Ladies and gentlemen, thank you for standing by and welcome to the Aspen Aerogels Q4 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, John Fairbanks.

Thanks, Corneshia. 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'd like to address before turning the call over to Don Young, Aspen's President and CEO. The 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, 2019. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year.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. These forward-looking 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, 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 20, 2020. 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 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 are included in today's press release. I'd also like to note that over the next two weeks, in connection with the vesting of restricted stock units issued under our long-term equity incentive program, our Section 16 officers will file Form 4s to report the withholding of shares by the company to satisfy statutory tax obligations related to the vesting of RSUs. I want to emphasize that these shares that are withheld by Aspen are not sold into the market and will remain unissued. 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, 2019, earnings call. I will start by providing an overview of our business and strategy. Next, John will review our Q4 and fiscal 2019 financial performance and provide detailed 2020 guidance. We will conclude the call with a Q&A session. I plan to cover several topics in my prepared remarks. I will review Q4 and the year 2019 overall, including our four performance indicators. I will discuss our strategy to address global opportunities, promoting resource efficiency and sustainability through the leveraging of our Aerogel Technology Platform. As part of the strategic discussion, I will include comments related not only to our core energy infrastructure business, but also to two initiatives driven by the projected rapid growth of electric vehicles. Next, I will introduce our performance indicators for 2020. And finally, I will discuss the rationale for our recent equity financing where we raised $15 million. Our fourth quarter performance is built upon the significant revenue growth and gross margin expansion that we experienced in the third quarter of 2019. Revenue in Q4 increased 30% to a record $46.5 million and for the year grew 34% to reach a record $139.4 million. Importantly, we expanded our gross margin in Q4 to 24% and doubled gross profit from the first half of the year to the second half. With this exceptional revenue growth and margin expansion, we again delivered positive adjusted EBITDA in the fourth quarter and improved adjusted EBITDA year-over-year, by over $11 million to nearly breakeven. Overall, we created the commercial and operational momentum required for significant additional gross margin expansion and adjusted EBITDA growth in 2020. I'll now review our 2019 performance indicators. Our three initial performance indicators were: first, to achieve 20% revenue growth and…

Thanks Don. I'd like to start by running through our reported financial results for the fourth quarter and fiscal 2019 at a summary level. Fourth quarter total revenue grew by 30% to a record $46.5 million from $35.7 million in the fourth quarter of 2018. Fourth quarter net loss was $1 million or $0.04 per share compared to a net loss of $14.1 million or $0.59 per share last year. Fourth quarter adjusted EBITDA was positive $2.6 million compared to negative $3.2 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. For the full year total revenue grew 34% to a record $139.4 million. Net loss was $14.6 million or $0.60 per share in 2019 versus a net loss of $34.4 million or $1.45 per share last year. And adjusted EBITDA for the year was a loss of $175,000 compared to a loss of $11.5 million a year ago. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. During the fourth quarter, total revenue increased by $10.8 million or 30% to $46.5 million versus $35.7 million last year. This increase in fourth quarter revenue was driven by continued shipments to the PTT LNG Nong Fab project exceedingly strong growth in our core petrochemical and refinery markets in the United States and renewed growth in our energy markets in the Middle East and Europe. Total shipments during the quarter increased by 13% to 13.3 million square feet of aerogel blankets and our average selling price increased by 17% to $3.49 per square foot. The increase in ASP reflected both our 2019 price increase and a favorable mix of…

Thank you. [Operator Instructions] And your first question comes from the line of Eric Stine from Craig-Hallum.

Hi, Don, hi, John.

Hey, Eric.

Eric, how are you?

Hey, so I just wanted to start with the thermal runaway opportunity. Obviously a big problem that OEMs sense some urgency to figure out a solution. It sounds like that's come together pretty quickly. So just curious maybe how that whole thing came together next steps we should look for? And then just – you said you're kind of in the process of optimizing your product for that application. Just what are some of the performance benefits that you're starting to see?

Thank you, Eric. Yes we actually had a handful of EV manufacturers experimenting with our material, the same material that we provide to the energy infrastructure space, the ExxonMobils of the world and somewhat unbeknownst to us initially. And as we became more aware of it and worked closely with them we were able to spend time with them, understand the issues, better spend time in their test facilities, explain to them better the levers we have with our materials and are on a rapid pace in the midst of optimizing our material. We've gone back to them at this point. And with a significantly improved optimized product we're in the midst of several full-scale test activities going on. And we're optimistic that we have a solution to the problem. As I said in my prepared remarks, this is exactly what we do. We've been providing what we refer to in the energy infrastructure space as passive fire protection for a long time. We've installed nearly $1 billion of material in the energy infrastructure space and so this is exactly, what we do and very much consistent with our technology. So we're working fast and closely with them and we think we're going to play a role in the solution for thermal runaway.

No. That's great. Maybe just turning to the project team, I know in place for some time but really starting to gain traction. I don't know if you're willing to discuss maybe what that's meant for your pipeline? And then, I'm curious just on the LNG side, what that pipeline looks like and what it maybe means for I guess it wouldn't be for 2020 but it would be for 2021 potentially?

Yeah. As you know, we put the – the project-focused team in place, just about two years ago now and their mission is to expand our project pipeline not only the size of it, but the quality of it. And by quality, I mean, that we are in more and more of the specifications right from the start of these engineering projects and in fact in a preferred position. So they have expanded that project pipeline, now with identified opportunities of over $900 million. We just added two people to the team which is I think a reflection of the progress, they're making and the opportunity that we see of working early on with the asset owners with the EPC companies, with the contractors, and really positioning ourselves to win our fair share of that business. With respect to LNG in particular, I think we've laid the groundwork for continued success. We've done maintenance work now in three dozen facilities around the world. We've done small projects around the world. We are in the midst of delivering our PTT project now that the value proposition based on not only great thermal performance, but both speed and ease of installation. And that is a value proposition that is resonating very well, with the asset owners and the EPC companies. And a good part of our project pipeline is comprised of LNG opportunities. We all -- we're pretty easy to follow them. There are a couple of dozen in particular that are on our radar screen. And we think, we will again continue to – we've laid the groundwork and we'll continue to win projects. We're delivering the PTT project very effectively and winning projects is the best way to win more projects frankly as your reputation grows. So that's where we are on that business.

Okay. And maybe just last one for me. You laid out the performance indicators. And I know you said that, some of them on purpose stretched goals. I mean, I would think that the gross margin goal that's one that you have a lot of visibility into and a lot of confidence in. But curious as you look at this list of six what are the ones that you have a high confidence level in? And what are the ones that are stretch goals you're confident in but there's some work to do?

Well, look I think of the six, I would say that the ones that are outside of our guidance almost by definition are ones who are – we're going to need extra effort so to speak by the team. Double-digit revenue growth is outside of our guidance. John, set that up, well, I think with contemplating a more normalized year around our subsea business, the fact that almost by definition delivering the other half of a big project PTT is a non-growth component shedding our R&D government contract work. All those things dig a little bit of a hole for us. So we're going to have to do some terrific things, I think to create that double-digit growth. It's – we wouldn't have put it down if it were impossible, but it's going to take a real effort. The gross margin one, I think we're – it's going to take good work. If we continue to perform as we did last year from a margin expansion point of view and the implementation of these programs, we think we've got a good shot of doing that. I really love the one on our drive to profitability to two quarters of positive EPS. That's perhaps a sign of maturity of our company, and the growth of our company, and the effectiveness or this focus that we've had on drive to profitability. The EP20 project, we're in good shape there. We did a great job in 2018, focusing on the first part of expanding the facility by 20%. In 2019, we focused principally on the raw material initiatives. And we've got I think the remaining part of the EP20 quite well in hand. I talked a little bit already about the thermal runaway opportunity. That's a fast-moving situation. We're very excited about it. It's right up our ally. And again, we're – on the carbon aerogel side of the battery initiative, we're having conversations with several of the leading companies: SKC and Evonik, right? We've got working groups working closely now on this issue. And I do believe that, we'll continue to expand the number of companies that we're working closely with formally or informally. So I'm excited about them. So I'd say some of them are – I would say kind of down the middle of the fairway and some of them are going to really take an extra effort.

Okay. Thanks a lot.

Thank you, Eric.

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

Hey, good evening guys.

Chip, How are you?

Hi, Chip

Hey, wondering if I could follow-up back to the thermal runaway opportunity for your traditional aerogel blankets? It sounds like this is more piloting activity in 2020, but it sounds like you think things could be moving fairly rapidly. On the other hand, sometimes OEMs have -- are notorious for moving rather slowly. So how should we think about any key milestones or announcements on that end?

Yes. I think that we've got -- our focus is on being designed into an adoption and that will likely generate more noticeable revenue in 2021 and beyond. And that adoption may come with -- what we're referring to as initial revenue in 2020 again not denominated in millions of dollars at all, but very much smaller than that. But I think indication or a great indicator of the design in process and the work that we're doing with these groups. We started with a small handful and our team is rolling this out across-the-board with the manufacturers. This is I would say a universal problem. This is not a problem of any one producer. And so I think the idea of adoption and initial revenue I think will be the big indicators for 2020. And hopefully what would be progress -- revenue -- noticeable revenue progress in 2021 and beyond.

That's helpful. And can you give us any insight on margin potential there versus your traditional sort of energy infrastructure end market?

For now, I'd like you to think about it as being on par with it. We're going to be using the same manufacturing assets. We obviously are working on our value proposition and we'll price it accordingly. But I think just from our expectations at this point, let's just think of them as being on par with our energy infrastructure margins.

But it is material that we can produce on our existing assets. It is -- it will benefit from the incremental economics in the plant. It will help drive us towards that $200 million capacity in East Providence and drive us towards the $35 million of potential EBITDA in the plant. So we're very excited about the opportunity.

That's a good point John. And just as a reminder Chip and you know this incremental revenue we drop $0.45 $0.50 for every dollar of incremental revenue from East Providence down to the adjusted EBITDA line. So when we talk about those kind of -- those are pretty good -- pretty solid margins from continuing this drive to profitability.

Yes. No absolutely. That's perfect. Thanks. And just one more from me. Back to commercial efforts. I think you talked about $900 million plus identified potential opportunities, some more resources on the team. It's a little bit early, but can you talk about confidence in backfilling of at least PTT in 2021? Thanks.

Thank you. Thanks Chip. Yes. I mean look we're -- we want to announce some project wins over the course of 2020 that we'll be sure that we don't get a drop in revenue in 2021 and beyond. And we think we have in the LNG space but also more broadly in the petrochemical and refining area that we've got the ability to continue to grow the project part of our business. And we went through a long period of time with project revenue in that kind of industry norm 40% to 45% range. And I think we've got the resources in place now at our end to sustain that kind of percentage of total revenue. And as you know from -- a kind of the flip side of that is that our maintenance revenue which we've grown double-digits every single year since we introduced Pyrogel and Cryogel back in 2007 and 2008. So, again, we think we've got the pieces in place.

All right. Thanks.

Thank you.

And your next question comes from the line of Thomas Curran from B. Riley FBR.

Good evening.

Hey Tom.

Hi Tom.

Don on the carbon aerogels side of your set of EV battery opportunities, given the stage of development you're at with Evonik and SKC respectively, when does it seem most likely that you'll convert the first of those evaluation partnerships into some sort of nonexclusive commercial agreement? And then from the time you would ink that commercial deal, what would be the time frame for initial revenue? And could you size for us how much in annual revenue each of those two applications could generate?

Yes, I'll give my best answer. In terms of -- on the carbon aerogels side and our relationship with SKC and Evonik is actually more of a supply relationship to us with a very interesting component so to speak of our system. We believe that this is a three- to five-year revenue opportunity for us. We believe that between now and that period of time you will see us working closely with SKC and their sister company, so to speak and with other leading companies in the space. And so working with them in the sense of advancing our technology and working towards being designed in to battery systems. And I think those will be events that we will talk about along the way. And I think will be again, while not revenue generators necessarily, will give confidence in our team and in the investor group that we have a role to play with our aerogel technology. We're very, very good at producing these nanomaterials, and we think we've got a real opportunity to play in this space as they continue to look for new methods to improve energy density, improve the density, improve the performance, improve the durability of these battery systems. The early work that we've done as I said in my notes -- the fact that we were able to have a broad reception from many of the leading companies in the space gave us confidence that we're on the right track. And so we're eager -- I hope that sets it up pretty well for you. How big can it be? Well it's, obviously, an enormous -- it's an enormous opportunity that is just measured in numbers well beyond anything our energy infrastructure space could produce. So it's a very big opportunity over a longer period of time. I cite on the thermal runaway side, on the silica aerogel side again utilizing our existing technology, our existing assets protected by our existing intellectual property. That's an opportunity. As I've said it's a more immediate revenue opportunity for us here over the course of small, small 2020 but beginning to build in 2021 and beyond. And as I said in my notes, again for illustration purposes you take the average of projections for EVs and from some of the feedback that we've received from them in terms of the amount of material required per auto. A 5% market share in that space equates to roughly $100 million of revenue potential. Again I use that for just illustration purposes just to show that order of magnitude what numbers we're talking about.

All right. That was a helpful summary and framing -- and I guess we'll just stay tuned on the carbon aerogel side. John, on a product line basis, when it comes to the margin range, I know that the Pyrogel end markets are the most profitable and then Cryogel for subsea infrastructure is one of the least lucrative. But could you quantify for us what that spread is from highest to lowest? And then you've just said for now, we could assume that any kind of Pyrogel application for thermal runaway would most likely have a margin in line with the weighted average for energy infrastructure. What would you expect for any eventual carbon aerogel product for EV batteries?

So carbon aerogel -- and first off, you've got that right. So it really has to do with the value proposition in these markets. And in combination with the amount of material we produced and we've come down the experience curve. So we sell about 60% -- 65% of our revenue comes on the hot side of the business with Pyrogel, and 35% or so comes from the ambient and cold side. And through time we've got more experience making Pyrogel products and that's actually led us to have the lowest cost and the highest margins. So as we continue to see an increasing share of our business move to Cryogel and to our building material Spaceloft, we'd expect improvement in margins in those products as time progresses. We would expect generally for the thermal runaway product to have margins that are roughly equivalent to the weighted average, but we'll have to see how that plays out through time. I think most importantly though with any revenue that we generate from those existing assets has very beneficial incremental economics associated with it. As Don mentioned, we see -- as we fill the plant we get roughly 45% to 50% incremental profitability on that differential in revenue. Looking at carbon aerogel, it's -- it would be a different manufacturing process. And so we don't really know yet how we would commercialize that product that we would -- might have the opportunity to simply license the technology and let a battery manufacturer utilize that technology in the manufacturer of batteries or we could, obviously, with our experience base we would be in the best position to ultimately manufacture the material itself, which we could then use to have more of a traditional supplier-customer relationship. That's all to be determined. We'll clearly choose the form that's required by the marketplace. And we'll do it with an eye to try to minimize the capital intensity of our future businesses as well. So -- and that really is to be determined, but I do think that ultimately we've got multiple ways that we could service that business opportunity moving forward.

Go ahead, Don please.

Sorry, I was just wanted to add just -- we are acutely aware of -- that we need to strike the balance between performance and cost, so we are very, very aware of that balancing act. And again a lot of that work that we're doing with these partner companies is related to hitting that -- just that balance point that again takes into consideration both performance and cost.

Right. And it sounds like just in general on the carbon aerogel front, there's simply more to explore, narrow and clarify commercially. So we'll have to stay tuned.

Yeah, absolutely. And again once we put it into our performance indicators, we do that mindfully in the sense that we'll talk about it each quarter. And typically when we're at an investor conference or something, we really work off of these performance indicators to create a consistent dialogue with our investor base over the course of the year so standby.

Thanks for taking my questions guys.

Thank you, Tom.

Your next question comes from the line of Amit Dayal from H.C. Wainwright.

Thank you. Hi, guys. I appreciate you taking my call. A lot of color on the call. Thank you for that. Most of my questions have been asked, but just wanted to touch on potentially price increases in 2020. I know you had some in 2019, but are we staying put on the prices, or do you see some opportunity to raise prices again this year?

Yes. We took -- after a significant price increase last year where across the sort of on a mix weighted basis, we were between 10% and 15% last year. We took a lower increase this year roughly 2% once again across the mix of our products weighted a little more heavily towards the hot side. We just felt we had more room to move. And that 2% Amit is -- it's a little more in line with what we've done over the last 3 to 5 years and we felt it would be well received in the marketplace. We didn't get much pushback on it. And we were particularly sensitive this year to not having a significant increase given the size of the increase we had back in 2019.

Got it. And the revenue mix, I know you've touched on this a little bit but the revenue mix this year -- is there any opportunity to bring in some of these bigger projects that you saw in say early 2019? Is there any of that in the pipeline, or is that something that may materialize maybe 2021? I'm just trying to see where the delta between your stretch target for revenues versus your guidance is and what could possibly come in and allow you to hit that double-digit growth on the revenue side?

Yes. We really had a strong Q4. And if you look at the second half of that year, we won a couple of projects. They're not of the order of magnitude of a PTT not $40 million, but something closer to $3 million, $4 million, $5 million, $6 million. And we had an excellent project in Canada. We had an excellent project in Egypt. And those projects are the ones that really make a big difference on the margin, if you will. So I would not expect us to win a large, large-scale project during 2020 that leads to 2020 revenue. We could win some larger projects, but I'm anticipating that that revenue will then come in 2021 and beyond. So our work in that pipeline -- yes it has some of the larger scale projects in it, but it also has -- it's really filled with projects that are kind of in the $4 million, $8 million $12 million size. And those are the ones that -- we need to win an extra one or two of those over the course of the year to get us into that double-digit revenue territory that we're stretching for here and we're very motivated to do it.

I mean we're really talking about $5 million, $6 million to get to double-digit. And if we could just win a couple of those $3 million type projects that would put us over the goal line. So -- and as Don mentioned, we did that in 2019. And if we can replicate it again in 2020 we could have that potential. We're very comfortable with our guidance range, but I think one of the things about this -- setting the target at double-digit growth we are not -- we're a growth aerogel technology company. We have huge opportunity in the energy infrastructure market, in the building materials market and ultimately in the electric vehicle market as well. And we're not satisfied with our outlook. We want double-digit plus every year in and year out. Really getting a sense there that we want to do more than what we see currently available to us in…

Right. I appreciate that. And just maybe one final question related to the margin aspect of the story. It looks like most of the margin capture you're going to see or margin improvements you will see happen post the second quarter. So in the context of a stronger performance in the fourth quarter on the margin front, should we expect a little bit of a dip in the first quarter and then steady improvements rest of the year?

Yeah. Absolutely. It's very much a function. So I think -- we mentioned that -- but in the last three years between 42% and 43% of our revenue was generated in the first half of the year and the remainder in the second half of the year. And our expenses are really incurred on a level basis during the year. So you get your cost level, but your revenue grows as the year progresses. And so it puts a lot of pressure on margin and our profitability in the first half of the year. So we expect that to continue again in 2020. And as I alluded to, we really expect the profit profile of our financial performance in the first quarter of 2020 to be very similar to what we saw in the first quarter of 2019 with then good solid growth Q2, Q3 and Q4 as a function of two things: increasing revenue as the year progresses and then continued benefit or the growing benefit from those bill of material cost reduction initiatives. And that is the dynamic. And so you should absolutely expect a dip in revenue margin and EBITDA in the first quarter with good solid growth into our guidance range, our outlook range for the full year.

Yeah. Okay. Good. That's all I have. Thank you so much.

Thank you, Amit. Thanks.

And there are no further questions. I'll turn the call back over to Don Young for closing remarks.

Thank you, Corneshia. Good job tonight. Thank you very much. We appreciate your interest in Aspen Aerogels. We look forward to reporting to you our first quarter 2020 results at the end of April. Have a good evening. Thank you.

And this does conclude today's conference call. You may all disconnect your lines.