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

Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. I'm John Fairbanks, Aspen's CFO. Before turning the call over to Don Young, Aspen's President and CEO, there are a couple of housekeeping items that I would like to take care of. First, we'll take questions at the end of our prepared remarks, and as the operator indicated, an archived version of this webcast will be available in the Investor's section of Apsen's website, www.aerogel.com. Press release announcing Apsen's third quarter 2015 results and business outlook as well as a reconciliation of management's use of non-GAAP financial measures as compared to most applicable GAAP measures is available on the Investor's section of the website. There you will find a summary statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the third quarter of 2015. Please note, that our discussion today will include forward-looking statements, including any statements regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact and such statements are subject to risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in the forward-looking statements. A list of factors that could affect the Company's actual results can be found in Aspen's press release issued today and are discussed in more detail in the reports Aspen files with the SEC, particularly in the Company's most recent annual report on Form 10-K. The Company's press release issued today and filings with the SEC can also be found in the Investor's section of Aspen's website www.aerogel.com. The forward-looking statements made today represent the Company's views as of today November 5, 2015. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures including adjusted EBITDA. These financial measures are not prepared in accordance with the U.S. Generally Accepted Accounting Principles or GAAP. These non-GAAP financials measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Definitions of the reconciliations of these non-GAAP financials measures to the most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures is available on today's press release, which is also available on the Aspen website. I'll now turn the call over to Don Young, President and CEO of Aspen Aerogels.

Thank you, John. Good afternoon. Thank you for joining us for our Q3 2015 earnings call. I will provide comments about the business and our performance and John Fairbanks, our CFO will present the financial details of our third quarter, update guidance for 2015 and provide initial guidance for 2016. We will conclude the call with a Q&A session. We would like to start by announcing that we have chosen Statesboro, Georgia as the site for our second manufacturing plant. Our team ran an elaborate selection process that initially included international and domestic alternatives before we narrowed the list to potential sites in the Southeast part of the United States. We evaluated several attractive sites in Georgia and South Carolina. In the end, Georgia, Bulloch County and the City of Statesboro provided the best combination of incentives and operating features. The 43 acre site is served by rail and provides excellent access to the ports of Savannah, Charleston and Jacksonville. The City of Statesboro and the surrounding region is served by a well-developed technical education system, featuring Ogeechee Technical College, East Georgia State College. In addition, the region is home to a strong, available workforce and will provide Aspen with secure, low-cost utilities and good access to critical raw materials. Building on the momentum of the successful execution and start-up of line 3 in our East Providence manufacturing facility, we are confident we will deliver the first phase of plant two in a similar manner. The plant two project represents another critical building block to the long-term development of Aspen Aerogels following our IPO in 2014 and a successful start-up of the third manufacturing line in East Providence in 2015. With respect to Q3 operations, product revenue resumed its growth with a continued ramp up of line 3. Q3 product…

Thanks Don. As Don highlighted during his comments, we achieved several milestones during our third quarter. We achieved record total revenue, supported by continued strong output from our third manufacturing line. We delivered record adjusted EBITDA. We selected Statesboro, Georgia, as the site for our second plant and we're well-positioned to deliver a record fourth quarter 2015 supported by a solid book of business. I'd like to start by running through our reported financial results for the third quarter at a summary level. Third quarter total revenue grew 24% year-over-year to $31.5 million. Third quarter GAAP net loss was $2.5 million or $0.11 per share versus $2.4 million or $0.10 per share last year. Our third quarter adjusted EBITDA grew 38% to $1.7 million compared to $1.2 million in the third quarter of 2014. We defined adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expense and other items that we do not believe are indicative of our core operating performance. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. Third quarter total revenue was comprised of product revenue of $30.9 million and research services revenue of $613,000. In the third quarter product revenue increased 26% versus the third quarter of 2014. This growth was due primarily to strength in the subsea market and in the petrochemical and refinery sectors in North America and Europe offset in part by particular weakness in the Latin American market. During the quarter we shipped 10.45 million square feet of aerogel blankets, which represented a growth of 12% over the third quarter of 2014 and was supported by output from our third manufacturing line. We expect to maintain double digit growth in the number of square feet produced during the remainder of 2015…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No.

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

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

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

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

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

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

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

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

Okay, great and then --

[indiscernible] 2016.

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

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

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

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

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

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

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

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

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

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

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

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

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

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