Aspen Aerogels, Inc.
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Aspen Aerogels Q3 2015 Earnings Call. During the call, all participants will be on a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today Thursday, November 5, 2015 at 5 o'clock Eastern Time. I would now like to now turn the meeting over to your host for today's call, John Fairbanks, the CFO. Please go ahead, Mr. Fairbanks.

[John Fairbanks:]

Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. I'm John Fairbanks, Aspen's CFO. Before turning the call over to Don Young, Aspen's President and CEO, there are a couple of housekeeping items that I would like to take care of. First, we'll take questions at the end of our prepared remarks, and as the operator indicated, an archived version of this webcast will be available in the Investor's section of Apsen's website, www.aerogel.com. Press release announcing Apsen's third quarter 2015 results and business outlook as well as a reconciliation of management's use of non-GAAP financial measures as compared to most applicable GAAP measures is available on the Investor's section of the website. There you will find a summary statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the third quarter of 2015. 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 and such statements are subject to risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in the 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 Investor's section of Aspen's website www.aerogel.com. The forward-looking statements made today represent the Company's views as of today November 5, 2015. 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 the U.S. Generally Accepted Accounting Principles or GAAP. These non-GAAP financials measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Definitions of the reconciliations of these non-GAAP financials measures to the most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures is available on today's press release, which is also available on the Aspen website. 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 our Q3 2015 earnings call. I will provide comments about the business and our performance and John Fairbanks, our CFO will present the financial details of our third quarter, update guidance for 2015 and provide initial guidance for 2016. We will conclude the call with a Q&A session. We would like to start by announcing that we have chosen Statesboro, Georgia as the site for our second manufacturing plant. Our team ran an elaborate selection process that initially included international and domestic alternatives before we narrowed the list to potential sites in the Southeast part of the United States. We evaluated several attractive sites in Georgia and South Carolina. In the end, Georgia, Bulloch County and the City of Statesboro provided the best combination of incentives and operating features. The 43 acre site is served by rail and provides excellent access to the ports of Savannah, Charleston and Jacksonville. The City of Statesboro and the surrounding region is served by a well-developed technical education system, featuring Ogeechee Technical College, East Georgia State College. In addition, the region is home to a strong, available workforce and will provide Aspen with secure, low-cost utilities and good access to critical raw materials. Building on the momentum of the successful execution and start-up of line 3 in our East Providence manufacturing facility, we are confident we will deliver the first phase of plant two in a similar manner. The plant two project represents another critical building block to the long-term development of Aspen Aerogels following our IPO in 2014 and a successful start-up of the third manufacturing line in East Providence in 2015. With respect to Q3 operations, product revenue resumed its growth with a continued ramp up of line 3. Q3 product revenue grew by 26%, compared with Q3 2014. Sales were particularly strong in the U.S. and European refinery and petrochemical sectors, offset in part by weakness in the Latin American market, which we expected. In addition, our subsea work remained robust during the quarter. We believe, we are in a strong commercial position through 2015 and for the first half of 2016, but are being careful about predicting results for the second half of 2016 for both Company and macro factors. At the Company level, there are two items of particular interest. The first point relates to our subsea business. We had a record subsea year in 2014 with a revenue level of $13.8 million. We are poised to break that record in 2015 with subsea revenue expected to exceed $20 million, which will also result in unusually high ASPs for 2015 and especially half for the second half of the year. We have a strong value proposition in this business and are winning virtually all of the most thermally challenging subsea flowline projects. We believe, however that the size of the subsea business for Aspen Aerogels in a normal year is approximately $10 million and we expect 2016 to be a more normal year. The second Company-specific point relates to the large South Asian petrochemical project that we have been discussing for several quarters. The project has required an average of approximately $4 million per quarter of product since Q2 of 2014, and as anticipated will taper off after Q1 2016. With the end of this specific project, we anticipate that this customer's orders will level off in the range of $1.5 million to $2 million per quarter for the remainder of 2016, a move from approximately $16 million during 2015 to a level of approximately $10 million in 2016, with the majority of the impact occurring during the second half of the year. We're also facing the macro headwinds related to the depressed energy market leading to an industry wide reduction in capital projects. This influence has been at work on the industry for more than a year, but has not had a dramatic impact on us to date. We know however, that insulation work tends to come towards the end of a capital project and we are gauging the impact of this flywheel effect as we look out to the second half of 2016, and for a company that exports approximately two thirds of its product, the continued strength of the dollar is a negative factor. While we are confident in our outlook through 2015 and for the first half of 2016, the combined impact on our 2016 plan of the decreased volume from two 2015 revenue drivers, namely subsea and the South Asian project result in a need to replace approximately $20 million of revenue before we can achieve growth in 2016. These Company-specific factors coupled with a challenging macro environment are the reasons why we are conservative in our revenue outlook for the second half of 2016. On the flipside, over 70% of our revenue is derived from the downstream market where critical reliability and maintenance work is essential to safety and high utilization rates for our end-users. Many downstream end users favor lower oil and gas prices. This revenue is derived from refinery, petrochemical and LNG work and these markets remain strong for us. In fact, we commenced shipments to a project for an LNG receiving terminal in Thailand this quarter with expected revenue over the next two quarters of $5 million. This represents our first large scale LNG project win. Our lead times remain long and while the weak upstream energy market has led to delays and cancellations of projects within our commercial pipeline, we remain confident in our outlook for the remainder of 2015 and for the first half of 2016. Our team is focused on deeper penetration of our existing accounts and extra push towards ongoing maintenance activities and the emergence of our LNG project business in order to compensate for the completion of the South Asian petrochemical project, the return to normal levels for our subsea business and the macro headwinds. We would also benefit from being able to build a higher level of finished to goods inventory and to restock our distribution channel. As you know, we've been operating with low levels of finished goods inventory for many quarters, which in turn has led to long lead times for our distributors and end-users. We believe we will be able to do several things more effectively with a higher level of finished goods inventory. Maintenance work in refineries and petrochemical facilities occurs, day in and day out and relies on a ready supply of materials. If our products are not immediately available, the engineer will use incumbent products. We know we've missed maintenance business in 2014 and 2015 as the result of this scenario and believe that a higher level of inventory and a better stock distribution channel will help to mitigate the situation. Another benefit of higher levels of inventory is that it permits us to take longer runs on our manufacturing lines without the need for frequent changeovers. With limited inventory, we've been in a made-to-order mode of operation that results in lower yield and throughput and therefore lower revenue and gross profit. A higher amount of finished goods inventory also enables us to expand short-term business interruptions, such as the recent CO2 disruption or the unusual winter weather that we experienced during 2015. Finally, a higher level of inventory will allow us to gain traction in additional markets where our products have unique value and will enable us to diversify our end markets over time. Before, I turn the call over to John, I would like to comment on a couple of operational issues we experienced during the third quarter. The first point relates to the CO2 industrial gas disruption that we disclosed in our Form 8-K filing on September 22, with the associated revision to our 2015 financial guidance. As we described at the time, we received a force majeure notification from our primary CO2 industrial gas supplier as the result of a temporary feed-gas issue, impacting several CO2 facilities in the North-eastern United States. We lost $1.45 million of revenue, 2 gross margin points, and $848,000 of adjusted EBIT as the result of the CO2 disruption. In the short term, we are seeking additional sources of supply for our CO2, and as discussed, we believe a higher level of finished goods inventory will help mitigate such disruptions. Over a longer period of time, our second manufacturing plant will enable a diversification of manufacturing sites and allow for a broader array of industrial gas suppliers. The second operational point relates to the lower than expected gross margin reported for the third quarter. As we discussed two margin points were directly related to the CO2 disruption. In addition, we experienced two yield related issues early in the third quarter. First, we qualified a new source for Pyrogel batting with a goal to diversify our supplier base. We initially experienced reduced yields when running the new batting, but have since seen steady improvements. Our yields on these materials are now approaching plan. Second, we targeted a 16% increase for 2015 in the throughput of our Cryogel product. We achieved our targeted throughput, but experienced lower than planned yields at the advanced production rates. We're making steady progress towards balancing the throughput and yield goals and have well-defined plans in place to meet targeted levels. Overall, our efforts to improve plant productivity or to mitigate operating risk and having an unfavourable short-term impact, but we are confident these efforts will lead to enhanced results in the longer term. Overall, we continue to be cautiously optimistic. We are confident that we will perform well in Q4 and for the first half of 2016. We believe our expected financial performance in Q4 2015 will demonstrate the importance of leveraging our scale in terms of growth in revenue, gross margin and adjusted EBITDA. We are confident in our ability to execute our penetration strategy and to continue to operate at high capacity utilization rates. We believe our opportunity to continue to gain market share is significant. Now I'll turn the call over to John for a review of our financial results. John?

[John Fairbanks:]

Thanks Don. As Don highlighted during his comments, we achieved several milestones during our third quarter. We achieved record total revenue, supported by continued strong output from our third manufacturing line. We delivered record adjusted EBITDA. We selected Statesboro, Georgia, as the site for our second plant and we're well-positioned to deliver a record fourth quarter 2015 supported by a solid book of business. I'd like to start by running through our reported financial results for the third quarter at a summary level. Third quarter total revenue grew 24% year-over-year to $31.5 million. Third quarter GAAP net loss was $2.5 million or $0.11 per share versus $2.4 million or $0.10 per share last year. Our third quarter adjusted EBITDA grew 38% to $1.7 million compared to $1.2 million in the third quarter of 2014. We defined 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. 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 $30.9 million and research services revenue of $613,000. In the third quarter product revenue increased 26% versus the third quarter of 2014. This growth was due primarily to strength in the subsea market and in the petrochemical and refinery sectors in North America and Europe offset in part by particular weakness in the Latin American market. During the quarter we shipped 10.45 million square feet of aerogel blankets, which represented a growth of 12% over the third quarter of 2014 and was supported by output from our third manufacturing line. We expect to maintain double digit growth in the number of square feet produced during the remainder of 2015 and through the first half of 2016, due to the continued impact of our third manufacturing line. Our third quarter average selling price increased 13% versus the third quarter of 2014 to a record $2.96 per square foot, and reflected a temporary shift in product mix, the higher priced subsea products and the impact of price increases in the range of 4% over the past year across the mix of our products. We expect average selling price to remain in the range of $3 per square foot during the fourth quarter of 2015 due to continued record levels of subsea project revenue during the period. I'll now turn to our research services revenue. Our research services revenue is related to contract research performed principally for government agencies. Research revenue declined 28% versus Q3 '14 to $613,000, primarily due to limitations on our eligibility to receive SBIR contract awards. We expect research services revenue to increase during the fourth quarter of 2015 and to total approximately $2 million for the year. In addition, we expect research services revenue to remain in the range of $2 million, again in 2016. These expectations are included in both our updated 2015 revenue guidance and our initial 2016 revenue guidance. Next, I'll discuss gross profit. Gross profit grew 2% to $5.2 million and gross margin of 16% represented a decrease of 4 percentage points from the third quarter of 2014, and 1 percentage point from the second quarter of 2015. Several factors contributed to the year-over-year sequential decline in gross margin during the quarter. A favorable mix of products sold was more than offset by lower than planned manufacturing yields. In addition, we estimate the reduction in revenue potential and overhead absorption associated with the CO2 supply disruption reduced gross margin by 2 points. Looking forward, we expect an increase in gross margin into the mid 20% range, during the fourth quarter of 2015 due to increased production volumes, a favorable mix of products sold and expected improvement in manufacturing yields and productivity. Next, I'll discuss operating expenses. Operating expenses of $7.6 million in the third quarter of 2015 represented a modest increase of 3% from the third quarter of 2014. This increase was principally due to an increase in sales and marketing personnel and initiatives. We expect operating expenses to remain flat during the fourth quarter of 2015, in line with our efforts to enhance profitability. This expectation is included in our EPS and adjusted EBITDA guidance for the year. Next, I'd like to reiterate the impact that the CO2 supply disruption had on the quarter. Due to the previously announced disruption, we needed to intermittently idle the East Providence plant, resulting in the equivalent of 3.8 days of lost production. In dollar terms, we estimate that the disruption reduced both our output and revenue by $1.45 million and gross profit and EBITDA by $848,000 during the quarter. We also estimate that the supply disruption had the impact of reducing third quarter revenue growth by 6 percentage points, gross margin by 2 percentage points and EPS by $0.04 per share. Importantly though, the impact of the supply disruption was contained within the third quarter, and we have received delivery of our full CO2 requirements to date during the fourth quarter. Next, I'll discuss our balance sheet and cash flow. We ended the third quarter with $30 million of cash and cash equivalents, minimal debt, net current assets of $42.4 million and shareholders' equity of $119.6 million. In addition, we had $13 million of borrowing capacity under our revolving credit facility at quarter end. During the third quarter, net cash provided by operating activities of $500,000 reflected our adjusted EBITDA of $1.7 million, offset in part by an increase in working capital investment of $1.2 million during the quarter. Moving forward, we expect to generate positive cash flow from operations, expect our cash balance to be slightly higher than $13 million at the end of 2015. I'll now update our financial guidance for 2015. Total revenue is expected to range between $120 million and $122 million, up modestly from our prior guidance. This increase reflects our expectation that subsea revenue will continue to constitute more than 25% of total revenue during the fourth quarter. Our subsea business is normally characterized by a higher effective selling price and higher cost per unit. GAAP EPS is expected to range between a loss of $0.28 a loss of $0.31 per share, down slightly from our prior guidance of a loss of between $0.26 and $0.30 per share. This gap EPS guidance assumes weighted average shares outstanding of approximately 23 million shares for the year. Adjusted EBITDA is expected to range between $8.3 million and $9 million, refinement of our prior guidance of between $8.2 million and $9.5 million. This updated 2015 outlook also assumes depreciation and amortization expense of $9.9 million, stock-based compensation expense of $5.4 million and interest expense of $200,000. I'd like to emphasize that this updated 2015 guidance includes our expectations for a record fourth quarter. The differential between our 2015 full year guidance and our nine-month actuals indicates that fourth quarter revenue is expected to range between $34.9 million and $36.9 million. Fourth quarter adjusted EBITDA is expected to range between $4.6 million and $5.3 million and fourth quarter EPS is expected to range between earnings of $0.04 and $0.07 per share. As discussed earlier, we expect our average selling price to be approximately $3 per square foot and our gross margin to reach the mid 20% range during the fourth quarter. I'll now provide initial guidance for 2016. Total revenue is expected to range between $117 million and $122 million. GAAP EPS is expected to range between a loss of $0.06 and $0.15 per share. This GAAP EPS guidance assumes weighted average shares outstanding of 23.2 million shares for the year and adjusted EBITDA is expected to range between $11.5 million and $13 million. 2016 outlook also assumes depreciation and amortization expense of between $9.5 million and $9.8 million, stock-based compensation expense of between $4.7 million and $4.9 million and interest expense of approximately $200,000. For the year, we expect our average selling price to be approximately $2.75 per square foot and our gross margin to be in the mid 20% range. Although, we could experience some quarterly variability. Underlying our 2016 guidance is our expectation that we will build finished goods inventory during the year that would support approximately $14 million of revenue beyond the upper end of our guidance range. We believe this inventory build will allow us to improve customer service, to fulfil Russian last-minute orders, schedule and run our plant more efficiently and to create a potential buffer against unexpected events, such as this past quarter's CO2 supply disruption. I'll now turn the call back to Anastasia for Q&A. Anastasia?

[Operator:]

[Operator Instructions] Our first question comes from Ryan Cassil with Seaport Global Securities. Your line is open.

[Ryan Cassil:]

I guess, just looking at one of the comments you made before about not seeing the impact of the macro headwinds in the market currently, have you guys seen it start to impact your pipeline yet in terms of new orders or any color there?

[Don Young:]

So, the pipeline, as I said in my prepared comments, we have seen projects be delayed. We all have I think, whether it's in Canada or elsewhere, we've seen projects be delayed or cancelled within that pipeline. What I would say is that our commercial pipeline is still very robust, given the amount of capacity that we have and there is plenty of opportunity for us in 2016 and beyond to achieve our revenue goals. Maybe your question's getting a little bit to second half of 2016 and the conserved or careful approach that we've take to that. We feel, again, as I've said in my comments that we're very confident about 2015, the remainder of 2015 and the first half of 2016, but I think it's just prudent, just given the macro environment that we see to be a little careful about that second half and that's what we're doing.

[Ryan Cassil:]

Okay, can you give us a little color, just given that you have good visibility on the first half and maybe not so much on the second half, what you're assuming in terms of growth rate in the first half and maybe what that implies for just how you're being conservative in approaching the second half given that lack of visibility?

[Don Young:]

So, in terms of dollars, we believe that we can achieve $65 million of revenue in the first half of the year, and well-targeted to do that and so you can do the math from John's guidance from there how we're thinking about the second half at the moment.

[Ryan Cassil:]

Okay, that's down sort of 10% to 15% it seems like in the second half. Have I got that right? And just to be clear, that's based on just conservatism of what you think is going to happen and not what you're seeing in the pipeline already. Am I getting that right?

[Don Young:]

Yes, I think that's right, and also, don't forget, we've had Reliance plugging away -- excuse me, we've had this tough Asian customer plugging away for quarter after quarter since Q2 of 2014 and as I said, that's going to continue to Q1 of 2016, begin to taper off Q2 and then go down to that level that we discussed in quarters three and four. So, yeah there's just some -- there's just the math of that also, just dropping off as well, as expected.

[John Fairbanks:]

And we do have subsea related project work already slated for the first half of 2016, and we don't have visibility on significant project work in the second half as well, is what you're really seeing between the first happen and second half are those factors that Don mentioned. It's a run off of the South Asian petrochemical project and essentially a lower level of subsea related business in the second half of the year.

[Don Young:]

Ryan, as you know, our business -- this type of business doesn't typically have a significant backlog that maybe a capital equipment manufacturer might have, that might span out over a year or more and so, it's not particularly unusual that we don't have backlog or much backlog out in that timeframe. Again, I think, just being prudent is just the smart thing for us to do as we plan our business for 2016.

[Ryan Cassil:]

Okay, and then last one I guess, if I look at just at the top line assumption there and then what you've laid out for adjusted EBITDA, it implies quite a bit of leverage, a little bit more, I guess, than I was thinking. Could you explain given what's happening with gross margin and the yields this quarter, where you guys are getting that leverage? Is it from the gross margin line or is it expected to be from the OpEx line? Thanks.

[John Fairbanks:]

It's definitely the gross margin line moving forward Ryan. So, the yield issue that we experienced really peaked in July of this year, and we've seen steady improvement from that point in time. So, we have a high degree of confidence in our ability to deliver the fourth quarter of this year and that would obviously translate into our performance next year. In addition, we did talk about the fact that we expect to build roughly $14 million worth of finished goods inventory or inventory that would support $14 million worth of revenue and our standard margins on that kind of above inventory build are in the mid-20s, So, there's a significant ability if we can push that revenue out next year to have significantly higher EBITDA, but it is -- the economics of the business haven't changed, which feel very comfortable with the economics that we've presented in the past. The real issue next year is simply a revenue volume issue.

[Operator:]

Our next question comes from Chip Moore with Canaccord. Your line is open.

[Chip Moore:]

Just wanted to follow up there, and see if anything's changed in the past few months, I guess, that caused you to come out with guidance for next year now and then, if you did get better visibility on the second half, would you curtail that inventory build in the second half?

[Don Young:]

Well Chip, as I said and as John said, we do see benefits to having a higher level of inventory than we've been able to have over the course of the past -- most of the past two years. Having said that, we'll try to find the right balance between taking care of our customers and fulfilling those orders that we might not be anticipating at the moment in the second half of the year and so we would use that inventory for that purpose, but again, I think there is real merit for us to have a level of inventory that allows us to run the business a little more effectively than we are, right now.

[Chip Moore:]

Okay, that's fair, but nothing specific that changed to cause you to come out with that outlook now?

[Don Young:]

No.

[Chip Moore:]

Okay, and then, on the site selection. Good to see. Maybe you can elaborate on -- now that it's out there, some of the incentives that you got there and next steps. Thanks.

[Don Young:]

I'll ask John to talk a little bit about that. We're very pleased with this selection as I said in my comments, we actually had a handful of terrific sites in Georgia and South Carolina and Statesboro and Bulloch County, just a bit west of Savannah, Georgia proved to be an excellent site for us. So, John you want to say a few words?

[John Fairbanks:]

Sure. So as Don mentioned, we went through a very elaborate selection process. We probably looked at 45 sites and we've looked overseas and we've looked around the U.S. as well. Ultimately really cantered our attention on Georgia and South Carolina. Ultimately, within each of those states, South Carolina and Georgia, we pitted county versus county to make sure we were getting the best county deal. Ultimately, we selected our site in both Georgia and South Carolina and we then pit both states against each other, to ensure that we got the best state deal as well. Ultimately, State of Georgia, Bulloch County and the City of Statesboro really gave us a superior package of benefits -- in addition to a fantastic site located in close proximity to Savannah with a large, available workforce, but they also gave us outright land. They gave us free land. They gave us infrastructure support. They gave us tax credits, although income tax credits don't mean much to Aspen, there were job-related that cash credits, statutory credit that we could take in Georgia. Then they also gave us property tax abatements, training, support both at the state level and actually at the local college level, technical college level and then they give us a whole host of other incentives as well. It really was just a superior package and we're very, very pleased with the support that we got out of that community and we think it's going to be a great partnership, Aspen in the Statesboro region.

[Chip Moore:]

Great, and maybe just any next steps in terms of the timeline there, you could update us. Thanks.

[Don Young:]

Yeah, so in terms of the incentive package itself, we've already got it essentially signed on the bottom line, which is why we announced it today. Then next steps, we're continuing with our engineering effort, our Board has approved, where we're doing sort of plus minus 30% engineering work both with the site in mind, particular site in mind and we're streaming towards a point where we will order our long lead time equipment. We're still on pace for a start-up of that plant in the fourth quarter of 2017, but just given the demand parameters, we'll make those decisions as we move forward with our eyes wide open, but we see no fundamental reason to have any delays in that project from a project perspective, but as time progresses we'll make sure that we bring that demand online -- the supply online when demand warrants.

[Operator:]

Our next question comes from Tyler Frank with Robert Baird. Your line is open.

[Tyler Frank:]

Does the change in your outlook for next year -- given that you're going to be using more of your capital to build inventory, does that change your needs for the second plant in terms of, will you need to draw on outside sources of the capital in order to fund construction?

[Don Young:]

Yeah, it shouldn't -- it really is more dependent upon our revenue in 2017, our cash requirements were always kind of peeking in the queue. We're starting to become significant in the Q1, Q2 time period in 2017 when we were involved in the full-scale construction of the of the second plant, when we were paying the contractors to be on-site, the electricians and the plumbers and the general contractors as well. So, as long as we have strong demand for our product in the first half of 2017, we could probably eat into that inventory build and I think we'd be in a position where our cash needs will not change significantly.

[Tyler Frank:]

Okay, great and then --

[Don Young:]

[indiscernible] 2016.

[Tyler Frank:]

Okay, and then I guess the throughput issues that you guys have had in terms of the supply issue with the CO2, do you expect that to continue here in Q4 and what needs to be done to source additional CO2 suppliers that you can avoid this in the future?

[Don Young:]

Yeah, well, the force majeure from our primary supplier, it was an unusual event impacting not only our primary supplier, but one of our backup suppliers as well. So that's an unusual event. Again, what we're doing is, we're trying to create some additional layers of industrial gas suppliers to help us here in the short-term. Also, as we go to a second plant, of course we get some diversity in our manufacturing sites, but also a broader array, frankly, the Southeast is a much richer area when it comes to industrial gasses than is the Northeast, and so we'll have more diversity there as well. As I've said, there are some benefits to having a higher level of inventory than we've been able to carry so far, and one of those is to smooth out those kinds of events. I can't promise that it'll never happen again, but we're doing everything we can to mitigate it and I know that our suppliers are doing what they can to mitigate the situation.

[Operator:]

Our next question comes from Sean Meakim with JPMorgan. Your line is open.

[Sean Meakim:]

Thank you for all the detailed guidance. I've a similar question to some of the others, but I was thinking about asking it a different way. You noted that -- it's not really a backlog driven business, but I'm trying to think through just some of the different variables, as inventory builds next year, delivery times are to shrink and you try to backfill with what's probably shorter cycle MRO business and some of these different things you're to do to help. As we think about the second half revenue guide what's the window of time for you to improve that number or to replace some of the work that drops off?

[Don Young:]

Yeah, so, I think it'll be very -- we should start to have more and more visibility onto the third quarter as we begin completing Q1 of 2016. Again, and we feel strongly -- we feel confident in our ability to execute in Q1 and Q2 of next year, and so I think we'll have -- that would be sort of the normal amount of lead time for our business and you're right, we are putting extra emphasis today on our MRO business, and we actually -- we can see the U.S. based and the European based refiners delaying maintenance, deferring maintenance and we think that there's a good chance that we'll have a robust maintenance season, maybe a little delayed which suits us fairly well frankly, as the South Asian project drops off and as the subsea normalizes a bit. So I think that we'll have better disability on Q3 as we start to -- as we work our way through Q1 of '16.

[John Fairbanks:]

We should be able to give additional guidance in our earnings call in February.

[Sean Meakim:]

Okay, that's definitely helpful. Do you have a sense of what your sales mix is today for MRO? I imagine it's pretty small. Pretty small slice.

[Don Young:]

It is, I mean, I think you should think about it sort of in general as kind of a 50-50 situation, recently because of the South Asian project and because of the subsea, both of which we classify as project work, we're probably a little closer to 60-40 or even 65-35, project to maintenance, but I think if you look back over a longer period of time in our short history, over the course of three or four, five years there have been other times when it's been the opposite of that and I think it's -- our expectation in 2016 is that we'll get down to a bit more parity maintenance to project work. That's our expectation and that's certainly the way we see quarter two shaping up, and again as the South Asia project begins to come to a completion at the end of Q1.

[Sean Meakim:]

Right, that makes sense and then just the last part to that thought process I think is, if the revenue guidance proves to be accurate, we talked about some of this and certainly in the prepared remarks you mentioned some, but just to kind of summarize, the levers you have to pull on the margin side to make up some of the shortfall as top line comes in as you expect?

[John Fairbanks:]

Well, I think that our EBITDA guidance is aligned with our top line guidance and so the differential principally is that if we're able to sell that inventory, we would generate incremental gross profit and incremental EBITDA of mid-20s for every $1 that we are able to beat our revenue guidance by, the upper end of our revenue guidance. So the principal lever next year is, selling some of that incremental inventory, that additional inventory that we'll build during the year. We believe, there's always all during the year -- we believe there's always room for us to improve yields and improve output and as a management team we're always committing to doing that in the plant. We are very careful on the operating expense side. We always maintain very tight expense budgets and we'll continue to do that, but really going forward next year it comes down to us selling some of that inventory and that's where the upside would be generated.

[Don Young:]

And I would just add to that, we have good team of people running our East Providence plant, and we have high expectations that we will run that facility leading to better yields and driving profitability, even with this guided relatively flat revenue stream projection that we've issued today. So I think we have some leverage in our ability to run our business better as well. End of Q&A

[Operator:]

There are no further questions in queue at this time. I'd like to turn the call back over to the presenters.

[Don Young:]

Thank you very much. We are eager to close the year 2015 with a strong quarter. We believe we are well-positioned to finish 2015 at record levels. We thank you very much for your interest in Aspen Aerogels and we look forward to reporting our fourth quarter results to you in late February. Have a good evening. Thank you.

[Operator:]

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