Good morning. Thank you for attending Aspen Aerogels, Inc. 2022 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to your host, Laura Guerrant, Aspen's Vice President of Investor Relations and Corporate Communications. Thank you. You may proceed, Ms. Guerrant.

Thank you, Elliot. Good morning and thank you for joining us for the Aspen Aerogels fiscal year 2022 and fourth quarter financial results conference call. With us today are Don Young, President and CEO; and Ricardo Rodriguez, Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don. 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 U.S. generally accepted accounting principles or 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 2022 fourth quarter and full year ended December 31, 2022. In addition, I'd like to highlight that we have uploaded to our website, a slide deck that will accompany our conversation today. You can find the deck at the Investors section of our website. An archive of today's webcast will be on our website for approximately one year. Please note that our discussion today will include forward-looking statements including any statements regarding outlook, expectations, beliefs, projections, estimates, targets, prospects business plans and any other statement that is not 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 yesterday, Page 1 of the presentation and are discussed in more detail on the reports Aspen files with the SEC, particularly in the company's most recent annual report on Form 10-Q. The Company's press release issued yesterday 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 16, 2023. 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 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 yesterday press release. And one final note. During the Q&A session, in the interest of time, we ask that you limit your questions to two questions at a time. If you have additional questions beyond the initial two, please get back into the queue and we will get to all questions. I'll now turn the call over to Don. Don?

Thanks, Laura. Good morning, everyone. Thank you for joining us for our Q4 2022 earnings call. I will start with comments on our performance, our Q4 financing, our outlook for 2023 and our highlights from our EV OEM development work. Ricardo will discuss business results and outlook in detail. We will conclude with a Q&A session. During the fourth quarter, we had record PyroThin thermal barrier revenue, slightly surpassing the $25 million mark and a robust energy industrial order book, which together enabled us to achieve our target of $180 million with growth for the year of nearly 50%. PyroThin thermal barrier revenue for the year surpassed $55 million, up nearly nine times from the 2021 levels. As we look out over 2023, we expect PyroThin thermal barrier revenue to build over the year as automotive OEMs scale their operations, which we believe will result in materially more PyroThin thermal barrier revenue in the second half of the year compared with the first half. At the same time, we expect our energy industrial business to remain strong through the year and provide a steady base load of revenue. Our demonstrated capability both supply and demand to generate nearly $60 million of revenue in Q4 2022, supports our target of reaching approximately $240 million of revenue this year, consistent with our objective to double revenue from 2021 to 2023. The Q4 gross margin of 24% demonstrates the value of higher-capacity utilization and the progress we are making to eliminate redundant costs as we scale. Our teams did an outstanding job in Q4 and are now focused on continuing to make additional productivity gains in 2023. While our longer-term gross margin target remains 35%, we are pleased with the progress we've made in Q4. We continue to deepen our technical and commercial…

Thank you, Don. I'll start on Slide 4 and our financial highlights for the fourth quarter of 2022 and recap on the last year. Starting with revenues. We delivered $59.6 million of revenue in Q4, which translates into 90% growth year-over-year. This record level of run rate in Q4 contributed to our delivery of $180.4 million of annual revenues for the year. This is a 48% year-over-year increase over our revenues in 2021 of $121.6 million. This growth rate is well in line with our long-standing targets of doubling our 2021 revenues by the end of 2023 and then, tripling them by the end of 2025. I am truly thankful for our team as it came together in Rhode Island, Mexico, the Boston area, and all our international sales locations to produce high-quality EV thermal barriers and get all the last possible energy industrial deliveries out the door. In Q4, we proved that when the EV thermal barrier demand is there, our assets can deliver in a world-class way. Speaking of EV thermal barrier demand, this came in line with our expectations for the quarter, thanks to a supplemental order from General Motors that spans Q4 of 2022 and Q1 of '23. This order is meant to stabilize our volumes as GM ramps up their demand in the second half of 2023. This order also enabled us to leverage the productivity of our manual assembly operation in Mexico to deliver a total of $25.2 million in EV thermal barrier during Q4. This is a 111% increase over the prior quarter and a five times increase over last year. Our total EV thermal barrier revenues in 2022 were up $55.5 million, an almost nine-fold increase over the prior years. Our Q4 Energy Industrial revenues of $34.4 million were 39% higher than…

Thank you, Ricardo. We have covered a significant amount of ground today and reviewing 2022 and in setting the stage for 2023 and beyond. I would like to emphasize four points. First, we had record revenue in 2022 finished with a strong Q4 and positioned ourselves to achieve our target of doubling revenue from 2021 to 2023 to $240 million. Second, our business development pipeline for PyroThin thermal barriers is robust. Between existing customers and new customer prospects, we have been invited to $15 billion of PyroThin thermal barrier business. We are in a strong position to serve existing customers and to add important new customers. Third, we are actively managing cost and schedule pressures of Plant 2 in a way that enables us to achieve our 2025 revenue target of $720 million and provides maximum flexibility to meet the potential for significant customer demand. And fourth, we are focused on leveraging our operating efficiencies to achieve our gross margin target of 35% and to drive significant profitability as we scale. Elliot, let's turn the call to Q&A, please.

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

So maybe we can just start with Plant 2 and I know over the last couple of months, the thought process has been to get away from kind of Phase 1 Phase 2 because it was a bit confusing, but I guess maybe first, given that you still are talking about Phase 1 here and at $1.6 billion of overall revenue capabilities. That's where you were, when you were talking about where you'd be for Phase II. So, maybe thoughts on what you would be able to get to when Phase II is completed. And then also maybe just more detail on some of the steps, how are you expanding this, it's pretty meaningful, in Georgia, but also in Rhode Island?

Yes, no, that's a good question, Eric. I mean, in an ideal world, we wouldn't be talking about phases anymore. I think we just use the Phase 1 label given that we had put that out there just over a year ago alongside Phase 2 as well. It is worth highlighting though that Phase 1 has is still the infrastructure to pave the way for us to add the capacity that had been outlined for Phase 2. But obviously if you recalculate that is now a much higher amount using the methods that we're now referencing. And so, I would argue that Phase 2 would now be more like Phases 4 -- Phases 2 through 5 and so we have the ability to more incrementally add equipment to the plant, particularly in what happens to be the longest cycle time process of our facility, which is the extraction of the liquid from the roles. And so, right now, frankly, we're more focused on just the demand being there in the second half of 2023 before going to plan for these additional phases of expansion to the plant. But as I've outlined in my remarks, we think that what we're planning to do with Plant 2 now does give us the flexibility to capture our 2025 revenues and to flex well beyond that as we allocate revenue capacity. And to your question on really what changed in the process, I think it's really been multiple things that the team has applied to our site in Rhode Island, frankly, to get us to the run rate that we delivered in Q4 that was a big meaningful step. But it's also worth -- within our product range, the roll length that we can make at the plant actually vary significantly between one product and the other. And as we prioritize those products that we make in higher roll lengths, we're able to get more square feet of Aerogel, which assuming the prices, the same for all of them, which is not, you can see how it's just a much leaner mix on the plant and we're able to crank out more product as a result.

Eric, a key point just to reiterate -- just one point I would just reiterate is, you know, as we are managing the build, first and foremost, was our ability to be sure we were able to meet our 2025 revenue target, a tripling of revenue to $720 million and the design does have that capability and more frankly as we see potential upside as we scale our business and as the megatrend continues to take shape.

Got it. And so, but maybe another way to think about this, you were targeting with Phase 2, $1.6 billion in revenue capacity, and I think the CapEx number was $700 million. So effectively, yes, you're increasing $575 million to $710 million, but you're really -- it's an increase of $10 million for a like amount of capacity. I mean is that a fair way to think about it?

It is. I think there is more product mix trade-offs that are implied in the $1.6 billion revenue number. But yes, I mean the math is the math, right. It is a lot more capital efficient now as with how we plan the capacity.

Got it. And then maybe just on the award and quote pipeline, and thanks for all the details there. But I do notice that you no longer have people in kind of the testing phase. They've all moved to the quote phase. Is it still fair to say that although you're not in charge of when you're able to announce these things, the OEM is, that your expectation is that you'll be adding more -- beyond the German OEM and the opportunities that you've detailed today?

Yes, we're sort of playing with two charts here, right. One is the map that we had before and now this assume on the quote pipeline. I would argue that those OEMs that we're testing, that are testing the material or frankly that where we've quoted and sold prototype parts too. There are several who were quoting those testing parts or prototypes that would need to be added to this list when we actually quote a production program for them. So one thing that's worth clarifying is that, here on Slide 7, we included our only production vehicle quotes. So, this is our production vehicle code pipeline.

Got it.

I think one other point I would make -- one observation I would make, Eric, is I would say that our -- the testing period seems to be shorter than that maybe originally. And it's I think in part because our domain expertise, our knowledge is much greater, our product is better characterized as we've gone through the process with several of these OEMs. And so -- and I think there is more urgency on the OEMs part to move through the process more quickly as well. And so, for a combination of reasons, I think that that testing period is tending to be a little shorter than it was a year or so ago.

Our next question comes from Colin Rusch from Oppenheimer. Your line is open.

Thanks so much guys. Could you talk a little bit about the pricing dynamics as you're going through this quoting process, how much leverage do you guys have from a pricing perspective, as well as the growing of content per vehicle, and how that is trending?

I mean, we definitely have not seen any weakness. We, as Don mentioned, the fact that the testing goes through much faster and that we are able to leverage some of our own testing data to advance the pipeline further has given us leverage to not only accelerate these discussions, but I think when -- we have a pretty, I wouldn't say simple or easy message to deliver to customers. But when one looks at the capital that we're investing here, we are laser focused on paying it back and more. And I think with that, we can justify the pricing and not really go into the pricing dynamics of selling something that's been commoditized, right. And so, we saw a very special need here. We're well aware of that, but at the same time we realize that we are having to spend a lot of capital to supply that and we are focused on paying it back and more and therefore the price is the price.

And we are very focused, call it, of course, on our stated target of 35% gross margin as a business here, as we scale here in the near future. So, that underlies our pricing strategy that concept. We also believe will bring significant value to these customers and that has also given us the latitude to be firm in our quoting process.

It's funny, we have a short list of companies that sell into our markets that are doing 70% plus gross margins on a good year and we've actually shown that here across our team because in some ways, we really shouldn't be having to apologize for being profitable. I think, when you have something unique and when you are solving a problem, we strongly believe in cut and capturing our fair share of the value with most importantly paying all this capital back.

That's super helpful. And then as you scale this business, obviously, you need to grow the team a fair amount. Could you just talk a little bit about the cadence of OpEx and then and the investments that you need to make here over the next 12 months to 18 months to really support the growth trajectory that you guys are talking about?

Yes. So, you've probably heard in my remarks here over the past three quarters where our tone on this has changed. So I think gone through, I would say, two significant step function increases in OpEx. One big one in 2021 and then another one at the beginning of last year. Then, it was really during the second half of last year where we started seeing that we could actually leverage a lot of the work that has been done, literally throughout all of our functions to get more efficient and ultimately really change how we work. And we've started switching the spigot from investing in just adding more people to investing in our IT systems, implementing more processes, and really the hiring has slowed on the OpEx side and we've only focused it, as I've mentioned in my remarks, on just delivering very clear R&D milestones that are time-bound and that are not research expeditions, but that are actually driven towards improving our processes and reducing our manufacturing costs. And then on the commercial side, it's really been encouraging to see how the team has been able to leverage baseline work from when we were initially working with General Motors to actually build an archive of our own test data that we used to accelerate these commercial discussions. And then, on the support functions, I think we've added capability and we've hired a lot of new people from the outside who are bringing their ways of working and their tools and their knowledge of these different tool chains that we're now working to implement and they are yielding results. So, our hope is that we actually taper the OpEx growth this year, but at the same time, this need of being flexible and this transition as we implement new tools and processes, I think, we'll sign up to take more OpEx out of this or it's actually start taking OpEx out of this ramp that we've had as these things start being implemented on the support function side particularly.

Yes, I would just emphasize that we have invested in our OpEx in anticipation. And so, as we scale, as we grow, you're going to see a disproportionate amount of growth relative to any OpEx increases at this point, by a wide margin.

I mean, Colin, maybe to summarize it, in my mind, OpEx North Star should not be more than 10 percentage points of sales and so right now, we're pretty high, like the revenues would need to be a $1billion for us to all of our OpEx run rate. And so, we're just -- we're not just focused on letting the revenues get to $1 billion. We're also bringing the OpEx back down to something that aligns with 10% on the $725 million in 2025.

Really appreciate that target. That's incredibly helpful for understanding the long-term model. Thanks guys.

Our next question comes from Chris Souther from B. Riley. Your line is open.

Thanks for taking my questions here. Can you give us any sense of the timing of that German OEMs platform? I'm curious if that when adds to the 2025 visibility, what do you think that's 2026 plus. And then, I think on the call, you said the awarded business represents anywhere from 80% to 170% of the target for 2025. Is that saying kind of in future years beyond 2025, we see just this program kind of growing beyond the 2025 target or is that including any of the people that you're quoting?

Yes, so, I'm happy to take the one on the platform first and then go into that remark around the percentage of the 2025 revenue target that is made up by the existing awards. So, yes, LOI is for SOP. I think the first SOP on that platform is in 2025. So, we do expect a little bit of revenue from that in 2025. And then, I mean, we have been fairly conservative as we estimate the value of these awards, right. And yes, at the same time, it's one of those things where if you put together all of the volumes of all the OEMs, you end up with a market that's two times larger than the vehicle market, right. Everybody has high aspirations here as they ramp-up their production forecast. And we just want to be cautious, but at the same time, just given how profound this transition to electrification is looking, whether 2025 is the year when all of this becomes mainstream or 2026, we just don't want to be wrong and that's why we thought that expressing that and just showing what the value of these awards can be not just in 2025 and beyond, plus the quote pipeline that the team is actively working. If people see the scope of that, one can then understand why we are pushing the team to flex our capacity in the way that we're doing it.

Okay. No, that certainly makes sense. So, the incremental move from 60% visibility, I think you had previously talked about 80%, it's just more confidence around the volumes would just those two folks?

Yes, I would say, it's the same level of confidence applied to more volume.

Okay, got it. And then maybe just -- it looks like the gross margins are going to fluctuate pretty largely from the beginning of the year to the end of the year. It sounds like a lot of PyroThin you're going to be producing kind of ahead of time to be shipping in the second half. So, you probably have a similar phenomenon where scrap costs are incurred in the first half of product you ship later, but maybe you could give us a sense where you think PyroThin gross margins should land for the full year, and then looking at like the exit rate probably pretty similar to what we saw in the fourth quarter here and how does that trajectory shape for 2024, what the ramps kind of continue or stabilize?

Yes, so really for us, the profitability of PyroThin, it's hard to go into that one because it really all hinges on the volumes during the second half of the year. However, if our expectations really align there, particularly in the middle of our revenue range, then we do believe that we can make PyroThin gross margin positive for the year and then have that progress in 2024 and 2025 to the point that our gross profit moves into the mid-teens in 2024 if the growth rate continues. I mean, you kind of can draw a line from 35% to where we're at today and I think we've shown in Q4 that when the demand is there, we can easily dig ourselves out of negative gross margins. And we think, we'll dig out PyroThin this year if the demand is there in the second half.

Our next question comes from Alex Potter from Piper Sandler. Your line is open.

So first question, I was wondering if you could comment on whether you think you're going to draw on any of the loan from General Motors. I know that some of that money was contingent on construction milestones at Plant 2 and that you weren't necessarily going to draw the money in the first place. So just curious on your updated thoughts on that topic.

Yes. So, we basically have a window between now and the end of September of this year to draw it. The requirement to draw the first $33 million is that we complete the site work in Georgia, which has actually been completed already and that we spend the $100 million that we got from the public offering from Koch. And we will most likely have spent that here by the end of March, early April. And at that point is when we would draw this first $33 million from the loan. We've been in close contact with General Motors on this and they are basically ready to receive our draw form here at the end of March, early April.

Okay, very good. And then maybe just going back to pricing, I can appreciate the comments you were talking about earlier with regard to Aspen is adding value, you don't have to apologize to being profitable, things like this. I'm just curious when you go into these conversations like the LOI for instance with this German OEM, is pricing more or less set in stone, like are you just coming into it saying this is the price. Now, let's talk about everything else or is pricing sort of a placeholder there that you will come back to and finalize at the end of the agreement? Just how much visibility do you have on pricing at this stage in the discussion with that relationship in particular and with others more broadly? Thanks.

Yes, I think at this point, there have been several turns on a lot of these quotes, usually go through an iteration of them and the team knows what the art of the possible is, right. And at some point, you just really start making sense, but yes, at this point, indicative pricing has been agreed on that. We think, it's worth allocating the capacity for it and then that may evolve really more. It's more driven by the design of the part itself than I would say, any sort of negotiations.

Yes, I think, Alex the LOI, both technically and the commercial terms are pretty fully negotiated at this point. There is not much mystery left on that.

Our next question comes from George Gianarikas, Canaccord Genuity. Your line is open.

I'd like to focused on General Motors and there's obviously been a lot of ink spilled on their potential decision to move some of their manufacturing -- battery manufacturing capacity to cylindrical. Just your thoughts on that, the fourth plant, et cetera, any guidance there as to what it means for your volumes. And second, I'd like to ask about Ford. It appears that -- I'm just going to venture and guess that might be the North American OEM that you're quoting and I guess, they've halted production of their Ford F-150 and overnight, there has been discussion in the press around that production halt being related to battery fires. So, if you could just touch on both questions, I'd appreciate it. Thank you.

Well, the GM -- on the GM question, I would just kind of categorize it as speculation as most of that ink has done and we're closely engaged with General Motors, not only on their current activities but with development activities as well. So, I don't want to comment too much on that. I think it makes sense for any OEM to be exploring various chemistries, various form factors as they think through their ultimate lineup of vehicles. And so, all of these things, I think, one can imagine companies doing those sorts of things, but so specifically to General Motors, I would just put it in the category of speculation and we don't really have any particular knowledge of anything that was talked about in those Korean trade publications. With respect to Ford, yes, we've read and come to understand, I think, the same things that you have, Georgia, that you highlighted, the stop production, stop shipments originally articulated around battery issue. I think, now a more refined and this may fall into the category of speculation, but in fact or as I read at least around a battery fire of a stored vehicle that propagated across the battery platform into at least to a vehicle -- another vehicle next to it. And so, I think, my view of Ford is that they are highly focused on battery performance and safety and they're engaged in getting these platforms right for the long term. And they are certainly sensitive to creating any brand damage that comes from these kinds of events. So, that's sort of our view. We don't know a lot more about the specific situation than you do.

Can you just go back to the General Motors question just for a second because I think ultimately, this is about, can Aspen hit their 20 -- there tripling of revenue by 2025. If GM decides in this fourth plant or maybe even a third plant to switch some production to cylindrical and therefore they don't -- they might not need your material. Is that something we should worry about or has this -- have these other potential wins this quoting these LOIs, have they kind of reinforced your conviction that that's a real target in those out years? Thank you so much.

Yes, thank you, George. 2025 and Ricardo knows this better than I do -- 2025 is not very far away when it comes to building battery factories and having battery factories and having products form factors and chemistries. And so, I don't really view this as a 2025 issue and I should say, potential speculative issue. And again, I think it will make sense for all OEMs to experiment with form factors and chemistries that may differ over certain parts of their fleet. And again, I'm not assigning this to General Motors. I'm assigning this to just logic but 2025 is again a very short time away in sort of battery development and battery factory building. So again, we don't think that's an enormous risk for us today.

I mean. it's kind of interesting. I think that for every 100 people that are out there writing and speculating about what direction any particular OEM will take, there is probably about one engineer working on this stuff and there is also some pretty significant CapEx decisions behind the direction that these OEMs decided to take. And when we speak to engineers that were quoting stuff, they basically tell us this train is moving, the track is built, and it's not really switching direction. And even if a parallel track is being built in some of these cases, that's really more of, I would say, a 7-year decision than a quick switch of one train from on track to the next.

Our next question comes from Jeff Osborne from Cowen. Your line is open.

Thank you. Hi, Don, in your prepared remarks, you mentioned some references to failed attempts to mitigate propagation as sort of a driver potentially for the order in Europe for other engagement. I was just wondering, common question I get from investors is that your differentiation around technology and other approaches to what -- why those fail and why you win. Is that something you can articulate more on?

Well, I think what I would say, Jeff, is that it's a complex problem and there are thermal management, fire safety issues involved. There are mechanical self-stabilization issues involved. And I think, it is not an easy task to triangulate on those various constraints or factors. And our material touches upon each of those critical areas, I think, very effectively and very uniquely. And we do believe that there are materials that do one thing or the other, perhaps. But again, it is that combination of attributes that, I think, is setting our material apart and has us in the position that we're in today, both with existing customers and with prospective customers here during this really critical stage of this EV activity here.

That's helpful. And then maybe for Ricardo. I might have missed this, but on Mexico, you obviously showed the ramp up in Q4 and the margin potential but can you give us a sense of perspective on where we are with the automation? I think, you made reference that most of the products in Mexico is manually made, but are those automation plans in place? Have they been fully validated or up and running or when will that transition take place?

Yes, that transition basically takes place in the second quarter fully and then our -- so our production in the second half would be off of the automated equipment. We're still keeping the manual equipment to be able to flex up if the demand is higher, but that transition will be fully in place for the second half of this year.

[Operator Instructions] Our next question comes from Amit Dayal from H.C. Wainwright. Your line is open.

Just on guidance for next 2023 -- hi, guys, can you hear me?

Yes. Perfect. Yes.

Okay, thank you. Just wanted to see how much concentration from GM there is in the guide for 2023?

I mean, quite a bit. We've got their volumes from IHS there on the slide, right. So they are a big driver. They were a big driver in Q4 as well and they are big driver right now. I mean, they make up a disproportionate portion of our thermal barrier demand.

Okay. I understood. And then just with respect to the energy industrial orders, I think, you guys highlighted $100 million worth of orders that you have in hand. Is this all expected to be delivered in 2023?

Yes. Those orders are -- people who would like to receive those materials and we will -- again, we're trying to be mindful of keeping that business strong at the same time when we have a single plant, making sure that we feed the EV thermal barrier side of this as well. So, we do have some flexibility in the way we deliver that material, but all of those purchase orders are -- have been requested for 2023 and even in the first couple of three quarters of the year.

This concludes our Q&A. I'll now hand back to Mr. Young for closing remarks.

Thank you, Elliot, for your help today. We appreciate your interest in Aspen Aerogels and we look forward to reporting to you our first quarter 2023 results in April. Be well and have a good day. Thank you.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.