Aspen Aerogels, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good afternoon. My name is Jessie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels' Q3 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. John Fairbanks, you may begin your conference.

[John Fairbanks:]

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. The press release announcing Aspen's financial results and business developments, as well as a reconciliation of management's use of non-GAAP financial measures compared to the most applicable GAAP measures is available on the Investors section of Aspen's website, www.aerogel.com. Quoted in the press release is a summary statement of operations, a summary balance sheet, and a summary of key financial and operating statistics for the quarter ended September 30th, 2017. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year. Please note that our discussion today will include forward-looking statements, including any statements regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans, and any other statement that is not a historical fact. Such statements are subject to risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in these forward-looking statements. A list of factors that could affect the company's actual results can be found in Aspen's press release issued today and are discussed in more detail in the reports Aspen files with the SEC, particularly in the company's most recent Annual Report on Form 10-K. The company's press release issued today and filings with the SEC can also be found in the Investors section of Aspen's website. Forward-looking statements made today represent the company's views as of today November 2nd, 2017. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA. These financial measures are not prepared in accordance with U.S., Generally Accepted Accounting Principles or GAAP. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Definitions of and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures is also available on today's press release. I'll now turn the call over to Don Young, President and CEO of Aspen Aerogels.

[Don Young:]

Thank you, John. Good afternoon. Thank you for joining us for Q3 2017 earnings calls. I will start by providing comments about the business and our performance; next, John will present financial details for Q3 and year-to-date 2017 and comment on our guidance for the remainder of the year. We will conclude the call with a Q&A session. I plan to cover four topics in my prepared remarks. First, I will comment on our recent victory in our patent enforcement action at the United States International Trade Commission, the ITC. Second, I will review the three important indicators related to the performance of our business that we believe will mark 2017 as a successful year. Third, I will discuss the current commercial environment including our market outlook for the remainder of 2017. And fourth, I will reiterate our strategy and describe the longer term scope of our opportunity. As we announced in June 2016, we took a series of legal actions to assert our rights against companies that infringe our intellectual property. We filed a complaint with the ITC alleging that two China-based companies engaged in unfair trade practices by selling Aerogel products in the United States that infringe or were manufactured by processes that infringed several of our patents. Based on our complaint, the IPC instituted an investigation and conducted a hearing. While the ITC was deliberating, one of the defendants challenged the validity of four of our patents at the United States Patent and Trademark Office. The defendants challenge to the validity of the patents was denied by the USPTO, a very favorable outcome for Aspen. Then on September 29th, the Judge overseeing the ITC investigation found that all patent claims that we asserted were valid and infringed by each of the two China-based companies. The Judge recommended a limited exclusion order as a remedy to prevent the importation of infringing Aerogel products into the United States. We anticipate a final determination on the violation and remedy to be issued by the full ITC Commission by the end of January 2018. This determination by the ITC validates the strength of the patent portfolio protecting our Aerogel Technology Platform. Our strategy is to leverage our Aerogel Technology Platform and essential to that strategy are the investments in our R&D and the protection of our intellectual property. Similar to other companies that have become market leaders by creating valuable technology, we remain committed to defending our Aerogel Technology Platform and will continue to assert our right as appropriate against companies that infringe our patented technology. We have similar actions outstanding in the German Courts against the same two Chinese companies and a European distributor and expected determination in those cases during the first part of 2018. Our second topic today is an update of the three important indicators related to the 2017 performance of our business. Our first indicator is focused on our goal for 2017 to build commercial momentum each consecutive quarter by gaining market share in our core end markets, principally refinery and petrochemical companies, by demonstrating value and growth in our adjacent markets, including LNG, district energy, and power, and by taking a partnered approach in the development of new markets including building materials. We are measuring our progress towards achieving this goal by driving increases in quarterly revenue throughout the year with Q2 stronger than Q1, Q3 stronger than Q2, and Q4 stronger than Q3. We believe this momentum and the continued successful development of our core adjacent and new markets will position us to achieve our revenue and adjusted EBITDA goals in years ahead. We've met this goal this year by growing revenue from $23 million in Q1 to $25.1 million in Q2 to $27.2 million in Q3. And as our financial guidance indicates, we expect even stronger sequential growth. During Q3, we supplied over $3 million of Pyrogel XTE to an important project in Brazil and saw steady revenue growth in Europe and the United States. The latter despite the initial negative impact of Hurricane Harvey. Asia was down after strong growth in 2016 and during the first part of 2017. Despite the current weakness in Asia, we believe the region is shaping up for strong performance in 2019 and 2020. In Asia, we are building on our 2016 and 2017 LNG successes in the region and are well-positioned for the next set of projects, many of which we believe will have far greater scope than our recent projects. And with respect to Hurricane Harvey in the U.S., despite the initial pause as our end-users evaluated damage, the severe flooding has created opportunity for our products. Wet insulation in a refinery or petrochemical plant leads to inefficient operating conditions and corrosion under insulation which is a significant maintenance and safety challenge. Our hydrophobic products reduce the incident of CUI and install rapidly. A perfect combination when you want to solve a problem and get back up and running as quickly as possible. While there may have been a pause in the weeks after the hurricane, the coming months and quarters will represent an opportunity for us. As we discussed at the time of the last earnings call, we have been positively surprised during 2017 by recent levels of activity for subsea projects. The main driver of the activity centers on the attractive economics for offshore platform owners to leverage existing assets with construction of tiebacks, and extended subsea pipelines. Our Aerogel products are perfectly suited to guarantee flow assurance by addressing the thermal challenges associated with longer pipelines. We delivered over $5 million of subsea product during the third quarter and one additional projects that will be supplied in Q4 2017, Q1 2018. The global energy market is not yet robust, but we continue to penetrate our accounts and capture market share. And importantly, our revenue growth contributed to a 300 basis point increase in gross margin versus Q2 2017 to 18%. This revenue growth and gross margin improvement supported $2.5 million increase in adjusted EBITDA in Q3 versus Q2 to a positive $1.1 million. We clearly achieved our goal of building momentum during the quarter and with current activity levels in our markets, especially in subsea, we are projecting continued revenue growth in Q4. The second indicator of centers on our revenue not comprised of subsea in the South Asia petrochemical project --. Fracking revenue other than subsea in the South Asia petrochemical project permits us to gauge our day-in and day-out maintenance and small project work, which we believe is the base for sustained future growth. To provide context is important to remember that subsea in the South Asia petrochemical project together accounted for approximately 30% of our revenue in both 2015 and 2016. However, in 2017, we anticipate that they will account for slightly less than 20% of our total revenue. On the other hand, our base revenue, revenue not comprised of subsea in the South Asia petrochemical project has grown in millions of dollars from the low 70s in 2013 and 2014 to the low 80s in 2015 and 2016. We project continued growth in this base revenue during 2017, driven by anticipated gains in market penetration in our core markets, growth in our adjacent markets, and by our price increase. We are confident we will grow base revenue to a record level in 2017 and we have a keen focus on reaching $90 million. This continued growth in base revenue is especially notable given the backdrop of lower 27 -- sorry lower 2017 overall market activity levels in energy infrastructure relative to the years 2014 and 2015. With strong orders already in hand for the subsea and from our South Asia petrochemical customer, our focus to close out the year strongly is on generating base revenue. The third indicator related to the performance of our business in 2017 is the strategic importance of diversifying into adjacent markets. We launched on-schedule July 2017, a new product Pyrogel HPS, targeting the power industry, an industry that consumes $1.4 billion of insulation per year. Success this year will be defined by our ability to generate $1 million to $3 million of Pyrogel HPS revenue before year end, to build a portfolio of case studies, and to begin the typical adoption progression for maintenance work to small scope project work, and then on to larger scope project work. Now, approximately 100 days after launch, these success indicators are well within reach. In addition, we have worked our way into the global specifications of several key players in this market, which is a critical step as we work the adoption progression. And as we have discussed in the past, the successful rollout of Pyrogel HPS is an important demonstration of our core competency to commercialize innovation; that is, our ability to leverage our Aerogel Technology Platform and to develop and commercialize innovative Aerogel products to adjacent and new market. Our progress in the LNG and district energy markets, and now in the power market, illustrates our ability to target and penetrate diverse and high value adjacent markets supplement our core refinery petrochemical and subsea work. This key value driver for Aspen bodes well for future efforts as we continue to leverage our Aerogel Technology Platform in new and exciting markets. We will report out on these three performance indicators as we tally up the numbers upon the conclusion of Q4 in 2017. Again, the three indicators are building momentum each quarter, expanding our base revenue, and launching Pyrogel HPS. We will also set performance indicators for 2018 and use this tool to report our progress throughout next year. Our third topic today pertains the current commercial environment and our market outlook for 20 [ph]. We stated early in the year that for 2017 planning purposes, we would assume that conditions in the upstream and downstream energy end markets in 2017 be about on par with 2016. That is to say limited upstream activity, constrained downstream spending by refining and petrochemical end user, and that 2017 market-wide activity levels will remain below 2014. While this outlook remains mostly correct, as discussed, recent levels of activity for subsea projects have been an unexpected bonus. Certain subsea projects are now technically feasible and economically attractive within today's oil price environment; we believe we are well-positioned to play an enabling role in the execution of these projects. Overall, we remain conservative in our commercial outlook, although, we are encouraged by certain market signals and by our progress in executing our strategy to leverage our Aerogel Technology Platform across our core adjacent and new markets. Our products are becoming increasingly mainstream in both maintenance and project work and we are benefiting from our focus on adjacent and new markets. And as our products become more universally recognized, we believe the adoption pattern will be accelerated and become truncated in time. Furthermore, we believe the adoption pattern that has characterized our core markets from maintenance to small scope projects to large scope projects applies to many of our end markets, most recently, LNG. We are now specified for important large scope projects in our core and adjacent markets which are planned for 2019 and 2020 time period. Our ability to build base revenue, to position ourselves for significant project work and to continue to exhibit strength in entering new markets gives us confidence that over a two to three-year period, we can experience substantial and diverse growth even within the current price environment. This narrative leads neatly to our fourth and final topic, which is the reiteration of our strategy and the scope of our opportunity. Our strategy is to leverage our Aerogel Technology Platform. We have world-class Aerogel product and process technology. Our progress from core to adjacent and new markets is powerful and creates the opportunity to build a large and profitable company. Core and adjacent energy infrastructure markets are over $3 billion in size and technical standards are moving in our direction. The building materials market for insulation is very large, over $20 billion. Our agreements with BASF are driven at the macro level by the global trends of resource efficiency and sustainability and, of course, by the need for high performance insulations that are fire-resistant. Our initial success in entering adjacent and new markets is indicative of our progress towards the goal broadening and diversifying our end markets, creating additional growth engines and offsetting areas of cyclical weakness such as the current energy environment. More broadly, our partnered approach to building materials market with BASF represents an excellent template as we evaluate additional large and high value new market opportunities in which to leverage our Aerogel Technology Platform. We will target markets for Aerogel elements such as low thermal conductivity, high surface area, and high electrical conductivity, and suitable porosity, mainly through Aerogel enhanced products that could prove to be the next-generation technology in important and large markets. Each of these markets has world-class companies that are technical, commercial, and financial leaders, are well-positioned to leverage new technologies, and are potential partners for us. During the downturn in the energy market, we will continue to invest in research and development, sales and marketing, and operational excellence and believe these investments are creating strong technical and commercial position. We will continue our strategy of leveraging our Aerogel Technology Platform across diverse markets to position us for long-term growth. Overall, we're confident that the strength of our technology, ROI that we framed to our end users across multiple markets will enable solid performance for our company. We will maintain our commitments to grow profitably, to prudently scale up our operations, and to remain financially strong. We have an experienced team of people. We are confident in our ability to execute our strategy, realize our vision. Now, I'll turn the call over to John for a review of our financial results. John?

[John Fairbanks:]

Good afternoon. Thanks Don. Let's start by running through our reported financial results for the third quarter and the first nine months of 2017 at a summary level. Third quarter total revenue declined 8% to $27.2 million versus $29.6 million in the third quarter of 2016. Third quarter net loss, $3.1 million or $0.13 per share in both 2017 and in 2016. Third quarter adjusted EBITDA $1.1 million compared to $1.5 billion a year ago. Importantly, our third quarter adjusted EBITDA this year represented our first quarter with positive adjusted EBITDA since the third quarter of last year. We define adjusted EBITDA as net income or loss for interest, taxes, depreciation, amortization, stock-based compensation expense, and any other items that we do not believe are indicative of our core operating performance. Patent enforcement costs had a much less significant impact on our net loss and adjusted EBITDA during the third quarter this year than in recent quarters. We incurred only $53,000 of patent enforcement costs during the third quarter versus $1.1 million in the third quarter last year. The first nine months, total revenue declined 16% to $75.3 million. Net loss was $17.6 million or $0.76 per share in the first nine months of 2017 versus a net loss of $6.3 million or $0.27 per share last year. And adjusted EBITDA for the first nine months was negative $5.5 million compared to positive $6.1 million a year ago. The first nine months of 2017, patent enforcement cost had a disproportionate impact on both our net loss and adjusted EBITDA. We incurred $2.9 million of patent enforcement costs during the-- [Technical Difficulty]

[Operator:]

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

[John Fairbanks:]

Sorry, we had a line issue. And so I'll continue. Importantly, we continue to build sequential momentum during the third quarter. Total revenue this year has improved from $23 million in the first quarter to $25.1 million in the second quarter, $27.2 million in the third quarter. As we discussed during our recent conference calls, our gross profit and gross margin are highly dependent on product revenue and capacity utilization levels. Principally as a result of the sequential growth in revenue, gross margin this year has improved from 10% in the first quarter to 15% in the second quarter to 18% in the third quarter. Gross profit, in turn, improved from $2.2 million in the first quarter to $3.7 million in the second quarter, $4.9 million in the third quarter. And adjusted EBITDA improved from negative $5.1 million in the first quarter to negative $1.4 million in the second quarter, a positive $1.1 million in the third quarter. The future revenue and utilization growth, we would expect to continue to see the percentage growth in gross profit and adjusted EBITDA to outpace the associated growth product revenue. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. Third quarter total revenue was comprised of product revenue of $26.8 million and research services revenue of $386,000. Total revenue for the first nine months was comprised of product revenue of $73.7 million and research services revenue of $1.6 million. During the third quarter, product revenue decreased by $2.1 million or 7% versus last year's $28.9 million. Solid growth in our core energy and adjacent markets and resurgent demand in the subsea market during the quarter was more than offset by the conclusion of shipments to the multi-year South Asia petrochemical project, which comprise more than 30% on revenue in last year's third quarter. During the quarter, total shipments decreased by 27%, 8.7 million square feet of Aerogel blankets. While our average selling price increased by 27% to a record $3.10 per square foot, principally due to an increase in the mix of the higher price subsea products during the quarter. The first nine months of 2017, product revenue decreased by $14.6 million or 17% versus last year, again, this decrease was driven by the conclusion of shipments to the multi-year South Asia petrochemical projects. For the first nine months of 2017, total shipments decreased by 24% to 25.6 million square feet, while our average selling price increased by 10% versus a year ago to $2.88 per square foot. Now, turning to our research services revenue. Our research services revenue is related to contract research performed principally for government agencies. Research services revenue decreased by 43% during the third quarter, approximately $400,000 and by 13% percent to $1.6 million during the first nine months of 2017. This decline was due to the relative value and timing of active research contracts versus last year. For the full year, we expect research services revenue of approximately $2.1 million, down slightly from last year. This expectation is included in our 2017 guidance tax. Next, I'll discuss gross profit. Gross profit was $4.9 billion or 18% of revenue during the third quarter of 2017 versus $6.4 million or 22% last year. This decline in gross profit and gross margin was driven by 27% decline in shipment volume and a 31% decrease in production volume that we instituted to manage inventory growth, offset in part by the 27% increase in average selling price for our products and a decrease in manufacturing and material cost during the quarter. Gross profit was $10.9 million or 14% of revenue for the first nine months of 2017 versus $19.6 million for 22% of revenue last year. Decline in the first nine months' gross profit and gross margin is principally the result of the 24% decline in shipment volume during the period, a 30% cumulative reduction in production volume that we enacted in 2017 to manage inventory growth, offset in part by the increase of 10% in average selling price for our products, the decrease in manufacturing and material costs during the period. Looking forward, we anticipate improvements in gross profit and gross margin, principally associated with our expectation of increasing revenue, output, and capacity utilization levels. Next, I'll discuss operating expenses. Third quarter operating expenses decreased by $800,000 or 9% relative to last year to $8 million. This decrease in operating expenses was driven by the $1.1 million decrease in IP enforcement cost, offset in part by a $300,000 or 3% increase in all other operating expenses during the quarter. The first nine months of 2017, operating expenses grew by $3.3 million or 13% relative to last year to $28.4 million. This increase in operating expenses was result of a $1.2 million increase in patent enforcement costs $800,000 increase in research and development expense, a $300,000 increase for sales personnel and programs, and $1 million a year-over-year increase in all other operating expenses. The growth in our operating expenses during the first nine months of 2017 reflects our commitment to expand, protect, and defend our Aerogel Technology Platform and to position Aspen for solid long-term growth. Next, I'll discuss our balance sheet and cash flow. Overall, our cash flow was in line with our expectations for the first nine months of 2017. Cash used in operations of $5 million reflected our negative adjusted EBITDA of $5.5 million, offset in part by $500,000 of cash generated by changes in working capital during the period. Capital expenditures during the first nine months totaled $5.4 million, down from $10 million last year. We ended the first nine months of 2017 with $7.3 million of cash and minimal debt, current assets of $39.9 million, shareholders' equity of $101.5 million. In addition we had $11.3 million available under our revolving credit facility at the end of the third quarter. We've updated our full year financial outlook for 2017. Total revenues expected to range between $106 million and $112 million, revised from prior guidance of $104 million to $112 million. Net loss is expected to range between $19.3 million to $21 million, revised from prior guidance of $18.2 million to $20.8 million. Adjusted EBITDA is expected to range between a loss of $3 million and a loss of $5 million, revised from prior guidance of a loss of $2 million to a loss of $5 million. EPS is expected to range between a loss of $0.82 to a loss of $0.90 per share, revised from prior guidance of $0.78 to $0.89 per share. EPS guidance assumes a weighted average of 23.4 million shares outstanding for the year. 2017 outlook also assumes depreciation and amortization of between $10.7 million to $10.8 million. Stock-based compensation of between $5.1 million and $5.3 million. And interest expense of $200,000. In addition this financial outlook includes between $3.5 million and $3.9 million of cost expenses associated with our patent enforcement actions for the full year. We've also increased our projected average selling price for the full year to $2.90 per square foot, plus or minus $0.05. This projected average selling price reflects an increase of $0.05 from our prior guidance due to an expected mix of higher price subsea products during the fourth quarter. For the full year, we continue to expect the gross margin in the mid-teens. This gross margin expectation is unchanged from our prior 2017 outlook. We're also reaffirming our 2017 full year capital expenditure guidance of $6.3 million. As a reminder, $6.3 million projection is comprised of $1 million in new projects initiated during 2017 and $5.3 million in final expenditures for the pilot line, both [ph] in support of new products and other projects approved and initiated during 2016. Turning to cash in an aggregate level, we expect to generate cash during the fourth quarter due to projected improvements in operating performance, planned reduction in inventory balances, and continued constraints on capital spending during the period. Within the context of the adjusted EBITDA range spread out in our 2017 full year outlook, we expect to exit the year with between $10 million, $12 million of cash on hand. As always, project work, product mix, and unexpected expenses can create quarterly and annual variability in financial performance. I'll now turn the call back to Jessie for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from Eric Stine with Craig-Hallum. Your line is open.

[John Fairbanks:]

Hi Eric.

[Eric Stine:]

Hi Don, hi John. I was wondering if we can just start with subsea. I just wanted to confirm did you say that that the 3Q business level was $5 million. I guess confirm that first. And then you mentioned additional work, any way you can quantify that as you're thinking about 2018?

[Don Young:]

Yes Eric. Yes, just a little over $5 million for Q3. And what we said in our prepared remarks is simply that we had quarters in hand for both Q4 and for Q1. So, we're going on a strong Q4 in the subsea area as well.

[Eric Stine:]

Is that something where -- I mean I know -- well along with the refinery and petrochem, you've been a little hesitant to kind of view that as sustainable. I mean is it -- what you're seeing in some scene, does that make you more confident that that is something that's sustainable or are you still kind of taking a wait-and-see approach on that?

[Don Young:]

If you go back, we've been doing subsea work since -- I'd say about 2005 and our historic averages in that space are sort of in the $4 million to $8 million range. When you go back to those years where we had a spike in oil prices, $80, $90, $100 oil prices, those numbers -- our subsea numbers went up considerably. John, correct me, I think we had roughly $15 million in 2014 and over $20 million of subsea business in 2015. It came down in 2016 to numbers approximately $3 million or $4 million, if I remember correctly. And this year we've seen a nice uptick -- let's just say, oil prices have stabilized and technology has improved, cost cutting has taken place, combinations have taken place of companies in the subsea, and they have found a way to be more economic -- at projects, they are economically attractive in these areas. They're extending existing assets. Our products are terrific in that longer pipelines have greater thermal challenges. So, we continue to do win dominant amount of those more challenging opportunities. And all I can tell you is we've got to get Q4 lined up, we've got good Q1 lined up, and there's a lot of -- let me call this sort of positive body language out there across 2018 as projects are being either dusted-off or conceived of right now. So, -- again, we feel better about that about business, we do not expect to return to 2014 and 2015 levels. But to be solidly in our historical range is -- feels good to us.

[Eric Stine:]

Yes, that's great after where it's been as of late. Okay, maybe just turning to refinery, that part of the business continue in this round of earnings releases as I hear companies talking about the 2018, they're seeing increased activity, they've got set up and I know to this point again you've kind of been a little conservative on that. I mean is this an area where you're starting to see that oil being part of it, but just increased confidence in -- from market participants, seeing that potentially that gets back on better footing as well?

[Don Young:]

Time will tell. I've traveled a lot the last six weeks. I spent time in the field with all of our salespeople around the world and our partners and many of our end users. And I would say that things do feel more positive and I'll be more quantitative with you once we get a few more purchase orders in hand. I think that these levels are still below where they were in say 2014 and even the first part of 2015. So, we're still below those levels of overall market activity. We've grown our base revenue as I said in my in my comments, we will continue to hear in 2017 and we'll strive to, again, in 2018. We know that we're taking market share. We know we're penetrating our accounts and we know that we're moving down this adoption progression that I talk about from maintenance to small scope project work to larger scope project work. And we -- in both our core and our adjacent markets, we continue to make progress moving towards some of that larger scale project work. And while 2018 may or may not bring any large projects, we are in a very strong position in 2019 and 2020 for some of this work that we see that has been initiated. So, again, I'll tell you more quantitatively when we have purchase orders in hand I think. But we do feel better about that market. As I said in my remarks, we did see a little pause right after Hurricane Harvey here in the United States, but it was just pretty temporary and we feel there's nice opportunity for us here in Q4 and going into 2018 to provide solutions to some of the flooded insulation that that occurred and they've now evaluated. So, we're in a good position to grow from there.

[Eric Stine:]

Okay, that's great. Thanks a lot.

[Don Young:]

Thank you Eric.

[Operator:]

[Operator Instructions] The next question comes from Chip Moore with Canaccord. Your line is open.

[Chip Moore:]

Thanks. Maybe just dovetail on your comments there. Obviously, some short-term impacts with those storms in the Gulf, but this would seem to be a good case study, I guess, on the advantages of your product. Any changes in sort of discussions, customer behavior that you're seeing post those events?

[Don Young:]

I think, -- again, you don't ever wish that kind of devastation anywhere and certainly Hurricane Harvey was devastating. And we do believe that our materials really shine in resisting flooding or we're being able to recover from flooding relatively quickly. Hydrophobic open porous -- we do not -- we are not harmed by that once the flooding recedes. And in replacing other materials that were on these pipes, we do it quickly and we do it with high performance. So, it's just a nice combination of events, frankly. We are able to demonstrate that the product that was installed can withstand that kind of an event and again, go on very rapidly and get these assets up and running quickly. So -- and we're seeing that, there's no question.

[Chip Moore:]

Yes. Okay, good. And maybe if we switch over to the new power-gen product, maybe you can elaborate a little bit more on sort of how those initial orders have been coming and then sort of longer term as you get specked [ph] in with turbines and things like that, how you see that playing out?

[Don Young:]

So, we came out of the gate in July -- the beginning of Q3 and with our launch and we've said that we will get between $1 million and $3 million of orders here in the tail end of 2017 and we'll be comfortably in that range. And I think very importantly we've begun to build some case studies and those are the best-selling tools that we can have. And so we feel that we're in a strong position. And the other thing that's so important is that we have been able to work our way into the specifications of some of these key players. And without being in the specification, you're always tempting to, sort of, crash the party frankly and being in the specs positions us for maintenance small scope and we believe over a longer period of time larger scope work in those high temperature ranges that are consistent with power generation. It’s a big market too, Chip. We also -- the more we have begun to work that market, the more convinced we are that we have a role to play in that market that consumes $1.4 billion of insulation every year.

[Chip Moore:]

Yes. No, that's great. I will hop back in queue. Let someone else in, but thank you.

[Don Young:]

Thank you.

[Operator:]

[Operator Instructions] Your next question comes from Ethan Potasnick with Needham & Company. Your line is open.

[Ethan Potasnick:]

Yes. Hi, this is Ethan Potasnick filling in for Sean Hannan. I was just curious if you could talk about the BASF partnership now that it's about 16 to 17 months' old. I'm wondering if you guys could share the degree that to which it's being additive? I know you guys talked about -- you guys were hoping to double building materials revenue in 2017 as well 2018. So, could you guys provide more color on the degree this is being realized in building materials? And what the BASF partnership is specifically contributing and perhaps when that should contribute more?

[Don Young:]

Yes. Thank you, Ethan. There are three elements to those agreements that occurred in the summer of 2016. The first one -- or one element was around technology development and so we have a joint development agreement with them where we are developing a next-generation product for the building materials market. And that work is going well. We're not quite in a position to announce the specifics of that, but what I would say is it's a product that we believe will be valuable in the market, excellent thermal performance, great energy efficiency capabilities, very important in the market today, a product that has limited combustibility -- non-combustibility, which, of course, has taken heightened visibility here over the course of the past several months. So, that's one element and a very important element and we are working very closely with BASF at that tactical level and making progress. Second element of that -- of the agreement, related -- really think of it is as almost kind of a consulting role in some of our operations in our plant. They are expert in several areas that are relevant to our manufacturing, not necessarily with Aerogel specifically, but with areas around material handling, a whole host of areas that where they are helping us put best practices in place. And we believe that we will see the benefit of that denominated in yield and throughput improvements in our east province manufacturing plant. Again, working closely and I think very good productivity in the partnership with that element. And then the third element was the rollout of what we were referring to as Spaceloft A2 in our building materials effort, a first-generation product that we have gone through testing and certification, particularly in the European market. And that process takes longer than we had anticipated and -- but we still believe that that product will contribute here in 2018 and beyond. What I would just kind of try to categorize for you is this generally speaking building materials was roughly 4%, 5% of our revenue here in 2017. We believe it can play a much larger role as we rollout in 2018, 2019, especially if we continue to make progress with the next-generation product here. So that will have some attributes that we think will be important. Let me just say, sort of, more broadly, we are working closely with BASF on some of our other -- we talked about the Aerogel Technology Platform, there are lots of concepts that we have traded ideas with BASF around, and again, it's an important and strong relationship for our company and we're confident it will pay dividends here in the short-term, medium term.

[Ethan Potasnick:]

Okay, great. And then on the operational side, could you describe some of your efforts to become more efficient, drive better margin, and what incremental dollars are we realizing today versus a year ago? And possibly what can we potentially -- you guys gain further from here?

[Don Young:]

Let me start and I might have John -- I mean the most important thing for us driving margin is driving volume through that plant. It's a big fixed asset and today we have the ability to generate roughly $150 million of product through that plant. In our economics, the model underlying that plant have remained strong. Even though our gross margins are a little lower, it's purely a function of volume going through that plant. We've continued to make progress in the efficiency of that plant; again, around throughput and yield that we believe will allow us to drive those gross margins and EBITDA margins that we've talked about for a long period of time as we fill that plant. John, do you want to add to that?

[John Fairbanks:]

Sure. I think as Don said, we really had -- we've had the time with a plant that hasn't been full over the course of the past few quarters, to really focus on operational efficiency, operational excellence and those efforts really are starting to pay-off. It's a combination of time spent, new process -- actually evolving process technology, and some capital expenditures over that time period. But our yields are now -- in our plant are at record levels. Our ability to run product through the plant, our throughput and productivity is at record levels. And the product that we're producing is of the best quality that we've seen now in our history. And so we've really put that operating of that -- the capacity -- the excess capacity, we've actually been able to use it to position ourselves that when we see the volume that Don talked about, we will be more profitable than we originally anticipated. And just in rough terms, we think we could generate gross margins now about two points higher than maybe what we thought we could do 12 to 15 to 18 months ago and that would also drop right down to the bottom-line. So, we're -- we still need to get that volume fill that plant, but when we do, we expect profitability to be even higher than we [Indiscernible].

[Ethan Potasnick:]

Okay, great. Thank you.

[Don Young:]

You're welcome.

[Operator:]

There are no further questions at the time. I'll turn the call back over to Don Young.

[Don Young:]

Thank you, Jessie. Appreciate it. Thank you for your interest in Aspen Aerogels. We look forward to reporting our fourth quarter 2017 and full year results to you in February 2018. Have a good evening. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.