Aspen Aerogels, Inc. (NYSE:ASPN) Q1 2024 Earnings Call Transcript May 2, 2024

Aspen Aerogels, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you for attending the Aspen Aerogels, Inc. Q1 2024 Financial Results Call. All lines will be muted during the presentation portion of the call with the opportunity for questions-and-answers at the end. I would now like to turn the conference over to your host Neal Baranosky, Aspen, Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may now may proceed, Mr. Baranosky

Neal Baranosky: Thank you, Chad. Good morning and thank you for joining us for the Aspen Aerogels first quarter 2024 financial results conference call. With us today are Don Young, President and CEO; and Ricardo Rodriguez, Chief Financial Officer and Treasurer. 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 recent business developments as well as a reconciliation of management's use of non-GAAP financial measures compared to the most applicable US generally accepted accounting principles or GAAP measures is available on the Investors section of Aspen's website, www.aerogel.com. 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. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statements on Pages 1 and 2 of the slide deck, as the content of our call will be governed by this language. 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. I'd also like to note that from time-to-time, in connection with divesting or pending expiration of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officers will file Form 4s to report the sale and or withholding of shares in order to cover the payment of taxes and or the exercise price of options. Please note that immediately after the filing of our Form 10-Q for the first quarter, we will also be filing a resale registration statement on Form S-3 to cover the Aspen securities held by Wood River Capital, LLC, an affiliate of Koch Industries, Inc.

and our largest shareholder. The purpose of this is to consolidate shares covered by prior resale registration statements filed for affiliates of Koch and other Aspen securities, previously purchased by affiliates of Koch. It does not represent a change in the amount or form of the Koch affiliates current equity interest in Aspen, as is typical with any resale S-3. We do not know when, if or what amounts Koch may offer securities for sale in the future. Lastly, I want to call out a few near-term IR engagements. Next Thursday, May 9, Don, Ricardo and I will be hosting one-on-one investor discussions at the Oppenheimer – Oppenheimer 9th Annual Emerging Growth Conference being held virtually. Additionally on May 21, Don, Ricardo and I will host one-on-one investor discussions at TD Cowen's Virtual 2nd Annual Sustainability Week.

This event will also include a fireside chat with Don, Ricardo on May 21, from 9:45 to 10:15 AM EST. On May 22 through May 23, Don, Ricardo and I will host one-on-one investor discussions in Los Angeles California at the B. Riley 24th Annual Institutional Investor Conference. And lastly on June 25 through June 27, Ricardo and Don will host one-on-one investor discussions in London at the 10th Annual ROTH London Conference. I'll now turn the call over to Don. Don?

Don Young: Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q1 2024 earnings call. My comments will focus on our Q1 performance, our 2024 full year outlook and provide the status and expected impact of several critical elements of our strategy. Ricardo will dig deeper into our financial performance and outlook and our business strategy. We will conclude with a Q&A session. We operated very well in Q1. The strong execution leveraged and extended the momentum that we built throughout 2023. The performance is reflected in the Q1 financial results and in the raised 2024 revenue and adjusted EBITDA outlook. In fact, we now anticipate net income will be positive for the year. Overall, revenue grew from $61 million in Q3 2023 to $84 million in Q4 2023 and now to nearly $95 million in Q1.

EV PyroThin thermal barrier revenue grew from $7 million in 2021 to $56 million in 2022 to $110 million in 2023 and we are now poised to more than double PyroThin thermal barrier revenue in 2024. The year-long capacity constraint that hampered our Energy Industrial business is being successfully addressed through our supplemental supply. Our external manufacturing facility supplied 10% of our Energy Industrial revenue in Q4 2023 and 50% in Q1 2024. We anticipate that the percentage will grow to approximately 80% in Q2, and be near 100% for the second half of 2024. The transition to the External Manufacturing Facility supports strong gross margin expansion. We believe we have the demand and the supply to reach at least $150 million of Energy Industrial revenue with gross margins exceeding our 35% target.

While we drove strong top line growth in Q1, we believe the profitability metrics for the -- for the Company overall are even more impressive. The gross margin over the past five quarters has expanded from 11% to 17% to 23% to 35% and now to 37%. Comparing Q1 2024 to Q1 2023, revenue increased by approximately $49 million and adjusted EBITDA improved by nearly $27 million dropping 55% of incremental revenue to the adjusted EBITDA line. These growth these result leverage growth through efficient operations and OpEx cost controls. And we believe demonstrate the power of our business model. The results and momentum have also given us the confidence to boost our 2024 revenue outlook by $30 million to at least $380 million and our 2024 adjusted EBITDA outlook by $25 million to at least $55 million.

These outlook numbers are baseline numbers. And we believe, we have an opportunity to exceed them. Our strong start to 2024 bodes well for additional outstanding results, including for here in Q2. We also believe that we are on a direct path to utilizing our current capacity and supply arrangements to realize our interim target of $650 million in revenue, $230 million in gross profit and $160 million in adjusted EBITDA. We are executing three key elements of our strategy that are important to our top line and profitability goals. First, the full conversion of Plant 1 in East Providence, Rhode Island to support the growth of the PyroThin thermal barrier business. Second, the transition to our External Manufacturing Facility to support the growth of the Energy Industrial business and third, the operating performance that reinforces the financial flexibility and strength necessary to achieve our interim and long-term targets.

The full conversion of Plant 1 to PyroThin thermal barrier production is proceeding well. Based on current project productivity and yields from Plant 1 and from our Mexico-based assembly plants, we believe annual revenue capacity for PyroThin thermal barriers to be at least $500 million. The commercial development activity for PyroThin thermal barriers remains robust. During Q1, we invoiced specific prototype parts to nearly 20 different OEM programs, signaling deep engagement with these potential customers. We believe we will add additional design awards to our roster, during 2024, as OEMs finalize their respective Battery platforms. As described earlier, we believe the External Manufacturing Facility will supply nearly 100% of our product for the energy industrial business for the second half of 2024.

Energy industrial activity remained strong across all regions and segments, including significant growth of cryogenic products serving the LNG industry. We believe our energy industrial team will drive steady, long-term and highly profitable growth for the company. Again by utilizing existing assets and supply arrangements, we anticipate having an overall business that can achieve at least 650 million in revenue, which we believe can generate 35% gross margins 25 percentage adjusted EBITDA margins or over 160 million in adjusted EBITDA given that we have recorded gross margins at/or above 35% in recent quarters. We believe this level of performance is well within reach. In terms of financial strength and flexibility, we finished Q1 with over $100 million in cash.

And with the momentum from the recent operating performance, we now anticipate for the full year 2024 at least $55 million of adjusted EBITDA and positive net income. As we plan for revenue beyond $650 million, we are focused on our second aerogel manufacturing facility in Georgia, which will add approximately $1.2 billion of revenue capacity by 2027. Several mortgage,nths ago we announced that the US Department of Energy Loan Programs Office invited Aspen into the formal due diligence and term sheet negotiation stage of the process. This loan application is one of the key drivers for restarting the construction of Plant 2, while the DOE's invitation to the formal due diligence stage is not an assurance that the DOE will issue a conditional commitment, we remain deeply engaged with the LPO and its advisers and continue to believe that we are a strong candidate to partner in this program.

We anticipate providing the next update on this subject no later than our Q2 2024 earnings call. Ricardo over to you.

Ricardo Rodriguez: Thank you Don, and good morning, everyone. I'll start by covering our first quarter results before walking you through the rationale behind our updated outlook for the rest of 2024. I'll begin on slide 4 with our revenues. We delivered $94.5 million of revenue in Q1, which translates into 107% growth year over year and 12% growth quarter-over-quarter. This was an all time company quarterly record and reflects an annual run rate of $378 million. This is already higher than our $350 million revenue guidance of 2024 called for. And it was achieved by prioritizing aerogel production in Rhode Island for thermal barrier production, and operating our part assembly plants in Mexico on a schedule that enables higher productivity.

Our energy industrial revenue was $29.1 million, a decrease of 14% year-over-year and a 7% decrease quarter-over-quarter. $14.6 million was delivered through our external manufacturing facility, which has ramped up meaningfully and is now qualified to produce 85% of our revenue mix. We are not concerned by this temporary squeeze in supply and still expect to deliver over $150 million of revenues in 2024 in this segment. As we previously mentioned, our energy business is sold out and even though the Q1 EV thermal barrier demand squeeze supply for this segment more than expected, our business is now geared in a way where revenue in either segment is just as accretive to gross profit. EV thermal barrier revenue of $65.4 million was up 459% year-over-year and 24% quarter-over-quarter, reflecting the consistent volumes for Toyota and accelerating volume in GM's production of Ultium platform based electric vehicles along with the launch of production parts for Scania.

Next, I'll provide a summary of our main expenses. Material expenses of $28.1 million for the quarter made up 30 percentage points of sales, a three percentage point improvement quarter-over-quarter. We continue to be pleasantly surprised here as our team continues managing these costs in an environment where although the cost of some raw materials provides relief to logistics of feeding our value chain continue getting more complicated. We remain vigilant with the goal of ensuring so we can keep these below 40-percentage points of sales reliably and prefer to continue conservatively planning with this as our target or long-term North Star. Conversion costs, which we describe as all production costs required to convert raw materials into finished goods, were of $31.2 million or 33 percentage points of sales in Q1.

These costs include all elements of direct labor, manufacturing overhead, factory supplies, rent, insurance, utilities, process logistics, quality and inspection. These results reflect a slight increase compared to conversion costs in Q4 of last year, which were 31 percentage points of sales. This is mostly due to product mix as the portion of these costs in EV thermal barriers is higher than it is in our Energy Industrial products. As previously mentioned, our long-term target for these costs at a meaningfully higher revenue run rate is of 20 to 25 percentage points of sales. So we are done managing these. The continuation of our work increasing the uptime of our equipment in Mexico, introducing further automation at a faster pace along with some recent upgrades in aerogel production is paying off and we still got more opportunity for improvement.

Our operations team has not done rightsizing our manufacturing fixed cost structure. So this is where we can continue scaling more efficiently. In Q1, company level gross profit margins were 37% and our gross profit of $35.1 million is a $30.1 million improvement over our gross profit of $5.1 million during the same quarter last year. Our Energy Industrial segment delivered $11.6 million of gross profit or 30% year-over-year increase on lower revenues. In EV thermal barriers, we delivered $23.6 million of gross profit in Q1. If we compare this quarter with Q4 of last year, our EV thermal barriers gross profit improved by $3.8 million on incremental revenue of $12.8 million. This incremental fall through would have been better without a few one-time charges of obsolete inventory and equipment related to customer-driven engineering changes that we implemented in the quarter.

The benefit of those changes and the anticipated reimbursement from customers on a significant portion of these charges will likely be reflected later in the year. At this time last year, our EV thermal barrier segment still operated at a gross loss of $3.8 million on an $11.7 million of revenue. Now that we ran at over $65.4 million quarterly revenue run rate, the comparison to $23.6 million of gross profit in Q1 of 2024 doesn't even seem relevant. The resulting gross profit margins during the quarter were 40% and 36% for our Energy Industrial and EV thermal barrier segments respectively. Operating expenses, which are sized for our near term projected annual revenue capacity of over $650 million were $32.7 million in Q1. These would have actually been down quarter-over-quarter instead of up by about $4.9 million without a couple of meaningful one-time items.

The first one is $2.7 million, driven by our team developing the second generation of our automated encapsulation equipment for prismatic cells, faster than we could install and launched the first generation, leading to a write-down of the first-generation equipment. The second one is a $2.2 million cancellation of the management's restricted performance shares award on March 6th of this year. Without these two items, our OpEx would have been close to the $110 million annual OpEx run rate level that we've been communicating as our North Star and guideline in the gearing of our company, and we'll continue managing around this level opportunistically increasing it as needed for performance pay, R&D opportunities and to drive incremental demand only.

Our team continues to revisiting every key company process and implementing new systems with the intent of bolstering our capabilities, reducing fixed costs and maintaining our OpEx at around this level in order to continue driving scale and efficiency. Putting these elements together, our adjusted EBITDA was 12.9 million in Q1 compared to negative 13.9 million during the same period last year, resulting in a $24.5 million year-over-year reduction in our EBITDA loss. As a reminder, we define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expenses, and other items that we do not believe are indicative of our core operating performance. In Q1, these adjustments were limited to $4.7 million of stock-based compensation, $1.4 million of interest income and $3.5 million of interest and financing related expenses.

Our net loss in Q1 decreased to $1.8 million, or $0.02 per share versus a net loss of $16.8 million, or $0.24 per share in the same quarter of 2023. Next I'll turn to cash flow and our balance sheet. Cash used in operations of $17.7 million reflected our adjusted EBITDA of $12.9 million, other non-cash charges of $5.2 million, interest income of $1.4 million, offset by cash used for working capital of $37.2 million. The key items that resulted in the usage of working capital were an increase in accounts receivable and inventory offset by an increase in accounts payable prepaid and accrued expenses. Our capital expenditures during the quarter were of $25.9 million. This put our operating cash needs for the quarter at $43.6 million. As we work our way through Q2, we're focused on reducing our working capital needs and freeing up cash by reducing our raw material inventories in what is now more stable procurement environment and staying on top of our accounts receivable.

We actually reduced our raw material inventories by $5 million during the quarter. And there's an element of seasonality to working capital in our business, as we prepay for the year's insurance costs and pay down our accrued expenses related to performance paid for the previous year in Q1. In Q1, we spent $8.1 million slowly advancing progress to fully enclose all the main structures at Plant 2 and temperature control the main production area. To-date, we have incurred $287.9 million in cumulative capital expenses through the end of the first quarter towards Plant 2 in Georgia to position the project for potential restart of construction in the fourth quarter of 2024 and only spent $17.8 million on other CapEx that will enable the ramp here of the second half of 2024 and potentially 2025.

Our financing activities in the quarter included the $5.3 million sale leaseback of a range of assets in Rhode Island and our labs in the Boston area. And we believe that there are opportunities to continue funding our CapEx in the U.S. in this way and there are currently exploring options to fund our investments in Mexico in a similar fashion at a relatively attractive cost of capital. We ended the quarter with $101.5 million of cash and shareholders' equity of $488.9 million, We continue meaningfully working our way through the due diligence and term sheet negotiation phase with the U.S. Department of Energy's Loan Programs Office as part of our application to fund the remaining construction costs of Plant 2 through a loan pursuant to the DOE's Advanced Technology Vehicle Manufacturing, or ATVM loan program.

In the appendix, we have a graphic of the different phases of the DOE's application steps and details on the work streams that make up the due diligence and term sheet negotiation phase. We believe that understanding the structure in terms of this financing enables us to continue working in parallel to ensure that we're capitalized to fund a potentially faster than expected but very profitable near term ramp in our business. Our top of mind options include increasing our usage of capital leases, asset-backed loans our revolving line of credit akin to what we had in 2022 and other relatively inexpensive debt options that are now available to us given the recent and expected near term performance. Now I'll turn over to Slide 5 and walk you through our thinking behind the updated outlook for the year.

When we framed out our revenue outlook for 2024, we were running on limited information and the historical track record of our customers' ability to ramp up production in the prior year. Now, as we are seeing an initial ramp, we expect General Motors to produce at least 200,000 EVs in 2024 and then enable our EV thermal barrier business to deliver over $230 million of revenue in combination with Toyota, some initial scanning of volumes and prototype sales. This acceleration of GM's revenues is likely to continue into Q2 and Q3, but can very well settled in Q4 as the initial sell through of Altium based vehicles in Florence GM's production schedules. We've seen some investors attempt to connect our customers' volume plants to our revenue expectations.

And we strongly advise against this because there's a significant delay of weeks or even months for a finished EV thermal barrier part that we invoice customers for to end up in a produced vehicle. This delay is even longer for assault vehicles. We've added Slide 11 in the appendix of this presentation to illustrate this and we recommend that you study it and reach out to Neil, if you have any questions. There's plenty of evidence that General Motors established brands with long running customer loyalty combined with the size and scope of its distribution scale and the appeal of the recently launched nameplates can drive over 200,000 units of EV sales in 2024. This is well below what we believe is GM's fair share of the EV market. But nonetheless, we'll be monitoring dealer inventory levels to better inform our next guidance update and further frame up our view of what Q3 and Q4 demand could look like.

For reference in the center of slide 5, we have a chart that shows AHS' as expectations for what GM's Ultium production ramp looks like in 2024 to achieve an expected 279,000 units. While time will tell with our 279,000 units is the right production expectation for 2020 for the distribution of volume across the four quarters of 2020 more closely matches our expectations. Lastly on the right side of slide 5, one can see how we expect the transition of supply from our external manufacturing facility within the energy industrial segment to occur. In the second half of 2024, we expect our aerogel plant in Rhode Island to mainly be focused on aerogel for EV thermal barriers and with our external manufacturing facility starting to deliver subsea products in Q2, we remain confident on our ability to deliver over 150 million of revenues in this segment.

Turning over to slide 6. Combining both segments results in a total revenue outlook of at least 380 million, which again would be a 59% year-over-year increase from our revenues in 2023 and the 9% increase over our prior revenue baseline for 2024. In my mind this translates into a 25% improvement of our year-over-year growth outlook. With this revenue baseline, we believe that we can deliver over 11 million of operating income in 2024, which assuming D&A of around 30 million and stock-based compensation of $14 million would translate into over 55 million of adjusted EBITDA. This is an 83% improvement over our prior baseline EBITDA outlook, demonstrating our ability to scale profitably without relying on outsized revenue growth. Our updated 2024 EBITDA outlook continues considering some potential headwinds to our near term profitability such as the cost of new launches higher prototype sales engineering changes that could lead to inventory obsolescence and expedited freight costs freight costs driven by the start-stop nature of some of the nameplates in our thermal burial demand.

We could also opportunistically decide that OpEx to continue advanced advancing our R&D in key areas and accelerate the development of our technical sales capabilities into one new program launches. As we reintroduce the rest of our energy industrial products, a mix that includes these products will initially impact gross profit in this segment. On the flip side, if additional demand is truly there we expect a disproportionate amount of it to flow to our bottom line, and our team will continue reducing our fixed costs, increasing our production yields, our uptime, and driving the right energy industrial pricing and mix. Continuing with the rest of our 2024 outlook, $55 million of positive EBITDA would translate into net income of over $2 million or $0.03 per share, assuming a share count of 76.5 million shares.

Delivering positive net income is a meaningful milestone that motivates all of us at Aspen. Our CapEx, without including Plant II, is expected to remain at $50 million for the year. This is for equipment to fund additional productivity gains at our Aerogels plant in Rhode Island, along with equipping our operations in Mexico with the tooling to ramp up our part production capacity in 2025. We are now planning to spend more than $30 million advancing the construction of Plant II in Georgia during the first half of the year to ensure that the site is advanced enough to preserve all of our investments made to date and to enable the potential re-acceleration of construction in the second half of the year. The team's ability to reduce the spend in Q1 reaffirms that the $30 million spent target here is still appropriate.

On the right side of slide 6, before I hand the call back to Don, I think that it's worth pausing and taking stock of the operational and financial journey that our team has been on over the past 15 months. Basic metrics of revenue growth, gross margins, EBITDA, and operating income that had to be up and to the right are getting closer to where we need them to be. These results are driven by the consistent execution of a plant that was put in place at a fixed cost level in the fall of 2022 and at a capital investment level in the spring of last year. Thanks to this, we are on a path where we can now scale revenues profitably, and the near-term outlook for 2024 is bright. Nonetheless, we remain cautious about the broader long-term industry dynamics while continuing to manage our costs and selectively optimizing our balance sheet.

We remain highly motivated and energized by the idea of continuing to advance our level of sophistication as we make the most of the opportunity that we have in front of us. We will do this without forgetting the most important of all things, our cost of capital. And with that, I'm happy to hand the call back to Don. Thank you, everyone.

Don Young: Thank you, Ricardo. Before we move to Q&A, I would like to boast with modesty about two awards our team won earlier this week. We were presented the coveted Automotive News PACE Prize for our cell-to-cell thermal barrier products dedicated to battery safety and performance. PyroThin is driving EV battery safety by combining thermal propagation protection and lifecycle mechanical performance. In addition, Aspen was honored with a PACE Innovation Partnership Award that recognizes our collaboration with General Motors in deploying our PyroThin cell-to-cell barriers as a thermal runaway solution for GM's Ultium battery platform. Automotive News' PACE program is recognized globally as the most prestigious innovation award for automotive suppliers, and we are deeply honored by this recognition.

These awards highlight Aspen's rich history of customer collaboration and game-changing Aerogel technology. All employees at Aspen had a hand in these achievements, and I want to salute the Aspen team here. Tash, let's turn to Q&A.

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