Aspen Aerogels Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Good morning. Thank you for attending Aspen Aerogels Inc. Q3 2023 Financial Results Call. All lines will be muted during the presentation portion of call with an opportunity for questions and answers at the end. I would now like to turn the conference over to your host, Neil Barorinsky, Aspen's Senior Director of Corporate Strategy and Finance.

Operator

Thank you. You may proceed, Mr. Baranski.

Speaker 1

Thank you, Elliot. Good morning, and thank you for joining us for the Aspen Aerogels fiscal year 2023 Q3 financial results conference call. With us today are Don Young, President and CEO and Ricardo Rodriguez, Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don. 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, U.

Speaker 1

S. Generally Accepted Accounting Principles or GAAP measures is available on the Investors section of Aspen's website, www.aerogel.com. In addition, I'd like to highlight that we've uploaded to our website a slide deck that will accompany our conversation today.

Operator

The call. You can find

Speaker 1

the deck in the Investors section

Operator

of our website.

Speaker 1

On today's call, management will make forward looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statement on Pages 12 of the slide deck as the content of our call will be governed by this language. The call.

Speaker 1

During this call, we will refer to non GAAP financial measures, including adjusted EBITDA. These financial measures are not prepared in accordance with 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. The definitions 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 are included in yesterday's press release. And one final note, during the Q and A session, in the interest of time, we ask that you limit your questions to 2 questions at a time.

Speaker 1

You have additional questions beyond the initial two, please get back into the queue and we will get to all questions. I'll now turn the call over to Don. Don?

Speaker 2

Thanks, Neil. Good morning, everyone. Thank you for joining us for our Q3 2023 earnings call. My initial comments will highlight our Q3 performance and Q4 outlook, the status and impact of several critical elements of our strategy and our EV OEM development pipeline. Ricardo will dig deeper into our financial performance and our business strategy.

Speaker 2

Ricardo and I will expand upon last week's announcement related to our upgraded revenue and adjusted EBITDA outlook for 2023 and the addition of Audi and Scania to our list of OEM design awards. We will conclude with a Q and A session. Q3 revenue was a record at over $60,000,000 Pirates and Thermal Barrier revenue was $33,000,000 surpassing that of Energy Industrial of our Energy Industrial business for the first time. We believe pyrothin thermal barrier revenue for the second half of twenty twenty three will be 3 or 4 times larger than It was for the first half of the year. Gross profit for the second half of twenty twenty three will be 2 or 3 times larger the year.

Speaker 2

Energy industrial activity remains strong while the team manages through a supply constrained period as we shift Plant 1 to produce pyrothin thermal barriers and test the system of our planned supplemental supply for Energy Industrial. We are making good progress on both initiatives. In addition to the ramping of the pyrothin thermal barrier business, A highlight for Q3 is the continued progression of our gross margins through 2023, 11% in Q1, 17% in Q2, 23% in Q3. We anticipate continued gross margin expansion in Q4 as we progress on the path to achieving our targeted 35% gross margin. Based on our Q3 performance and current momentum, On October 24, we announced a revenue outlook of at least $225,000,000 favorably modified from an earlier outlook of a range between $200,000,000 $250,000,000 The UAW strike has not impacted our revenue, but we will remain cautious until the tentative agreements have been ratified and the auto workers are fully back to work.

Speaker 2

We also announced an improvement to our 2023 adjusted EBITDA outlook from a midpoint of negative $50,000,000 to a midpoint of negative $35,000,000 our second enhanced adjusted EBITDA outlook in as many quarters. The improved outlook for adjusted EBITDA is driven by higher volumes leading to a fuller fixed cost absorption. We expect this trend to continue in Q4. Also on October 24, We announced the additions of Scania and Audi, both part of the Volkswagen Group, to our list of design awards. We expect revenue from these two awards to commence during 2024, scale in 2025 and be significant contributors in 2026 and beyond.

Speaker 2

We anticipate the opportunity to serve other European OEMs as well and continue to believe that we remain on track to reach our target of 6 OEM Design Awards by year end. 2 key elements of the implementation of our strategy are first, the full conversion of Plant 1 in East Providence to PyraThin Thermal Barrier Supply and second, the commencement of our supplemental supply dedicated to our Energy Industrial segment. We believe that both strategic initiatives will be functional in early 2024. A third key element of our strategy is the balancing of growth, scale and profitability, which includes the right timing of Plant 2 in Georgia. Our focus prior to the restart of full construction of Plant 2 is to utilize our existing assets, supply arrangements and current commercial opportunities to build a business that has the potential to produce annually approximately $550,000,000 of revenue, approximately $200,000,000 of gross profit and approximately $140,000,000 of EBITDA.

Speaker 2

We believe we are well positioned to attain this level of performance. Current industry headlines citing uncertainty related to EV capacity investments by OEMs and to the ramp for EV demand are consistent with the underlying assumptions we have used since early 2023 informing our operating and investment plans. Given the challenging capital environment, We are working to avoid unnecessary dilution for our shareholders by seeking to operate from a position of operational and financial strength and potentially by partnering with the DOE Loan Programs Office with whom we remain in close contact regarding our advanced Technology Vehicle Manufacturing Loan Application. We believe a more measured ramp in OEM EV production may enable us to have a capital efficient growth path utilizing our current assets that leads to profitability in the near term and without sacrificing our full growth opportunities in the longer term. Ricardo, over to you.

Speaker 3

Thank you, Don, and good morning, everyone. I'll start by covering our Q3 and year to date results before moving on to the 2023 outlook and then handing the call back to Don. For this quarterly call, I don't have any meaningful strategic updates to cover, and I'm happy to simply focus on reporting our results, with the Q3 representing an important transition period towards higher revenue run rate levels that enable meaningful reductions in our operating losses. Our strategy is also yielding positive developments in our commercial pipeline, such as the recent conversion of the LOI from Audi into an the award and are gearing up of production to begin supplying scanning at higher volumes next year. As Don mentioned, We feel confident in our ability to receive additional OEM awards as we focus on delivering results with our existing assets.

Speaker 3

To cover our performance, I'll start on Slide 4, beginning with revenues. We delivered $60,800,000 of revenue in Q3, which translates into 66% growth year over year and 26% growth quarter over quarter. As Don mentioned, this was an all time company record. We didn't suffer any supply disruptions, thanks to the team's efforts over the past 12 months in Rhode Island and Mexico to preemptively manage our supply chain. Year to date, we have delivered $154,500,000 of revenue, which reflects a 28% year over year increase.

Speaker 3

Year to date Energy Industrial revenues were $97,300,000 an 8% year over year increase. Given our limited aerogel production capacity, in Q3, we continued to focus on optimizing our Energy Industrial product mix to lighten the load on our operations by making those products that require the least standard hours of processing and delivered $27,900,000 in sales, reflecting a 21% quarterly decrease and a 13% year over year increase. As we previously mentioned, our energy business is sold out. We have a clear line of sight to about $216,000,000 of annual demand and currently have approximately $118,000,000 of backlog in orders to fulfill over the next few quarters. To fulfill this excess demand, we are focused on continuing to optimize our mix for steady supply during the remainder of the year and bringing in supplemental supply as soon as possible.

Speaker 3

EV Thermal Barrier Revenues of $32,800,000 We're up 175% year over year and 160% quarter over quarter, reflecting the accelerating ramp in GM's production of Altium platform based electric vehicles and steady volumes in the Toyota nameplate that we supply, the BC4X. General Motors has more than doubled the production of models that we supply them on quarter over quarter. Our year to date EV thermal barrier revenues were $57,200,000 representing an 88% increase when compared to the same period in 2022. Next, I'll provide a summary of our main expenses. Material expenses of $22,000,000 for the quarter made up 36 percentage points of sales, continuing to reflect the work that our supply chain and procurement groups have put into reducing the cost of some of our main raw materials.

Speaker 3

We see this as temporary relief and the result of conservative planning as well. So we will remain vigilant with the goal of ensuring that we can keep these below 40 percentage points of sales. The Q3 performance enabled our total year to date material costs to be a $58,000,000 or 38 percentage points of sales or 200 basis points favorable to our target of 40 percentage points of sales. Conversion costs, which we describe as all production costs required convert raw materials into finished products were of $25,000,000 or 41 percentage points of sales in Q3. These costs include all elements of direct labor, manufacturing overhead, factory supplies, rent, insurance, process logistics, quality and inspection.

Speaker 3

These results compare favorably to conversion costs in Q2 of this year, which were 46 percentage points of sales. This is the result of much better fixed cost absorption on our aerogel production costs driven by the higher sales run rate level of this quarter. As previously mentioned, our long term target for these costs at a roughly double revenue run rate. It's of 20 to 25 percentage points of sales. So we aren't done managing these.

Speaker 3

Well, we've made improvements, primarily thanks to the efficiency of our operations in Mexico. We need to continue capturing additional opportunities to reduce these costs. Looking ahead, as our teams start running all lines of our aerogel plant in Rhode Island to make pyrothin without any switchovers and find their flow, We're sure that we'll see some efficiencies. In Mexico, for EV thermal barrier parts assembly, this week we have a focused team with all hands on deck on increasing the uptime and throughput of our encapsulation and assembly equipment to drive efficiency and enable potential step up in demand. The launch next year of simpler designs for prismatic cells on a new set of encapsulation equipment that can be shared across programs will drive additional efficiency.

Speaker 3

Year to date, our conversion costs of $69,200,000 reflect 45 percentage points of sales and our performance improvement year over year here has been primarily driven by fabricating $9,900,000 of Subsea Products within our Energy Industrial segment in Mexico versus in Rhode Island. In Q3, company level gross profit margins were up 23% and our gross profit of $13,800,000 is a $20,200,000 improvement over our gross loss of $6,400,000 during the same quarter last year. Our Energy Industrial segment delivered $5,800,000 of gross profit or 182% year over year increase. In EV Thermal Barriers, we delivered $8,000,000 of gross profit in Q3. If we compare this quarter with Q2, Our EV Thermo variant gross profit improved by $9,100,000 on incremental revenue of $20,800,000 Our Q3 of 2023 gross profit in EV Thermal Barriers was $16,400,000 higher and the gross loss of $8,400,000 that we incurred during Q3 of last year in this segment, reflecting the benefits of starting to operate at a revenue run rate that aligns with the size of our operation.

Speaker 3

The resulting gross profit margins during the quarter were 21% and 24% for our Energy Industrial and EV Thermal Barrier segments respectively. Year to date, our gross profit of $27,300,000 reflects a $36,700,000 improvement in gross profit versus our gross loss of $9,400,000 during the same period last year. Operating expenses, which are sized for near term projected annual revenue capacity of over $550,000,000 or $28,400,000 These ran up in the quarter above our target range as we had several one time expenses related to the reallocation of our resources from support functions and overhead to further building our technical capabilities. Approximately 1 third of our quarter over quarter OpEx increase $3,000,000 was driven by strategic investments and resources tied specifically to accelerating EV thermal barrier product development and commercial launch activity with specific customers tied to unannounced OEM awards. Putting these elements together, Our adjusted EBITDA was negative $7,300,000 in Q3 compared to negative $23,200,000 during the same period last year, resulting in a $16,000,000 year over year reduction in our EBITDA loss or a reduction of 68.5%.

Speaker 3

As a reminder, we define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock based compensation expenses and other items that we do not believe are indicative of our core operating performance. In Q3, these other items included $2,800,000 of stock based compensation, dollars 1,300,000 of interest income and $2,200,000 of employee retention credits from the government. Our net loss in Q3 decreased to $13,100,000 or $0.19 per share versus a net loss of $29,600,000 or $0.75 per share in the same quarter of 2022. Our quarter over quarter net loss decreased by $2,300,000 from $15,400,000 Our year to date net loss of $45,300,000

Speaker 4

Is CAD

Speaker 3

27,800,000 lower than our loss of CAD 73,100,000 during the 1st 3 quarters of last year or down by 38%. Next, I'll turn to cash flow and our balance sheet. Cash used in operations of $7,500,000 reflected our adjusted EBITDA of negative $7,300,000 and cash Qs for working capital of $1,500,000 offset by interest income of $1,300,000 The key items that resulted in a usage of working capital were an increase in accounts receivable of $10,200,000 and inventory of $1,100,000 offset by an increase in accounts payable of $1,000,000 and the crude expenses of $6,000,000 and a decrease in prepaid expenses of $1,900,000 Our capital expenditures during the quarter were $32,300,000 These put our operating cash needs for the quarter at $39,800,000 $10,000,000 of our CapEx was spent in closing the main buildings of Plant 2 in Georgia and helping bring the plant to a healthy resting spot of while securing the site, while the remaining $22,000,000 was spent on continuing to tool up our facilities in Mexico to support the EV thermal barrier capacity ramp of 2024 2025, while covering the last invoices of the construction of our recently opened Advanced Thermal Barrier Center. The conversion of our remaining lines in Rhode Island to making Pyrothene is also covered by these $22,000,000 We have incurred $255,000,000 in capital expenses through the end of the Q3 towards plan 2 in Georgia.

Speaker 3

We ended the quarter with $94,600,000 of cash and shareholders' equity of $409,800,000 This balance is over $20,000,000 higher than our expectations going into the quarter as we have managed to reduce the quarter over quarter cash burn of the company by $33,900,000 or 46 percent to $39,800,000 versus the $73,700,000 in the prior quarter. Turning over to Slide 5, I'd like to spend some time recapping the last 15 months and cover where we've been before going into our updated financial outlook for the remainder of 2023. On the left side, you can see how we've improved the company's gross profit margins from 11% in Q1 of this year to 17% in Q2 and 23% during the most recent quarter. Our adjusted EBITDA loss has also shrunk from a loss of $23,000,000 in Q3 of 2022 to an adjusted EBITDA loss of $7,000,000 in the most recent quarter. In Q3, it's no surprise that the lion's share of our 26% quarter over quarter revenue ramp was driven by 160 the presentation.

Speaker 3

We will now begin the presentation portion of the presentation. We will now begin the presentation portion of the presentation. We will now begin the presentation portion of the presentation. GM has more than doubled its production run rates for Altium powered vehicles from Q2 into Q3 and barring any interruptions, we expect this this ramp to continue. This ramp in demand from General Motors drives our revenue guidance range to above $225,000,000 of 2023.

Speaker 3

Running at an implied $70,000,000 or above quarterly revenue run rate for Q4 enables us to lower our EBITDA range to a loss of $30,000,000 to $40,000,000 a loss reduction of $15,000,000 this is our prior range of negative $40,000,000 to negative $55,000,000 of adjusted EBITDA for the year. As we factor in the effect of meaningful interest income and a different amortization schedule as we operate with less deployed capital, We're also lowering our net loss guidance for the year from a loss of $75,000,000 to $85,000,000 to a loss of $52,000,000 to $62,000,000 This improvement of $17,000,000 represents an 18% 17% reduction on the lower and upper end of our prior guidance range respectively. This also brings our earnings per share guidance to an updated loss range of $0.76 per share to $0.90 per share. With $147,700,000 of CapEx spent year to date, we realize that we're very close to our previously stated CapEx guidance of $150,000,000 for the year. Last quarter, we mentioned that we would only increase this amount We saw a very clear picture of a 2024 EV thermal barrier demand increase as the second half of twenty twenty three materialized.

Speaker 3

Now that we've experienced this ramp, we think that it is prudent to spend up to an additional $25,000,000 in Q4 of 2023 To enable additional capacity improvements for thermal barrier assembly in Mexico and improvements to our aerogel plant in Rhode Island, as well as preserving the value of our assets in Georgia. For Plan 2 in Georgia, October was really the 1st month at which the spend level cross below our target level to preserve the site now that it has arrived at a healthy resting spot with all the equipment that is on-site secured in a temperature controlled environment. These $25,000,000 would bring our CapEx spend for 2023 to $175,000,000 and enable us to flex up to supply a plan that isn't as constrained as our original expectations for 2024. In the near term, we continue focused on managing the company with at least CAD75 1,000,000 of cash on the balance sheet and are pursuing non dilutive sources of financing such as working capital, lines of credit, asset backed loans, equipment leases and other instruments that leverage our current asset base. You may remember that on June 15, we terminated our ATM program and that we have not sold any equity in 2023.

Speaker 3

Turning over to Slide 6. At this point, you've heard Don and I outline for several quarters and in every meeting Our team is focused on making the most of our existing assets and leveraging our partner in China to have approximately $550,000,000 of revenue capacity and deliver 35% gross margins as we get close to maximizing this capacity. While I'll let you digest this slide on of. Your own showing how our quarterly results of 2023 compare with this North Star, it's easy to see how on a run rate basis, The profitability of our business has been positively evolving during the 1st three quarters, with progressive increases in gross profit from 11% in Q1, 17% in Q2 and most recently 23% in Q3 at a $244,000,000 annual revenue run rate That is still only 44% of our potential capacity. When we compare the last 12 months For the prior 12 months, our revenue run rate has increased by 41%, while our material costs have decreased by 17 percentage points of sales and our manufacturing costs have decreased by 10 percentage points of sales.

Speaker 3

Our OpEx has basically remained flat as a percentage of sales and these have enabled us to shrink our EBITDA loss by 47%. These results or the benefit of rightsizing and right timing our capacity ramp. And as we look ahead to 2024 2025, We will continue adopting the same approach to posting results on the board without being influenced by headlines of a slowing demand for EVs and retimed OEM Investments. We believe that we may have been very conservative and cautious in our plans and are encouraged to see the updated reality continue to be above our expectations. The OEM ramp delays of the past 18 months and rising cost of capital have taught us a lot and we are confident that these learnings will enable us to continue playing offense by posting results and then making investments versus the treadmill of constantly playing defense by working the other way around.

Speaker 3

With that, I'm happy to turn the call back to Don.

Speaker 2

Thank you, Ricardo. We have covered a significant amount of ground today in reviewing Q3 and our near term outlook. Before we move to Q and A, I would like to emphasize our focus on driving significant profitability from our existing resources and opportunities. We believe the near term business profile as we have it constructed and again consistent with our current assets and commercial opportunities has the potential to produce on an annual basis approximately $550,000,000 of revenue, approximately $200,000,000 of gross profit and approximately $140,000,000 of EBITDA. We believe Q4 will be the next significant step towards this level of business performance.

Speaker 2

At the same time, we believe that we maintain our full longer term upside potential as we continue to win design awards from EV OEMs to expand our profitable baseload of energy industrial revenue and to leverage our aerogel technology platform into additional high value markets, including our ongoing work in battery materials. The key point is that we are seeking to avoid unnecessary dilution for our shareholders by optimizing the use of our existing assets and opportunities to create a dynamic and cash generating business. With that, we welcome the Q and A session.

Operator

Thank When prepared to ask your question, please ensure your device is unmuted locally. Our first question today comes from Colin Rusch with Oppenheimer. Your line is

Speaker 5

open. Thanks so much, guys. With the cadence of these incremental wins and the start of production. Can you talk a little bit about the dynamics around sell in to just fill the channel and get these guys supply to start production and how much actual sell through you're seeing on the vehicles at this point?

Speaker 3

Sorry, Collyn. Maybe just to clarify, so sell through on the end of General Motors specifically or Is this more related to additional OEMs?

Speaker 5

The dynamic we're trying to get after is how much of the growth is really coming from sell in into the OEMs. And as you have an incremental cadence of new program wins, there's going to be growth to support the production, but there's a lot of concern around how these vehicles are selling and potential stagnation in terms of growth at some point. So That's the dynamic we're trying to get after.

Speaker 3

Yes. I mean, I think there's sort of 2 parts to thinking about this one, right? I mean, We've known that some of these EVs have been sitting in lots for over a year at this point, right? And we factor that into our conservatism as we factor in the volume plans, not only when we are making our own plans, but also when we're quoting these opportunities. And When it comes to Altium specifically, it's a little tough to assess how close General Motors is hitting the demand limit.

Speaker 3

When they only produce, we estimate around 14,000 vehicles in Q3. And there's roughly 3000 to 4000, Chevy dealers in North America. And I mean that doesn't even come close to getting up to the limits of consumer demand for these vehicles. So we do think that GM has ways to go in terms of ramping up production before they start to see of any limit on consumer demand. Now as we look at additional opportunities kind of going to the second part of the question, I mean, we in the same way as we planned the ramp from GM and we truly have learned a lot through the delays with GM's ramp on how to deploy capital in these opportunities, how to design the processes to execute them.

Speaker 3

And we apply a very similar level of accounting to some of these opportunities in 20252026 that we're being awarded here in the near term. And It's worth noting that once an OEM puts together a sourcing package for a vehicle that is 2 to 3 years away. A lot of work has already been done and a lot of investment has already been made. And so we do feel pretty good about our ability to get more wins for this 2025 2026 timeframe. Now additional programs, I think, for that 2027 and 2028 timeframe, we do expect that to continue being retimed and frankly see the recent news of some retimed EV investments as It's something that was kind of inevitable just given everyone's cost of capital.

Speaker 3

And we were surprised that it actually took this long to ratchet back some of these investment expectations. But we still feel very good about the opportunities that we have in the horizon for 2025, 2026. And Even if we go back to our plans in 2021, we have not had to adjust those downward based on what we're seeing.

Speaker 2

Collyn, I would just add, I think the momentum that we've had moving from Q2 to Q3, I think you'll see that momentum continue for us here as we move into Q4 and into the New Year.

Speaker 5

That's super helpful. Thanks so much guys. And then as you work through contracting on new product wins or with these new customers, The value of both mechanical and the thermal performance of the material is becoming really well understood. I guess I'm curious about Any potential for price leverage on your part or at least price preservation even as you get into higher volumes with some of these customers given that mechanical performance.

Speaker 3

Yes. I mean for us it's really not just about the underlying merits of the material and the critical problems that it solves, but also the amount of capital that we've deployed And that we will continue to cautiously deploy here and an emphasis on paying it back, right. So we will manage pricing in a way that kind of come hell or high water. We really aligned with the gearing that we've presented here on Slide 6, for example, right? I mean, we want all programs and all sales that we execute here to not pull us away from this path of of getting 35% gross profit margins and we'll manage pricing to do that.

Speaker 5

Thanks so much guys.

Speaker 2

Thanks Scott.

Operator

We now turn to Eric Stine with Craig Hallum. Your line is open.

Speaker 6

Hi, Don. Hi, Ricardo.

Speaker 3

Hey.

Speaker 7

Hi, Eric.

Speaker 8

Hey, good morning. So maybe for me, I know in the past you had talked about that $550,000,000 run rate, 25 percent EBITDA margin and very good slide, appreciate that, that you gave this morning. I think previously you'd said thought that was possible in the next 4 to 6 quarters. And I know you're managing the contract manufacturer and ramping things up and you're constrained in EI and all of that. Is that still something that you see as possible on a run rate basis by, I guess, your expectation had been 3Q of 2024.

Speaker 3

It's not unlikely. I mean, if we actually included a slide In the back for everyone's benefit on, if you just look at GM alone and the ramp that they're in, right. So Kind of in spite of the headlines, if you just look at the IHS ramp and if you see GM's intended ramp, it's even higher than this. But there is the potential for them to just continuing doubling production every quarter for at least 2 more quarters, right? And the implications of that on our revenue run rate supplemented By the supply from China for our energy industrial business put us on this path to be able to get there.

Speaker 3

Now whether it happens in Q2, Q3, Q4, We're just cautiously managing it, but we do see it as something that is still possible.

Speaker 8

Understood. Yes, just making sure that's still kind of the expectation. That is helpful. And then maybe for my follow-up, Maybe just an update on the DOE loan that you're in the mix for. I know previously you talked about Potentially hearing kind of next steps by year end and the expectation that if you're invited for further diligence that That's a great sign towards the eventual award or possible award.

Speaker 8

Just curious if that's still the view.

Speaker 2

Thank you, Eric. Yes, the DOE the LPO process, we continue to be Closely engaged with the LPO office and the team, if you will, on that side of the table and working very closely with them. Our team is doing a great job. I think we're putting our best foot forward. And of course, it's always an unpredictable of process.

Speaker 2

But we do believe that we're on that timeline that we outlined earlier. And we hope to be able to keep you posted on that here in the as we work our way through Q4.

Speaker 7

Okay. Thank you.

Speaker 2

Thank you.

Operator

We now turn to Alex Potter with Piper Sandler. Your line is open.

Speaker 7

Great. Thanks, guys. So I was wondering just maybe Obviously, you're working on the contract manufacturing avenue with your partner in China. Any update you can give on how that's progressing? What gives you Confidence that everything is on track and on time.

Speaker 2

Well, we again, that's a We're impressed by them. We're working very closely. It's a matter of qualifying our products, setting up the supply chain, the logistics, working with our energy industrial customers. And it's going very well. And we have said that we will test the system here over the course of 2023 and we're doing just that now And that it should be up and contributing at the early part of 2024.

Speaker 2

And Alex, we're right on that path. So we're confident. We're impressed by the work that we're doing together with our supplemental supplier and again, right on track.

Speaker 7

Okay. That's great to hear. And then the second question I had was on the pyrothin Volume that you're selling into GM for the Altium products. Just kind of curious, are they putting Pyrites in themselves In their own inventory? Or are they taking it from you putting it directly into a vehicle and pushing the vehicle out?

Speaker 7

I'm just trying to understand, Obviously, you're producing, you sell to them, but I don't know if just I guess trying to gauge whether there's the potential for inventory buildup Or shortages at any point between you, GM and then downstream of GM.

Speaker 3

Yes. I mean, I think the best way to think about it is that it's fair to say that A part that we're making in Mexico right now probably won't find its way into a finished vehicle for about a month. And so when the ramp is as significant as what we're seeing, right, looking at the 14,000 of vehicles, Altium based vehicles that we believe GM built in Q3 isn't totally enough to Our revenues, right. You would if you take our revenues divided by $14,000 you end up with a CPV that's way higher than what's actually there. And so, GM is building up a decent amount of inventory here to enable the ramp.

Speaker 3

And from what we understand, I mean, they've been hand to mouth here during Q3. And we'll have to see really kind of going back to Colin's question on, we'll see how long these vehicles then spend on the lot to translate that into ultimate sales for GM, but we do see about a 1 month delay, Which kind of gives us the chance to recognize revenues and build revenues of a month ahead of the end of the quarter, right.

Speaker 7

Okay, got it. Thanks. That's very helpful. I'll pass it on.

Speaker 2

Thank you. Thanks, Chris.

Operator

Our next question comes from Jeff Osborne with TD Cowen. Your line is open.

Speaker 6

Thank you. Good morning. Two quick ones on my side. I was curious on the Audi win, that's great to see. Is that part of a broader program as part of the VW family Maybe just starting with one vehicle in 2024, any help there would be helpful because I thought you were targeting more pack designs across multiple vehicles as opposed to a one off.

Speaker 6

So understanding that would be helpful. And then Any other updates that you could share on the battery materials side of the business? You haven't talked about that in a few quarters, but I'm just curious how that's progressing would be also helpful to understand.

Speaker 3

Yes. So happy to jump in on the first one there, Jeff. Yes, so the Audi program is an electric vehicle platform, which means that multiple different Audi nameplates this. Could be based on this platform.

Speaker 2

And then on the Battery Materials side, we continue to work on advancing the technology and We are endeavoring to solve a hard problem and we are making, I think, steady and Interesting progress on that. We've kept quiet on it To a great degree on purpose as we've continued to advance that. I think it will be of an opportunity for us to talk about it. In the coming earnings call or 2, and I would really Like for that to not only talk about the status of the technology, but perhaps also the status of 1 or 2 working relationships we have with 3rd parties At that point, helping us advance the technology and taking it that next step. But it's a very Exciting program for us.

Speaker 2

We've got an excellent team of people working on it and It's we're careful in our expenditures, but it's adequately and well resourced to continue to advance that technology.

Operator

We now turn to George Giancarakis with Canaccord. Your line is open.

Speaker 9

Hey, good morning and thanks for taking my question. Maybe just to focus on some of the potential EV OEM awards that you haven't announced yet that could get announced by the end of the year. Curious, can you just shed a little light on when you expect potential volumes to start there? Just so we can understand When we look to 2024, how diversified will your pyrothene business be away from GM? Thank you.

Speaker 3

Yes. Thanks, George. So I mean those awards would really kick in, in 2025. The meaningful volumes and the ramp would happen in 2025. So for 2024, it's fair to say that we will still be fairly of GM, which is proving out to not be a bad thing now.

Speaker 3

And then Toyota and Scania will also ramp up in the second half of next year.

Speaker 2

Thank you. And maybe to the

Speaker 9

extent you could share any details on Toyota, I mean they seem to be in the at least in their public pronouncements going Back and forth with their commitment to EVs. I mean, what sort of momentum do you see with that account? Thank you.

Speaker 3

Yes. I mean, I think we would put them in similar bucket as the other OEMs. I mean, they still haven't announced a broad battery platform strategy. Instead, it's more of a nameplate by nameplate approach. And that scope Can increase, but we don't see anything here in the near term for 2024.

Speaker 9

Thanks.

Speaker 2

Thank you, George.

Operator

We now turn to Chris Souther with B. Riley. Your line is open.

Speaker 10

Hey, guys. Thanks for taking my questions here. Could you talk through the moving pieces on the revenue and EBITDA guidance for the Q4. You said revenue is expected to grow, gross margins are expected to increase. And you had a $7,000,000 EBITDA loss in the Q3.

Speaker 10

So like what are the moving pieces around the low end of the EBITDA guidance, Yes, dollars 8,000,000 loss. Can you talk through what you'd need from a revenue perspective to hit the positive EBITDA in the Q4 or is it some specific output out of China or other factors that would kind of be in play there?

Speaker 3

Yes. No, that's a good question. We knew you'd kind of go there. And we really are protecting for the doomsday scenario here. If you look at the negative $40,000,000 of EBITDA, right, of potential EBITDA, I think we'll be forthcoming tightening that up as November materializes here.

Speaker 3

But for us, really when we looked at The UAW agreement not being ratified, some of the big certification work streams with the Contract manufacturer is still in full swing and the potential cost of an additional turn of certification on those products. Really, if you combine all of those negative things that could happen albeit with low probabilities, that's how you end up at the Negative $40,000,000 of EBITDA. And yes, I mean, I do think that given the ramp that we Expect for Q4, we will have an opportunity to potentially tighten that range.

Speaker 10

Understood. Okay. That's really helpful.

Speaker 2

Yes. Chris, I would say That is a reasonable chance that we'll provide one more update before year end on some of these topics that you and Your colleagues have asked about revenue and EBITDA, additional OEM awards, commentary on the DOE LPO, those sorts of things, I think It could very well be appropriate for us to again to update you all one more time before year end.

Speaker 10

Got it. Okay. That's really helpful. And then, just You kind of talked through your sales not matching up kind of as a leading indicator of GM production, because obviously the implied ASPs otherwise would have been very high here. Where are The ASP is kind of shaking out.

Speaker 10

If we exclude the scania stuff, just for kind of general Cars, SUVs that are in your OEM awards and how much revenue are you guys getting from of awards that you haven't yet received as far as kind of component sales that are related to testing and the like. I just wanted to see if you could kind of provide a bit more clarity around that.

Speaker 3

Yes. I mean, the prototype revenues right now make up well less than 10% of our pyrothin revenues. And then I'm assuming you mean more around in when it Comes to the rest of the pyro thin revenues, you mean more on our content per vehicle, right? How that is tracking?

Speaker 10

Yes, exactly. Yes, exactly.

Speaker 3

Yes. And so I mean, we're still pretty consistently seeing our content per vehicle in that $700 to $1,000 per vehicle range, Given that the bulk of what we're supplying is vehicles with pretty large packs and powered cells, right? And When we add one of these prismatic programs, I think the content there is more in the $3.50 to $400 per car range. But nonetheless, I mean, it's a much simpler part to produce. It requires a lot less capital.

Speaker 3

And so we're happy with the economics of those awards as well. But right now, I mean, if you're looking at What we're producing here what we produce here in Q3, what we'll do in Q4 and most of 'twenty four, it's still going to be this of large pouch configuration with the CPD in that $700 range.

Operator

Our next question comes from Tom Curran with Seaport Research Partners. Your line is open.

Speaker 4

Good morning, guys. When it comes to the supplemental supply that you're in the process of testing with your Chinese contract manufacturing partner. Is the expectation still that once that's fully ramped To the maximum expected capacity that your available quarterly revenue capacity for Energy Industrial would be around $37,500,000 And then when it comes to that $118,000,000 backlog of unfilled orders, How much

Speaker 9

time do you feel you have to

Speaker 4

catch up with those orders? And do you have any risk or liability related to letting them remain unfilled past a certain point in time.

Speaker 2

Well, it's a good question, Tom. We are very close to our Energy Industrial customers and the distribution channels and the engineering firms And we actively communicate with them to be sure that we're meeting their expectations. And But we are in a position to switch over to the supplemental supply again early next year. And we feel that we will fulfill our obligations, our responsibilities to those customers. And quite frankly, that business is strong.

Speaker 2

Our sales team on the Energy Industrial side is very active on both the Pyrogel side of the business and the cryogel side at the LNG part of the business. And so that business is going to continue to grow and be an important the base load of revenue and gross profit for our company. And so again, We feel we're in a good position with those customers communicating well. Yes, the backlog and you might remember if If you go back to the last time we were short of capacity, the backlog is substantial and but we're in good shape. As long as we communicate well, I think we're good.

Speaker 3

Yes. And if I may add, I mean, the team is pretty good at assessing what gets into that $118,000,000 backlog and which orders they accept and an order makes it into that $118,000,000 If the team has line of sight to fulfilling it within a reasonable timeframe.

Speaker 4

Glad to hear that. That's reassuring. And just to follow-up and try to clarify, within the $550,000,000 Would you think of fully eventual fully available annual revenue capacity for EEI being around 150,000,000

Speaker 2

Yes. Yes, we would.

Speaker 7

Okay.

Speaker 2

I mean, when we think about the 550, We do think about the pyrethin part of that being 400 and the remaining part being the Energy Industrial side of our business.

Speaker 4

Got it. Thanks for that clarification, Don. And then Turning to EBTB, when it comes to these next two potential awards that you remain very optimistic about of landing before year end. Would you still expect at least one of those to result in a new customer, essentially what would be customer number 4?

Speaker 3

Yes, that's correct. Yes, I mean, we kind of put your bingo board there on Slide 3, And we would expect different logos on there.

Speaker 5

Sorry, you

Speaker 4

know I love playing my bingo. I'm almost 50. Thanks guys. I'll turn it back. Thank

Speaker 2

you, Tom.

Operator

This concludes our Q and A. I'll now hand back to Don Young, CEO for closing remarks.

Speaker 2

Thank you, Elliot. We appreciate your interest in Aspen Aerogels. We look forward to Staying in close touch with you and reporting our Q4 2023 results to you early next year. Be well and have a good day. Thanks so much.

Operator

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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Key Takeaways

  • Q3 record revenue of $60.8 M, with PyroThin EV Thermal Barrier sales ($32.8 M) surpassing Energy Industrial ($27.9 M) for the first time and gross margins rising from 11% in Q1 to 23% in Q3.
  • Management upgraded full-year 2023 guidance to at least $225 M in revenue and improved adjusted EBITDA to a midpoint of –$35 M, driven by higher volumes and better fixed-cost absorption.
  • Aspen added Audi and Scania (VW Group) to its OEM design awards, with volume shipments starting in 2024, scaling in 2025 and becoming major contributors by 2026, and a goal of six awards by year-end.
  • Material costs fell to 36% of sales and conversion costs to 41% in Q3, reflecting supply-chain improvements and Mexico plant efficiencies, on track toward long-term targets of <40% and 20–25%, respectively.
  • Key strategic initiatives include converting Plant 1 for PyroThin production and bringing on supplemental Energy Industrial supply in early 2024, leveraging existing assets toward a $550 M revenue run rate with ~$140 M EBITDA.
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Earnings Conference Call
Aspen Aerogels Q3 2023
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