Good afternoon. My name is Loral, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels Fourth Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to John Fairbanks, Aspen Aerogels' CFO. Please go ahead.

Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. 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 First, we'll take questions at the end of our prepared remarks, and as the operator indicated, an archived version of this webcast will be available in the Investor's section of Aspen's Web site, www.aerogel.com. The press release announcing Aspen's fourth quarter 2015 results, and 2016 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 quarter, and the year. 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 Web site, www.aerogel.com. The forward-looking statements made today represent the company's views as of today, February 25, 2016. 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 financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The definitions of, and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and a discussion of why we present these non-GAAP financial measures is available on today's press release, which is also available on the Aspen Web site. 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 Q4 2015 earnings Call. I will provide comments about the business and our performance; and John Fairbanks, our CFO, will present the financial details for the fourth quarter, the year 2015, and our guidance for 2016. We will conclude the call with a Q&A session. I'd like to start with a recap of 2015, our first full year as a public company. We had three broad goals going into the year. The first goal was to expand capacity to meet the growing demand for our products in 2015 and beyond. We completed Line 3 in East Providence on time and on budget, and we did so safely. We produced high-quality products from the outset, and today Line 3 is exceeding our expectations in terms of output and yields. During the year we also made significant progress on our Plant 2 project. We negotiated incentives, and selected an excellent site in Statesboro, Georgia, and have completed initial site layout and engineering designs for the facility. Our solid Line 3 execution provides a perfect blueprint for Plant 2. And I have high confidence in our team's ability to complete the project successfully. The second 2015 goal was to grow our revenue by deepening the penetration of our broad base of end-users in the energy infrastructure market. The successful startup and operation of Line 3 enabled us to grow product revenue by 21% for the year, and 34% for Q4 alone, and to continue to gain market share despite a deteriorating energy environment. We not only gained share with our existing end-users, but we also diversified into additional segments of the energy infrastructure market, with our first substantial LNG project win, an initial success in the district heating market. We will…

Thanks, Don. As Don highlighted during his comments, our financial performance during the fourth quarter was strong. We set new records for revenue, gross profit, gross margin, adjusted EBITDA, and earnings per share during the quarter. These results reflected a favorable mix of products sold, strong manufacturing performance, and the full impact of our third manufacturing line. Let us start by running through our reported financial results for the fourth quarter and fiscal 2015 at a summary level. Fourth quarter total revenue grew 34% year-over-year to $37.4 million. Fourth quarter GAAP net income was $1.6 million or $0.07 per share versus a net loss of $2.7 million or $0.12 per share last year. Fourth quarter adjusted EBITDA was $5.4 million compared to $1.3 million a year ago. We define 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. We also generated free cash flow of $2.9 million during the fourth quarter, and ended the period with $32.8 million of cash and cash equivalent. For the year, total revenue 20% to $122.5 million. GAAP net loss was $6.4 million or $0.28 per share in 2015, which represented a significant improvement over the last year. Adjusted EBITDA for the full year was $9.1 million, up from $3 million a year ago. Overall, we are very pleased with our performance. Our revenue, net loss, earnings per share, adjusted EBITDA, and cash balance reach the upper end of or slightly over our most recent guidance. I will now provide additional detail on the components of our results. First, I will discuss revenue. Fourth quarter total revenue was comprised of product revenue of $36.6 million and research services revenue of $743,000. For the year,…

Thank you. [Operator Instructions] Your first question comes from the line of James West with Evercore ISI. Your line is open.

Good evening, guys.

Hi James, how are you?

Good. A question for me on the new power gel that you're talking about for the power market, how long has this been in the R&D or in process? So what do you usually see as time to market? I know you said it wouldn't really contribute in 2017, but presumably you'll have something commercialized this year. Is that fair?

It is fair. James, we've been working on this project for the better part of a couple of years, frankly, and it has intensified over the course of the past year. You'll remember, we've always thought about energy infrastructure, and you know, sort of six buckets, and that power market has some characteristics that are a little different than the refinery and petrochemical markets, in particular. And as we learn more about that market, and created a market focus on it, we thought it prudent to optimize a product for those specific conditions of the power gen market force. And that's what we've done. And we think that we will be able to -- it may be beta form in 2016, but more impactful -- in a more impactful way in 2017, launch a product, and that be again an important segment.

Okay, thank you, Don. Then the shift, you're back into the building materials market. If I remember correctly, you had exited that area both because of capacity constraints, as you mentioned in your prepared comments. But it was also, correct me if I'm wrong, but I thought it was a lower margin business too. And that the energy side was higher margin. Is that the case? And then, I guess if you're talking about just niche parts of the building [ph] products markets, are those the higher margin parts?

Yes, James, it's John. So if you look at the profitability expectations for our new markets, in the power market and the district heating markets, we'd expect gross margins that are consistent with existing revenue in the broader energy infrastructure market. Our existing Pyrogel products or slightly optimized version for the power market will meet the needs of district heating applications, and applications within the power segment. And so we expect no degradation in gross margin with those markets. Our building materials product line does deliver a lower gross margin. However, based on what we see in terms of volumes this year, the impact of increasing the mix of building materials' revenue in 2016 would be less than a one percentage point for Aspen's gross margin. And in addition, we expect that we'll be able to drive down the costs of those products, and expand our margins as production volumes increase, as we gain experience producing those products. I think we've always cited that we've sold roughly, now, about $500 million worth of product, but the bulk of that has been our Pyrogel and Cryogel products. I think our aggregate building material sales are probably around $20 million. So we really haven't had the opportunity yet to go down the experience curve, and driving costs out of those products. And then we'll have additional ability to drive out costs as we optimize those products through technological advances as well. So with volume and technological advances, ultimately we think that we can drive margins in the building materials business that are consistent with what we get in energy infrastructure, it just might take us a couple of years to get there.

Okay, that's very helpful. Thanks guys.

Thanks, James.

Your next question comes from the line of Chip Moore with Canaccord. Please go ahead.

Hi, Chip.

Hi, thanks. Guess first, was curious to see on Canada, you called out a rather quick pivot there to the downstream side. I guess, maybe talk about -- is that just a couple of projects or does that speak to your ability to pivot, if need be, you know how to upstream.

Yes, I mean -- I think the way I would say it is that the work that is done in the eastern part of the country is more similar, if you will, to our core refinery and petrochemical work that we do abundantly, here in the U.S. And so it was a very natural extension of that work. We had been working on it for a period of time. And I think it was a natural progression, frankly. And so it -- and a timely progression, especially as the Volkswagens came under such tremendous pressure. So again, we've been working on this for a couple of years, quite honestly. As we continue to try to broaden the scope of our end-user base in that refinery and petrochemical work, and then begin to deepen those accounts, and I think we've done that. And that's exactly what happened in Canada.

And we didn't -- we did not decrease the number of sales reps we have in Canada. And they shifted their focus away from the oil sands into the other segments of the market in that region.

Got it. Okay, that's helpful. And I guess just more broadly on sort of pivoting to some of these new markets. Can you talk about lead times now, and sort of go-to-market on some of those newer opportunities, the district heating, building materials, anything you need to do there?

Yes, so first on lead times. You remember, we, for most of 2014 and 2015, we talked about 20 weeks kind of lead times. That had come down by the end of 2015, as we brought on the new capacity. That has actually maybe come down into that 10 to 12-week kind of period. That's actually increased here recently. Back up maybe into the 15-16-week kind of timeframe. With respect to district heating, we've had a concerted effort going in this area, we dedicated resources. We have an ideal product, a great value proposition. We now have built out some excellent case studies in that area. And again, as I said in my comments, we will at least double our revenue activity in that area in 2016, from the beta launch that we did in 2015 to get out to these kinds of numbers in that $5 million to $10 million range, here in 2016. That is a market that is quite large though, and over a longer period of time, we think that will be a valuable market for us. The power market, we're a little further back because we are still finalizing the product, beginning to introduce it, and getting feedback, just as we did with Pyrogel and Cryogel with ExxonMobil, back in 2007-2008. And so we want to perfect that product before we roll it out with gusto. So, again, we're learning a lot in 2016, and I think you should expect some impact on revenue growth and profitability in 2017.

Yes, okay, that's helpful. And then I guess just lastly on Plant 2. Maybe you can talk about where we stand in terms of timing on potential debt financing? And then also, given Line 3 has been up and running for a bit here, and running above plan, have you learned anything new that should help you there? Thanks guys.

So in terms -- really nothing has changed with our financing. I think as Don had alluded to, we're now expecting that line to be up operational and contributing in 2018. At this point, we've completed the site acquisition and set-up negotiations. And we've completed our plus-minus 30% engineering layouts. We're involved in the second phase of engineering, with the completion of plus-minus 10% engineering layouts expected in May. Our current plans for the facility, the projected cost to compete a full first line and the plan is between $110 million and $120 million. However, the scope and scale of that line has changed somewhat, and we're actually planning to build it now in two phases. So the first phase will cost us roughly $85 million to $90 million, which is kind of in line with our expectations for that line initially. And then the second phase will cost us about $25 million to $30 million. One significant change though is that we expect to get additional capacity out of each of those phases, and ultimately additional capacity out of the full first line. So each phase of that first line will give us between 20 million and 24 million square feet of aerogel. So the aggregate for that first line now is between 40 million and 48 million square feet of aerogel products. So we're pretty excited. So the capital intensity has reduced. And, ultimately, we think the output that we can drive out of the plant has increased. And I think it's important to note that the plant site, the layout, and the design will support the development of two additional, similar production lines in the future. And that Plant 2 engineering effort is -- continues to be in process, but it really has gone smoothly, where we haven't lost any time in that engineering effort. And so we feel very good about the progress that we've made. And to the second part of the question, on the performance of Line 3, the way I would say that is Line 3 is better than Line 2 in certain ways. And Line 2 is better than Line 1, just as you would expect. And I think you should also expect that, in essence, Line 4, Line 1, Plant 2, we will take all the learnings that we've had from lines 1, 2, and 3, and incorporate them into the first line of the second plant. And as we continue to invest in our process development capabilities, again, I would anticipate that line running better than Line 3.

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

Hi, good evening. So I wanted just to follow-up a little bit on the LNG project in Thailand. Obviously, the LNG market globally is looking pretty challenged, but there are a number of facilities under construction. So I was just hoping you could just give us a little more context around the timing it took to win that award. Where Aspen sits in the award cadence for LNG project? And then just the potential for other prospects that are out there at the present time?

Yes. LNG, like most projects, insulation comes quite late in the cadences, to use your word, of project development. It's one of the reasons why we get very, very few cancellations. These projects are well along by the time the insulation is installed on these facilities. So there's a lot of momentum, a lot of capital spend, et cetera. And that was the case in the Thailand project as well, in that receiving terminal. We also -- we don't deny your comment that the LNG market is challenged. Like so much of the big infrastructure project in world right now. But there are other projects that we are well-along in the bid process for. And we anticipate that we will be able to add to our first win here during 2016 with other projects.

That's very helpful. And then just to bring back to another -- a topic from last quarter's call. How are you guys thinking about the inventory levels that you think are necessary as you trying to shorten your lead time? So this is something we talked about quite a bit. Just, I'm thinking on the context of any update you have on MRO opportunities, as spring turnaround is coming, just maybe curious to get an update there.

Yes, so our finished goods inventory at the end of the year is about $2 million, is up a couple of $100,000 from the end of the third quarter. And that kind of finished goods inventory for us is virtually nothing. It's the product that we just produced in the last couple of days. And product that hasn't yet been delivered to the customer, but might be on a truck or on a ship, where we can't recognize revenue until it's delivered. And so we have not yet built a significant finished goods inventory. We do expect though, that during 2016, we will be able to create that finished goods inventory, principally, not necessarily so much in the first quarter, but moving into second quarter, and definitely in the second-half of the year. Which would give us the ability to serve on a quick-turn basis to be able to take advantage of those turnarounds and that deferred maintenance in case there's any sort of emergency maintenance within the refinery and petrochemical companies that we serve. And so it is definitely an anticipated benefit of that build. In addition, we're also excited about the fact that that additional finished goods inventory will allow us to start to run our plant to produce product two inventory rather than to produce product two orders, which will allow us to take longer runs, and allow us to run that plant more efficiently. So that, we still do anticipate that that will happen. It hasn't yet happened till the beginning of the first -- half-way through the first quarter.

And also, Sean, we're trying our hardest not to starve our distributors. We want more product in the pipeline near the refineries, near the facilities, so they can respond. Obviously, we track very carefully MRO spending. And we subscribe to the fault that there may very well be a relatively high percentage of unplanned maintenance in the facilities again because they have been running them so hard for so long now as you know.

That's right, yes. That's very helpful. Thank you, guys.

Thank you, Shawn.

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

Hi, good afternoon guys, initially the question; nice quarter.

Thank you.

I want to get updates on the price increases, I think you had commented earlier that that you said the price increases have been successful in 2016 or was that 2015? I guess you guys increased price this year or should we expect future price increases in 2016?

Yes. So, just a history of our price increase; we were successful putting price increases in place in 2013, '14, and '15. Again, roughly 4% across -- on average across the mix, there are some higher and lower ones within that mix, but just think of it across the model is about 4%. We did the same thing effective January 1, 2016. And we might remember, we did announce that, inform our customers in the July-August timeframe of that 2016 price increase. Again, at that point in time, we had four or five plus months lead time. So that was an appropriate communication. And in fact -- I mean price increases in 2016 are fairly unusual but -- in this business at the moment, but we were able to put it in place and sustain it for the year. And we have every confidence that it will hold even though the market is under pressure and vulnerable in some ways.

Great, thanks. And then, can you provide a little more color on the subsea market? I think that on the last call you guys said that you are expecting a slowdown in the second half of this year. Has that slowdown actually occurred a little faster than you guys have been planning, or are you just continued to be prepared for the second half of '16?

Yes, so the subsea market -- as I said earlier question, we come pretty late in these projects. And Shawn was referring to the LNG market, but it's also true in the subsea projects as well. So, there is a certain flywheel effect I guess in this segment. And so, we can track projects very carefully. They are well documented. We're participating in the bid processes early on in these projects. So, I think it's fair to say -- and I said in my comments that last earnings call we thought it would revert back to sort of historical levels of $5 million to $10 million, and in this earnings call, I was even a little more clear about that that we thought it would be in the lower end of that range. And we're -- we hope we are wrong, but I think we are probably right that it will be in that kind of -- at that kind of level. And we are very confident about that level because we've got that largely in hand today. But again, these projects with oil and -- where it is today, we feel these projects on pause in many cases. So, we will be ready to go when some of the best projects kick back on. And hopefully, we will be surprised over the course of the year, but we are not counting on in our guidance.

Great. Thank you.

Your next question comes from the line of Ryan Cassil with Seaport Global. Please go ahead.

Hi, guys. Good evening.

Hey, Ryan.

Hi, Ryan.

I just wanted to go back to the refining MRO opportunities. You are guys are apparently talking with these customers about planned shutdowns. And are you getting sense that that's going to happen at the end of '16 or early '17? Or is that more optimism that it needs to happen based on the duration in between turnarounds? And then, my second question is for the unplanned maintenance, given where you guys are with your lead times, is that really an opportunity for you guys based on where you will be with inventory in the second half?

Yes, thank you. So, inventory is important for us. And again, for us, getting more products down into the distribution channel near those refineries and petrochemical classes is very important. That doesn't show up as often as skids [ph] inventory, but it is plant side and that's where want it. So, we have done a reasonable job so far this year getting product in position. It is important we ourselves build more inventory here as we go later in the year. Our sales and marketing team are on the ground, calling on these accounts every day trying to gauge maintenance practice and maintenance expectations. And again, as I said, we are hearing and expecting a high level of unplanned maintenance. But we are also hearing that there are an array of turnarounds even here in the spring time let alone in the fall season that we were anticipating -- we are there telling us that they are going to be doing some significant maintenance work. So, we're going on that. We try not to be either optimistic or pessimistic, but just clear eyed about the opportunities and being as close to ground as we can. We think the team has done a pretty effective that will be ready for that opportunity.

Okay. Great. And then, could you tell us what your assumption is for capacity utilization in the East Providence plant for '16? And maybe how that -- if it's different in the first half and second half, but has that changed it at all with the third line running more efficiently perhaps to give you a little bit more buffer in case something goes wrong?

So, our existing guidance hasn't changed too much in that, Ryan. So I think at the last earnings call, we discussed that at the upper end of our revenue guidance for product revenue is $1.20 million. That gave us roughly $15 million of additional revenue capacity out of the plant. And so, that third line is definitely running above our expectation, is contributing, and just on that sort of stable basis would lead us to think that we would have additional revenue capacity. Working against that a bit is the mix, that I alluded to, in the first half of the year with a slightly lower ASP, we would anticipate higher volumes, slightly lower ASPs. And therefore, we are probably still in that range of about $135 million for the year. So, nothing has really changed since November, but sort of the component of that 135 million mix has changed a bit.

Okay. All right. Thanks guys.

Thank you, Ryan.

Your next question comes from the line of Craig Irwin with ROTH Capital Partners. Please go ahead.

Hi, good evening, gentlemen. In this current environment, a lot of investors are looking at things from a sort of worst case scenario. And, the dire scenario is what unfortunately the new buyers very often look at before they scoop in new positions. Can you maybe -- now you are 32 million cash, you are getting pricing on your product now, but can you maybe discuss with us that if you did see a surprise as far as your renew trajectory in '16, what your ability would be to take out additional cost to maybe reduce some of your operating costs? How much room do you have there? And what you see as a potential downside scenario?

Yes. So, -- I mean that's a very good question. A lot of our expense is people. And, it's both in the plant, operating expense, sales. Sales and marketing is predominantly sales reps and travel expenses. G&A is people and professional services and a lot of things that are required to be a public company. And research and development is actually and our engineering groups are people as well. And so, in terms of a really quick response, I think when you talk about cutting expenses, we can obviously cut discretionary expense although as a company we keep strong controls on cost to start with. So we do have some opportunity there. We could delay and defer potential hiring, and so instead of adding to our cost base in 2016 we could maintain it. And also I'd say probably we do have the ability to control and constrain cost by $2 million-$3 million to get something more than that though would mean we'd have to actually take out resources. And the implementation time and ultimately the time it takes to actually get a net benefit to those types of actions but push the impact of that out to 2017. So we do have some ability to cut and control expenses to offset any sort of downside scenarios and that would probably cover $5 million, $6 million, $7 million of a revenue mix. Beyond that we would probably see some kind of degradation in the profitability, but at present I think now based upon what we're seeing -- what we are seeing in the market we are fairly confident in the guidance range that we provided and we don't think we have to take those actions.

Great. That was fantastic.

Yes, I would just add if I may, Craig, to that, I mean you cited some things that are very important to us strong cash and position, not that that's a good place to be in this kind of environment. you pointed out the price increase -- putting a price increase in the tough environment is -- it says something about our product and I think the other thing to keep in mind for us that if you -- the markets that we have targeted -- the energy infrastructure market at our core, we have done a great job creating adoption across all virtually all the petrochemical and refinery companies, but our penetration rates are relatively low still, early stage. And we're doing a great job I think building, building, building into that market as our capacity has allowed, but we're -- for us just to gain another market share point or two is a very absorbing kind of thing from a revenue and cost point of view of running this business. And so I think I would just make the distinction that relative to a company that's more mature and might have a higher market share where it's very hard to evade being buffeted by this big macro environment that we find ourselves in today. I just think our ability to maneuver is a little greater within the marketplace and it does provide us some additional protection.

Great, thank you for that. So my second question again is sort of on the lines of a skeptical investor, and I believe I know what your answer is going to be like many people on the line, but a skeptical investor in this environment would probably be thinking that your customers could look to substitute back to the legacy products that they used a few years ago, given that your product is a pretty novel product. And probably an incremental cost for them an incremental first fit cost, can you maybe discuss how the economics work for your customers, whether or not this is something that would make sense? Whether or not the design and engineering changes that they've made to incorporate your product would be consistent with that?

Yes, so I think I've -- we always talk about and think about ourselves material cost, total installed cost, and total lifecycle cost. And so, you're right on the material cost point of view, but we tend to be very competitive with many of the products that we are displacing today at that total installed cost level. And it is typically at that point that the engineer that you might be referring to, he might be evaluated at that point. And we're very competitive in many cases at that level. And of course our value proposition and one of our selling points is, well, also if you can look towards the total lifecycle cost, and that's where the durability of our material that -- the prevention of corrosion and the insulation, the whole host of important factors that's where we really come in and save money over a period of time. But I don't want you to think that people necessarily rely on that third bucket. It's usually the second bucket where people are being measured, and we're competitive in that level in many, many, many cases.

Fantastic. Thank you for taking my questions.

Thank you, Craig.

Ladies and gentlemen, that's all the time we have for today. I'd now like to turn the call back to Don Young, CEO, for closing remarks.

Thank you, Loral, and thank you for participating in today's call. We really appreciate your interest in Aspen Aerogels, and we look forward to reporting our first quarter results to you in early May. Have a good evening.

Thanks everybody.

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