Good morning. Thank you for attending the Aspen Aerogels, Inc. Q1 2023 Financial Results Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to turn the conference over to your host, Neal Baranosky Aspen's Senior Director, Corporate of Strategy and Finance. Thank you. You may proceed, Mr. Baranosky.

Thank you, Alexis. Good morning, and thank you for joining us for the Aspen Aerogels fiscal year 2023 first 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, 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 2023 first quarter ended March 31, 2023. In addition, I'd like to highlight that we've 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 any 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 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 I'll discuss 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 filed with the SEC can also be found in the Investors section of Aspen's website. Forward-looking statements made today reference the company's views as of today, May 4, 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's 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, Neal, and welcome to Aspen. Good morning, everyone. Thank you for joining us for our Q1 2023 earnings call. My initial comments will focus on our Q1 performance, our highlights from our EV OEM development work and our strategy for balancing demand, supply and financing. Ricardo will dig deeper into our financial results, our EV business and our strategy. We will conclude with a Q&A session. The performance in the first quarter sets us on a path to reach our 2023 outlook of revenue between $200 million and $250 million and positive EBITDA in Q4. We anticipate sequential revenue growth as we work through the year. This growth outlook is a function of a very strong energy industrial backlog and the expected ramping of our EV customers, especially General Motors. This anticipated EV PyroThin ramp is the key factor impacting whether we are at the low or high end of our 2023 revenue outlook. During Q1, we saw continued improvements in operating efficiencies, which resulted in an 11% gross margin, which with continued revenue growth, we believe keeps us on track for longer-term gross margins at or above 35%. We also maintained careful control of OpEx. During our last call, we announced that we received both a letter of intent from the luxury brand of a major German OEM group and an order for approximately 1.5 million prototype parts from the commercial truck brand within the same German OEM group. Recently, we converted the prototype parts order into a multiyear award with the start of vehicle production in early 2024. We expect to announce the name of the commercial truck brand during the latter part of 2023, as we commenced delivery of production parts, with respect to the LOI for the sister company within the German OEM group we…

Thank you, Don. I'll start by providing an update on Plant 2, its construction progress, the latest on timing and our previously projected expense land towards it. As you can see on the left side of Slide 4, the site work and foundations have been completed. While the building construction, along with the electrical distribution are on schedule. Our team is on track to power the site at the end of June of this year. The team was on track for commissioning the plant at the end of the first half of 2024. We believe that our near-term EV thermal barrier demand is on track to ramp up in 2023 and that this ramp will fluctuate within the range of our revenue expectations, thanks to the development of contract manufacturing supply from China in 2024 and the investments in our Aerogel Plant in Rhode Island, we now have the flexibility to be able to right time and align the startup of Plant 2 for when it is ultimately needed to ensure alignment between supply and demand. This retiming allows us to reduce our total 2023 CapEx guidance to less than $150 million, including the $40 million that have already been spent towards Plant 2 in Q1. In discussions with our current and prospective EV thermal barrier customers, we are reassuring them that our Aerogel Plant in Rhode Island, combined with our assembly operations in Mexico can more than meet their demand in 2023, 2024 and the portion of 2025 depending on their volumes. As Don mentioned in his remarks, our Aerogel Plant in Rhode Island can support multiple customers and deliver over $400 million of annual revenue capacity, and we estimate that the contract manufacturing capacity can add another $150 million of revenues from energy industrial customers, resulting in total…

Thank you, Ricardo. We have covered a significant amount of ground today in reviewing Q1 and our strategy. Before we move to Q&A, I'd like to emphasize four points. First, during Q1, we demonstrated continued improvements in operating efficiencies, which resulted in an 11% gross margin, and we believe keeps us on track for longer-term gross margins at or above 35%. We also maintained careful control of OpEx during the quarter. Second, the commercial truck brand within an important German OEM group chose us for a multiyear award to provide to them PyroThin thermal barriers. We believe that we are on the cusp of winning more awards with other EV OEMs and are confident we will complete 2023 with a strong roster of EV customers that have designed PyroThin thermal barriers into their respective battery platforms. Third, we have decided to right time the final stages of the construction of Plant 2 in Statesboro, Georgia and in the meantime, to largely dedicate our Plant 1 aerogel manufacturing capacity in these providence to PyroThin thermal barriers. At the same time, we have reached a manufacturing agreement with a Chinese aerogel manufacturer to supply product to us for our energy industrial business. With this strategy, we believe that we continue to have our full upside opportunity, but during a potential period of economic uncertainty and while our EV OEMs ramp, we optimize the use of our existing assets to create a cash generating business and to avoid unnecessary dilution. And fourth, in this scenario from our current manufacturing assets and supply arrangements, we could have annual revenue capacity of $500 million to $600 million, gross margins at or above 35% and EBITDA meaningfully positive. The strategy enables us to reduce OpEx and CapEx to generate positive EBITDA to preserve our existing capital and to serve successfully both our EV and energy industrial businesses. Alexis, let's turn to Q&A. Thank you.

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Eric Stine with Craig Hallum. You may proceed.

Hi, Don. Hi, Ricardo.

Hey, Eric. How are you?

Good morning. Well, thanks. So maybe just starting with, I guess, Slide 13 and the $3 billion plus that you're targeting here over the next 3 quarters. Just curious if you could maybe break that down, I would assume that the German OEM under LOI today is part of that. But I mean, is that a number that you expect to be made up by a handful of the opportunities you list on this slide, it's a couple or it's more widespread than that?

So I think a handful is the right way to describe it without getting into too much detail of what the size of each award is. The interesting thesis, this element of not just getting awards from the OEMs themselves, but these battery joint ventures are actually a very good opportunity to get into multiple OEMs with one award and to have that opportunity grow as their vehicle rollout plans become clearer. So I mean, even though we're talking about the $3 billion figure of awards being added this year, the potential for next year and the following year could be even larger given that these $3 billion would just be kind of the really our initial award into each of these OEM groups.

Eric, as I said, I -- we're confident that we're going to have, as I said, a good roster of EV customers by the end of 2023. So I like your handful kind of imagery that feels right to us as we work our way through the year.

There's some pretty big fingers in this hand though.

Yeah.

All right. No, that's a great description. Good color there. Thank you. I guess tough to keep it to two questions, but I will -- I mean maybe just on the contract manufacturer, could you just talk about, I mean, it sounds like, so it is an existing Aerogel manufacturer. Does that kind of ease the ability to bring that online? I mean, is there CapEx required on the equipment side, maybe not because they're already in the business. Maybe just talk about some of the considerations there bringing that online, but also protecting your IP, which obviously is very, very important to Aspen, but you're using an existing Aerogel manufacturer?

Yeah. Thank you. Eric. As I indicated, we've been working on this for the better part of the year. And so, we are very mindful that this product will be to our specifications to our quality standards. It will be worked through our distribution with our labeling, et cetera. We are -- we've done extensive work with the data book, so to speak, and to be sure that we are able to deliver Aspen material to our energy industrial customers. The IP part of this has been at the forefront of this discussion. And you have seen us for many years, be aggressive in representing and defending our intellectual property around the world. And of course, again, recently during the month of April. So we will -- again, we're very -- those two things might have been a coincidence, but I think they're highly related in many regards. That is to say the enforcement action that we took in the contract manufacturing agreement that we reached. We're really excited about it and for what it can do to our -- for our company during this period of time. As I said in my notes, between our existing assets and Plant 1 being dedicated to EV thermal barriers and this supplemental supply to have the revenue capacity of $500 million or $600 million with significant gross margins and significant positive cash flow implications. It's just a terrific thing for us, we believe, and we'll continue to execute on that strategy.

Yeah. And maybe I can -- just got it. A bit of commentary here on the CapEx question, Eric. So I mean, the team actually was there a couple of weeks ago and completed a pretty good assessment of the equipment and their capabilities. And we don't expect this to drive any capital expenses on our end. It's really just a little bit of incremental OpEx that we were already planning for.

Okay. Thank you.

Thank you.

Thank you for your question. The next question comes from the line of Alex Potter with Piper Sandler. You may proceed.

Hi, there. Ben Johnson on the line for Alex. First question, now you sit contract manufacturing, we've been modeling CapEx in 2024 and beyond.

Yeah. I mean for us, I see two CapEx scenarios, right, for '24 and beyond. One is, which is really the one that we're focused on here until we resume plan to -- but that -- I mean, our -- it's pretty front-loaded, and we think that the CapEx that we'll deploy in, both in Mexico and in Rhode Island this year, we'll set it up so that, I mean, we should not be investing more than $15 million of CapEx in '24, '25 million and 26% if we don't restart Plant 2. But given the demand that we're still seeing out in the ‘25, 2026 time frame, we'll have to pretty much retime our expectations for investing in Plant 2 for that point in time after we decide to restart investing in the plant. [Multiple Speakers] Maybe I'll just add one thing really quickly. I mean, for us, really, the main driver towards this change in strategy and this right timing of Plant 2 is that if you lay out these lower CapEx numbers, I mean, there's a really good chance to create meaningful value here as we start delivering on our revenue later this year and going into next year because we actually start paying back all of the investments over the past two years, just as the business continues, makes its way towards generating positive cash flows here in the near term.

Got it. Thank you. And how much are you guys willingness to disclose regarding the financial terms of your relationship with the contract manufacturing?

Well, let me say it this way. That through the negotiations, we're focused on having a profitable energy industrial business, and the terms of that enable us to do that. And of course, that was an important part. It wasn't just serving that market in this temporary period. It is serving that market profitably for us and being consistent with our gross margin goals, et cetera. So we're not going to get into the arrangement in deep detail, but it's attractive to us. And again, as part of that $500 million to $600 million revenue capacity the combination of Plant 1 in that supplemental supply agreement, again, we have the ability to have these 35% gross margins that we've talked about in the past.

Thank you very much.

Thank you, Ben. Thanks.

Thank you for your question. The next question comes from the line of Colin Rusch with Oppenheimer. You may proceed.

Hi, Colin.

Hey, guys. Sorry for the trouble. Could you talk a little bit about the competitive landscape that you're seeing at this point with other solutions around he management. Obviously, if we're going to have a global standard that we're working toward -- there are going to be multiple entrants. And just curious what you're seeing in terms of early days of competition.

Yeah. I mean this is an area where we've actually been spending a lot of time and actually went through a pretty comprehensive process with the help of some experts and our team here internally to frame out all of our market views. And as we outlined a year ago, right, this is a systems problem, right? And so there's a bunch of active measures and passive measures that one can implement to try to tackle it without having the option of swapping one for the other, right? So you -- there's no silver bullet at addressing thermal runaway in propagation. There's only multiple lead bullets. And on the passive side, we think that depending on an OEM's objectives, we can be a pretty good lead bullet. What we're seeing on the as we go and quote business, I mean, we're still seeing the same dynamics of last year and the year before, more accelerated. And from a competitive point of view, I mean, we're seeing that it's fairly easy to pull up our website, start calling a product, thermal barriers and grabs stock photos and try to get market traction. But the technical dialogue that is required to actually get an award is completely is at a completely different level. These OEMs are not just assessing the capabilities of the material, but they're also assessing the capabilities of our process to deliver consistency at thicknesses that, frankly, two years ago, our team did not expect to have to make. And so we do feel very good about how we're positioned right now. And we don't see that changing dramatically because we just continue extending our lead.

That's helpful. And then just in terms of some of the financing options that you're going through, obviously, it's a pre dynamic environment in the commercial engine space. I'm just curious what you're seeing in terms of not necessarily rates, but around terms and limitations on loan-to-value of things like that in terms of some of these discussions and how that's evolving, obviously, in a pretty dynamic environment.

Yeah. So I mean we've been pretty focused on options that minimize dilution, right? So if you look at our menu of financing options, selling equity at the bottom of the list, especially at the prices that we're currently trading at and just where we know the company is at relative to when we were at $60 a share. And so the markets that we still see open are, for example, on the equipment backed loan financing or capital lease market. I mean you could -- you can get something in the -- you can something with the rates in the mid-teens, but obviously, you're pledging specific assets, and there's a bit of an administrative burden in getting that. But we do have a pretty clear line of sight to the $100 million that we've outlined there. And if it weren't for the GM loan, we could even take on more of that type of financing as we fund our growth. Now that our CapEx plans are lower. I mean there's only so much that you can put on those facilities given that they have to be backed by a specific piece of equipment. And then the other area that we're seeing is just I mean, we get pitched a lot of convertible products but are not really focused on that and instead are seeing the private market still pretty much alive, looking at opportunities where there's some equity upside and they are reasonable around the near-term coupon. But at the same time, I mean, the timing of those is important. And when we combine those with the DOE, the loan program office, I mean, obviously, the DOE one is extremely attractive. And now under this new plan, we can actually move that ahead. And as the timing will potentially line up from when we get a decision and when we ultimately will need to make a call on resuming our investment in Plant 2. So I'd say that those are really the three options that we see still alive and where the funding probabilities are good.

Colin, I think the one thing I would add to that is in this scenario, we're a different-looking company as well. We're a cash-generating business. That's our plan as we think through and execute on the Plant 1 dedicated to EV and the supplemental supply agreement, we have the ability to generate cash. And we all know that's -- those are the best investment dollars you can have, and we're very focused on that.

Thanks so much guys.

Thank you, Colin.

Thank you for your question. The next question comes from the line of Jeff Osborne with TD Cowen. You may proceed.

Great. Thank you. Just two quick ones. Riccardo is, I was confused on the equipment back financing that you mentioned, the $100 million. Is that in place or what's your degree of comfort that it will be in place? And if you could be more specific as to what specific equipment you're back leasing there.

Yeah. So I mean, we feel pretty good about that. We mentioned during the previous quarter's call that we actually had, I mean, three different term sheets already. We've sent back a nonbinding commitment with two of them and are now basically going through the formalities of the underwriting process. And so we feel pretty good about getting those $100 million. And the type of equipment that can be put under those facilities is a lot of the equipment that we're using to upgrade the plant in Rhode Island is going to be put on their dose. And same thing with our -- both our manual and our automated equipment that's going into our facility in Mexico, plus , I mean, everything from some of our IT infrastructure investments that we'll be making. And there's a fairly large allowance for soft costs in that as well of approximately 30%. And so we're going to try to put a fair amount of our CapEx on that as we line that up here this quarter.

That's helpful. I just want to make sure it wasn't affiliated with the Georgia facility, given the pause there. And then how to think about the content per vehicle on the truck side, you've given helpful anecdotes or detail on the passenger car side historically, but haven't talked about the truck opportunity.

Yeah. I mean, so it's a fairly big opportunity because these packs are very large, right? So we're talking about 180, 200-plus kilowatt-hour batteries. And so I mean, this is potentially a $1,200 to $1,500 content per vehicle opportunity for us, even though they're prismatic.

Got it. Is that mel-electric or PHEV? All of that PHEV?

These are all electric.

Okay. Great.

Yeah.

Perfect. Thank you.

Thanks, Jeff.

Thank you for your question. The next question comes from the line of George Gianarikas with Canaccord Genuity. You may proceed.

Hey. Good morning. Thanks for taking the questions. I'd like to ask to Toyota -- ask about Toyota and any color you can share on what you think their future plans are with electric vehicles, it needs to be a lot of press back and forth and what -- any way you can help us understand the opportunity there going forward?

Yes. Yeah, I was in Japan, last week as we -- and with the senior team at Toyota. And we've seen, and we've all read about and they talked extensively about it. The -- sort of a change in administration, so to speak, and very much a focus on being more aggressive with their EV program. And we all know they have the dominant position with the Toyota Prius and they had strategically sort of jumped right out to the idea around fuel cells and what have you. And the -- I think they have come to realize that they've got an important sort of franchise with that previous platform, if you will, or success of that vehicle. And so they have announced and discussed 10 EVs, different nameplates to be launched by 2026, I believe, is what they have said. And we're obviously close to the company and doing everything we can to be in that newly designed battery platform. So there's work to be done, but we have a strong relationship with the company.

Thanks. And maybe on the -- just to focus on the DOE opportunity. Any timing you can share with us any expectation on your part as to when any decision will be made there? Thank you.

I mean we expected before the end of this year.

Yes, George. It's -- we have been in consultation with the loan program office. And we have put together a strong internal team with very capable external resources. So we've really leaned into this and we're playing to win here, and we're putting the resources in place to do that. And as both Ricardo and I said it, the timing of it could align very neatly with this right timing strategy that we have for our Plant 2. But we expect to work through the process over the course of 2023.

Thanks.

Thank you.

Thank you for your question. The next question comes from the line of Chris Souther with B. Riley. You may proceed.

Hey. Just following up on the DOE loan. Can you give us the size of that application to the loan you're applying for there? And then I know you weren't successful with the DOE grant last year, but you've talked about kind of a mix grant that. I just wanted to see if that was something that was potentially on the table for this year as well.

Yeah. I mean we've actually been advised and through our dialogue with the loan office and the DOE that size doesn't matter, which is kind of odd as we put together the application together. But we've actually framed out a size, but we're just not in a position to disclose it at this point in time.

Yeah. And with respect to the -- our focus has been now with the loan program office and that process, we are aware that a next round of invitations could be issued around the grant program, as we described last time and as you well know, many of the awards in, I believe it was the October time frame last year were given to interesting companies, principally working inside the cell, and there was some thought that the next round of grants could be for manufacturing capability and related components, what have you, outside the cell. So we're keeping an eye on that program, but we've really put our resources behind the LPO.

Got it. Okay. And maybe just on the margin front and kind of the path to profitability. It seems like the gross margins in the first quarter essentially hit the way you can kind of back into with the guidance, assuming OpEx stays pretty flat, which seems to be the case. On the prior call, you've given expectations of the vast majority of gross margin being first half or second half loaded. And now we're talking about positive EBITDA for the fourth quarter. Can you just kind of give us a little bit of a walk on the gross margin and OpEx front for second and third quarter and then fourth quarter to get that kind of positive EBITDA here, I think, would be helpful for folks.

Yeah. I mean for us, really, the way we look at it is OpEx at this point, any increases that you see would be after having looked for savings somewhere else in the business, right? And so it's fair to expect that we're going to keep OpEx within this $100 million annual run rate at worst. And so then it's really all dependent on the revenues, right? And so as I mentioned in my remarks, I mean, we truly think that for the PyroThin business to be positive from a gross profit standpoint, our quarterly revenue run rate needs to be above $20 million. And as we get closer to that here, hopefully, in the second quarter and the remainder of the year, well above that, if GM can accelerate the ramp-up, then you're going to see the margins go back and start looking like what they look like in Q4 of last year. And then just really increase from there as we are able to absorb more of our fixed expenses. And on the energy industrial side, we actually think that the gross profit margin there is really limited by our ability to supply that business with product to sell. And so I think expecting it to continue around where we ended in this quarter is a fair expectation or maybe even lower as we take away some supply for it and give it to profit. So it's really hard to answer the question because the demand on the second half is truly what drives our profit engine for this year. And so far, we haven't seen any signals that would make us expect anything lower than what we were expecting 3 months ago. But I mean we're ready to go here.

Got it. Maybe just following up, like squaring that with kind of the EBITDA guidance here, it would seem to suggest just gross margins were a lot better than we saw. There's reasons why they should kind of improve throughout the year with additional scale. Is that adjusted EBITDA guidance pretty conservative at this point. It's kind of a way to think about that?

I would agree. I mean I think it's just more a reflection of our thoughts on the environment and not necessarily our own specific situation.

Okay. Thanks, guys.

Thank you, Chris.

Thank you for your question. There are currently no further questions in queue. So I'll now pass the line back to the management team for any additional or closing remarks.

Thank you, Alexis. We appreciate your interest in Aspen Aerogels, and we look forward to reporting to you our second quarter 2023 results in July. Be well. Have a good day. Thanks very much.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.