Aspen Aerogels Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

Key Takeaways

  • The implementation of a supplemental supply arrangement allows Aspen to serve energy industrial customers with shorter lead times, dedicate Plant 1 to EV thermal barriers and optimize the timing of Plant 2 construction while maintaining a strong balance sheet and targeting ≥35% gross margin.
  • Aspen’s near-term business profile, built on current assets and opportunities, targets an annual $550 million revenue run-rate producing ~$200 million gross profit and ~$140 million EBITDA within the next 4–6 quarters, while preserving long-term upside via further technology expansion.
  • Progress in the EV OEM pipeline includes three active design awards (GM, Toyota and a European commercial truck subsidiary) with production already underway, and line-of-sight on at least three additional OEM awards expected to commence volumes in 2024 and ramp in 2025.
  • The Energy Industrial segment delivered a record Q2 27% gross margin, driven by product mix and efficiency gains, and boasts a backlog of ~$138 million; contract manufacturing tests are underway in 2023 with full supplemental supply expected to contribute in Q1 2024.
  • In Q2 2023, revenue grew 6% YoY to $48.2 million with a 17% gross margin and a 41% reduction in adjusted EBITDA loss. Aspen maintained OpEx near $25 million per quarter and narrowed its full-year guidance to $200–$250 million in revenue and an EBITDA loss of $50–$55 million.
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Earnings Conference Call
Aspen Aerogels Q2 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good morning. Thank you for attending the Aspen Aerogel Inc. Q2 2023 Financial Results Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to turn the conference over to your host, Neil Boronsky, Aspen's Senior Director of Corporate Strategy and Finance.

Operator

Thank you. You may proceed, Mr. Dubaronsky.

Speaker 1

Thank you, Henry. Good morning. Thank you for joining us for the Asthma Aerogels fiscal year 2023 Second Quarter Financial Results Conference Call. With us today are Don Young, President and CEO Ricardo Rodriguez, Chief Financial Officer. There are a few housekeeping items that I'd like to address before turning the call over to Don.

Speaker 1

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. 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 have uploaded to our website a slide deck that will accompany our conversation today. You can find the deck at the Investors section 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 statements on pages 12 of the slide deck as the content of our call will be governed by this language. During this call, we will refer to non GAAP financial measures, including adjusted EBITDA.

Speaker 1

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 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. You have additional questions beyond the initial two, please get back into the queue and we will get to all questions.

Speaker 1

I'll now turn the call over to Don. Don?

Speaker 2

Thanks, Neil. Good morning, everyone. Thank you for joining us for our Q2 2023 earnings call. My initial comments will highlight the implementation of several critical elements of our strategy, our EV OEM development pipeline and GM's ramp and the financial benefits of key operating efficiencies. I will complete my remarks by drawing a picture of Aspen's business profile given current assets and opportunities.

Speaker 2

Ricardo will dig deeper into our financial performance and various elements of our business strategy. We will conclude with a Q and A session. During our last earnings call, we introduced the idea of our supplemental supply arrangement and the related plan to supply our energy industrial customers with products sourced from our aerogel manufacturing partner. The product will be produced exclusively for Aspen to our quality specifications and shipped by us under our labeling and through our distribution to our customers. The implementation of this supplemental supply arrangement supports several critical elements of our strategy.

Speaker 2

First, it allows us to serve our energy industrial customers with shorter, more dependable lead times and to continue to grow that baseload of revenue without supply constraints and in a manner consistent with our goal of achieving overall Company gross margins of at least 35%. 2nd, it allows us to dedicate Plant 1 in Rhode Island to produce pyrothin thermal barriers in order to support the ramp of our EV OEMs. And third, it allows us to maintain a strong balance sheet by right timing the final phase of the construction of Plant 2 in Georgia. In whole, the implementation of the supplemental supply arrangement allows us to focus on driving significant profitability from our existing resources and opportunities. We believe that we are building a business around our current assets and near term commercial opportunities 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 are striving to hit this level of business performance on a run rate basis over the next 4 to 6 quarters. At the same time, we believe that we maintain our full longer term upside potential as we continue to have talented teams garnering more design wins from EV OEMs to build out a profitable base load of energy industrial revenue and to leverage our aerogel technology platform into additional high value markets, including our ongoing work in battery materials. Regarding additional design wins from EV OEMs, We continue to build our reputation as an industry leader in the mitigation of the risk associated with thermal runaway. We are working closely with several EV OEMs as they finalize the designs of their battery platforms. As we announced earlier, we received our 3rd design award from an important commercial truck subsidiary of a major European OEM group.

Speaker 2

We are now delivering production part to this customer. In addition, we believe we have near term line of sight on design awards from at least 3 other EV OEMs with volumes expected to commence in 2024 and ramp in 2025. In the meantime, We anticipate an acceleration of the revenue ramp from General Motors later this year as they enter the production phase of the higher volume Silverado, Blazer, Equinox and BrightDrop Electric Vehicles. Turning to Slide 4 and our Energy Industrial business, both financial performance and demand are strong, Driven by product mix, operating efficiencies and a more normalized supply chain environment, we achieved A record Energy Industrial gross margin in Q2 of 27%. We believe we are on track of Having the Energy Industrial business provides strong support for our overall company gross margin target of at least 35%.

Speaker 2

We have significantly greater demand than we can produce from Plant 1, especially as we dedicate additional manufacturing lines to producing pyrothin thermal barriers. The supplemental supply arrangement is key to balancing supply and demand for the Energy Industrial Business. We previously said that we plan to test our supplemental supply strategy during 2023 before the full program begins to contribute in Q1 2024. To that end, we are currently focused On the completion of our product qualifications with our aerogel manufacturing partner, which when completed, we believe has the potential to drive incremental energy industrial revenue, gross profit and EBITDA during 2023. Turning back to the earlier slide, in many ways, Q2 was about blocking and tackling with a keen focus on strategic advancement and unit economics and profitability.

Speaker 2

Progress in operating efficiencies resulted in a 17% gross margin with significant improvements in both the pyreth and thermal barriers and Energy Industrial segments. To illustrate the financial impact of the improved operating performance, It is interesting to compare Q2 2023 with Q2 2022, where we had $2,500,000 of incremental revenue and $9,600,000 of incremental gross profit. Each contributing factor falls under the umbrella of our intense focus on our goal of reaching near term profitability and achieving gross margins of at least 35%. Consistent with these goals, we are maintaining careful control of OpEx with 3 quarters in a row at the $25,000,000 level. Before I turn the call over to Ricardo, I want to reiterate that our vision for Aspen is built upon the successful execution of the 3 pillars of our strategy, namely The implementation of the supplemental supply arrangement, the dedication of plant 1 production to pyrothin thermal barriers and the right timing of Plant 2.

Speaker 2

Again, we believe that from our existing resources and opportunities, The business has the potential to generate on an annual basis approximately $550,000,000 in revenue, Approximately $200,000,000 in gross profit and approximately $140,000,000 in EBITDA. We believe that we maintain our full upside opportunity, but during a period a potential period of Economic uncertainty and while our EV OEMs ramp, we optimize the use of our existing assets and opportunities to create a cash generating business and to avoid unnecessary dilution. Ricardo, over to you.

Speaker 3

Thank you, Don, and good morning, everyone. I'll start by covering the results of the second quarter and first half of this year and then move on to our 2023 outlook and briefly discuss the key near term demand drivers across our business segments. Before handing the call back to Don, I'll also spend some time framing out how we're gearing the company for continued improvements to near term financial performance as we continue to grow without requiring a second aerogel plant in Georgia, which we've historically referred to as plant 2. To cover our results from Q2 of 2023, I'll start on Slide 5. Beginning with revenues, We delivered $48,200,000 of revenue in Q2, which translates into 6% growth year over year.

Speaker 3

These revenues were supply constrained during the quarter as our aerogel plant was down for planned upgrades and maintenance on 2 of its 3 production lines with the lines down for 7 8 days during the quarter. In an operation that is running 24 hour days, 7 days a week, This is a loss of productivity of at least 8% on those lines during the quarter. This downtime in production was necessary to ensure that we're ready to fulfill an expected ramp in pyro thin demand during the second half of twenty twenty three, particularly in Q4. Year to date, we have delivered $93,700,000 of revenue, which reflects a 12% year over year increase. Energy industrial revenues in the first half of the year were $69,400,000 a 6% year over year increase.

Speaker 3

Given our capacity constraints, in Q2, we continue to focus on optimizing our energy industrial production mix To lighten the load on our operations by making those products that require the least standard hours of processing and delivered $35,500,000 in sales, reflecting a 5% quarterly increase and a 2% year over year increase. Adding to Don's earlier remarks on our Energy business, We have approximately $138,000,000 of backlog in orders to fulfill over the next 2 to 4 quarters. To fulfill this excess demand, we are focused on continuing to optimize our mix for steady supply during the second half of the year and bringing in contract manufacturing supply as soon as possible. EV Thermal Barrier Revenues of $12,600,000 We're up 17% year over year and 8% quarter over quarter, reflecting an expected delay in the demand increase from General Motors that we communicated during our Q1 results and steady volumes in the Toyota nameplate that we supply, the BC4X. Our EV thermal barrier revenues of CAD24,300,000 during the first half of twenty twenty three represent a 32% increase over the first half of twenty twenty two.

Speaker 3

Next, I'll provide a summary of our main expenses. Material expenses of $14,000,000 for the quarter made up 36 percentage points of sales, reflecting the work that our supply chain and procurement groups have put into reducing the cost of some of our main raw materials, particularly silanes. In a normalized environment, It is encouraging to see these costs come in 4 percentage points of sales, below our usual target of 40 percentage points of sales. The Q2 performance enabled our total material costs of the first half of twenty twenty three to be of $36,000,000 or 38 percentage points of sales or 200 basis points below our target of 40 percentage points of sales. Conversion costs, which we describe as all production costs required to convert raw materials into finished products, were $22,400,000 or 46 percentage points of sales in Q2.

Speaker 3

These costs include all elements of direct labor, Manufacturing overhead, factory supplies, rent, insurance, utilities, process, logistics, quality and inspection. These results compare favorably to conversion costs in Q1 of this year, which were of 48 percentage points of sales. As previously mentioned, our long term target for these costs at a higher revenue run rate is of 20 to 25 percentage points of sales. So we still have work ahead of us here. While 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.

Speaker 3

As our plant in Rhode Island is fully converted to making pyrethane and it finds its flow. We will continue driving several reductions in the cost of a standard hour of product conversion at the site. Year to date, our conversion costs of $44,200,000 reflect 47 percentage points of sales And our performance improvement year over year here has been primarily driven by fabricating $99,000,000 of subsea products within our Energy Industrial segment in Mexico versus Rhode Island. In Q2, company level gross profit margins were up 17 And our gross profit of $8,400,000 is a $9,600,000 improvement over our gross loss of $1,200,000 during the same quarter last year on revenues that were only 6% lower, highlighting how we haven't just been relying on higher revenues to drive profitability. The material cost tailwinds have been helpful, but we still need to keep pushing for a lower fixed manufacturing cost base through process updates.

Speaker 3

Our Energy Industrial segment delivered $9,600,000 of gross profit or a 59% year over year increase. In EV Thermal Barriers, we had a $1,100,000 gross loss in Q2. If we compare this quarter with Q1, Our EV Thermal Barrier gross loss improved by $2,700,000 on incremental revenue of only $900,000 Our Q2 of 2023 gross loss in EV Thermal Barriers was also 84% lower than the gross loss of $7,200,000 that we incurred during Q2 of last year in this segment, reflecting the benefits of automation and our assembly facilities in Mexico. The resulting gross profit margins during the quarter were 27% and negative 9% for our Energy Industrial and EV Thermal Barriers segments respectively. For EV Thermal Barriers, through Q1 of 2023, We needed a quarterly revenue run rate of $20,000,000 to achieve a positive gross profit.

Speaker 3

Thanks to additional Assembly automation that the team has been implementing, we have now lowered this breakeven point to approximately $15,000,000 of quarterly revenues. For the first half of the year, our gross profit of $13,500,000 reflects a $16,500,000 improvement in gross profit versus our loss of $3,000,000 during the same period last year. Operating expenses, which are sized for our near term projected Annual revenue capacity of over $550,000,000 were $25,500,000 during the quarter. We continue to level off our OpEx increases with 3 consecutive quarters around the $25,000,000 range and have ensured that any additional costs are focused on streamlining how we work and increasing productivity through new process development and important system upgrades with 12 month paybacks. Approximately 1 third of our quarter Over quarter, OpEx increase of $1,500,000 was driven by strategic investments in resources tied to Putting these elements together, our adjusted EBITDA was negative $10,800,000 in Q2 compared to negative $18,300,000 during the same period last year, resulting in a year over year reduction in our EBITDA loss of 41%.

Speaker 3

When we compare our year to date adjusted EBITDA loss of $24,800,000 with our original expectations for the first half of twenty twenty three, We're $14,000,000 ahead of those plans and our EBITDA loss is lowered by $8,100,000 during the first half of this year versus last year. 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 Q2, these other items included $2,700,000 of stock based compensation and $1,600,000 of net interest income. Our net loss in Q2 decreased to $15,400,000 or $0.22 per share versus a net loss of $24,100,000 or $0.68 per share in the same quarter of 2022. Our quarter over quarter net loss decreased by $1,400,000 from 16,800,000 Our year to date net loss of $32,200,000 is $11,300,000 lower than our loss of $43,500,000 during the first half of last year or down by 26%.

Speaker 3

Next, I'll turn to cash flow and our balance sheet. Cash used in operations of $7,700,000 reflected our adjusted EBITDA of negative $10,800,000 and a decrease in cash needs of $3,200,000 The key items that enabled us to free up working capital during the quarter were an increase in accounts payable of $4,100,000 and a decrease in accounts receivable of $3,300,000 while our inventory increased by $6,300,000 and consumed working capital. Our capital expenditures during the quarter were $66,000,000 These put our operating cash needs for the quarter at $73,700,000 $40,700,000 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. While the remaining $25,300,000 was spent on tooling up our facilities in Mexico to support the EV thermal barrier capacity ramp through the end of 2024 and finishing the construction of our recently opened Advanced Thermal Barrier Center along with meaningful upgrades to our state of the art material R and D labs outside of Boston. As progress on the construction of our second aerogel manufacturing plant continues, we have incurred 200 and $44,900,000 in capital expenses through the end of the first half of the year towards it.

Speaker 3

As we right time this project with the support of Turner Construction, most of the subcontractors left the site during the 4th July weekend and we from when we decide to reaccelerate construction at full pace. We ended the quarter with $134,300,000 of cash and shareholders' equity of $420,000,000 Turning over to Slide 6. 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 with the exception of Q4 of 2022, where we fulfilled a supplemental order from General Motors, We haven't yet broken through the $50,000,000 quarterly revenue run rate in the past 5 quarters. But at the same time, We've improved the company's gross profit margins from a low of negative 17% in Q3 of 2022 to positive 11% in Q1 of this year and 17% in the most recent quarter.

Speaker 3

Our adjusted EBITDA loss has also shrunk from a loss of $23,000,000 in Q3 of 2022 to an adjusted EBITDA loss of $10,800,000 in the most recent quarter. Since 2021, We've communicated our plans to double our 2021 revenues by 2023 and we've increased our emphasis on reducing our fixed cost space to accelerate our path to profitability. This doubling of 20 21's revenues into 2023 is still a possibility, but it's heavily dependent on demand from General Motors in Q4 and their ability to fulfill this demand alongside that of our energy industrial businesses Growing order backlog. With this high level of variability in demand from GM, we still maintain a range of $50,000,000 in our revenue outlook for 2023 from $200,000,000 to $250,000,000 I'll go into more detail in a minute on how we think about General Motors' expected Where we are updating our guidance for 2023 is in profitability, where we're seeing positive results from key initiatives such as optimizing our energy industrial revenue mix, reducing our raw material costs, driving process improvements in our subsea and EV thermobaric assembly operations in Mexico and managing our structural cost to yield a near term payback. As these efficiencies materialize versus our original plans, we're already $14,000,000 ahead of where we were to $55,000,000 a loss reduction of $5,000,000 versus our prior range of a negative $50,000,000 to $60,000,000 of adjusted EBITDA for the year.

Speaker 3

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 92 to $102,000,000 to a loss of $75,000,000 to $85,000,000 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 $1.07 per share to $1.21 per share. With $115,400,000 of CapEx spent year to date, We're focused on keeping our CapEx for the remainder of the year below $34,600,000 aiming to still not spend more than $150,000,000 of CapEx in 2023. We will only increase this amount If we see a very clear picture of 2024 EV thermal barrier demand as the second half of Q3 and Q4 materialize. To provide flexibility, we've recently come to an agreement with an asset backed lender to fund up to $25,000,000 of CapEx and are in discussions with other lenders to provide us with additional liquidity during the next few quarters.

Speaker 3

In the near term, We're focused on managing the company with at least $75,000,000 of cash on the balance sheet and are pursuing non dilutive sources of financing such as working capital lines 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. To provide flexibility for reaccelerating the construction of Plant 2 as EV thermal barrier demand starts pointing towards Exceeding our current revenue capacity of over $400,000,000 of annual revenues, we have applied for a loan with the U. S. Department of Energy's Loan Program Office, LPO.

Speaker 3

As a reminder, the LPO was created to grant loans for large scale energy infrastructure projects with the goal of supporting the development of more fuel efficient products, including the expansion of domestic manufacturing of electric vehicles. Our team has continued consultation with the loan program office and was invited to apply for a significant loan as part of its advanced technology vehicle manufacturing program, which we did on May 31 this year. The LPO process is uncertain and there is no guarantee that our proposed application will be looked upon favorably. We believe, however, that we are a very good candidate for a direct loan as part of the ATVM program Based on the importance of battery performance and safety and that while the timing can be drawn out, it may match Turning over to Slide 7, I'd like to provide more color into how we think about General Motors' expected Altium AV production ramp in the second half of and beyond with the help of some data from IHS Markit's light vehicle forecast, which as we've seen over the past couple of quarters has been adjusted downward since the beginning of the year from an expectation of 100 40,000 Altium based vehicles to be produced in 2023 to 76,000 vehicles in the most recent forecast, of 46% reduction.

Speaker 3

As we built our revenue projections for 2023 late last year, We anticipated this delay and still believe this forecast to be high. 89% of the expected volume for 2023 is expected to be produced in the second half of the year, putting most of the revenue variability in the second half of Q3 and particularly in Q4. GM has cited cell manufacturing supplier automation issues as the source of this production delay, But has said that it remains confident in its ability to resolve these challenges in 2023, reiterating their target for 100,000 EVs in the second half of the year, a figure that includes the Chevy Bolt, a legacy vehicle that is currently not yet based on the Altium battery platform. With a 30% increase over our part demand from Q2 from General Motors in Q3 and Q4, we'd be able to achieve the low end of our revenue guidance. Informing the upper end of our guidance is a higher revenue ramp that currently being communicated by General Motors and the most recent IHS market forecast projecting GM to triple It's Ultium EV production in Q3 over Q2's levels and then more than doubled that production into Q4.

Speaker 3

We are geared to capitalize on any potential demand scenario, but as you can see, the range of outcomes here is wide, but encouraging, particularly for Q4. The production ramp in vehicles in the second half of twenty twenty three Of the nameplates that have already been launched such as the Hummer EV, the large BrightDrop van and the Cadillac Lyric can drive a significant portion of this demand increase. The Silverado EV and the Blazer that recently launched Along with the Equinox that will begin high volume production in Q4 will provide additional volumes. GM reiterated the start of production dates during its earnings calls last week, and we're ready to support the ramp amidst broader uncertainty brought by the upcoming UAW Negotiations of the Detroit based automakers, including General Motors. While our 2023 outlook remains wide As GM begins its ramp, we believe that in the long term, the outlook remains strong.

Speaker 3

This belief is supported by our ongoing conversations with GM, other suppliers and IHS. GM has continued to reiterate its long term commitments to significantly ramp up its EV production capacity over the next few years. It continues to emphasize targets of producing 400,000 EVs from 2022 through the end of the first half of twenty twenty four and is investing in capacity for producing 1,000,000 units per year in North America by 2025. The trends within the latest IHS market forecast also align with these expectations for 2024 2025. Turning over to Slide 8, I'd like to cover a question that most investors have asked us since announcing the right timing or our 2nd aerogel plant in Rhode Island or plan to.

Speaker 3

The question is this, what business are you building during the next 4 to 6 quarters? To which our answer is now a lot simpler. We're basically building a business with the potential of $550,000,000 in revenue capacity available in 2024 and 25 percent EBITDA margins as we fill that capacity. Evolving EV Thermal Barrier demand will determine the timing of when we reach our approximate EV Thermal Barrier revenue capacity, which we currently estimate at $400,000,000 Our energy industrial demand already exceeds the initial $150,000,000 annual capacity enabled by our supply arrangement in 2024. As a company, we're working to have our material costs not exceed 40 percentage points of sales and we're focused on driving our manufacturing or conversion costs to less than 25 percentage points of sales to deliver at least 35% gross margins.

Speaker 3

5 percentage points of sales and variance between either of these Two cost buckets make up the range in cost structure differences across our products. If we manage material and conversion costs as targeted, We have the potential to deliver $200,000,000 of annual gross profit on a run rate basis. The OpEx ramp that we've experienced during the last 2 years is coming to its end as we remain focused on managing this below $100,000,000 on an annual run rate basis, which is less than 20% on CAD550 1,000,000 of revenues or CAD110 1,000,000 We've illustrated this basic gearing in Slide 8, while also showing how our historical quarterly financial performance compares with this near term gearing of our business plan on an annual run rate basis. While the revenue run rate isn't there yet, We brought material costs and manufacturing costs down, while the OpEx ramp is being managed. In Q4 of 2022, When thanks to a supplemental order from General Motors, our revenue run rate increased, one can see how our fixed manufacturing costs were better absorbed and our gross profit improved to 24%.

Speaker 3

As Don mentioned earlier, we have the potential deliver $140,000,000 of EBITDA or 25 percent plus gross margin on an annual run rate basis by combining the elements that make up the core gearing of our operating plan in the same quarter. Over the next 4 to 6 quarters, We are looking forward to posting results on this board and getting closer to delivering the profitability that is enabled by this gearing as demand increases across both our segments and we fulfill it with our current asset base combined with supplemental supply. As one can see, material costs are already there and our focus needs to remain on keeping OpEx near $100,000,000 annually and cutting our manufacturing or conversion costs in half as a percentage of sales with the assistance of higher revenues. Turning over to Slide 9. I'd like to close by saying that this quarter has been a lot about near execution setting up Aspen for what we believe is an eventual but not conditional surge in demand.

Speaker 3

We believe that this is really a matter of when, not if. This growth is driven by the underlying global vehicle electrification trend and the high share of vehicles that will be launched with pouch or prismatic cells. Our latest assessments of Pirate Thin's serviceable addressable market is that it can be up $8,700,000,000 annually in 2,030 or an underlying compounded expansion of 27% per year between now and then. While we don't have a crystal ball and process this market sizing exercise with caution. It's clear that the wind is on our sails as we work on our way through the EV plants of different OEMs At their pace in most cases, enabling a safe transition to electrification, we remain convinced that this is an opportunity worth capturing with all of our assets and energy to create value and post results as demand gets closer to these market sizing estimates.

Speaker 3

When we step back and compare these market size assessments that account for only a subset of the global ED market, it is easy to see that with our $400,000,000 of near term potential annual revenue We are really only getting started at capturing a very large opportunity while building a business that is geared for profitability in the near term. And with that, I'm happy to pass the call back to Don.

Speaker 2

Thank you, Ricardo. We have covered a significant amount of ground today in reviewing Q2 and our strategy. Before we move to Q and A, I would like to emphasize 3 points. 1st and perhaps our most important point, we are focused on driving significant profitability from our existing resources and opportunities. We believe the near term business profile as we have constructed and consistent with 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.

Speaker 2

We are striving to hit this level of business performance on a run rate basis within the next 4 to 6 quarters. At the same time, we believe that we maintain our full longer term upside potential as we continue to have talented teams garnering more design wins from EV OEMs, building out a profitable base load of energy industrial revenue and leveraging our aerogel technology platform into additional high value markets, including our ongoing work in battery materials. 2nd, we believe the implementation of the supply of the supplemental supply arrangement supports several critical elements of our strategy. It allows us to continue to grow the baseload of energy industrial revenue without supply constraints and in a manner consistent with our goal of achieving overall gross margins of at least 35%. The supply arrangement allows us to dedicate Plant 1 In Rhode Island to produce pyrothin thermal barriers in order to support the ramp of our EV OEMs.

Speaker 2

And finally, it allows us to maintain a strong balance sheet by the right timing of the final phase of the construction of Plant 2 in Georgia. And the 3rd point of emphasis, in addition to having the large European commercial truck customer join GM and Toyota on the list of design awards, We believe that we have near term line of sight on design awards from at least 3 other EV OEMs with volumes expected to commence in 2024 and ramp in 2025. Even with this anticipated near term success, Our team believes that we are just getting started as the need for battery performance and safety in EVs becomes yet more paramount. With that, operator, let's turn to the Q and A.

Operator

Your first question comes from the line of Eric Stine from Craig Hallum. Please go ahead.

Speaker 4

Hi, Donna. Hi, Ricardo.

Speaker 2

Hi, Eric. Hi, Eric.

Speaker 4

Hey, good morning. So first, can we just start with the guidance? You've laid out keeping the OpEx largely flat and reasons why the margins potentially some improvement from here. And I know it's dependent on the GM ramp, how steep that might be in the Q4, but your EBITDA guide seems to Expect, I guess, very little, if any improvement from what we've seen, especially in the second quarter. So maybe just skew that.

Speaker 4

And I know in the past you've thought that Q4 of this year was a potential EBITDA positive quarter, whether Curious whether that still holds?

Speaker 3

Yes. So I mean, I think being EBITDA positive In the Q4, it's still very much a possibility if the GM ramp materializes. However, at the same time, I mean, just given the range of outcomes and the fact that We almost have to protect for a scenario in which the ramp comes in Q1 of 2024 And we have to produce a lot of pyrothin in Q3 and Q4 of this year without having the ability to recorded as revenue in during this year. And so we felt that, That combined with I mean, in the end, you can only optimize the energy industrial product mix so much without totally not fulfilling orders for particular products. And so we may be in a position here at The end of the year where we have to fulfill some of the energy products that we've sort of postponed Manufacturing off during the first half of the year.

Speaker 3

And I think that combined with a GM brand that's Materializing more aggressively in Q1 of next year is really what guides that, conservativeness on And the lower end of the guidance. I mean, I do feel pretty good about the savings and there's more juice left to squeeze, particularly As the revenue run rate increases, we just want to be careful here, Eric, and protect the range From some of these lower probability, but still potential scenarios.

Speaker 2

Eric, I would just add To echo what Ricardo said, we realized that our revenue outlook is pretty wide, right? We're Halfway through the year. And there are really two things that will cause us to move higher in that range. 1, of course, is the GM ramp. And the second, And I mentioned it in my comments and as did Ricardo, the ability to attest the supplemental supply agreement here a bit in the latter part of this year.

Speaker 2

If we can get 1 or both of those things to happen. Of course, we move higher up in that revenue outlook range and I think you'll see us continue to improve Our EBITDA outlook, but for now until we see those things fall into place, while we did improve the EBITDA outlook A bit. I think we're very comfortable with where it is right now.

Speaker 4

Okay. Yes, it makes sense. Thanks for that. And then maybe just on the second question. I know you had had some Thought that you might, whether it was before on this call, be able to announce an OEM.

Speaker 4

And I know you mentioned that at least 3 for the remainder of the year. I mean, is there any thoughts on timing, gating factors there? And maybe longer term, do you kind of have a thought Of how many OEMs you potentially have if we look down to say 2025?

Speaker 2

Well, We have talked about 3 to date award design awards. We're as I said in the last earnings call and reiterate again, we feel confident that we will Have a half a dozen design awards by the end of this year and that will begin to contribute a bit in 2020 4, but really ramp in 2025. Those are the near term opportunities. We continue to work with virtually all the companies around the world who have pouch and prismatic designs in their battery platforms. And we believe that we will continue to make inroads with all of those companies, whether they turn into design awards or not, time will tell.

Speaker 2

But I can say And I think we all are seeing the dangers of thermal runaway and the need to address it To be ever more important and we are confident that all the EV OEMs Arjun, to address this in some manner. And again, we think we're industry leaders in the mitigation of that risk.

Speaker 4

Okay, thanks.

Speaker 2

Thank you, Eric.

Operator

Our next question comes from Alex Potter from Piper Sandler. Please go ahead.

Speaker 5

Great. Thanks a lot guys.

Speaker 3

So maybe First question

Speaker 5

on profitability and I guess the things that give you confidence With the new contract manufacturer, you mentioned on the one hand with regard to revenue, you could be toward the higher end of your range if that contract manufacturer sort of pulls their weight and comes online sooner than expected or on time, which is easy to sort of conceptualize. But what I'm trying to get a better understanding of is the impact that that would have on margins. So what does it how do you feel confident that as you shift that mix toward the contract manufacturer, Somebody won't drop the ball somewhere or there won't be price dislocation or cost dislocation. So anything you can comment on in that regard would be great.

Speaker 2

Yes, it's a good question. So the way we think about it, a couple of different ways. If you compare it to the current situation of producing In the East Providence plant, we take raw materials from the U. S, from Europe and several from Asia, including China. And we bring them we put them on the water for 8 or 10 weeks and we bring them into this country and we pay a 30 And we bring them up to Rhode Island and we produce our energy industrial product there and then we turn around and we export about 2 thirds of that, much of it back out to Asia.

Speaker 2

So you can see there's a lot of cost and a lot of time and a lot of working capital associated with all of that. And so I guess the clarity that we have is for one thing we've got a lot to work with as I just described. And I think the clarity is, we know our pricing for our energy industrial products well established And we also know our contract arrangements from the supplemental supply. There's not an enormous amount of mystery left to that. Yes, we have to execute.

Speaker 2

They have to execute. We're working very closely with them. But the math is pretty clear to us and it says, that it very much supports our overall targets of 27 or excuse me, 35 at least 35% gross margin. And you saw, Alex, this quarter on the Energy Industrial side, we were at the 27% level Even without some of these enhancements. So, I think a lot of our operating efficiencies are improving.

Speaker 2

We're seeing sort of supply chain and raw materials, let me just say, sort of normalize a little bit after, of course, a very hectic 3 year period or so. So that's sort of the math that's sort of both the atmosphere and the math, I guess, behind the supplemental supply.

Speaker 3

Yes. And if I may add, I mean, I think the margins aligned With our expectations given all of the room that there is in the value chain to have A contract manufacturer support our energy business, but most importantly for us and really why the pressure is on us is that we don't really take margins to the bank. We take the incremental gross profit. And here With the backlog of roughly $138,000,000 on the energy side, there's money there That we are just not taking by not being able to fulfill the demand.

Speaker 5

Perfect. That's all very helpful color. Maybe one other question. This goes to what you were alluding to just there in the last question with Eric, Don. This is The risk of potentially having to build some inventory, given, I guess, the uncertain ramp, and I can appreciate how uncertain these ramps are.

Speaker 5

This is sort of par for the course when somebody is turning on a big factory like this. But I've noticed that the inventory has been ramping up a bit sequentially here over the last couple of quarters. What is that? Is that reflecting a preparation for the GM ramp? Or I guess just qualitatively what's in inventory and will that continue?

Speaker 3

Yes, I mean at this point for us inventory really means flexibility, right. And so when we look at the demand that we get from a customer like GM or I mean, on the automotive side, you in essence have a right to build and invoice the customer for the next 4 weeks of demand. And the demand is changing on you roughly every 2 weeks. And you have a rough view of what the next 40 weeks are going to look like. But again, that can be changed every 2 weeks.

Speaker 3

And so having some inventory on hand to at least give us A month to react here, particularly on the aerogel side. We think it's important as we manage this ramp, particularly with GM. And so the roughly $6,000,000 of inventory that we added included quite a bit of Finished goods, pyrothin inventory that is basically ready to get processed in Mexico. And I think, yes, so for I mean, if actually Slide 8 is really telling if you This is what we're going through now is almost a repeat of the movie that we saw in Q3 and Q4 of last year. If you see the ramp that we had in Q4 when we fulfilled $101,000,000 of EV thermal barrier revenues on an annual run rate basis, right.

Speaker 3

That really came at the expense of energy revenues in Q3, because we had to make quite a bit of the pyrofin required for Q4 and Q3. And so that same dynamic is really playing out here until we get the additional Supply source for the energy business. And so that's where the inventory build is going. It's really going towards Enabling some flexibility on the EV thermal barrier side. And trust me, I mean, on the energy industrial So really the team is doing everything they can to empty the warehouse at the end of each quarter.

Speaker 5

Very helpful. Thanks, Ricardo. Thanks, everyone. Thanks, Alex. Our

Operator

next Question comes from Jeffrey Osborne from TD Cowen. Please go ahead.

Speaker 6

Yes, good morning. The IHS figures are very helpful. So thank you for sharing that. I had a question on the 3 potential awards. Is there a way of characterizing those relative to the GM ramp in terms of size and scope would be helpful?

Speaker 3

Yes. I mean, I think in Toyota, it's no secret that right now we're only supplying one nameplate. So that's the smallest one. And then the award that we have here with the European on the commercial truck program is the 2nd smallest and the GM one makes up the lion's share of the near term volume. However, the program in Europe with the commercial vehicle manufacturer, We already started delivering production parts to them and that will ramp up significantly In 2024 and it will make up a good portion of the run rate that we're currently seeing with GM.

Speaker 6

Ricardo, I was referring to the 3 potential awards that you were announcing before year end. Is there a way of Oh,

Speaker 3

you mean the next ones. Yes, I mean there's some pretty big ones, right? I mean Yes,

Speaker 2

the way I would say it, Jeff, I think again, just I would say That we're very focused. We have a strong team in Europe and We believe that even with significant growth from General Motors and additional North American wins, There's a reasonable chance that Europe could be our largest market in 3 to 5 years. And so a lot of the success We're anticipating here in the near term, I think supports that or gets that process started in a pretty significant way. General Motors is obviously right in front of us and are very large numbers, but we're really working hard to Create diversity of OEMs and geographies and we think we're doing a pretty good job of that. So I think we'll be able to answer that question a little better as we end this year and enter 2024.

Speaker 3

Yes. One key thing to keep in mind when thinking about the sizing of these European programs is that they're all for prismatic cells. And so the content per vehicle opportunity is lower, but at the same time, the process to manufacture Those parts is a lot more streamlined and we think we can ramp that up faster than some of the current designs that we're supplying.

Speaker 6

That's helpful. And maybe just one follow-up. You mentioned a few of those, maybe all 3 would start in 'twenty four, but really ramp in 'twenty five. So keeping in mind the 4th quarter Construction cadence to finish Georgia and I think maybe you can update us, but I think it was $450,000,000 To do that, would you need to sort of pull that trigger in the spring of 2024 to start that process? How do we think about when Georgia, if you were to win all 3, when Georgia would have to commence the restart of construction?

Speaker 3

We don't think we need to do it that early next year. It really depends more on General Motors, frankly, than these other customers. That's the other benefit of supplying prismatic cell programs that the material tends to be thinner. And so We could actually our capacity on the $400,000,000 would be significantly higher if we're supporting Mostly prismatic cell programs that are thinner. So I think we have actually more time to make the decision And what would actually force a decision to pull ahead the plant would be GM's acceleration of demand.

Speaker 6

Got it. That's helpful. I appreciate it, Ricardo. Yes.

Speaker 2

Thanks, Jeff.

Operator

Our next question comes from George Giannakoulis from Canaccord Genuity. Please go ahead. Hey, good morning and thanks for taking my questions. So, just to focus on the 3 OEMs again, can you just talk about the process that you've gone through, what has the bake off looked like? Who are you competing against?

Operator

What are the requirements that they need? I'm just kind of curious if you give us any more detail as to what that process look like. Thank you.

Speaker 3

Yes. I mean, so George, the process is very similar amongst all of them. And I wish we had Corby, our Head of Sales here with us to help us answer this one. But I mean, in essence, The questions that we used to get around being compared with other materials like ceramic papers and mica sheets, we don't get that anymore. We're being able to leverage a lot of the data that the team has developed over the past year with customers demonstrating that we really are the only solution for solving the main three requirements that they're looking for.

Speaker 3

They're looking for thermal isolation, In essence, the thinnest and the lightest envelope possible, they're looking for fire protection And most importantly and the one that all of our aspirational competitors Mist is this requirement around the mechanical properties of the material. We're in essence a spring inside of the battery in between every single cell. And so it's less about demonstrating the performance now and it's actually about just coming up with the design that will FIT designs that in many ways are already in flight and in progress. This idea of Solving for thermal runaway is new at some of these OEMs and so we have to bring them up to speed on actually on these requirements in many ways. And then it's really I think the tallest pole in the tent Is there design timeline for making pyrothin fit within their designs?

Speaker 3

And then a lot of the programs that we have quoted also have to go through their own approvals inside of the OEMs to get capital that enables the supply teams to source us. And that's a drawn out process Depending on the OEM, right. Very few OEMs have the same approach that GM took of going all in on a new battery platform that will underpin vehicles that haven't even been announced or thought of inside of General Motors. Instead, it's more of a nameplate by nameplate, application by application exercise that the team is going through. But again, I think we it's not really a bake off now.

Speaker 3

It's It's really more of an engineering and development exercise to develop the battery pack that delivers the vehicle requirements safely with our product in it. And that takes a while, right? I mean, for us in Europe right now, it's We're starting August, so that works against us with all of Europe taking August off. But we feel pretty confident around the volume of prototype orders that we're getting from these customers, The engagement that they're having and the discussions are becoming more strategic in nature particularly with OEM groups that have multiple brands, but don't quite have this sort of single platform approach that General Motors has.

Speaker 2

George, I would just ask and I really do agree with Ricardo's image Fitting into their platform ideas, one other thing that's really helping, I think Significantly, we're a lot better too. We have really come to understand the challenges around the mitigation of thermal runaway, but also of the sort of mechanical test as well. And so we bring a lot of expertise into these discussions. And that expertise is increasing with every day that passes. So I do agree with Ricardo that the gating item tends to be at this point more about their own battery design than a competitive bake off.

Speaker 3

Thank you. And just as a

Operator

follow-up, just to make sure I understood The range of outcomes to hit your guidance at the low end and the high end for GM. So you have this on Slide 7, $20,000 and then $47,000 in Q4,000 for GM. And I'm curious If hitting those numbers, did you say that would bring you to the high end of the range or the mid?

Speaker 3

I think well, so I mean, It depends on which numbers, right? So if we look at GM's current Demand, right, which is basically a 40 week expectation. We'd come in like well within the range, But that can always change. If we were to supply at the IHS rate, I think we would Totally coming above the range. At the same time, it's hard to tell how many parts GM still has in inventory.

Speaker 3

We don't have That communication back from them. And so as I mentioned in my remarks, Right. I mean for us to come in on a $200,000,000 of revenue this year, we would only need the run rate to increase by about 30% in the next two quarters over what we delivered to them in Q2. And that's I mean, I think that's a realistic expectation, right.

Speaker 1

Thank you.

Speaker 2

Thanks, George.

Operator

Our next question comes from Chris Souther from B. Riley. Please go ahead. Chris, you may be muted.

Speaker 7

Awesome. Hey, can you hear me now?

Speaker 6

Yes,

Speaker 7

sure. Perfect. Maybe just a little bit on the puts and takes on the gross margins for pyrethin once the contract manufacture Does that change the breakeven point for, Pyrethane gross margins? I'm just curious if there's like a step down in those margins when that's all you're producing out of Rhode Island.

Speaker 3

No, I mean that breakeven point is really more driven by the assembly. And I mean Don't get me wrong, I think there's still efficiencies on making only pyrethane In Rhode Island, but I'd argue that all of those efficiencies are ending up more likely On the energy industrial side, given that a lot of the processes for the energy industrial side would be taken out of Rhode Island and not necessarily benefit Pyrosin.

Speaker 7

Got it. Okay. And then just the last one to put a point on the EBITDA Guidance seems to reflect kind of the low end of revenue range where GM kind of slips on the ramp. Where does that shake out if GM's ramp stays on their targeted schedule and you hit that positive EBITDA in the Q4. Just what is kind of the upside there?

Speaker 7

It seems like you're kind of guiding people to the downside case.

Speaker 3

Yes. I mean, I think there's definitely a probability of coming in on the high end of the range of profitability if we have a good Q4 and if GM's demand ramp really starts in Q4. Quite a bit of it would come at the expense of Q3. So I mean, I think the higher end of the guidance range reflects that, right. It reflects A good Q4, but not a great Q3 and that's how we see things potentially playing out here.

Operator

Our next question comes from Thomas Curran from Seaport. Please go ahead.

Speaker 8

Good morning, guys. Just going to add some cleanup here on the 3 automotive EMs that you're in the most advanced stage of business development with and optimistic about Potentially converting into significant EVTV customers. Just Could you confirm that are all 3 of those European OEMs? And then Are each of the 3 distinct automotive groups or are any of them separate brands, but

Speaker 3

It looks like you have a bingo board there.

Speaker 2

Yes. Yes. Some are part of a group and some are separate or independent.

Speaker 8

Okay. And all European? Yes. Yes.

Speaker 4

Great.

Speaker 8

And then Just for my second here that's left, actually my first call question on the Energy Industrial side in a while. But for that division's LNG market, Could you update us on what LNG sales should account for as a percentage of EI revenue this year? Are you also producing cryogel product for LNG customers out of Mexico now as well? And are you currently pursuing any visible large LNG projects, by which I opportunities that could result in awards comparable in size to the PTT non fab receiving terminal contract that you won and delivered over 2019 2020?

Speaker 2

Let me peel that back a little bit. I might start with the latter part and remind me if I missed the beginning part. We are Pursuing several of the LNG projects that are on The drawing board, I mean, well along, frankly, on the drawing board where we have worked our way into the Specifications of these projects, not all of them, of course, are the size of the PTT project, which was about $45,000,000 but they are Significant orders. PTT, of course, is also expanding their facility with another receiving line as well and we're working hard to participate in that and we performed extremely well on the earlier projects. So we think We're in a strong position there.

Speaker 2

We are first focused on the supplemental supply agreement around our pyrogel product, which is The lion's share of our revenue in the energy industrial area in the range of 3 quarters. And we will move to qualifying our cryogel products next with the supplemental supplier. And so, and that breakdown is Roughly 3 quarters on the hot side and the remaining amount on the cryogenic cold side Of the slate. So, yes, we're good at this business, Thomas, as I think you know, and it was one of the reasons why it was so important for us to do the supplemental Supply, we would have been severely capacity constrained in that business and there's no question that we would have had demand destruction Had we not thought through and anticipated the EV business growing As it is and consuming Plant 1 for now. So anyway, it's a really important part of our strategy and we think we'll provide excellent service.

Speaker 2

A lot of that business is in Asia and to serve it from Asia, again, makes a ton of sense for us, Both from a customer service point of view and from an economics point of view.

Speaker 3

I think there was also a question there on cryo gel in Mexico. And so Tom, maybe just to clarify. So Cryogel for Cryogel, we're still selling just, aerogel insulation rolls that come out of Rhode Island. It's our subsea products that are being where the those roles basically go through an additional process being put inside of bags or they get encapsulated, that cutting and encapsulation is what is happening in Mexico for subsea projects, Not for go ahead, Jeff. Got

Speaker 2

it. LNG credit. No, no. I was just going to say, I know you're kind of a reformed oil and gas guy. And so I would just say, it's really interesting to us.

Speaker 2

We're seeing a tremendous amount of activity in our subsea business as well, which is We've been a little surprised by it, but we've won a series Of projects that extend well into 2024. So again, supporting that business, I think, very well.

Speaker 8

Great. Just to wrap this up then, could you just provide us with rough estimates for LNG and Subsea respectively as percentages of EI revenue?

Speaker 2

I like the $75,000,000 to the pyrogel side.

Speaker 8

Got it. Okay. I'll leave it there. Thanks for taking my questions.

Speaker 3

Anytime.

Operator

Thank you. Our next question comes from Amit Dayal from H. C. Wainwright. Please go ahead.

Operator

Hey, good morning guys.

Speaker 3

Hey, Amit.

Speaker 9

Yes, most of my questions have been addressed already. I won't take too much of anyone's time now. Just on the competitive side, are you seeing any other competitive solutions coming up to the thermal barrier product offering?

Speaker 3

No, I mean we see websites and kind of press releases being put out, But we don't see them gaining traction within the commercial processes that the team is engaged in?

Speaker 2

It is a hard problem to solve and it's a multidimensional problem to solve. Occasionally, we'll see something that addresses Part of the problem, but to have a to address all dimensions of the problem It's very difficult. And that's I think that's the importance of our Product and the work that our team has done in optimizing around That multidimensional challenge.

Operator

Understood guys. Thank you so much.

Speaker 1

Thank you.

Operator

Our next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Speaker 10

Thanks so much guys. Our checks suggest that some of the mechanical properties that you guys offer are critically important to the win rate here. Can you talk about what you're seeing at this point around the leverage from those mechanical properties, particularly as we get into structural battery packs becoming More prevalent outside of just Tesla?

Speaker 3

Yes. I mean, I think the mechanical element just become continues becoming more important, right? I mean, And a lot of these structural battery packs, now they're going to have crash requirements put in as well. And so we think that will yield to just more complex parts overall, right? And It's really interesting how everybody has to optimize for not just these mechanical elements and the structural Integrity of the pack itself, but now also there's this element of ease of assembly and particularly cost, right.

Speaker 3

And A lot of these ancillary things to the sales were not considered, I'd say, In the prior generation of EVs and now as we're seeing it, it's become a meaningful element of the design of the pack itself And it's cost, but I mean as packs get more structurally focused, I think We have plenty of room in there even for LFP cells and a lot of these structural packs are actually LFP So thanks.

Speaker 2

I think, Colin, also on the economics of it on the mechanical Slide are interesting as well in the sense that as we optimize our material To do not only the thermal, but the mechanical, we have an opportunity to displace some existing materials. And in some cases, quite costly expensive materials and it helps our value proposition as we try to have The best possible solution. And I think certain OEMs started with the mechanical Stability, if you will, of the inserts and have come to the thermal part of it Or are coming to the thermal part of it later. And so again, having a concept around displacing Some of the existing materials that are sell to sell has been a really important part of our strategy, And it's been a nice economic opportunity for us as well.

Speaker 5

Thanks so much guys. Thank you, Constance.

Operator

I will now turn the call over to CEO, Don Young, for closing remarks.

Speaker 2

Thank you, Henry. We appreciate everyone's interest in Aspen Aerogels, and we look forward to reporting our Q3 2023 results to you later in the year. Be well and have a good day. Thanks so much.

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