Earnings Labs

Aspen Aerogels, Inc. (ASPN)

Q3 2016 Earnings Call· Sun, Nov 6, 2016

$3.60

-1.24%

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Transcript

Operator

Operator

Good afternoon. My name is Blair and I'll be your conference operator today. At this time, I like to welcome everyone to Aspen Aerogels’ Third Quarter 2016 Earnings Conference 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. Gregg Landes, Vice President of Finance, you may go ahead.

Gregg Landes

Analyst

Good afternoon. Thank you for joining us for the Aspen Aerogels’ conference call. I'm Gregg Landes, Aspen’s Vice President of Finance. There are a couple of housekeeping items that I would like to address before turning the call over to Don Young, Aspen CEO and John Fairbanks Aspen’s CFO. The press release announcing Aspen’s third quarter 2016 results and business developments, as well as a reconciliation of management's use of non-GAAP financial measures as compared to the most applicable GAAP measures is available on the investor section of Aspen’s website, www.aerogel.com. Included in the press release is a summary statement of operations, a summary balance sheet, a summary of key financial and operating statistics for the quarter and nine months ended September 30th, 2016. In addition, investor section of Aspen’s website will contain an archived version of this webcast for approximately one year. Please also 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 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 section of Aspen’s website. The forward-looking statements made today represent the company's views as of today November 3rd, 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 included adjusted EBITDA. These financial measures are not prepared in accordance with 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 most directly comparable gap financial measures and a discussion of why we present these non-GAAP financial measures is also available in today's press release. I will now turn the call over to Don Young, President and CEO of Aspen Aerogels.

Don Young

Analyst

Thanks, Gregg. Good afternoon. Thank you for joining us for our Q3 2016 earnings call. I will provide comments about the business and our performance and John Fairbanks, our CFO, will present financial details for the third quarter 2016 and our guidance for the full year. We will conclude the call with a Q&A session. I plan to cover three topics in my prepared remarks. First, I'll provide a third quarter and year-to-date 2016 overview, a sense for the current commercial environment, and a market outlook for 2017. Second, I’ll provide an update on our plan to project and related financing. And third, I’ll review progress on our strategy of leveraging our Aerogel technology platform. Revenue for the quarter declined by 6%, while revenue year-to-date increased by 6% compared to 2015. We improved our gross margins over these same periods of time from 16% to 22% in Q3 and from 17% to 22% for the nine-month time frame. Although this 22% gross margin is below our mid-20’s target, the shortfall is attributable specifically to customer mix and more generally to the continued weakness in the energy market. As we have said in the past, we will experience quarterly variability in revenue and gross margin due to projects, product mix, or macroeconomic trends in a given market segment. As we achieve our objective to diversify our end markets, we expect that quarterly variability will become increasingly muted. The commercial environment in 2016 has been and continues to be challenging. As predicted, the upstream market, Subsea and Oil Sands for us has been very quiet. These two segments generated approximately $28 million of revenue in 2015, representing over 20% of total revenue for the year. This record performance occurred as oil prices and overall energy investment were generally declining and demonstrates the…

John Fairbanks

Analyst

Good afternoon. As Don highlighted during his comments, we operated well in the third quarter and made solid progress toward our goal to expand and diversify our business. Despite a 6% decline in total revenue, we grew gross profit by 24% to $6.4 million, achieved a 22% gross margin, a full six-point improvement versus the third quarter of 2015. Our net loss of $3.1 million increased and our adjusted EBITDA of $1.5 million decreased versus last year, but reflected $1.1 million of expense associated with our patent enforcement actions. Excluding these patent enforcement costs, our net loss and adjusted EBITDA would have improved versus the third quarter last year. And importantly we completed the pilot line in our East Providence facility, initiated our joint development efforts with BASF, and prepared for the launch during the second half of 2017 of our new product optimized for the power market. I'd like to start by running through our reported financial results for the third quarter and the first nine months of 2016 at a summary level. Third quarter total revenue declined 6% year-over-year to $29.6 million. Third quarter GAAP net loss was $3.1 million or $0.13 per share versus a net loss of $2.5 million or $0.11 per share last year. Third quarter adjusted EBITDA was $1.5 million, compared to $1.7 million a year ago. Overall results in the third quarter this year reflected two notable items. First, during the quarter we incurred an expense $700,000 of financing costs as a result of our decision to temporarily delay the Plant 2 construction project and related financing. During the quarter, we had completed negotiations and documentation at all approvals in hand and we’re prepared to close the debt facility required to fund the project. However, as Don discussed, we decided to temporarily to…

Operator

Operator

[Operator Instructions] The first question comes from the line of Chip Moore from Canaccord. Your line is open.

Chip Moore

Analyst

Hey, thanks folks. I guess just first on ‘17 clearly you had a hole there to fill on that large project of 20 million or so. Can you maybe talk a bit about some of the newer initiatives building materials, LNG et cetera, sort of magnitudes there of potential to help fill that?

Don Young

Analyst

Yeah. Hi, Chip. This is Don. So, those are - those are three important areas for us and I would just add and remind you that we're also introducing our power product during the year 2017. And while not having an enormous impact on the year, we think it will contribute also in helping us fill that hole. District energy has been very successful for us. We're growing that business substantially. We're creating a lot of good case studies and we think it has, as I have said in the past, the ability to ultimately be a market force that’s measured in the tens of millions of dollars, I’m not suggesting that for 2017, but we will continue to build along those lines. With respect to LNG, we had a good year here in 2016. You'll remember early in this year I suggested that we would win one and possibly two projects and as it turned out we had delivered on - we will have delivered by the end of the year on three different projects. So I think that bodes well for that industry. Of course, that industry is impacted by - by energy related activities and so we'll see how that builds out in 2017. But we know in the medium and long-term that that will be an important contributor for us. We are also focused on operationalizing our BASF agreements. And you'll remember that those have technical aspects to them, but they also have commercial aspects to them as well. And that will be an important area for us to focus on and make progress on to fill that - to fill that hole that's left by the - by the big petrochemical project.

Chip Moore

Analyst

Yeah. Okay. That's helpful. And I guess as we think about plan 2 and the pause and thinking about these newer areas, I guess, what do we need to see in terms of visibility? Is it really on the downstream side to get more comfort? Or how are you thinking about that?

Don Young

Analyst

Yeah. We're thinking about it with a few different pockets. One thing we've - we love to say, look, when quarterly revenue is X in a very quantitative way, we're going to pull the trigger. It's hard to do that. It's a little bit more intuitive than that, I think a little bit more of a gut feel. There are three areas that were indicators that we're looking to. One simply is the maintenance businesses. We're - it’s just bread and butter for us. We're very good at that business. We have seen this - this downturn in this activity even here in the United States that I would say was a little - a little greater than we had anticipated going into the year. But once - once that starts to turn, we'll get a feel for it and those are important assets and our product is important for turnarounds and we think it’s inevitable. No doubt a healthier energy market promotes that and moves that along. Second, our projects, as I indicated in my comments, our materials tend to be used a little late - a little late cycle in these projects. So we have pretty good visibility as RFQs become more active and projects start to pop their head up. We have - we have a great portfolio of projects that we're watching. And as these things again become more active, we think we're in a great position and we have nice visibility on being able to deliver on those kinds of projects. So, that's the second area. And then as we talked about earlier, the adjacent and the new markets have the ability to absorb significant capacity. And so, we have a - we have a lot of confidence in our ability to execute in those adjacent and new markets. And then - again as I said in my comments, I just want to - a backdrop of the fact that we have the ability with our capacity and some inventory to deliver nearly $150 million of product in any given year. So, that puts us in a strong position to continue to grow as we're waiting for these parts of the market to come alive again.

Chip Moore

Analyst

Okay. That's helpful. And I guess just lastly on BASF, any change to the relationship with the news, I know I think the 22 million was subject to some - to you getting debt financing, any change there, how does that work?

Don Young

Analyst

Yeah. So, under the supply agreement, the delay of the plant 2 project will result in an identical delay to the - the advanced payment mechanism under the supply agreement. So, when we restart the project and satisfy the financing conditions, the advanced payments will commence. Essentially those advanced payments are tied to our capital expenditures under plant 2. But the temporary delay of the plant 2 expansion will have no other impacts to any other aspects of the partnership. They can still purchase our Spaceloft A2 product. Under the supply agreement, we're committed to deliver it under that same agreement. They'll continue to provide technical support to us to help us enhance our manufacturing productivity. And during the quarter, we kicked off our joint development effort that's focused on the next generation products for the building materials market. So - so all of those aspects continue and we remain very excited about the potential of those efforts in partnership with BASF.

Chip Moore

Analyst

Great, thanks for that. I'll let someone else step on. Thanks.

Don Young

Analyst

Thanks, Chip.

Operator

Operator

The next question comes from the line of Sean Hannan from Needham & Company. Your line is open.

Sean Hannan

Analyst

Yes. Good evening. Thanks for taking my questions here. First one, you’re also going back to some of the commentary you’ve provided for ‘17, just want to make sure that I had understood you correctly. So we're going to have a roll off of material customer. We could have, I think the overall shun [ph] condition that will be ultimately flattish in what we've seen today for 2017. However, the third part of the year could be down year-on-year. Did I hear that correctly?

Don Young

Analyst

I think, Sean, we’re indicating that we could see a - we’ll have a challenge to maintain our revenue levels for the full year. But we could - we could actually see some revenue declines and it's really because of that $20 million challenge on the - on the South Asia petrochemical project. But it’s - the particulates particularly will be a challenge for us during the first half of the year. And again, Sean, that’s on the backdrop of the 2017 market. As we've said, that is - that is on par with the 2016 market just in terms of the market dynamic.

Sean Hannan

Analyst

Sure. I’ll follow up. Okay. And then in the same way, so this will be two years in a row where a certain segment or in this case specific customer creates disruption throughout the revenue growth that you previously have been enjoying. Is there a way at this point in time to maybe identify whether it’d be specific customers or subgroupings where you could potentially have that type of additional rigs [ph] going forward? In other words, I'm trying to get a sense of how do we not see a scenario like these one-off exceptions every year and thus we have a revenue swap?

Don Young

Analyst

Sean, I think it's a good - fair question. I think as we have said many times, the importance of our - diversifying our revenue from that core, from that subsea, from that petrochemical, from that refinery, that's our core, the adjacent markets tend to have a little less direct impact by energy prices or energy spending, maybe not LNG, but certainly district energy and building materials kind of marched to a different, a little bit different tune. And so, I think those efforts to diversify and into additional new markets will also be important. I can tell you at least for looking forward we do not anticipate having such a large block if you will that was represented by subsea in 2015 and - and the South Asia petrochemical project in - here in 2016. That project, Sean, has been going since the beginning of 2014 quite - quite steadily and - and we know it will - it will taper off here soon.

Sean Hannan

Analyst

Okay. All right. Great. Thanks very much. Thanks for taking my questions here.

Don Young

Analyst

Thanks, Sean.

Operator

Operator

The next question comes from the line of Eric Stine from Craig-Hallum. Your line is open.

Eric Stine

Analyst

Hi, Don. Hi, John.

John Fairbanks

Analyst

Hey, Eric. How are you?

Eric Stine

Analyst

I’m fine. I just wanted to touch on plant 2 and I don't know if this is something that you can give color around or not. But it sounds like, in your remarks, the temporary delay, but then some of your other remarks make it sound like it potentially could be - maybe it’s a year, maybe it's longer, I mean anyway, or are you able to quantify kind of what your gut feel is now in terms of that delay?

Don Young

Analyst

Well, it's a hard - it's a hard question, Eric, in the sense. We're reluctant to give - to guess and again we - we have adequate capacity in our existing asset to - to grow 25%. We also know that, as we see projects coming alive again, we tend to serve those towards the tail end of those projects, but we should have good visibility on those - on those projects as we start plan 2 again. And so, it's - it's - it's not unrelated of course to the energy market overall. So I think it's just hard for us to predict that and we’re just reluctant to say two quarters or three quarters or four quarters.

Eric Stine

Analyst

Okay. And just sticking with that, within that 2017 outlook on the refinery side, I mean I know near term here cautious, but from a few other companies I actually have heard the expectation that you're going to see refinery turnaround activity pick up, the expectation that it will pick up heading into 2017, so I mean just trying to - trying to square those two viewpoints and as you look at 2017, I mean do you think that - are you kind of anticipating flat versus 2016 activity or within that are you anticipating that there is some growth although it's probably modest?

Don Young

Analyst

I think - I think again we're looking at it very similarly to the 2016 market. We know we have a very good value proposition. We will - we will put that price increase in place again, which not a lot of companies have the ability to do in these relatively tough markets and we’ll continue to take market share in that area. So - so we would like to see growth in these - in these areas and we top occurred - and we - we hear in the market. We hear it from analysts in that market that those markets could come alive again during 2017. In our planning, we're being careful. We're being conservative in that - in that area. So, we're just gauging it to be flat from our - from our planning purposes.

Eric Stine

Analyst

Okay.

Don Young

Analyst

But we’ll be ready, if it's better than that.

Eric Stine

Analyst

Yeah. Understood. Okay. Thanks for that. Last one just related to LNG, I know you've delivered the two projects. You're looking to deliver the third. That the third one, curious whether it's a re-gas or it's export and just thoughts, I mean, does - does the margin profile differ at all whether it's re-gas or export or is it pretty much similar? How should we think about that?

Don Young

Analyst

It is similar. It's an export facility. So - and I think we will deliver most if not all of it. Here during Q4, it may go in - may straddle into Q1 a bit. So, in this year, we will have had one receiving terminal and two export facilities under our belt again and we've also done maintenance work in years prior. So we feel we have the case studies and the success stories now with some of the major - major engineering companies and owners of those assets. So, again we think that we're in a great position to - to grow and participate in that industry over a long period of time.

Eric Stine

Analyst

Got it. And I would assume you’ve talked about it a little bit in the past, but just given the characteristics of the product floating, LNG is a - is an area we should look for, I would think going forward?

Don Young

Analyst

It's a - it's a nice area right, because space is so important. Weight is important. A lot of characteristics that our primary attributes of our material swell in that - in that market. We install rapidly. We install easily. Some of those factors I think play a nice role in those apt LNG opportunities.

Eric Stine

Analyst

Okay. Thanks a lot.

Don Young

Analyst

Thank you, Eric.

Operator

Operator

The next question comes from the line of Robin Shoemaker from KeyBanc Capital. Your line is open.

Robin Shoemaker

Analyst

Okay. Thank you. So I wanted to see what this means the delay from a cash flow perspective. I had and I'm not sure whether these are numbers I got from you guys or but something like 15 million of CapEx related to plant 2 in 2016 and 36 million in 2017. So what is - if we - if we don't go forward here with any long lead time items or anything like that, what does the CapEx picture look like for this year and next year assuming you don't start up next year?

Don Young

Analyst

Yeah, Robin, our spending for 2016 will be relatively consistent. The bulk of our plant 2 related capital expenditures in 2015 and 2016 were for the engineering designs for the - for the plant. And so we had just completed or we’ll just complete those designs that they'll be in a position we’ll be able to take them off the shelf at the time that we restart the project and - and so they have - they have - they have value to us moving forward. So we should spend roughly $14 million to $15 million total this year in CapEx for the year and we’ll see a significant decline in capital during 2017 until we restart the plan. So, right now we would expect capital to be down the range of about $6 million in 2017. So, we have a significant step function decrease in CapEx because of the delay of the plant 2 project.

Robin Shoemaker

Analyst

Okay. So, tough year maybe from a market standpoint, but pre - I would think good - I mean some free cash flow possibly. But in any case, certainly you maintain strong liquidity.

Don Young

Analyst

Definitely a strong balance sheet, Robin, and again that we think that's an important attribute during an uncertain time for the energy business that you know well.

Robin Shoemaker

Analyst

Okay. So, on the patent enforcement obviously we're going to spend some money there in the first part of ‘17. And is there a way to quantify that? And do you have a - I think you have a court date set. And once that decision is made, is there any kind of continuing expense? I mean obviously it will come down from - from the pace it is now. But what do you anticipate there in ‘17?

Don Young

Analyst

Sure. So, Robin, so we are giving guidance in 2016 that our ITC and the German actions for the full year will run at about $3.5 million to $3.7 million of which we incurred about $1.7 million in the first nine months, so that puts us on pace to spend between $1.8 million and $2 million in the fourth quarter of 2016. And our attorneys are at president both in the U.S. and in Germany are fully engaged for - in preparation for the hearings and trials. And as you mentioned, we would expect those - the hearings and the trials could occur commencing in 2017. And so, that pace of spending will - will be maintained and even potentially accelerated in early 2017 as we - as we go to trial as we - as we head into the hearings. So - so at present we estimate that our patent enforcement costs and expenses during ‘17 could cost up to about $3 million additional to what we already - we expected and guided in - in 2016 and about two-thirds of that expense could - could come in the first - first quarter of the year, so the heavy spending in final preparation for trial and obviously for legal support during the trials.

Robin Shoemaker

Analyst

Okay. Okay. Thanks a lot. I appreciate it.

Don Young

Analyst

Thank you, Robin.

Operator

Operator

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

Sean Meakim

Analyst

Hi. I'm just hoping you could talk a little bit more about the timing on plan 2, just thinking about from the trigger point to getting back on track with where you are today kind of almost to the putting shovels in the ground.

Don Young

Analyst

Yeah.

Sean Meakim

Analyst

How much of - how much of a time lag should we expect from that next decision point? I’m just trying to get a sense of your ability to impact, looking beyond 2017 and looking your ability impact 2018 depending on how things unfold?

Don Young

Analyst

Yeah, exactly. So the next - the next important step is - is the purchase of a long lead time items. So, this was a very logical point for us to pause if you will as opposed to mid-construction where you have something half-built. And so we believe that it would take us between seven to eight quarters to have that facility operational from the moment we pull the - we pull the trigger. So, I hope that gives you some sense for the timing and the next steps involved. As John indicated in his comment just a moment ago, the work that we have done to date is valuable and will be implemented in our new - or in the new - in the - in the second plant. Again same location and all those types of things, so again we’re here to get this thing - get this thing started.

Sean Meakim

Analyst

So, permitting, financing, all those things are factored into this seven to eight quarters or those need to be lined up before the seven to eight start?

Don Young

Analyst

The permitting is - the construction project engineering permitting and construction long lead time equipment are all factored in. We have to - we would have to get the financing put in place again. But I think that that would not - that would not extend that time period significantly. I think given the success that we had in terms of being prepared to implement financing, we know we could secure it quickly and proceed with the project without much delay.

Sean Meakim

Analyst

Got it, okay. Thank you for that. And then just - also then we can maybe touch a bit more on the refining weakness that you are seeing up there. I mean in North America we've been waiting for this catchup and turnaround activity for at least a few years now and seem like it’s more likely to arrive in ‘17, just so that you can elaborate a bit more on what you're seeing in terms of weakness for refining and petrochem I guess in North America, but then you also have Europe as well?

Don Young

Analyst

Yeah. It’s been the U.S. market that we've been most - most focused on and working our distributer - our distributors, our contractors, our end users to make sure we understand what's going on. We believe that - and from the work that we've done and the conversations we've had, we believe that insulation materials going into the U.S. market, refineries and petrochemical plants, was down somewhere between 20% and 30% this year in 2016. It’s a substantial number. And as I said in my comments, our revenue is - is roughly flat in 2016. So again we've been the beneficiaries of - of our price increases and market share gains to kind of hold our - hold our own if you will during - during a tougher period. We're - we feel like we're well positioned to when those turnarounds do come, we're ready to go out and we've got the product and so again we have a - we have a - we have a hunch that 2017 will - will be a - will be a good year especially maybe in the second half of that - second half of that year.

Sean Meakim

Analyst

Okay. Yeah, fair enough. Thanks, Don.

Don Young

Analyst

Thank you.

Operator

Operator

The next question comes from the line of Shawn Boyd from Next Mark Capital. Your line is open.

Don Young

Analyst

Hi, Sean.

Shawn Boyd

Analyst

Good evening, guys. I want to switch over to gross margin for a second. In terms of the 22% we just did, we had mix shift that you mentioned. It looks like the implied guidance we’re probably going to be around that level, maybe just a little bit of that for Q4. Actually that’s my only assumption. So, if you could, just help us on gross margin as we think about December quarter and then more importantly into next year?

John Fairbanks

Analyst

Yeah, sure. So - so during 2016, I think you’ve identified our gross margins run about 22% for the year. But we have seen swings. We were 20% in the first quarter, 24% in the second quarter, 22% again in the third quarter, the variability really has come from the proportion of our total revenue in the quarter that was driven by the South Asia project. And again as we had mentioned, that - that project has - project pricing that we established back in 2013, it has a high mix of lower priced 5-millimeter product. So, the gross margin on that - that piece of business is slightly lower than average. And so as that mix has been more substantial in any given quarter, it's driven our margin down. So, that's really the fluctuation. But for the fourth quarter, we expect a very strong mix of the South Asian project again. And so, margins in that - the lower end of that range I gave you of the 22% to 24% is a good place to sort of set the expectations given the strength of the business we expect in Q4. In terms of margins next year, the economics of our business are really strong. Our manufacturing plant is operating well. Productivity is high. Yields are high. As Don mentioned, we’re getting our price increases. We're sustaining those price increases. And so, the biggest issue we have in terms of margin next year is volume. We've got a high degree of fixed costs in our plant. And so to the extent that we see any decreases in volume, it will have sort of a magnified effect in terms of our gross margin into 2017. But now we will take all actions that are required and obviously the first one with the delay of the plant 2 project. But we’ll be very aggressive in terms of how we address that potential margin decline based upon volume.

Shawn Boyd

Analyst

Okay. And in terms of the activity expenses [ph], it sounds like those potentially Q1 at this point, though, can we really forecast anything kind of tail beyond that and then I guess, well, I'm really trying to look out further and maybe I'm even asking more of a strategic question as opposed to putting numbers on this, but we're going to spend, what we talked about, another $3 million with two-thirds of that in Q1. But beyond, say, the first half of the year, we get that down to a more reasonable 200,000 a quarter or it's really just too early to tell?

John Fairbanks

Analyst

No, no, we have a fairly - we have a fairly good visibility in terms of potential expenses based upon the actions that are in place at present. So, we do expect patent enforcement related expenses up $3 million for the year, two-thirds in the first quarter, the remainder spread over - over the last three quarters of the year.

Shawn Boyd

Analyst

Got it, okay. Last question from me, Don, had you quantified the size of the LNG revenues or the revenues that we’re thinking about in terms of the power market sort of the next - in the second half of next year with the launch?

Don Young

Analyst

We haven't - we haven't provided specific segment breakdowns. But in terms of - the opportunity for LNG again is substantial. We started with maintenance. We've done these three projects. These projects have been kind of in the range of $2 million, $3 million, $4 million, $5 million each. We think of these as relatively moderate sized participation in the projects overall. Future projects could be multiples of that within a LNG complex. And so, if you think about, we started with maintenance and we've - we've participated in parts of these projects and denominated the numbers I just said to you. The - taking more and more share of a given project can lead to numbers again multiples of what I've talked about. So, I hope that's helpful. With respect to the power market, it is a very large market and we have not participated in it heavily to date. And part of that issue has been that we're capacity constrained in 2014 and ‘15, in parts of 2016. But also we came to - we were clear that we had the opportunity to optimize our products for that market. It's slightly different than the refining and petrochemical characteristics. And so, we are in the midst of completing that development and the installation of some equipment and so we’ll roll that out over the course of 2017. As we've said, it will begin to have an impact on the second half of 2017. And - but we think that we can participate in that market in a pretty strong, strong way, again a market that is over $1 billion per year in insulation materials.

Shawn Boyd

Analyst

Got it, okay. Thanks, guys.

Don Young

Analyst

Thank you.

Operator

Operator

The next question comes from the line of Geoffrey Scott from Scott Asset Management. Your line is open.

Geoffrey Scott

Analyst

Good afternoon. Thanks for taking my question. I wanted to follow up on the power generation market comments you made in the second quarter conference call and I guess what you talked about in the release today. Could you provide some color on what is special about your products? What problem does the product solve and what makes the product different? And does the industry also recognize that the special nature of your product? And also, are you looking to get into the new build or registered market? And then I have a follow-up. Thanks.

Don Young

Analyst

Sure. So, what we would expect in kind of 2017 or what I would ask you to expect in 2017 as well is that we will - we will participate in the market. We will - we will try as we have in other markets. In the subsea market, we cut into that market with technique or leader in the field in the refinery and petrochemical area. ExxonMobil is sort of our lead customer if you will. And we were able to demonstrate the merits of our product with those technically sophisticated companies. We're doing the same thing with BASF in the building materials area. I think you should anticipate that we will do the same thing with a lead partner in the power business, so that we can demonstrate the importance of our product. The importance of it is related to the thermal performance of it, to the lifecycle characteristics of the material, to its excellent thermal properties at these higher temperature ranges that are our inherent in these power operations. And so, that's how we'll go about it and we think we've got a pretty good template from some of the earlier successes we've had in other - in other segments.

Geoffrey Scott

Analyst

One of the attributes is - is you said life cycle, so you are going to tell people that it’ll last longer than an existing product. That sounds like a very long sale cycle. Is that fair?

Don Young

Analyst

I think - life cycle impacts are always a little harder to - to demonstrate. We did it with ExxonMobil very early on. And when you have a lead customer who shares the merits of the product, in ExxonMobil's case in the refineries, it was our products traverse around corrosion of other [ph] insulation. That really set us apart in Exxon's mind. And, yes, it starts with great thermal performance, but there are other attributes as well that are sometimes denominated in lifecycle. And - or sometimes one step before that in total installed cost, the rapid installation of the materials. So, again, we do try to separate ourselves from a pure material cost calculation that we have a high - high performance product and we don't necessarily compete on that first cost basis. So, I think to your implication, yes, that is a longer sales cycle. No doubt.

Geoffrey Scott

Analyst

Okay. The better thermal quality should be a shorter sales cycle in the end a bit easier to prove. Is that I guess what gives your product that better attribute of thermal insulation?

Don Young

Analyst

Well, Aerogel has much greater thermal performance than on the traditional materials calcium silicate - perlite and so our ability to bring that additional thermal performance for a given thickness is inherent in our flexible aerogel blankets and again very well demonstrated across a whole range of segments, not only the power market.

Geoffrey Scott

Analyst

I thought you said that the products of the power market was going to be a little bit different from the products of the other industrial markets?

Don Young

Analyst

Yes, but it's an adaptation of our Pyrogel product designed very specifically for the temperature ranges that are in power plants.

Geoffrey Scott

Analyst

Okay. Is just one of the benefits of having that pilot line part of line three that you were able to develop this in a fairly low cost and timing manner?

John Fairbanks

Analyst

Well, the pilot plant is coming up just during Q3 and we're just now beginning to do experiments on additional products and process improvements in that facility. In the case of the power facility, we were - we developed a product before the pilot line came on. We have done pilot work well on our existing lines or substituted for a pilot - for having an individual pilot or separate pilot asset. So, we've developed that product initially in our labs and then we've been scaling it up over time. And so, we're prepared again to roll that product out in the second half of 2017.

Don Young

Analyst

It actually will - this optimized power product takes a slightly different chemistry and we're able - we're going to be able to shake out all the bugs in that chemistry on that pilot line, so that when we go to full scale manufacturing we have strong output, strong productivity and strong yields. And so, we will definitely get benefit from that pilot line.

Geoffrey Scott

Analyst

I guess kind of the - the higher level question was, is the pilot line going to allow you to tweak second-generation improvements of existing products or is it going to give you the ability to try to develop completely new products?

Don Young

Analyst

Both, it will enable us to produce next-generation products for our existing markets and it will also provide the resources for us to explore some of these additional new markets.

John Fairbanks

Analyst

It will also allow us to optimize our current manufacturing process and reduce cost as well. But it really is a multi-functional tool for us moving forward to improve our - to develop new products, open new markets, and - and increase our gross margin going forward.

Geoffrey Scott

Analyst

Okay. I appreciate the color. Thanks guys.

John Fairbanks

Analyst

Thank you.

Don Young

Analyst

Sure.

Operator

Operator

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

Don Young

Analyst

Thank you, Blair. We appreciate your interest in Aspen Aerogels and we look forward to reporting our fourth quarter and yearend results to you in February. Have a good evening. Thank you.