Good afternoon. My name is Jesse, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels Q2 2018 Earnings Call. [Operator Instructions] Thank you. John Fairbanks, you may begin your conference.

Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. I’m John Fairbanks, Aspen’s Chief Financial Officer. A few housekeeping items that I would like to address before turning the call over to Don Young, Aspen’s President and CEO. Press release announcing Aspen’s financial results and business developments, as well as a reconciliation of management’s use of non-GAAP financial measures compared to the most applicable GAAP measures is available on the Investors section of Aspen’s website, www.aerogel.com. Included in the press release is a summary statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the quarter and half ended June 30, 2018. In addition, the investors section of Aspen’s website will contain an archived version of this webcast for approximately one year. Please note that our discussion today will include forward-looking statements, including any statement regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact. Such statements are subject to risks and uncertainties. Aspen Aerogels’ actual results may differ materially from those expressed in these 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. Company’s press release issued today and filings with the SEC can also be found in the Investors section of Aspen’s website. Forward-looking statements made today represent the company’s views as of today August 2, 2018. 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 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, the discussion of why we present these non-GAAP financial measures is also available in today’s press release. 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 Q2 2018 earnings call. I will start by providing comments about the business and our performance. Next John will review our Q2 and first half 2018 financials and update our guidance for the year. We will conclude the call with a Q&A session. I plan to cover two topics in my prepared remarks. First, I will review Q2, describe the current commercial environment and also comment on how we see the market playing out for the remainder of 2018 including the outlook against our three 2018 performance indicators. And second, I'll provide an update on the execution of our strategy which is to leverage our aerogel technology platform across our core adjacent and new markets. With respect to Q2, revenue of $21.7 million was below the same period in 2017 and below our expectations. Revenue in Q2 was comprised virtually entirely of small orders and locked the usual handful of $1 million, $2 million, and $3 million orders related to project work that we have typically countered each quarter for many years. In Q2, 2017 for example, we had nearly $6 million of subsea and LNG project work. While in Q2, 2018 we had approximately $0.5 million of similar project work. Growth in our day-in and day-out maintenance related work made up a portion of the difference but not the full amount. We believe that the lack of project work in Q2 2018 was an anomaly and was the result of decisions made by asset owners back in 2015 and 2016 to delay capital investments. We also believe Q2 2018 represents the low point of this downturn and energy prices for late cycle products such as ours. We believe that we will return to normal levels of project…

Thanks Don. I’d like to start by running through our reported financial results for the second quarter and the first six months of 2018 at a summary level. Second quarter total revenue declined 14% to $21.7 million versus $25.1 million in 2017. Second quarter net loss was $7 million or $0.29 per share versus a net loss of $5.5 million or $0.23 per share last year. Second quarter adjusted EBITDA was negative $3.2 million compared to negative $1.4 million a year ago. We define adjusted EBITDA as net income or loss for interest, taxes, depreciation, amortization, stock-based compensation expense and any other items that we do not believe are indicative of our core operating performance. We incurred $146,000 of patent enforcement costs during the second quarter of 2018 versus $152,000 in the second quarter last year. For the first half, total revenue declined 7%, $44.7 million. Net loss was $13.8 million or $0.58 per share in the first half of 2018 versus a net loss of $14.6 million or $0.62 per share last year, and adjusted EBITDA for the first half of 2018 was negative $5.6 million compared to negative $6.6 million last year. We incurred $235,000 of patent enforcement costs in the first half of 2018 versus $2.9 million during the first half of 2017. I will now provide additional detail on the components of our first half results. First, I’ll discuss revenue. First half total revenue was comprised of product revenue of $43.6 million and research services revenue of $1.1 million. During the first half, product revenue decreased by $3.3 million or 7% versus last year's $46.9 million. This decrease was driven by the successful conclusion during 2017 of the multi-year South Asia petrochemical project and several key LNG projects in combination with a decline in project work…

[Operator Instructions] Your first question comes from Eric Stine with Craig-Hallum. Your line is open.

Maybe we could just talk about the guide a little bit and just dig into it. So refinery and petrochem, I mean they actually sound a little bit more optimistic there. Is there any way to point to a culprit in the other end markets as to the lack of project work in the quarter I guess that will be the first question. And then the second question, I mean it seems like with your guide you're just - your basically flowing through the Q2 shortfall. What's your confidence level, are you already seeing some of that project will come back in some of these other end markets?

Good questions. With respect to the corporate, I guess look we had substantially more LNG work subsea work in the first half of 2017 than we did this year. And that had an impact on us no question. It was remarkable Eric that - we had a lot of orders but they were small orders. And so just different than quarters that we've had really since we were a public company, we've always had a handful of $1 million to $3 million orders that have complemented all the small orders. And we love the small orders. We think of it is kind of recurring revenue for us, but that was the real difference in Q2 and the reason that we were below expectation. We are seeing and we do have in hand the subsea activity that meaningfully enhances the second half of the year and frankly the beginning of 2019 as well, one of the major orders is to leave before the first half of 2019. And again the market activity is quite good and definitely on a day-in and day-out work in the U.S. and in Asia is solid. So, again, we feel that the second half of the year is going to be markedly better than the first half. And I think your math around the guide, I think you're largely right that the guide down is function of what's happened here in the first half.

Is it? I mean is it too simplistic to say that - I mean this is just subsea work that was just kind of pushed to the right and you did assume that you might have some of that hit in the second quarter or is it - because I know LNG, that's not necessarily something you were expecting, is that the right way to think about it or not? Is that too simplistic?

No, I think that's largely it. And we have other project activity that's not just LNG and subsea, turn around work and work that is kind of million dollar bucks that you tend to get, kind of quarter in and quarter out, they're not announcement worthy but they're important and we just didn't really have them. We see them now here in Q3 and in Q4. And again, it's the reason why we are confident that the second half of the year is going to look a lot different than the first half of the year, and in particular the second quarter.

Okay, maybe turning to subsea. I know you had - I think in the first quarter you won the $4.5 million project, and you were targeting more, and it sounds like you won that and then so I'm just curious, this recovery in orders, how that maybe compares to past recoveries and what kind of confidence does that give you specific to subsea as you look out to 2019, 2020, 2021?

Yes, we really - so, you see your math is right. We did win an order earlier this year and that we find for $4.5 million in the first half of 2019. So, that's terrific. Almost $7 million here for the second half of 2018, but we also - if you just look at the pipeline of subsea orders for 2019, we think it's a solid pipeline with some real upside to it, as we look out into 2019. Again, that activity levels is what we're looking for. And we win a lot of these projects. So, that's a really good sign not only for the second half of 2018 but for 2019.

And maybe last one from me, just turning to BASF, just - I know it's a couple of months, but an earlier update on the uptake of SLENTEX, wall system and then just - clearly you mentioned that you're increasingly confident with that relationship. Just curious if there any specifics or more that, you've gotten the payments and now and things just continue to progress?

So, payments both have been received about $2 million to $2.5 million are prepayments which have been great. We have had an enormous amount of activity in the SLENTEX product also called Spaceloft A2, going into that market. And I think of them as kind of priming the market with projects. Some are prospectively reasonable size. And again, many in response to the focus on noncombustible building materials in the U.K. and across Europe, and that work is growing, and there's no question that during 2018 we, Aspen and BASF, will have a nice array of case studies installed for us to market out into 2019 and 2020. I would also say, so in addition to the payments, the financial part, the early case study work with the SLENTEX are joint development work with the next-generation price as well. Excellent thermal performance in noncombustible, we are really pleased with the progress that our team's have made in that area as well, and we're proving that product out initially to ourselves and ultimately to the market out in the 2019 time.

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

So I guess, back to the guidance on the back half, maybe you can touch perhaps a little bit - what you need in terms of project activity? Is this sort of a return to normal or do you need a little more of a pickup there?

Yes, I think there are few things to look for Chip, that we're really focused on. We feel that - we've got the pick up, so to speak, in hand from the subsea work. That's a really solid second half for us of nearly $7 million of that type of work. We talk a lot about his base revenue, the definition that we've used is non-subsea and the South Asia petrochemical project. And again, that tends to be made up of these smaller orders and smaller project work, this kind of $1 million kinds of orders that we tend to get each quarter. And we - as one of our performance indicators, we set that target at a $100 million. And we have $57 million, $58 million to go in the second half. That's an ambitious target. We've said that that number of - we want that number to be in the 10% to 15% range. At 10% growth in 2018 would be about $97 million in there. And so we're really working hard to be sure we get into that kind of range. And if we can approach that as I indicated in my notes, that gets us up into the upper half of our guidance, our revenue guidance for sure. So, I think those are the things we're looking for, and I'm sure you're looking for as well.

It makes sense. That's good color, good way to frame it. On the higher silica cost, maybe you can talk about what you're doing to mitigate that? And sounds like you're pretty confident that that shouldn't be an issue into 2019. What's - next couple of quarters, how does that play out and then what are you doing there?

Yes, so, it really jumped out in Q2. This is something that we've been anticipating. I would call it through the dynamic on the silanes business. We had one closure of a facility, and then there's some dynamics in the silanes business that really aggravated the situation. We saw parts of this coming and so we have had a program in place for several quarters now to eliminate the need for this particular material in our building materials. And so our ability to - if you well design that product out or that component out, it's an important part of our mitigation strategy with respect to reducing our exposure to that. And we're in good shape to do that, and that's why we're confident that we can continue it here in 2018, and not let it creep into unexpected volatility in 2019.

And I guess lastly on the expansion it sounded, I think you mentioned costs coming in below plan. What's going on there that's allowing you to do that?

I think it's - just to frame that, the goal is to increase capacity by 20% by the end of 2020. We had indicated that we thought that would require capital of between $15 million and $20 million. We are more or less at the halfway point of achieving that goal for approximately $3 million. So the way I would think about it is, we've done a lot of terrific process technology work optimization, yield work, throughput work, that has paid dividends for us. No question, we probably picked the lower hanging fruits to start with just as you would expect to see how far we could get with those items, and we've done a really good job for R&D operations or engineering group have done an excellent job there. So we are confident that $15 million to $20 million capital requirement we won't be anywhere near that kind of a number. I'm not sure we'll get the other half of 3 million but we’re focused on really managing those costs carefully.

Your next question comes from Sean Hannan with Needham and Company. Your line is open.

Yes, thanks good evening folks. Sorry to beat a dead horse here and it might just be that I’m little obsessed. Overall I'm trying to assess how much of a hell you folks have on the expected orders or project work and how this isn’t repeatable for what you saw in the second quarter. I still really don't get the understanding of where perhaps the larger orders may have gone from the quarter. And it seems Don that you feel comfortable that you're seeing them here in 3Q and 4Q and I'm not really sure what that means, I would guessed entering 2Q that you would have guessed similarly and that you’d see that within your line of sight but at the same time you've always assumed to be 3Q or 4Q then subsides the year. And the other side of the equation it seems like you were a little bit more bearish on hitting the 100 million. I think that it was always clear it was an aspiration. But I might be over interpreting some of the tone here. So again I'm just trying to get a better handle around what's happened here and trying to assess how much we really have a handle on the firmness of the assumptions here?

So again as I said in my in my earlier commentary, if you just look at Q2 alone in 2017 we had roughly…

Right, sorry to interrupt you because I'm not really comparing to 2017, I'm really going back to what we've already looking at and what's been established for expectations here for 2018. So I'm we're past 2017 I'm just trying to understand from our most recent conversation and calls what has changed since then if that makes better sense?

Yes, look I really think Sean it is - we received the number of orders that we would have expected in the day-in and day-out work. What we didn't really receive or we’re able to recognize in Q2 were just the orders that are typically a little larger than that the kind of $1 million type orders. And typically we get a small handful of those every quarter, I should say $1 million, $2 million. And we're seeing that activity here in Q3 and Q4 and that’s the reason why we're confident about the second year. Plus, we have the nearly $7 million of subsea work to be delivered here in the last two quarters. So I think if you see me hesitating about the $100 million that's fair enough. I am - that's an ambitious target for us at this point given the weak second quarter in particular. And but having said that I think that our ability to get on a ramp that suggests that kind of a number will lead us into a strong second half and again set the stage for a much, much better 2019.

And then switching gears here in terms of the cost pressures is there any cost recovery you can get through customers due to those raw material impacts being little bit more pronounced is that - can that be a conversation do you need to just kind of way and try to make it up nominally through increase pricing a little bit further out. How do you address that at least in recovery or is it just effectively gone at this point?

Yes, it’s difficult to claw back or to deal with it in the most immediate term. We’ve talked about how we would modify our prices and it’s probable as we have as you know Sean since 2013 raised our price each year. We’re going to be very mindful of that come 2019 to be sure we're in a good position to meet expectations around our margins.

And that’s all the time that we have for questions today. With that I'll pass the call back to Don.

Thank you, Jessie. We appreciate your interest in Aspen Aerogels and we look forward to reporting to you our third quarter 2018 results in early November. Have a good evening. Thanks very much.

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