Aspen Aerogels, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Aspen Aerogels Inc. Q4 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Mr. John Fairbanks. Please go ahead sir.

[John Fairbanks:]

Thank you. Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. I'm John Fairbanks, Aspen's Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don Young, Aspen's President and CEO.

[Don Young:]

Thank you, John. Good afternoon. Thank you for joining us for our Q4 2020 earnings call. Today John and I are switching up the usual order of our comments. John will start with a recap of our 2020 full year performance and finish with our outlook for 2021. I will follow John by providing a strategic overview of the company and by outlining the significant opportunities we have before us. This evening, we also uploaded a new company presentation to the investor section of our website that expands upon my comments. We will conclude today's call with a Q&A session. John, over to you.

[John Fairbanks:]

Thanks, Don. I'll start by running through our reported financial results for 2020 at a summary level. Total revenue declined by $39 million, or 28% during the year to $100.3 million. Net loss increased to $21.8 million, or $0.83 per share in 2020 versus a net loss of $14.6 million or $0.60 per share last year, and adjusted EBITDA decreased to negative $6.4 million compared to negative $200,000 a year ago. We define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock based compensation expense and other items that we do not believe are indicative of our core operating performance. First want to emphasize that in response to the impact of COVID-19 on our revenue levels, we decreased our costs and expenses by a total of $30.5 million from 2019 levels. In addition to a reduction in material costs associated with the revenue decline, they drove this decrease in our cost structure by means of our initiatives to reduce compensation and discretionary expense in response to COVID-19 related uncertainty, and our multi-year initiatives to reduce bill of material costs. And importantly, we reduced our costs and expenses despite an increase in research and development spending in support of our electric vehicle programs. As a result, we estimate that we reduced the annual revenue required for us to achieve EBITDA breakeven to between $110 million and $115 million in 2020 from $140 million in 2019. This progress indicates that we made the right decisions in response to the COVID-19 related market challenges, and that the fundamental economics of our business remains strong. Moving into 2021, we estimate that our annual revenue required to achieve EBITDA breakeven will rise to approximately $125 million to principally through our decision to increase our expenses by $6 million in support of our electric vehicle initiatives and our new business development efforts. We will use this investment to accelerate PyroThin business development to establish industry leading thermal barrier fabrication capability to progress from the development phase towards the commercialization phase of our Silicon rich Carbon Aerogel battery materials and to identify additional high value markets for our Aerogel technology, among other items.

[Don Young:]

Great. Thank you, John. Aspen Aerogel is at a significant juncture in its development as we continue to realize the full potential and value of the company. Our vision is to make an important contribution to a better and more sustainable way of life. Our Aerogel technology, whether it deployed in electric vehicles, sustainable buildings, or energy infrastructure is centered on safety, energy efficiency, and asset resiliency. We envision that these priorities will hold us true as our Aerogel technology enables future solutions to pressing global challenges. We are motivated by the conviction that our work is important and meaningful by our focus on big societal challenges and transformations that matter. And by creating value broadly defined. We embrace the idea that the imperative for change often leads to creativity and innovation. The Aspen team believes that our time to contribute is now. Oue Aerogel technology platform is at the core of our strategy to be a global technology leader in sustainability, with a focus on multibillion dollar opportunities in high growth, high value markets and on creating a proprietary, diverse and very valuable business enterprise. Today, our Aerogel technology is being leveraged with products in four substantial areas; PyroThin thermal barriers address thermal runaway in electric vehicles and have resulted to date in battery platform design wins from a single customer with the potential to generate over $1 billion of revenue this decade. Aspen battery materials seeks to deploy our carbon aerogel technology and the design of low cost high performance anode and cathode materials for the lithium ion batteries that will power the EV megatrend. Space law sustainable building products target the construction market in applications for fire safety and energy efficiency are critical. And Pyrogel and Cryogel products address resource efficiency, asset resiliency and firesafety in global energy infrastructure facilities, where we have an installed base of over $1 billion.

[Operator:]

[Q - Eric Stine:]

Hi, Don and John.

[Don Young:]

Hi, Eric how are you?

[Eric Stine:]

Doing well. So I know that this first win that you have in hand in the thermal barrier side of the business was competitive. But I'm just curious if you could give some thoughts on the competitive environment as you see it now, in this application. I guess what I'm getting at is with this win in hand and based on what you see out there, why -- I mean, do you think that this can become the industry standard for this application?

[Don Young:]

Well, I would answer that thinking in two ways. One, we went through a rigorous process with a very technology forward company that chose our product to help them address this issue. I've said before, I think this is an issue that has caught the industry. I surprised the intensity of this issue. And they're playing catch up here. And our process took approximately a year to go through the development of the product and then a three-part RFQ process. Again, that was quite rigorous. Clear to me that there were a number of products, potential products to address this application on the table at the beginning of that RFQ process. And as we worked our way through the technology, the engineering, the quality and the procurement aspects of that RFQ process, we were determined to have the best solution. We do believe that we will be the technology leader and the industry standard when it comes to thermal barriers. Again, this is not an issue that only impacts the one customer with whom we've won the contract. But all -- and that is clear to me, because when we look at our business development funnel, we have over 30 companies in that funnel. Those companies represent incumbent companies, new players in the automotive industry. As I said, in my notes, we're seeing opportunities as well in stationary systems as well around distributed generation, which has many of the same thermal runaway issues also. In those -- in that funnel, we have now provided material and engaged at a pretty intense. We responded to a small handful RFQs that has come out. And so, we're in that RFQ processing with -- again, with small handful of companies. And we're engaged with virtually everyone in the business with one form or another. So again, we think we have a unique product. It’s a very challenging issue to resolve. And again, we're right in the middle of that.

[Eric Stine:]

Do you think that, given you did a lot of the heavy lifting of the development on the front end with the current OEM that you have in hand. I mean, do you expected these RFQ -- the RFQs that you're going through the process that you're going through will be accelerated versus that, which I mean, actually didn't take long to us, but eight months. Just curious what you think that looks like this going on with new customers?

[Don Young:]

Yes. We do think that the battery platform that will be serving both the incumbent and the new players will need to resolve this in the next two, four and six quarters. That's the way we're thinking about it. So the time for us to win is now. And we've moved a lot of our resources into being sure that we are front and center when it comes to competing for that business. Again, we think we have a very unique technology, a very unique solution to and we're engaged. So, I do believe this is something that's going to play out over the course of that timeframe, Eric, two, four and six quarters.

[Eric Stine:]

Got it. And then just last one for me. I know you're looking at options. And it's early for on the capacity side. You did mention the automated line for the PyroThin product. Just wondering what that does to capacity? Does it expand the capacity of the current East Providence facility? Or how should we think about that?

[Don Young:]

So, John reference the advanced thermal battery center, and -- which is focused on being not only the showcase for the technology for customers and others in the industry. But it also has our prototyping and a manufacturing capability as well. This relates to not just the aerogel production from East Providence, but the production of the Tier 1 production of the part as well, or the various parts that will go into these battery platforms. So it does enhance our revenue for sure. We have talked for a long time about having a revenue capacity of approximately $200 million with this capability of additional parts manufacturing, if you will, it does enhance our revenue capability. I want to -- it depends a bit on mix. But let's just say out to this, $250 million level. Having said that, that's important to us. But we also know, I made a statement that we have opportunity to double revenue every 24 months through 2025. And if you play that out, it's clear that we need additional manufacturing capacity. And we are heavily focused on that today. We've talked about this in the past as to whether we would build the facility ourselves or whether we have a manufacturing partners. We're exploring those items now.

[Eric Stine:]

Okay. Thank you.

[Don Young:]

Thanks, Eric.

[Operator:]

And your next question comes from Jed Dorsheimer from Canaccord.

[Don Young:]

Hi, Jed.

[John Fairbanks:]

Hi, Jed.

[Operator:]

Check to see if your line maybe on mute.

[Jed Dorsheimer:]

Sorry. Days of zoom, I guess I pulled the on mute. Sorry about that, guys. So anyways. So thanks for the visibility and the layout of the strategy. I just want to clarify. So the first win that you have for the thermal runaway. That's not the Asian customer that you had originally talked about. But this is a domestic player in the EV space or that be would not said?

[John Fairbanks:]

We have not named the company contractually for now. We're hopping to be able to do that. But have identified the company simply as a major North American automotive OEM.

[Jed Dorsheimer:]

Got it. That's helpful. Thanks. And I guess just pivoting away from the thermal runaway, if we look at -- I didn't hear. Maybe I just missed it. Did you give an update on the development of the silicon particles for the anode side?

[John Fairbanks:]

Yes, we did. And you'll notice on the company presentation, which we've uploaded onto our an Investor Section of our website. We expand on this a bit. But let me just say a few words about it. We have in fact made excellent progress in the development of the product. And when I say that Jed, is that is to say that we're hitting the cost and performance targets that have been laid out in front of us by both our partners and potential partners, our current partners and potential partners with whom we're engaged. So I would -- so we've made good progress. We've also expanded our team bringing in more technical talent, and we've expanded our laboratories, our test facilities. And that's enabled us to provide -- is enabling us to provide. This is happening for a real time here, larger quantities, sample quantities to current and potential partners, so that they can test the material at production level, production scale equipment. And so, we're very focused. I think the next thing that will come from this -- and Jed, we did repeat again, that we -- our goal and this is based on our work with a partner is our goal is to have our first adoption for 2023 EV lithium ion battery. And so, very definitive timeline there. So we're excited about that. I think the other thing that will be coming down the road here fairly soon is building not just an expanded laboratory capability for sampling material, but a larger scale, this is called a pilot facility that will enable us to accelerate the work and again, provide greater quantities, iterate more rapidly with our partners et cetera.

[Jed Dorsheimer:]

That's great. Thank you. I'd like to just -- if I could pivot back to sort of the core oil and gas business or the insulation for the oil and gas. I'm curious if we look at us -- so we're seen commodity prices rise. We're look at a pretty healthy increase in terms of pricing. I'm just wondering where your customers are at in terms of reinvestment in a midstream production, to start to trigger that demand scenario there?

[Don Young:]

Yes. It’s a great question. So, obviously, we've been, we've been consistent in saying that over the course of 2020 after really terrific 2019 with over 30% revenue growth, the brakes were put on because of COVID. We also knew simultaneously energy market was coming down in pricing. So we were trying to sort out the impact. How much of that was related to COVID. And how much of that was related to decrease in energy prices. And our feeling was that it was predominantly COVID. And I think there's no question that we would rather have these current $40, $50 and $60 oil prices, then $20, $30 and $40, which we were seeing. There's no question, that's a better environment for us. We're seeing a lot of engagement on the LNG side as well. As you know, we, we focused on that over five years ago, and we have a revenue CAGR of 50% in the LNG since 2015. So those -- that focus in investment has been good. I am -- I see real pent up demand both on the maintenance side and on the project side. And that when we get to the other side of COVID, we believe that we will recapture that 2019 level of activity and resume our growth in that part of our business. And we're pretty confident that we're going to see that. And I think the question is when? And we -- for our outlook purposes have said, that win is not until 2022. So here we are in 2021. We'll see how it plays out. But again, our assumption is, we're going to be right around that $25 million per quarter kind of level, some quarters a little higher, some quarters a little lower, but make our way into the guidance that John set out for 2021.

[Jed Dorsheimer:]

Got it. One last -- yes, just one last question, if I could, though. In terms of that business, in hitting that, is that going to be more - so, should I think of that is that -- I have historically thought of that is more production related in terms of on the mid to downstream. So should we think of that in the same way? And has that business shifted to offshore versus domestic production in terms of building out the pipes and refiners if you will?

[Don Young:]

Yes. No, we're still -- our focus is really on the refinery petrochemical side, the LNG side, both in terms of liquefaction and the receiving terminals. The only real upstream parts that we have and it's been a steady performer for our business for a long time, not a big growth area, but we have a very high market share. And these are these so called pipe-in-pipe subsea programs that we have. But that is a -- we typically say, that's in any given year, it's about a $10 million business plus or minus $5 million, it's been kind of in that range for a long time. It's solid business for us. We're very good at it. And we like that business. But most of our work comes in the refiners with the refiners with the petrochemical guys and of course, with the LNG side of it.

[Jed Dorsheimer:]

Got it. Thanks. I'll jump back in the queue. Thank you.

[Don Young:]

Thank you, Jeff.

[Operator:]

And your next question comes from the line of Tom Curran from B. Riley Securities.

[Tom Curran:]

Good evening.

[John Fairbanks:]

Hi, Tom.

[Tom Curran:]

Don, based just on the PyroThin RFQs currently in hand, what's the earliest any of them could result in a second production volume contract? And at this point just given where all the conversations and where you're at each of RFQ stages, does it seem as if that award is more likely to come from new -- from your partner in China who support BYD for new third OEM customer?

[Don Young:]

I believe that these RFQs will come to fruition -- this current step that I referenced in my conversation over the course of the first half of the year -- half of this year. I don't want to say a week or a month, but I feel very comfortable in saying, the first half of this year. And I also believe that addition RFQs and additional design and development will also take place over the course of the second part of the year and even into 2022. But I do believe, Tom, that much of this will be determine over the course of this calendar year and into the early part of 2022. And we are focused on being that technical leader, that technical expert, that go to resource for solving this issue with the automotive OEMs, with the battery manufacturers, with Tier-1 suppliers, with the companies that are focused on stationary battery supplies, both the grid and really at their home scale as well. So this will play out over the course of -- in stages over the course of that period of time two, four and six quarters.

[Tom Curran:]

And then shifting over to the carbon aerogel side. I've surmised the two of your goals for your relationship with SK Group this year were to convert your existing evaluation agreement into some type of joint development deal. And then for that new partnership structure to set a target of having carbon aerogel material designed into 2023 battery at SK Innovation. Could you provide an update on those objectives and speak to how they had been or might be impacted by last week's ITC ruling against SK Innovation?

[Don Young:]

Yes, sure. Our focus is with the team, the development team in Korea. And that's the group that we're working most closely with. Our development agreement with it is with a sister company called SKC, and of course, SK Innovation, SKI is right in the middle of that, because of their testing capability. They are a very large company. They are developing battery technology in Korea, for the Asian market, for the European market. That ruling was focused on the United States, which is certainly an important market. I think, when I look at not just the Aspen, but much larger companies like Ford and VW and other companies who have -- would like to see this result. And we certainly put ourselves in that place. We haven't noticed any change at all. We're engaged with the SKC and SKI teams multiple times per week. And, again, it's been a short period of time, but we haven't noticed the single difference between pre and post that announcement. Again, our hope is that they can resolve that. And I think there are lot have people who are cheering that outcome on.

[Tom Curran:]

Yes. I would expect the same in that. That's good to hear. It sounds reassuring. And then just turning to 2021 guidance, John, for this adjusted EBITDA range, negative $8 million to $12 million. Should we think of that as partner reflective of incremental $6 million of EV-related spending. Is that what you're trying to tell us? And will that $6 million be entirely captured within R&D?

[Don Young:]

Actually yes. So the $6 million is included in the $8 million to $12 million guidance, negative guidance. It is not all in R&D. Some of it is actually captured in cost of sales associated with the build out of the advanced thermal battery fabrication facility. And so, we need to hire people, fabricators, we have equipment that we need to run and operating expenses associated with that fabrication operation, associated with that principle contract we have with the North American EV manufacturer.

[Tom Curran:]

Got it. That makes sense. Thanks for fielding my questions.

[John Fairbanks:]

Thank you, Tom.

[Operator:]

And your next question comes from Amit Dayal from H.C. Wainwright.

[Amit Dayal:]

Thank you. Hi, guys. Appreciate for taking the question.

[Don Young:]

How are you?

[Amit Dayal:]

Good. Thank you. On the EV side of the story, can you talk about margins for the EV segment potentially that you are anticipating versus what you might be generating for infrastructure implications?

[Don Young:]

Yes. John, do you want to take that?

[John Fairbanks:]

Yes. Well, we talked at the time we announced that contract back in our third quarter earnings call, at about 55% of the revenue associated with that contract will be for our PyroThin aerogel materials. Our margins on that component of the revenue are strong. They are in line with what we're seeing on the energy infrastructure side. And if anything a bit at the high end of that range. The other component, the other 45% is fabrication, and for the fabrication, its much lower margin. And so in the aggregate, we would expect a lower margin on that business. But I think as Don alluded to earlier, the capacity that we could generate out of East Providence plan increases from $200 million to up around $250 million. The best way I think to think about it is, will still generate gross margins, close to 30% at full capacity in East Providence plant. And we would still expect to generate adjusted EBITDA at capacity in East Providence plant of about $35 million. All the changes, as it will see slightly higher revenue out of that facility, but the profitability, and the cash generation hasn't really been changed by that business.

[Amit Dayal:]

Understood. Thank you for that. Really appreciate it. And you're getting to roughly single digit million revenues from the EV opportunity in 2021 and 22. Is there growth in that single digit millions between 2021 and 22? Or are you sort of just getting used to flying with the first two years. Give us some color on how that plays out, please?

[Don Young:]

It does. It basically doubles from one year to another, but still single digit million. So I want to keep that in perspective. And look, it's entirely consistent with the rollout of electric vehicle models for this particular player. And really, when you look across the industry, we're starting to see some new 2022 models, but really, most of the OEMs I've talked about 2023, 2024, 2025 models, and coming on to the market. So, from having one or two in sort of their launch year to three, four, five and six, and then ultimately, you know, 15, 20 and 25 vehicles, electric vehicles coming off of their lines. And so, the exact ramp of that is consistent with our projections from the design win that we had with the North American entity. So as we say, single digits in 2021, doubling that, but still being in single digits in 2022. And as I said, in 2024, and through the rest of the decades, up in the $150 million range. And 2023 is that substantial ramp year, as we move to those much higher numbers. Kind of just think of it as kind of maybe getting halfway there kind of thing for the ultimate ramp.

[Amit Dayal:]

Understood. Yes. That's all I have. My other questions were asked. That's all my question. Thank you so much.

[John Fairbanks:]

Thanks, Amit. We'll talk you later.

[Operator:]

And your next question comes from Doug Becker from Northland Capital.

[John Fairbanks:]

Hi, Doug.

[Doug Becker:]

Thanks. I was just hoping to get a little more context on the $225 million in revenue target and the 30% gross margin. Just -- is there a clear visibility to that number? Or is it based more on a top down assessment of the of the opportunity? And what type of fabrication revenues are included in that, as you were just alluding to that's at a lower margin?

[Don Young:]

Let me talk about it one level, and then John maybe can go to a little bit more detail. So really it's comprised principle of two major components is the way we're thinking about it. One is from the single North American entity, automotive OEM. And, again, these are their projections and that we're using in this case. And then the other assumption that we make is that we, in 2023, we recapture our 2019 revenue level in our energy infrastructure business. And so when you put those two things together, you get up very close to that $225 million level. We also have the sustainable building materials activity, and a variety of other sort of small sources of revenue. But those are the two principal components of that 225. John, when I was talking, did you figure out that portion of that that would be a fabrication?

[John Fairbanks:]

Yes. I think just -- we'll just do the math on. So -- and this is just indicative. So I don't want to be held to this. But just the 225 and 140, which was the peak energy infrastructure revenue we saw back in 2019. If you subtract that out at 225, you're down to $85 million worth of EV Thermal Barrier business. And I think we alluded earlier that that would be 55% of that would be the sale of aerogel blankets PyroThin product, and the remainder of the fabrication. But it's in line, that gives us essentially somewhere on the order of $190 million worth of silicon -- silica aerogel blankets revenue in 2023, which would be right up against the capacity of our east Providence plant. And, the economics, as we've said all along have been changed, they expect to see a gross profit -- gross margin above 30% capacity in that plant and be able to generate $30 million to $35 million of EBITDA at capacity. And so that's essentially the breakdown. So you in 2023, at 225 million, we'd be very close to a full aerogel plant at that time. We have a little room to grow. get a little closer to that $250 million as Don alluded to, but we'd have a very good full plant, generating quite a bit of cash at that time.

[Don Young:]

And Doug, let me just add -- let me add one thing to that. It's an interesting question. Let me tell you what's not in that number. Again, it just assumes a 2019 level of revenue from our energy infrastructure business. Again, we're assuming that 2022 and 2023 are post COVID. And we believe that we will recapture that level over the course of that period. And we also believe that we'll continue to grow that business. And as I said in my comments earlier, we grew revenue CAGR over 20% from 2008 to 2019, 34%, in 2019, alone. So we'll see how that plays out. Another thing that's not in there, to any great extent, is that additional RFQ wins from companies that are sort of on par with the one that we won already. And so, we believe we're going to be the technical leader, we're going to be the industry standard in these Thermal Barriers. And, and so let me just say we would be disappointed if we weren't playing in more battery platforms than the one that we have in hand today.

[Doug Becker:]

Understood. And 30% gross margin seems to imply incremental margins -- incremental gross margins of around 45%. And I just want to make sure that's achievable even with some components of fabrication coming in a very minimal margin, just because of the capacity utilization?

[Don Young:]

Yes, absolutely. We anticipate two things. We'll get the incremental 45% that we talked about for a long time as the incremental gross profit per dollar of aerogel blanket revenue. We also anticipate -- we have continued effort ongoing to improve our bill of material cost as a percentage of sales. So we'd expect a bit of a margin enhancement there from that. And it would offset that degradation in margin associated with the fabrication component of revenue.

[Doug Becker:]

Got it.

[Don Young:]

So it’s easily achievable and in line with the basic economics we've discussed for the last five years.

[Doug Becker:]

Got it. Thank you.

[John Fairbanks:]

Thank you, Doug.

[Operator:]

And you have follow-up question from Jed Dorsheimer from Canaccord.

[Jed Dorsheimer:]

Hey. Thanks guys. Just a real quick one here. So just on the Biz Dev side of things, can you convince me why your insulation that's being used for oil and gas. And wouldn't be used in a hydrogen reaffirmation application?

[John Fairbanks:]

We are exploring that issue. And we wanted to get our thoughts alive before we put it into any presentation. We are looking that as a potential use for our materials. There are obviously very great similarity between that hydrogen work and other work that we do in the industrial area. So standby on that, I know it’s a very topical question and we want to really make sure we're focusing on it in the right way and express carefully what we think our role could be that space. We'll definitely do that.

[Jed Dorsheimer:]

Got it. Let me just rephrase the questions slightly. From a thermodynamic perspective, your insulation is going to get -- is going to give properties it would either be beneficial in terms of high temperature heat, but also low temperature too. So I'm operating it at 260 degrees below Fahrenheit then having the thermodynamic benefits of your phone and the lack of air penetration, hermeticity if you will, which still have the same beneficial properties, correct?

[John Fairbanks:]

You're exactly right. The reason -- and we're -- perhaps remove focused right now in the cold side and -- of that equation. And I think for the reasons that we are doing very well in the LNG space today might be the reasons why we do well in the hydrogen space coming down the road.

[Jed Dorsheimer:]

Thank you.

[John Fairbanks:]

Yes. Thank you, Jed.

[Operator:]

And there are no further questions in queue at this time. And I would like to turn the call back over to Don Young.

[Don Young:]

Thank you. Hey, we appreciate everyone's interest in Aspen Aerogels. We look forward to reporting to you our Q1, 2021 results in late April. Thanks for joining us tonight. We look forward to seeing you then, Be well. Take care.

[Operator:]

This does conclude today's conference call. Thank you for participating. You may now disconnect.