Ladies and gentlemen, thank you for standing by, and welcome to the Aspen Aerogels, Inc. 2Q 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, John Fairbanks. Thank you. Please go ahead.

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. The press release announcing Aspen's financial results and business developments as well as the 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 six months ended June 30, 2020. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year.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 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 Investors section of Aspen's website. The forward-looking statements made today represent the company's views as of today, July 30, 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 measures and a discussion of why we present these non-GAAP financial measures are included 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 2020 earnings call. I will start by sharing our recent business results and our perspective on the current operating environment. I will also discuss our ongoing strategy related not only to our core energy infrastructure business, but also to our two electric vehicle initiatives. Next, John will review our Q2 and year-to-date financial performance, describe the progress we've made to ensure the long-term financial strength of the company and introduce new financial guidance for 2020. We will conclude the call with a Q&A session. Let's start with the obvious. The pandemic is having a negative impact on our business, particularly on our near-term revenue generation. Our products are installed by contractors, working in refineries, petrochemical plants and LNG terminals around the world. It is critical to us for contractors to have access to the energy infrastructure facilities that we serve. In response to COVID-19, facility owners have limited the number of contractors onsite in order to reduce worker density. For this reason, our revenue has been negatively impacted during Q2, most notably in the U.S. maintenance market. Adding to the challenge in Q2, our distributors actively manage their own working capital, which resulted in a destocking of the distribution channel. Fortunately, a distributor can only destock once in a given period of time. So for this pandemic, we believe it's a negative impact of destocking has largely played out. Looking forward, we expect revenue to rebound strongly when contractor access to facilities improves and the distribution channel restocks. It is clear that there is a significant pent up demand, especially on the maintenance side of the business. When we examine EIA data for U.S. refineries, we see the capacity utilization for this period last year was over…

Thanks, Don. Let’s start by running through our reported financial results for the second quarter of 2020 at a summary level. Second quarter, total revenue declined by 17% to $24.6 million from $29.5 million in the second quarter of 2019. Second quarter net loss was $5.7 million or $0.21 share versus $5.3 million or $0.22 per share last year. Second quarter adjusted EBITDA was negative $2.1 million compared to negative $1.7 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 first half of 2020, total revenue declined by $4.4 million or 8% to $53.1 million. Net loss improved to $8.9 million or $0.34 per share in 2020 versus a net loss of $11.3 million or $0.47 per share last year. And adjusted EBITDA for the first half improved to a loss of $1.6 million compared to a loss of $4.3 million a year ago. Through the remainder of my comments I'll focus on second quarter performance and our outlook for the remainder of the year. However, I first want to emphasize that in the first half of 2020 we improved adjusted EBITDA by $2.6 million, despite a revenue decline of $4.4 million during the period. This improvement was driven by our initiatives to reduce compensation and discretionary expense in response to COVID-19 related uncertainty, our multi-year initiatives to reduce the bill of material costs, continued improvement in yields and productivity in our East Providence plant and our annual price increases. And importantly, we improved profitability despite an increase in research and development spending in support of our electric vehicle and next generation process technology programs. This performance indicates that we are…

[Operator Instructions] Your first question is from Eric Stine of Craig-Hallum. Please go ahead. Your line is open.

Hey, Don. How are you doing?

Eric, how are you?

Hi, Eric.

Hey, I'm fine. So I was hoping before moving onto the electric vehicle topic, if we could just talk about the core business to you. I mean, it seems like the weakness that you've seen in Q2 not a surprise, but also that you expect for the remainder of the year is that day-to-day business that up until this point grown every quarter, every year, I believe is how you described it. And with the view that that comes back, I mean, I would love to hear a little bit about the project business you did in the release and a little bit in the, in the commentary there. Talk about how you were seeing some positive signs, but just talk about that business and then maybe some of the end markets within that business.

Yes. So there's a lot of discussion going on the industry today about the timing of projects and how the pandemic has impacted that timing. Whether we talk to contractors or our distributors, the basic consensus for now is that we've seen primarily delays in project work as opposed to cancellations of project work, at least for our part of the world. And so we're doing everything we can to be in position and competitive for those projects. There are several projects that are – that have passed through the financial decision, and in many cases have begun construction, and we feel we're in a prime position to participate in those over the course of 2021 and 2022. We are very focused on replacing if you will, the PPP – excuse me, the PTT tie LNG project that we have, which will come to an end – towards the end of Q1 2021. And we think that we will do that, not only in the LNG business, there are two or three prime projects that we're focused on and believe that we're in a strong, competitive position to win, but also in the petrochemical and refinery areas as well, particularly in our Asian region. So again, I don't want to pretend that the pandemic hasn't had an impact. It clearly has. It has caused people to slow down. And so our – frankly, our focus right now is to execute the projects that we have and monitor carefully worker access, contractor access into those job sites. And as I noted in my comments, there's been kind of a rolling starts and stops to access, again, depending on where you are in the world. We are seeing a pretty good access in Asia and that's an important region for us, in particular, in Thailand. And right now, I would say we're seeing a little pause or a little extra cautiousness on the Gulf Coast here in the United States. And for all the reasons that we read about it all the time, just the activity levels of COVID-19 down in Texas and around the Gulf. I think our outlook is largely the same. Just these pauses, these delays, clearly are – clearly having influence.

Yes. And then when I think about the guide and a guide for second half, that looks a lot like the first. I mean, is it fair to say that you really are factoring in only modest improvement in that access problem? And maybe that's a little bit offset by the fact that there's no destocking or the destocking at the distributor level is done. It just seems – you mentioned some potential upside from project business. Is it in terms of the day-to-day business? Is that upside there? Or is that something where you have enough visibility into some of the refinery schedule that you think that is truly more of an early 2021 part of the business?

Yes. So on the core side I think your characterization is right. We just think it's prudent for us to assume that quarters three and four are going to look and feel a lot like Q2 from an access point of view, and so we based our new financial guidance on that assumption. To the extent that I talked about some of the refinery capacity numbers, returning back to kind of pre-COVID norms, those activity levels with no question translates to more activity back in the refinery and petrochemical side of the world. So that forms a bit of upside for us, also the project. So, look, we have some projects that have themselves had some starts and stops to them. And I think our upside in project work is, again, an assumption that we get maybe better than expected access to finish off some of those projects, again, some here in the U.S. as well.

Okay, that's helpful. Well, maybe just turning to the electric vehicle opportunity, the RFQ details with the large North American OEM. I mean, is it fair to say that that is the one that that kind of from the start you've been furthest along with? And then just curious, you mentioned that if you get that RFQ, it would mean that you would start with a small order for a pilot deployment? Maybe just talk about, is that something where you are competing versus another technology once you get to that point? Or is it really a decision by the OEM? Did they move forward or not?

No question, it's a competitive environment. We feel that we have an excellent solution. And if you think about some of the parameters of this, pacifier protection, that's really the nature of our product, a thin product, a compressible product. There are a lot of factors where this type of application really suits us quite well. No question, it's a competitive environment. We've made it over some of the early hurdles and we're moving fast and they're moving fast. So we think we're in a strong position, but still it's competitive. The prototype fleet that is – would require initial parts, initial shipments. It would be a Q3 2020 order. Again, I emphasize it's not an important amount of revenue per se, but it is crumbs on the trail for sure that we're moving in the right direction. We would expect that that type of order would expand in 2021 and begin to have some noticeable revenue, but it's really in the 2022-2023 timeframe, where you start to see really quite noticeable revenue. The more work we've done in this space, and I’ve said this before, that we believe that this opportunity can be as large and important and perhaps larger than our energy infrastructure business, where we had $140 million of revenue last year. And it's clear to me the opportunity is at least of that scale.

I think it's important to mention that it's for the 2022 model of the year. So it's prototyping late 2020 initial commercial production in late 2021, an introduction at that time, and then ramping there after 2022, 2023 and beyond.

Okay, thanks. I'll take the rest offline.

Yes, thank you, Eric.

Your next question is from Amit Dayal of H.C. Wainwright. Please go ahead. Your line is open.

Thank you. Hi, John. Hi, Don.

Thank you.

So with respect to the unit side of your progression, did you say you've already shipped some amounts to BYD or is that also sort of 3Q event?

We’ve shipped to our Asian partner, who is responsible for fabrication and delivery to BYD. So you are correct, we have shipped that product.

Okay. And then…

That was a couple of hundred thousand dollars. That's kind of a prototype level.

So how does this – what needs to happen for that relationship of that sort of order to move to the next level, if you're will? If there’s a testing period, how long would that take, et cetera? If there's any color you can provide.

They've been working with the material for a period of time already. This is, again, for – what we refer to and the industry refers to as a prototype fleet, again, using BYD’s new battery systems, so-called Blade, and this they announced a few months ago, and – I believe actually in June of this year. And so this is a material that our material is looking for a role to play in that new battery system. And, again, we've gone through substantial testing through our partner and with BYD for that material.

Understood. Yes, I’ll take my other questions on this offline. Just getting back to sort of the adjusted EBITDA sort of expectations, some of these cost cuts that you've made, how much of this should we think will be permanent? And as you sort of scaled back [indiscernible] et cetera. Would have some of these costs going back into the business? Are you going to try and ship them away?

John, do you want to take that?

Yes, I will. I think it'll probably be a mix. We pulled back discretionary spending and I think we're learning to operate in a new mode. And I do think that some of the cost savings will be permanent and that we will see improvements to our bottom line flowing because of sort of the actions that we've taken in the way we've operated through our COVID-19. Other expenses will return. I mean, at present quite a bit of the savings is our sales force not traveling. We would love to get back to a position where we could be making our sales pitches to face to face. It’s very effective in this industry, and we have definitely lost something in doing those virtually. A portion of it is a reduction in incentive compensation, that was set pre-COVID and that we're not achieving at present. So we've pulled that back. We'd expect that to return as well. So I think it's a mix, but we as a management team have as sort of one of our goals is to find ways to take some of these learnings and cost savings measures and make sure that they are permanent and help us achieve our drive to profitability objectives.

I can tell you, those initiatives that we had in place around raw material cost reductions and yield and productivity improvements, those are fundamental. Those are going to stay with us past the pandemic. I think John has it exactly right. I can tell you, I'm really biting at the bit right now to get back traveling. And there are a lot of good reasons for me to be an Asia. There are a lot of good reasons for me to be in Europe. And I'm sort of ready to go. And of course those are expenses that will enter back onto our income statement, but also we believe that they will, and for our team in general, will help solidify and advance some of the strategic work that we're doing. I give my team a lot of credit for being able to advance our strategy. I don't want to say without interruption, but we've made a lot of progress in the – during the COVID period here with our key partners. It's sometimes the partners, the potential partners who one knows less well, that are – that's probably where the delay is coming, if you will. It's a little harder to break into a new relationship from a distance. And – but our team has done a terrific job advancing our strategy to this kind of virtual world.

Understood. And just maybe going back to last question, going back to the North American EV opportunity; you're saying this is mostly a hundred million dollar opportunity for you. What would it take from an investment perspective to deliver these levels of orders [indiscernible]?

That's a good question. So we got plenty of capacity to deal with the early years. And, again, this has spread out over the course of, let me just say, 5- to 10-year period. And so we are re-tooling one of our three operating lines to optimize our performance around this new product, so-called PyroThin. And that does well within our capital expenditure budget that John mentioned, it’s $4 million in total. So it will be a subset of that. So we feel that we're in good shape to be able to meet those orders in the years to come. It will be interesting to see how the energy infrastructure business comes back strong, and this business comes into play. We do anticipate at the right time that we will build additional capacity. And so time will tell, but we're fine for now. If you remember we have roughly $200 million of revenue capacity in our existing manufacturing plant. And our guidance, $104 million, $110 million, I think that's little artificially low, we were at $140 million last year. So even with that, we still have some running room here to continue to grow within the confines of our existing asset base.

I just want to stress, that this is – it's a silica aerogel based product that can be manufactured in the East Providence plants. And when Don said retool this is really optimizing the existing production assets that form of the product, but it's very similar what we've been supplying in the energy markets for years.

Understood. Yes. I was just going to say, it's a good problem to have.

Yes.

No, exactly, that's the way we think about it. And when it comes time to make that capital decision, John and I have talked about, on taking partnered approaches to new capacity or additional capacity minimize our own capital. We're really about advancing our aerogel technology platform as a technology company, as a technology platform company. And we believe that this EV opportunity both on the silica aerogel and on the carbon aerogel side position us well. And there's no question in my mind also that we have additional ideas that are valuable to develop again, leveraging that platform into some additional markets as well.

Thank you, guys.

Other handful right now with this one and we're really excited about it.

Right, understood. That’s all I have. Thank you so much.

Thank you.

Thanks Amit.

Your next question is from Jed Dorsheimer of Canaccord Genuity. Please go ahead. Your line is open,

Hi, thanks Don. I guess you've addressed a lot of them, but I was wondering, I'm just digging into the core energy business and I know that COVID come in and hit all of us taken us by surprise, I guess. But if I look at rig count in kind of looking at a peak of 620 in 2019, that's going to come down to less than 150 and so I'm just wondering, is that kind of the bigger driver in terms of the energy market versus COVID? And then also, along the same lines, we're going from 12.3 million barrels per day to less than 8 million. So I'm just wondering how I reconcile some of those figures as I'm trying to figure out when the ramp is going to happen, is its more COVID related or just looking at the capacity related there?

These facilities – we've really had our eye on the EIA numbers. They come out weekly, capacity utilization. It just talks about the activity levels within these refineries. And these refineries can't consistently run their facilities either optimally or necessarily safely without an ongoing day-in and day-out maintenance program. So we find that particular number for us to be indicative and look, I mean we're still a little bit in the early days for me, I cited the numbers being, I just happen to remember July of 2019 that number was about 93% capacity utilization and dipped down into the mid-to-high sixties in April of 2020, ruffled its way back up to about 80% now. And it's pretty interesting we were going gangbusters, July of 2019 we really felt it in April of 2019, it's starting to feel a little better. So again, there are not a million data points there, but I think that does represent a reasonable pulse on the market for what we do. We're very international, as you know Jed, we're exporting, John I want to say over 60%, I believe of our product – it's a little, but now ranked 65%. And we do have some geographic diversity here as well. We're seeing for the most part the Asian economies are more active than ours. We started to come back and I think we're a little bit back on our heels right now in the Gulf Coast at the moment. But, in the U.S. maintenance market, I can't emphasize how important that market is to us. We have a terrific team of people working in that market. It's kind of our home field, if you will. And so when that's quiet, we really feel – we really feel that. We felt it a bit in Q2. And the destocking didn't help, right, those distributors did exactly what you and I would do. They managed their working capital, they pulled back their inventory a little bit. And so it’s kind of a – little bit of a double whammy force in Q2. Again, we wanted to take the prudent approach to thinking about the remaining part of the year. So we said, okay, let's just assume it's going to be a lot Q2. Our hope is that we start to see a little better activity level that 80% number stays there, goes up a bit. And I think maybe that would just get us up into the middle or upper part of our guidance range if that happens.

Got it. And one last question there, the utilization number that you put out there, there have been a lot of refiners that have gone under due to the pricing. So is that a true apples-to-apples number or is that going up as a function of the companies that aren't able to stay in business therefore a lower denominator?

Well, that's – I haven't – exactly people deport[ph] the EIA numbers quite to that extent. I think those numbers are pretty reliable and have their finger on the pulse pretty well. I think the refiners for the most part have – I wouldn't call them at their healthiest point in time. I think they're stronger than some of the highly levered frackers, et cetera, et cetera. So I think that part of the business – those are big broad-shouldered companies for the most part we serve.

Got it. Thank you. Just turning into the EV side. I got a few questions if you don't mind. So, just to be clear the product with BYD is for the passive fire protection, correct? It's not for the carbon battery materials?

Correct. It is to address thermal runaway within their lithium-ion battery program.

So, and you just shipped that within the last year to them?

Within the last month.

Within the last month. So – and I just want to make sure from an expectation perspective. So – you are booking it into the battery pack for the fire protection that to be adopted with the 2022 model year for them, that would be the expectation?

Well, we have two activities going on. And John, when he said that was particularly talking about the North American based opportunity, that we're in the middle of it RFQ process around, that is a 2022 launch, which will take place as you know in September or October of 2021 with initial volumes, if you will. So yes, think of it as a 2022 mile. On the BYD, I think you should assume the same timeframe 2022 model late 2021 launch.

Got it. I mean, it’s really even for BYD that seems incredibly aggressive in terms of timeframe in that sector[ph]. If there is something that are messing in terms of – I mean that's a critical element in the car, particularly its reducing the risk of catching on fire. Is there something that you've been able to kind of circum back to accelerate that program, because I mean hats-off to you that sounds fantastic. I'm just curious how the timeframe works.

We are –we've been very impressed with the companies we're working most closely with, with the speed with which they are addressing this issue. I think it might be fair to say that they were not anticipating in the early design of these battery systems in these EVs. this issue quite to the degree that they're having to wrestle with it. And I'm not saying that they're – this is kind of a retrofit idea, it's not quite like that. But I think they are a little behind in their development for addressing this particular problem. And so they're going all out to address it in their systems. And the blade, the blade battery system is you can read about it online. I mean, one of its advertised attributes is safety and they really talk about safety, energy density or drive range and cost. And so they put safety right at the beginning of that. So we like that, we liked that safety emphasis and we think that suits our product, but Jed, I don't disagree with you, I've had other jobs in my career where we've addressed the auto industry and look, we worked at – we have a long history of working with very large companies, whether they're in the energy business or in the chemical business and now here in the automotive business. Historically those are not the fastest moving companies, unless they've got a problem to solve. And I really believe that that's the emphasis here, and we're the beneficiaries of it, speed, innovation, customer intimacy, that's what Aspen is all about and so it really suits us well to have this level of intensity.

Listen, I think it’s a fantastic win for you guys. I did want to better understand the puts and takes, and probability of the timing. And yes, so congrats. I will take the rest offline. Thank you.

We haven't exactly declared a win yet. But we still think we're in the middle of the game. I mean, this is going to play out big time over the course of the next, months and quarters and a couple of years. And we're, again – indications are pretty good. And but we're working hard to keep our head down and really serve those customers well. So thank you, Jed.

You are welcome.

There are no further questions at this time. I will turn the call over to Don Young for closing remarks.

Thank you, Sheryl. We appreciate your interest in Aspen Aerogels, we look forward to continuing to report our progress to you and our third quarter 2020 results towards the end of October. Be well and have a good evening. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.