directly tied to funded research projects than they are to direct casting projects for customers.

Kent Rockwell

And that magnitude is going to be anywhere from 5 or up. There is a lot of opportunity in some of the things that we’re looking at.

Jason North – Jefferies

Okay. Great. Thank you.


Thank you. Our next question comes from the line Weston Twigg with Pacific Crest Securities. Please proceed with your question.

Weston Twigg - Pacific Crest Securities

Hi. Thanks. Just first of all the lessons learned from the big project you were working on in Q1 and Q2. The limitations with the materials and the new binders you’re working on, does that in any way limit your market opportunity versus your previous expectations particularly in the aerospace industry?

David Burns

No I don’t think so. I think to do a real postmortem on what happened and how it will take a lot longer call with a lot more detailed technical discussion about specific steps. But generally speaking, I don’t think what we have endured limits our opportunities. In fact the fact that we’ve achieved what we have has already caused us to see that there’s more opportunity than we would have though even six months ago.

Weston Twigg - Pacific Crest Securities

Is there more risk heading into Q3 that maybe some of the solutions that you have come up with don’t work and we see another surprise in the P&L next quarter?

David Burns

Well we’ve already acknowledged in our margin forecast that there is going to be some spillover into Q3. But at this point what I would say is our margin forecast for remainder of this year fully embodies everything we know and expect to happen relative to ExCast.

Weston Twigg - Pacific Crest Securities

Okay. And then just finally, another line of questioning, I am a little surprised that you haven’t shipped more metal machine in Q2 or Q1 and I am wondering what is the reason that the sales have been so low in the first half but the order book is so high in the back half?

David Burns

I would say it’s the simply the cycle that many machine tool companies see. The capital acquisition cycle that large companies that tend to follow this pattern. We knew for the last year, we had no shipments of M-Flex until the end of the year we shipped a bunch because of bunch of people came in at the end of the year and said we’ve funding and we want to go ahead and right now we’re working a bunch of projects that are funded and they’re available for capital this year and we’re going to ship them in Q3 and Q4.

I don’t know how to explain it and I would change it if I could but all I can tell you is that is the cycle and we’re very much subject to that cycle.

Weston Twigg - Pacific Crest Securities

All right. Fair enough. Thank you very much.


Thank you. (Operator instructions).Our next question comes from the line of James [indiscernible] with Cowen & Company. Please proceed with your question.

Unidentified Analyst

Good morning and thanks for taking my questions. My first question is, are the new service centers at this point fully utilized?

David Burns

No James. Not at all. In fact when we announced that we’re opening two on the West Coast, the point of announcement was to make sure that people understood we’re going down that path. The actualization of them, one was late in the year, last June we got started and the second one was actually into the early part of this year.

So for the second of our West Coast PSCs, we’re less than six months in and we had talked originally about an 18-month development cycle to get them up to even close to capacity.

I would even say at this point that, that development cycle may be protracted even from the 18 months. So we’re in the early stages of both of our West Coast facilities and of course we absorbed a bunch of costs in Q2 to get Italy started and we don’t even have the machines installed there yet. So we’re very early in the cycle on three of PSCs.

Unidentified Analyst

So then we should expect the PSC margins to continue to absorb that overheard.

David Burns


Unidentified Analyst

Okay. And the second question I have is when you’re finished with all the consolidations of production capacity, what will the capacity be? How many machines per month or per quarter or per year is the target capacity in Germany?

David Burns

Well, it’s a hard question to answer simply because different machines take up a different amount of floor space and they have different build cycles. But generally speaking around the world, we have the capacity to build out machines at a rate that’s at least 2X what we have previously and probably up even higher than that.

Unidentified Analyst

So the ability to -- if you’ve been delivering sort of six or I guess fourth quarter of last year 12 unites were shipped and now we’re talking about 20 or 30. It seems like -- and in the midst of consolidating or removing, getting everything into one facility by November, I am just wondering if there’s enough capacity there to deliver the number of units that you’re needing to get to the numbers for the second half.

David Burns

The answer is absolutely yes. If you look at our working capital, you can see we’ve built out in advance a significant number of machines specifically to address our perception of market demand for the year, so yes we’re not concerned about capacity this year.

Unidentified Analyst

Okay. That’s great. And then my final question is it sounds like the cadence of all this is that Q3 is a snapback from Q2 and then Q4 is where you’ll really make the year. Is that fair?

David Burns

That’s the way it feels to us, yes.

Unidentified Analyst

All right. Thank you.


Thank you. Ladies and gentleman, we have come to the end of our question-and-answer session. I would like to turn the floor back to management for closing comments.

Kent Rockwell

Yeah, again thanks everybody for joining us. We appreciate your taking time this morning to listen to story.

Our financial results were not admirable when you take the nonrecurring charges that we hit associated with ExCast. In all honesty, it was -- we were naïve with some contractual aspects of dealing with large companies and we fixed it. We’re going to get through this.

The good news about it all is that we got through it from the standpoint of the – even though it cost us a lot more money, the customer is satisfied and we’re going ahead with some very large program proposals, which I think are going to bode well for us in '15.

We’re excited about the progress that we’re making in all these areas of machine development and the improving clarity for the roll on acceptance of the binder jetting technology, it's absolutely evident now from the customers that we have got and the things that we’re doing. The binder jetting in their minds has a place and it’s just trying to exploit those places most effectively.

We’ll be updating you again in the following quarter, in September, and I think that you’ll see the results starting to show up at that point in time. As we said particularly with increased machine sales in as much as we're weighted that way in Q3 and Q4. So thank you for your time. Good day.


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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!