Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels Fourth Quarter 2018 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. Mr. John Fairbanks, you may begin your conference.

Thanks, Rob. Good afternoon. Thank you for joining us for the Aspen Aerogels’ conference call. I’m John Fairbanks, Aspen’s Chief Financial Officer. There are 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 year ended December 31, 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 In addition, the Investors section of Aspen’s website will contain an archived version of this webcast for approximately one year.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 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, February 21, 2019. 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. 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, Good afternoon. Thank you for joining us for our Q4 2018 earnings call. I will start by providing comments about the business, our performance and our outlook. Next, John will review our Q4 and fiscal 2018 financials performance and provide 2019 guidance. We will conclude the call with a Q&A session. I plan to cover four topics in my prepared remarks. First, I will review Q4 and the year 2018 overall, including our three 2018 performance indicators. Second, I will describe the current commercial environment and introduce our performance indicators for 2019. Third, I will provide an update on our strategic relationship with BASF, which includes a second $5 million prepayment that we received from BASF last month. And fourth, I will explain our strategy to address global opportunities for resource efficiency and sustainability through the leveraging of our Aerogel technology platform. At a summary level, our fourth quarter revenue trends were strong on a quarter-over-quarter basis. Total revenue of $35.7 million was nearly 50% higher than Q3 and on par with a strong Q4 last year. Base revenue in Q4 grew 26% year-over-year to a record $29.4 million. Project revenue was more than 15% of total revenue in Q4 and in line with our outlook at the time of our last earnings call. This fourth quarter project revenue was a significant improvement to the first three quarters of 2018 when projects represented less than 5% of total revenue. This Q4 momentum in both base and project revenue is key to our 2019 revenue outlook. With respect to the full year 2018, despite the strong finish in Q4, revenue was down 7% from 2017. Adjusted EBITDA lagged our expectations and was hampered throughout the year by repeated cost increases in our raw materials, especially in the silanes value…

Thanks, Don. Let’s start by running through our reported financial results for the fourth quarter and fiscal 2018 at a summary level. Fourth quarter total revenue declined by 2% to $35.7 million from $36.4 million in the fourth quarter of 2017. Fourth quarter net loss was $14.1 million or $0.59 per share compared to a net loss of $1.7 million or $0.07 per share last year. Fourth quarter adjusted EBITDA was negative $3.2 million compared to positive $2.2 million a year ago. We define adjusted EBITDA as net income or loss for interest, taxes, depreciation, amortization, stock-based compensation expense and other items that we do not believe are indicative of our core operating performance. Our net loss and adjusted EBITDA for the fourth quarter reflected a $2.8 million reserve for uncollectible accounts receivable related to revenue we booked during 2017 for a refinery project in Brazil. In addition, our net loss for the quarter reflected a $7.4 million impairment charge, the write off of pre-construction costs for the Statesboro, Georgia facility. Statesboro asset write-off had no impact on adjusted EBITDA during the period. For the full year, total revenue declined 7% to $104.4 million. Net loss was $34.4 million or $1.45 per share in 2018, versus a net loss of $19.3 million or $0.83 per share last year. Adjusted EBITDA for the year was negative $11.5 million, compared to negative $3.3 million a year ago. Again, net loss for 2018 reflected both the $2.8 million reserve for uncollectible accounts receivable and the $7.4 million write-off of the Statesboro assets, while adjusted EBITDA for the year only reflected the $2.8 million accounts receivable reserve. I’ll now provide additional detail on the components of our results. First, I’ll discuss revenue. Fourth quarter total revenue was comprised of product revenue of $35.1 million…

[Operator Instructions] And your first question comes from the line of Eric Stine from Craig-Hallum. Your line is open.

Hi, Don. Hi, John.

Hey, Eick.

Hey. Maybe just starting with LNG, you provided some commentary there on the pipeline. Just curious – I mean maybe some context. Is that something where you’re seeing more projects, are you seeing more content within projects, or how does it break down between the two?

We are – I would characterize it this way Eric, that we’ve had LNG projects in our pipeline and they have become more near-term. And so where – we just have a variety of projects that are more near-term and we believe that one or two of them will fall into 2019 and have a big impact.

Got it. I mean, how should we think about that, I guess, in the context of this guidance, just doing the math, you called out the subsea work that I think you’re at $12.5 million for 2019 already. So you’re almost halfway to your project mix goal. So that doesn’t – I mean, you’re going to get more orders in subsea. So that doesn’t leave a whole lot of what needs to be filled in by LNG. I mean is that – should we think of these as upside or are you trying to just build in the fact that the timing is very difficult to call?

I think we’re being careful with your latter point there and make sure that we set expectations that we can meet or beat. And so I would think of the LNG revenue as important to our meeting our goals throughout the year. And some of these projects are rather large and will span from not only 2019, but into 2020 as well, and really supports that year also. So these are pretty good sized projects that we’re talking about. And I talked about –we’ve done maintenance work for lots of different facilities around the world, three dozen or so. And as you know, Eric, we did the three projects towards the end of 2017, $3 million, $5 million and $8 million in size and we’re building on that momentum and we think that will come to fruition for us here in 2019 and 2020. But your math is basically right. We’ve got some more work to do to hit that 20% of total, and we’ve got a good shot at doing it.

And then just on subsea, in that, you gave the order number or the number you’ve got booked for 2019. I mean, when you think about the recovery that you’re seeing now, how does that compare to past recoveries in that market? And – I mean I would assume the strength you’re seeing now that something you expect to persist throughout the year.

We think that – this is the one area where we tend to have a little visibility on our projects. We get the purchase order in advance and then typically deliver a quarter or two later. And so the way I would say it is, we’ve got solid projects in hand, as the $12.4 million number suggests. We anticipate getting another order or two for this year, but the pipeline is strong and we continue to believe that we will continue to build on that business into 2020 and even 2021. So that market has some nice visibility for us right now and there is reason for optimism.

And maybe last one for me, just turning to power gen, maybe just an update on that – on that product, it seems like it is tracking the same as some of your other applications have in the past. So kind of where do you view that application as we sit here today?

Yes, I – we have continued to win a series of smaller orders, kind of maintenance and small scope work. And as you suggested in your question, that’s the pattern, dating all the way back to 2007, ‘08, and ‘09 when we introduced Pyrogel and Cryogel into refinery and petrochemical and LNG business. We started off doing smaller scope maintenance work, mostly in small scope project work, and then of course we built into much larger size projects over time. The power market is playing out exactly the same way. Our revenue mix there – there’s no one order that’s been spectacular, but there are – we’re seeing greenshoots all around the world.

Okay, thank you.

Thanks, Eric.

And your next question comes from the line of Chip Moore from Canaccord. Your line I sopen.

Hey, Don. Hey, John. How are you doing?

Fine, how are you?

Good. I guess following up on your commentary around the strengthening pipeline and LNG potential, little early to talk about 2020. But it sounds like you tones is a little more optimistic. Is the 20% growth rate something we should think about as being sustainable into 2020 when you combine that with the maintenance work?

Yes, so the way I would think about the pieces of that, we’ve been able to grow our day-in and day-out business, really dating back to 2008, in good times and bad times, and I believe that we’ll continue to do that in 2019 and 2020 and 2021. Those numbers have been – if you look back over time, have been double-digit percentages throughout that period of time. And so the project work, what we’re seeing is more diversity in project work. A lot of our project work used to be really driven, frankly, by sort of crude prices and that drove a lot of that early project work that we had, and we’re still seeing opportunities there. So we’ll continue to build on that. But the natural gas – the ample supply of natural gas is driving a different set of projects for us, which of course there’s been a lot written about LNG and we’re playing really well into that – into that trend. But I would also say we’re seeing things on the petrochemical side that are using natural gas as feedstock and low cost natural gas as feedstock. And so we’re seeing broader set of projects in more markets across our geographies, and it gives us confidence that – and this is something that’s not just set up here for 2019, but we think there’s nice visibility in 2019, 2020 and 2021. And I will just remind you that when we grew significantly from 2008 through 2015, project revenue was 40%, 45%, even 50% in any given year of our total revenue. And as I said in my commentary that number in the first three quarters of 2018 was around 5% in Q4, it was 15%, and here in 2019, we are projecting it to be 20%. Those are relatively modest numbers from – even from any historical sorts of – for our history, at least, going back to 2008. So we think we have room to grow on the project side as well, as of – just marked against total revenue. So we see a lot of opportunity for us to grow our maintenance business and power projects on top of it, really put together a growth track here in 2019, 2020 and 2021. We built like a casting, Chip, using EP20, and we did it with the expectation that the investments that we’re making, both in the facility, but also in our sales and marketing team and some of the research and development work that we’ve done to make those sales more profitable. Again, we think those are good investments that will pay dividends in 2019, 2020 and 2021.

Absolutely. Maybe if we turn to BASF, with the prepayment, maybe a little more update on commercialization and building materials and development of future products, where that stands. And then you did talk about hopefully signing up someone new this year, maybe you can expand on that a little bit in terms of progress you’ve had in terms of negotiations already?

Yes. So BASF, again, just has been a terrific partner for us and we – I believe, we’ve said in Q4 we received technical approvals in the European market for our first generation product, which really opens up the market to our sales team and much more broadly the BASF sales team to begin moving product of that first generation, and so we anticipate that playing a greater and greater role in 2019 and beyond. A lot of this expanded supply agreement that we had in the second $5 million prepayment was around the second generation product as well, which we’re very excited about. It has great application, no doubt, in the building materials area. We believe it also has application in some other markets as well. It’s a really interesting product form and that’s got great characteristics in terms of thermal and non-combustibility. So we’re really excited with our partnership with BASF and that $5 million obviously is a shot in the arm for us both in terms of accelerating the work and just supporting our financial position. So that’s great. Go ahead.

That new product we see, it’s really complementary to the existing Spaceloft A2 SLENTEX product in the building materials market. I just want to emphasize the point that Don made that it will help us to open up applications within other markets for that product form as well. So we are – we and BASF are very excited about the potential of that new product.

And then in terms of new partnerships, we have a long history of working in government research programs, on other forms of aerogel and we’ve said before, we are very focused in areas around energy storage, around filtration and we’ve advanced that work. We’re working with two universities right now to continue to move that work forward. There are a handful of very logical partners in these areas and we have conversations going on with them all on these topics. So as I said in my notes that BASF model, if you will, technical, commercial, financial monetizing our aerogel technology platform, those are all through the key elements that we expect to put forth later this year with one of those good companies.

And one more on the price increase. I think you said it was in January, has that been successfully implemented and what’s your confidence that, that gets pushed through?

Yes, we’re very confident that the 10% marker that John talked, taking our ASPs from the very, very high – just shy of $3 to $3.25, plus or minus $0.05. We’re very confident about that for the year, Chip. The price increase ranged, frankly, across our product mix, across our geographies, et cetera. And so we’re – when you boil it all down, we are very confident about the 10% sticking for the year.

One last one on the bankruptcy in Brazil there, the AR issue, is that sort of one-off situation or any other outstanding collections that we should be concerned about?

Nothing. It was – it really was a one-off for us. Highly unusual for us in our history and it was in Brazil. Brazil is a tough country at present to do business in and we just got hit. It was a Petrobras project, we felt was well capitalized, but the contractor just ran into financial difficulties. We actually won a lawsuit against them. Any payments that Petrobras was making would be diverted to a court account on our behalf, but ultimately the agreement that this contractor had with Petrobras was terminated and we believe that they’re likely to go bankrupt. So that’s why we reserved it, but we have no other exposure to speak of.

Great, all right, thanks a lot guys.

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

Yeah, thanks. Good evening folks. So first question here, just wanted to see if we could get – and maybe I’d missed this – just a little bit of detail on that impairment, specifically, what should we be thinking about what is behind those numbers and what should folks think about Georgia here going forward? Obviously we move forward EP20 and we’ve been on that whole track, and that’s very clear, but is everything regarding Georgia just completely dead and off the table now?

Sure, I’ll go back just to provide a little color. During 2016, we completed the design of that second…

Yes…

For Georgia, right, and we had an incentive package from the local government, included free land. And back in 2016, we delayed that project, but we had – those engineering designs would cost us about $7.4 million. And so then during the –

Okay. That’s all during design work, dollars. Okay.

That’s all it is. And essentially it’s the fall in the full value. So in 2018 we decided that we were unlikely to use those designs going forward. At first, the local government, our contracts with them, got to the point, they had a right to terminate the incentive package, unless we broke ground by February 2019, we obviously did not [indiscernible]. And so they indicated they were going to terminate incentives and we wouldn’t have rights to the land. So some of the value of the designs was associated with the plot of land it was on. Then secondly, our EP20-related capacity gains have expanded the time frame in which we expect demand will exceed capacity and that pushed out the need for that second facility. And finally, I think, probably most importantly, our cumulative manufacturing technology, process technology advancements since 2016 had been significant and we continue to make advancements. Over the next couple of years, we expect for our technology to advance further working on it. We think we’re putting quite a bit of investment into it. And so from that perspective, it’s making the technology that underlies the old plants increasingly obsolete. And so when you look at it from those three factors, it just made us come to the decision in the fourth quarter that we just were not going to use going forward.

Sean. I would just add to that very good description. We are – and really just to build on that – we are focusing very hard on low capital process technology improvements, not only in our existing plants, but in the plant of the future as well and we’ve made some really interesting advancements in that area. So that’s one thing. The second thing is, and it’s consistent with the low capital sort of version here is, we’re really working hard and our partnerships and so we’ll see how those partnerships play out, not only in terms of product development, distribution and those sorts of ideas, but also next lines of capacity. So there is a lot on the table here, but we’re very focused on being low capital and driving to profitability, that’s what we’re all about right now, we need to do that. And so that’s our focus.

Okay. And actually, Don, on that note, as we are looking to focus more on profitability that brings me to another question for you, and John is, if I think about the revenue opportunity for 2019 that really kind of gets you at a high number versus some historical levels. But when I look at how we flow through to EBITDA, we’re certainly not realizing what we had realized, say, back in 2014, 2015, 2016 and I’m just kind of looking at this quickly, but it’s really an offset factor. The gross margins we’re looking to be tracking to a better number for this year. I recognize that sales and marketing is a conscious effort to have more dollars in that place. In the aggregate, the OpEx number seems to be a fair bit higher than I think a few of us may have – would’ve expected to get to for that type of a revenue number. How should we think about the OpEx here? I mean is there – is this the right type of number, is the G&A number appropriate where it is, what are some opportunities we could have in order to perhaps become a little bit more driving in that EBITDA? Just wanted to get some perspective on that.

Yes, actually Sean, there’s really actually two pieces, and we acknowledge that our operating expenses are up since 2015, 2016, 2017 levels, and those are conscious investments in driving sales, because that’s clearly been what’s been missing from the mix over the past few years, so you hit the nail on the head. And we have added about $3 million to research and development over that 2015 to 2019 time period as well, and that’s once again conscious decision to invest in our aerogel technology platform and ultimately to open up new markets. We’ll take those off the table, because those are conscious investments. One of the other pieces, though, with this increase in our raw material costs, which we’ve taken with the price increase, taken the efforts to mitigate, it’s actually changed our breakeven. Essentially our material costs went up by effectively 10%, our revenue went up by 10%. That’s changed the whole dynamic that we used to talk about. We talk about our breakeven being about $110 million and our breakeven now is essentially 10% higher than that, plus $30 million to $32 million, $32.5 million, depending on mix, but a lot of that is because of the increase in raw material cost and increase in pricing. It’s just changed the old algebra I think that that you’re familiar with. But ultimately we still will be able – when we fill that East Providence plant, with that $200 million revenue, we can still generate between $28 million and $35 million of EBITDA. So the dollars haven’t changed, but the percentages clearly went up.

And also Sean, I would just add – I talked about the EP20 and we made good progress in our first year and we’ll complete the capacity expansion portion of that next year, in 2020. We are very focused here in 2019 on what I was referring to as profit enhancing process technology advancements and we believe there are efficiencies that we can bring to our manufacturing technology, to our bill of materials that drive profitability to numbers that would be, I think, more satisfying to you and to us.

Okay, last question here, as I think about the core work that you do and then the project work in – Don, you’d hit on this a few times in the conversation. Prior years – early years project was a really big percentage in some of those growth years. Recently that had come off the table, you core has been coming up a fair bit. We’re now looking at about 20%-ish project work in 2019. What should the model be, because clearly there’s a lot of volatility that you can get in that project work. Can you lend us a perspective around what do you think it should be, where your comfort levels with for a given range, help us provide some perspective as you implement strategy and, in fact, we execute in the balance of the nature of your revenues.

Yes. So for a 7-year period, we were in the 40-plus percent range of project revenue, and if you look at some similar companies to ours, I talked about Thermolon before, not exactly our business, but works to the same kinds of factors that we do. They are roughly 50-50 between maintenance and project work themselves. I believe that we will continue to move to our historical norms in 2020 and 2021. We’re already on that track here in 2019. And I also know that we need to have more consistency in our project success here. Just winning a big project and have it work through over the course of two quarters or four quarters or even six quarters, that’s not good enough. We need to have consistent project wins. And so we’re really doing two things about that. One is, over a year ago we changed our organization to include a very dedicated team to project wins and that’s without getting into the specifications very early in these – in the process and taking advantage of our $800 million of Pyrogel and Cryogel installed in these kinds of facilities, using them as case studies and winning projects day in and day out. So it’s a consistent part of our revenue. And the second thing and I mentioned this earlier in the Q&A, we are pretty crude – or crude oil price-oriented in our earliest days and I think we have more breadth now with natural gas, not only on the LNG side, but also on the petrochemical side. So, the opportunities we have to win projects over the course of many years is much greater. So we’re targeting 20% this year. I believe that number on an ongoing basis, a third of our revenue, year in and year out, should be in that range, a third of our revenue. That makes a lot of sense to me. And yes, I think some years it should be – it will be a little higher than that and some years it will be a little lower than that, but we cannot have it be 5% or 10% or 15% of our revenue, it needs to get into that 1/3 of our revenue coming from projects, year in and year out. And I believe we’ve got the ability to do that.

Okay, all right, thanks so much. Thanks for addressing the questions here.

Thank you, Sean.

Thank you, Sean.

And there are no further questions at this time, I will turn the call back over to Mr. Don Young.

Thank you, Rob. We appreciate your interest in Aspen Aerogels. We look forward to reporting to you our first quarter 2019 results in early May 2019. Have a good evening.

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