Ladies and gentlemen, thank you for standing by. Welcome to the Aspen Aerogels Second Quarter 2015 Earnings Results Conference Call. During the call, all participants will be on a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today Thursday, August 6, 2015 at 5 o’clock Eastern Time. I would now like to turn the meeting over to your host for today's call, Shawn Severson with the Blueshirt Group. Please go ahead, Shawn.

Thank you. Good afternoon, everyone. Thank you for joining us for the Aspen Aerogels conference call. I'm Shawn Severson with the Blueshirt Group. Before turning the call over to Don Young, Aspen's President and CEO, there are a couple of bookkeeping items that I would like to take care of first. Aspen’s management will take questions at the end of their prepared remarks. And as the operator indicated, an archive version of this webcast will be available in the Investor section of Apsen’s website, www.aerogel.com. The press release announcing Apsen’s second quarter 2015 results and business outlook as well as a reconciliation of management’s use of non-GAAP financial measures as compared to most applicable GAAP measures is available on the investor section of Aspen’s Web site. There you will also find a summary statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the second quarter of 2015. Please note, that management’s discussion today will include forward-looking statements including any statements regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact and such statements are subject to risk and uncertainties. Aspen Aerogels’ actual results may differ materially from those expressed in the forward-looking statements. A list of factors that could affect the Company’s actual results can be found Aspen’s press release issued today and are discussed in more detail in the reports Aspen’s filed with the SEC, particularly in the Company’s most recent annual report on Form 10-K. The Company’s press release issued today and our filings with the SEC can also be found in the Investor section of Aspen’s website www.aerogel.com. The forward-looking statements made today represent the Company’s view as of today August 6, 2015. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, Aspen’s management will refer to non-GAAP financial measures including adjusted EBITDA. These financial measures were not prepared in accordance with the U.S. Generally Accepted Accounting Principles or GAAP. These non-GAAP financials measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The definitions of reconciliations of these non-GAAP financials measures to the most directly comparable GAAP financial measures and a discussions of why we present these non-GAAP financial measures is available on today's press release, which is also available on Apsen’s website. I will now turn the call over to Don Young, President and Chief Executive Officer of Aspen Aerogels.

Thank you, Shawn. Good afternoon, everyone. Thank you for joining us for our Q2 2015 earnings call. I will provide about comments about the business and our performance and John Fairbanks, our CFO will present the financial details of our second quarter and update guidance for 2015. We will conclude the call with a Q&A session. The biggest change to our performance in the second quarter was enabled by the successful ramp up of our third manufacturing line. Output from Line 3 was strong, however, our yields were few percentage points lower than planned. We attribute the lower-than-planned yield to normal shakedown issues associated with brining a substantial new piece of equipment into operation and are confident that yields will match our existing product lines during the second half of the year. Importantly, the robust Line 3 output provides the opportunity to perform maintenance on lines one and two that had been running full out for five quarters in order to minimize the impact of our capacity constraints. In addition, the strong performance of Line 3 supports our confidence that we will meet manufacturing output and revenue guidance for the year. Product revenue resumed its growth with the addition of Line 3. Q2 product revenue grew by 15% compared with Q2, 2014 and 28% compared with Q1, 2015. Shipments were particularly strong to Asia and Europe offset by previously anticipated weakness in the Canadian oil sands and Latin America. In addition, our U.S.-based business and our subsea work remain robust during the quarter. Our lead times remain high, which when combined with our commercial pipeline provides high levels of confidence for 2015 and the first half of 2016. As I’ve emphasized in the past, our business is well diversified across all major refinery and petrochemical companies in many facets of…

Thanks Don and good afternoon. As Don highlighted during his comments, our second quarter performance keeps us on track to deliver a solid 2015. We achieved record total revenue supported by strong initial output from my third manufacturing line. Our gross profit and adjusted EBITDA increased significantly, versus the second quarter of 2014. And our commercial pipeline remains strong and provides us with high levels of confidence for the remainder of 2015. I like to start by running through our financial results for the second quarter at a summary level. Second quarter total revenue grew 13% year-over-year to $13.1 million. Second quarter GAAP net loss was $2.7 million or $0.12 per share which represented a significant improvement over the second quarter of 2014. In our second quarter adjusted EBITDA was $1.3 million, compared to $432,000 in the second quarter of 2014. Redefined adjusted EBITDA is net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expense, and other items that we do not believe are indicative of our core operating performance. I’ll now provide additional detail on the components of our results. First, I’ll discuss revenue. Second quarter total revenue was comprised of product revenue of $29.8 million and research services of $341,000. As Don mentioned, our product revenue remains well diversified across geographies, the sub segments of the energy market, in all phases of maintenance and project work. In the second quarter, our product revenue increased to 15% versus the second quarter of 2014. This growth is due primarily to strength in the petrochemical and refinery sectors in Asia and Europe during the period. During the quarter, we shipped 11.2 million square feet of aerogel blankets, which represent a growth of approximately 11% over the second quarter of 2014 and was supported by output from our newly constructed…

[Operator Instructions] We will pause for a brief moment to compile a Q&A roster. Your first question comes from the line of John Quealy with Canaccord. John, your line is open.

Two questions. First on the yield on Line 3. So can you talk about some of the things that you are addressing, obviously, you’ve seen this before running in lines, one and two, but can you give us a little bit more granular detail on what was some of the tweaks you’re going to do on Line 3 here?

Sure, John. So it really was just during Q2 as we brought the line up, we were seeing yields on the third line that were just a couple of points lower than what we are seeing on Line 1 and Line 2 and we were are running identical products. And it was principally just mechanical and so it was just a few CapEx related initiatives, some engineering work, dialing the dials and tweaking the alignments of the belts [ph] on the table. But we now have that online, back up and running in line with what we see at Line 1 and Line 2. Now frankly, we had planned for and budgeted for some yield loss associated with the – with brining Line 3 online. And what we actually saw on the line was really right in line with our expectations. But we just thought it was something that we should discuss in the call today.

Great, thanks for that. Secondly, Southeast Asia continues to do well. And did you talk about concentration, I know, there’s one larger project there. How is that going, is it nearly completed, et cetera?

Hi, John, this is Don. Yes, that project continues to be strong and in fact during the first half of the year it was consistent performer. It will work its way through that entire project by the end of this calendar, roughly $28 million in total spread out over 2014 and 2015. But we expect that project to come to an end during the fourth quarter of this year.

Okay and then just two more questions. On plant II, obviously, I’d assume, is this sort of Q4 type of time frames to announce and potentially finances the financing environment still favorable Don, and remind us again what sort of cogs differential do you expect on plant II versus plant I? I mentioned directly, but it is one of the key swings here.

So in terms of timing, I think that timing is there, where we’re getting very close to completing the negotiations around state incentives. We are actively doing due diligence work on the site itself. And we are very making good progress. Having completed Line 3 in east province allowed us to deploy that team there in the Southeast part of the U.S. So that is going, I think, extremely well, again we have a lot of confidence that we will bring that facility on the schedule we talked about. John, do you want to comment on that COGS.

Yes, so, I think, the better way to think about John is our margin expectations associated with operating our plant. So for the first six months of 2015, our gross margin was 18% and our adjusted EBITDA margin was 4% with EP Line 3 operating at full capacity we’d expect gross margins in the low-to-mid 20% range. And we would expect low double digit adjusted EBITDA margins, as well. The impact of the second plant – the first line of the second plant when it’s operating at full capacity, would be significant. At that point in time, we’d expect gross margins in the high-20s approaching 30% and EBITDA margins to see 20%. So we do see a very significant expected step function increase in gross margins and EBITDA margins associated with each of our plant capacity. Actually are implementing capacity expansion with respect to Line 3 and our plant capacity expansion associated with the first line of the second plant.

Okay, great. And then the last question, with regards to the energy centric business more sort of onshore downstream, given that you guys are still pretty much at capacity and customers, I don’t if they are truly on allocation or close to it. Don, what’s your expectation of when you folks can at least provide a little inventory to the channel, is this couple of years out or are you still going to be doing very safe, specific, PO driven business? And I’ll take the answer offline thanks guys.

Thank you John.

Thanks John. We are looking at 2015 with a lot of confident and really into the first half of 2016. Our team is now working hard on that second part of 2016 and being sure that our pipeline is full productive [ph] over time, and that we’re executing our penetration strategy successfully. So our expectation is that we will again build up our own inventory, so we can take longer runs operationally, but also replenish our supply chain, which has been depleted a project now for four or five quarters. But we’re expecting to improve that situation but not totally resolve it, here over the course of the next year. Obviously the energy business is – we’ve been watching the other earnings and impacts on the other businesses that play in the same markets that we do and obviously, this is a tough environment with the lower oil and gas prices. And frankly, the stronger dollar is challenging, as well for us and for others. We believe that our ability to move our market share in a positive direction even in this difficult environment and absorb our capacity, we’ve got that ability to do it certainly here in 2015 first half of 2016. Again, looking out further and that’s a little hard for us, but we’re working hard at it, and we have a lot of confidence in our team.

Your next question comes from the line of Sean Meakim with JPMorgan. Sean, your line is open.

Hey, good afternoon guys.

Hey Sean.

Hey Sean.

So Don, with the recent move within the oil price as you just eluting to, it seems that as we are going through earnings season here some folks are looking to maybe take a pause on projects in here. We certainly are relooking at capital spending plans and obviously, that’s very upstream focused, but perhaps in some cases that’s whether into the downstream in terms of some capital project decision making, has there been any shifts in your discussions with customers or if things remain fairly consistent in spite of accustomed to noise effect there?

No, I think it definitely has, it has the ability to affect our pipeline out over any period of time. The Canadian oil said is, I think, from a lot of companies this has sort of has been most dramatic example of that.

Sure.

We were talking among ourselves earlier today. We haven’t had any purchase orders be reserve because of cancellations of projects. But we’ve seen things that we were expecting for, pushed out to the right in time. And again, that has some impact on businesses like ours and whether it’s upstream or downstream, those things will have some impact. Again, we don’t have – we just increased our capacity by 25%. It represents roughly one market share point in this market, so our ability to go from 3% to 4% market share to 5% share. Again, we think that as much to do with our ability to implement our penetration strategy within the accounts we have as much as it relates to lots of new projects upstream or downstream.

Of course, that makes sense. And just shifting gears a little bit, I know we’ve talked about this before, but I was just hoping to kind of go through a little bit the puts and takes involved with the mix shifts quarter-to-quarter.

Sure.

It seems like as we’ve talked about, in many cases the impact is kind of net neutral because of the shift in volumes, the compensation on the pricing side. Has there been anything changing in terms of those dynamics? May be anything on the manufacturing side from efficiency, just trying to think about how that dynamic, back and forth will play out here in the coming quarters?

Yes, that’s a very good question. So I really characterize. So we – and our margins were up significantly year-over-year in both the first and second quarter of this year by about four points on a year-over-year basis. And that was additional output, it was good, it was favorable mix and that was price impacts. And so everything was really moving in the right direction for us in the first half. I think you’ll notice and if you look at our Q1 performance to our Q2 performance, we had a sequential decline from 19% in Q1 to 17% Q2. When we actually look at that performance we really see it as about 18% over the first six months, a couple of points higher based on mix in Q1 and a little lower in the second quarter, just once again, based on mix. And so when we look to that from a standard margin perspective just based on our expectations that whole sequential decline was attributable to mix. So our operating performance in Q2 was identical from an efficiency and productivity standpoint to our operating performance in Q1. So there’s really no issues that we would uncover there. So I think moving forward when we look at the second half of the year, we have a very favorable mix associated with that offshore business. We have continued impact of that increased prices that we put in place last year. And then we have the additional contribution against our fixed costs associated with operation of the third manufacturing line. And all that makes us very confident that in the second half the year that you’ll a sequential increase in our margins, first into the low-20s and then ultimately getting very nearer into the mid-20s.

That’s very helpful. Thank you. I guess there’s one last, just a follow-up on your last point there on the maintenance side, could you drill down a little bit, you mentioned that the third line gave you the opportunity to do some needed work on lines Line 1 and Line 2. Can you just give us little more detail on what that entails and kind of how the normal maintenance cycle looks for the lines?

Well, I would say that we had deferred some maintenance as long as we possibly could, while we’re capacity constrained and you always try to make judgments in real-time and I would say that we pushed those assets one and two to, I don’t want to say to the limit, but right up as much as we could, and they produced admirably. They were two or three things on those two lines that needed some TLC and we were able to do that largely because of the great performance of Line 3 providing some good volumes for us. And so we guide after those in the May, June timeframe, those have been implemented now, and those lines are strong.

Very good, thank you for the detail.

Thanks Sean.

[Operator Instructions] Your next question comes from the line of Sean Hannan with Needham and Company. Sean, your line is open.

Yes, thanks for taking my questions. Can you hear me?

Sure Sean. Thanks Sean.

Okay, great. Just want to see if I can help to get better understanding around seeing your revised guidance here. So your revenues were brought up, but the EBITDA was not brought up instead it was narrowed, I’m thinking in the context of that they were expectations you would have some yield challenges within the second quarter, which you talked about. We’re looking at some products variables, mixed variables in the back end of the year with the greater component of subsea that should help the business. Not sure if mix somehow in the second quarter is really the topic here [ph], because it looks like from an EBITDA standpoint, I mean, you certainly see street expectations and it was pretty good quarter. So can you help me to understand, why the EBITDA range didn’t also move up and what might have occurred there.

Yes, so Shawn I think it really comes down to that Subsea business. So I’ll get to that. But, I think, given our long lead times at least relative to our operating history, it gives us great visibility on our revenue mix for the remainder of the year. And in our lead times if they are running four to five months. And so clearly now we’ve got visibility to the mix that we’re going to produce, ship and deliver for the remainder of the year. And so with that refined visibility, it actually allows us to then refine our profitability estimates and we’re not working with forecasts anymore really working with purchase orders in hand. And that’s ultimately why we refined and narrowed our guidance. We always want to be giving you the best perspective in terms of what we feel we can deliver. In terms of the increase in revenue, but without the increase in adjusted EBITDA, as Don and I both noted in our comments, we anticipate a temporarily heavy mix of subsea revenue during the second half of the year. That subsea business is characterized by a higher effective selling price per unit per square foot, but it also comes with a higher cost per square foot. So it’s a high cost, high priced product. And so essentially that the dollars of profitability that we deliver are essentially the same. So higher revenue, higher costs, same profit. And so that mix shift to subsea business, just that, it increases our expectations in revenue, but it delivers that same level of profitability. And so that’s what you are really seeing without guidance, increased revenue, based on that subsea business but the same profitability, that we otherwise would have had if we had a different mix of products in there. That makes sense?

Yes, that’s helpful. Okay. And then in terms of brining up Line 3 here, how utilized, I don’t know if I could a number, how utilized was Line 3, I think, there were general expectations that would be something around 45%-ish if I remember correctly for second quarter? It sounded like it might have been a little bit better than that. And then are there any changes to the expectation of 80% to 85% in the third quarter, and then that 100% in the fourth? Any news [ph] around that?

Yes. So Sean it’s a good question. So it was higher than the 45%, but then we used that additional output in order to allow us to back into the maintenance on line – one – line in Line 1 and Line 3. So first half, there is no change in expectation of performance in the back half of the year. The strong output we had in the second quarter makes us increasing confident, our ability to hit output. I think the most important thing to think about is, these lines don’t run on their own it really is a plan. We will cast product on our third line and then we will age it and extract it on our extract it on our second line or our first line. And so ultimately, once that line is up and running we really look at plant capacity. And we got out of that plant in the second quarter exactly what we had anticipated. And just to do a little quick math for you, the third line added 25% to our aggregate capacity. We expect it to run at 45%. If you multiply 25% by 45%, it gives you 11%. And our increased volume year-over-year was exactly 11%.

Right.

So we’ve ultimately got from that line and from the plant exactly what we had anticipated.

Right, okay, very helpful. And then in terms of a broader question of deals, can you talk a little bit about the ability to achieve better yields in products overall. So it is just beyond just that third line more in terms of minimizing ways, getting more products out of your process. Are there any metrics or goals that you set internally or what we should think about in terms of yield improvements within your existing plant I facility? Either in this year kind of going forward thinking about 2016 or would have any contexts around that for getting more products out in minimizing ways would be helpful. Thanks.

Yes. I'm Don, I’ll take this one. So we are always working on enhancing yield across our product lines, within product lines, throughout the plant. We’re actually measuring uptime how much maintenance we have to do on those lines, what percentage of the available hours there up and running. And we are looking at yields, we’re looking at throughput. How many rolls we can produce per hour on each of those lines? How many hours we are effectively able to run those lines per day. And then for the product that is produced and manufactured, what’s that yield, so per unit of input what unit of output do we get. We see significant ability to continue to enhance the overall productivity of our plant across that uptime, throughput, and yield spectrum. And we’re continually working that. And we’ve made solid progress on all fronts since from 2011, to 2012, to 2013, to 2014. And our expectation is we’re going to able to continue to do that in 2015 and well into 2016. We haven’t publicized any specific improvement targets. I don’t think we’re in a position to do that today, but it is an important part of our plan. It’s included in our guidance for 2015 and clearly it will be fundamental to the guidance that provide for 2016 and moving forward.

And Sean, I would just add to that, answer that our cryogenic business, or so called Cryogel product is a product where we are gaining greater and greater traction in the market. And that’s a product that we’re a little less experienced making relative to the Pyrogel product, and we’re, the slope of that line in terms of yield and improving our throughputs and again the yields there. We have room to improve and we are and we set some very clear internal targets for the business. But a lot of this is just experience based. And we’re having an opportunity to gain a lot of experience in that product.

That’s great. Thank you so much.

Thanks Sean.

This concludes our question-and-answer session. I would like to turn the conference call back over to CEO Donald Young for closing remarks.

Thank you, Amy. Overall I’m pleased with our results for the second quarter of 2015, with the contribution from our new manufacturing line and continued strong demand for our products we believe we’re well positioned to perform in 2015 at record levels. Thank you for your interest in Aspen Aerogels. We look forward to reporting our third quarter results to you in early November. Have a good evening.

Thanks everybody.

Thank you.

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