Aspen Aerogels, Inc. (NYSE:ASPN) Q3 2023 Earnings Call Transcript

Aspen Aerogels, Inc. (NYSE:ASPN) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning. Thank you for attending Aspen Aerogels, Inc. Q3 2023 Financial Results Call. All lines will be muted during the presentation portion of the call with an opportunity to questions and answers at the end. I would now like to turn the conference over to your host, Neal Baranosky, Aspen’s Senior Director of Corporate Strategy and Finance. Thank you. You may proceed, Mr. Baranosky.

Neal Baranosky: Thank you, Elliot. Good morning, and thank you for joining us for the Aspen Aerogels fiscal year 2023 third 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. 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. 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?

Don Young: Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q3 2023 earnings call. My initial comments will highlight our Q3 performance and Q4 outlook, the status and impact of several critical elements of our strategy and our EV OEM development pipeline. Ricardo will dig deeper into our financial performance and our business strategy. Ricardo and I will expand upon last week’s announcement related to our upgraded revenue and adjusted EBITDA outlook for 2023 and the addition of Audi and Scania to our list of OEM design awards. We will conclude with a Q&A session. Q3 revenue was a record at over $60 million. PyroThin thermal barrier revenue was $33 million, surpassing that of energy industrial of our energy industrial business for the first time.

We believe PyroThin thermal barrier revenue for the second half of 2023 will be 3 or 4 times larger than it was for the first half of the year. Gross profit for the second half of 2023 will be 2 or 3 times larger than for the first half of the year. Energy Industrial activity remains strong while the team manages through a supply constrained period as we shift Plant 1 to produce PyroThin thermal barriers and, quote, test the system of our planned supplemental supply for Energy Industrial. We are making good progress on both initiatives. In addition to the ramping of the PyroThin thermal barrier business, a highlight for Q3 is the continued progression of our gross margins through 2023, 11% in Q1, 17% in Q2, 23% in Q3. We anticipate continued gross margin expansion in Q4 as we progress on the path to achieving our targeted 35% gross margin.

Based on our Q3 performance and current momentum, on October 24, we announced a revenue outlook of at least $225 million, favorably modified from an earlier outlook of a range between $200 million and $250 million. The UAW strike has not impacted our revenue, but we will remain cautious until the tentative agreements have been ratified and the auto workers are fully back to work. We also announced an improvement to our 2023 adjusted EBITDA outlook from a mid-point of negative $50 million to a mid-point of negative $35 million, our second enhanced adjusted EBITDA outlook in as many quarters. The improved outlook for adjusted EBITDA is driven by higher volumes, leading to a fuller fixed cost absorption. We expect this trend to continue in Q4.

Also, on October 24, we announced the additions of Scania and Audi, both part of the Volkswagen Group, to our list of design awards. We expect revenue from these two awards to commence during 2024, scale in 2025 and be significant contributors in 2026 and beyond. We anticipate the opportunity to serve other European OEMs as well and continue to believe that we remain on track to reach our target of six OEM design awards by year-end. Two key elements of the implementation of our strategy are first, the full conversion of Plant 1 in East Providence to PyroThin thermal barrier supply. And second, the commencement of our supplemental supply dedicated to our Energy Industrial segment. We believe that both strategic initiatives will be functional in early 2024.

A third key element of our strategy is the balancing of growth, scale, and profitability, which includes the right timing of Plant 2 in Georgia. Our focus prior to the restart of full construction of Plant 2 is to utilize our existing assets, supply arrangements and current commercial opportunities to build a business that has the potential to produce annually approximately $550 million of revenue, approximately $200 million of gross profit, and approximately $140 million of EBITDA. We believe we are well-positioned to attain this level of performance. Current industry headlines citing uncertainty related to EV capacity investments by OEMs and to the ramp for EV demand are consistent with the underlying assumptions we have used since early 2023 informing our operating and investment plans.

Given the challenging capital environment, we are working to avoid unnecessary dilution for our shareholders by seeking to operate from a position of operational and financial strength, and potentially by partnering with the DOE Loan Programs Office, with whom we remain in close contact regarding our Advanced Technology Vehicle Manufacturing loan application. We believe a more measured ramp in OEM EV production may enable us to have a capital efficient growth path utilizing our current assets that leads to profitability in the near-term and without sacrificing our full growth opportunities in the longer-term. Ricardo, over to you.

Ricardo Rodriguez: Thank you, Don, and good morning, everyone. I’ll start by covering our third quarter and year-to-date results before moving on to the 2023 outlook and then handing the call back to Don. For this quarterly call, I don’t have any meaningful strategic updates to cover, and I’m happy to simply focus on reporting our results. With the third quarter representing an important transition period towards higher revenue run rate levels that enable meaningful reductions in our operating losses. Our strategy is also yielding positive developments in our commercial pipeline, such as the recent conversion of the LOI from Audi into an award, and our gearing up of production to begin supplying Scania at higher volumes next year.

As Don mentioned, we feel confident in our ability to receive additional OEM awards as we focus on delivering results with our existing assets. To cover our performance, I’ll start on Slide 4 beginning with revenues. We delivered $60.8 million of revenue in Q3, which translates into 66% growth year-over-year and 26% growth quarter-over-quarter. As Don mentioned, this was an all time company record. We didn’t suffer any supply disruptions, thanks to the team’s efforts over the past 12 months in Rhode Island and Mexico to preemptively manage our supply chain. Year-to-date, we have delivered $154.5 million of revenue, which reflects a 28% year-over-year increase. Year-to-date, energy industrial revenues were $97.3 million, an 8% year-over-year increase.

Given our limited aerogel production capacity in Q3, we continued to focus on optimizing our energy industrial product mix to lighten the load on our operations by making those products that require the least standard hours of processing and deliver $27.9 million in sales, reflecting a 21% quarterly decrease and a 13% year-over-year increase. As we’ve previously mentioned, our energy business is sold out. We have a clear line of sight to about $216 million of annual demand and currently have approximately $118 million of backlog in orders to fulfill over the next few quarters. To fulfill this excess demand, we are focused on continuing to optimize our mix for steady supply during the remainder of the year and bringing in supplemental supply as soon as possible.

EV thermal barrier revenues of $32.8 million were up 175% year-over-year and 160% quarter-over-quarter, reflecting the accelerating ramp in GM’s production of Ultium platform based electric vehicles and steady volumes in the Toyota nameplate that we supply the bZ4X. General Motors has more than doubled the production of models that we supply them on quarter-over-quarter. Our year-to-date EV thermal barrier revenues were $57.2 million, representing an 88% increase when compared to the same period in 2022. Next, I’ll provide a summary of our main expenses. Material expenses of $22 million for the quarter made up 36 percentage points of sales, continuing to reflect the work that our supply chain and procurement groups have put into reducing the cost of some of our main raw materials.

We see this as temporary relief and the result of conservative planning as well, so we will remain vigilant with the goal of ensuring that we can keep these below 40 percentage points of sales. The Q3 performance enabled our total year-to-date material costs to be of $58 million, or 38 percentage points of sales, or 200 basis points favorable to our target of 40 percentage points of sales. Conversion costs, which we describe as all production costs required to convert raw materials into finished products were of $25 million, or 41 percentage points of sales in Q3. These costs include all elements of direct labor, manufacturing overhead, factory supplies, rent, insurance, process logistics, quality and inspection. These results compare favorably to conversion costs in Q2 of this year, which were a 46 percentage points of sales.

This is the result of much better fixed cost absorption on our aerogel production costs, driven by the higher sales run rate level of this quarter. As previously mentioned, our long-term target for these costs at a roughly double revenue run rate is of 20 to 25 percentage points of sales. So we aren’t done managing these. While we’ve made improvements primarily thanks to the efficiency of our operations in Mexico, we need to continue capturing additional opportunities to reduce these costs. Looking ahead as our teams start running all lines of our aerogel plant in Rhode Island to make PyroThin without any switchovers and find their flow, we’re sure that we’ll see some efficiencies. In Mexico for EV thermal barrier part assembly, this week we have a focused team with all hands on deck on increasing the uptime and throughput of our encapsulation and assembly equipment to drive efficiency and enable the next potential step up in demand.

The launch next year of simpler designs for prismatic cells on a new set of encapsulation equipment that can be shared across programs will drive additional efficiency. Year-to-date, our conversion costs of $69.2 million reflect 45 percentage points of sales, and our performance improvement year-over-year here has been primarily driven by fabricating $9.9 million of subsea products within our Energy Industrial segment in Mexico versus in Rhode Island. In Q3, company level gross profit margins were of 23%, and our gross profit of $13.8 million is a $20.2 million improvement over our gross loss of $6.4 million during the same quarter last year. Our Energy Industrial segment delivered $5.8 million of gross profit, or 182% year-over-year increase.

In EV thermal barriers, we delivered $8 million of gross profit in Q3. If we compare this quarter with Q2, our EV thermal barrier gross profit improved by $9.1 million on incremental revenue of $20.8 million. Our third quarter of 2023 gross profit in EV thermal barriers was $16.4 million higher than the gross loss of $8.4 million that we incurred during Q3 of last year in this segment, reflecting the benefits of starting to operate at a revenue run rate that aligns with the size of our operation. The resulting gross profit margins during the quarter were 21% and 24% for our Energy Industrial and EV thermal barrier segments respectively. Year-to-date, our gross profit of $27.3 million reflects a $36.7 million improvement in gross profit versus our gross loss of $9.4 million during the same period last year.

Operating expenses, which are sized for a near-term projected annual revenue capacity of over $550 million were $28.4 million. These ran up in the quarter above our target range, as we had several one-time expenses related to the reallocation of our resources from support functions and overhead to further building our technical capabilities. Approximately one-third of our quarter-over-quarter OpEx increase of $3 million was driven by strategic investments in resources tied specifically to accelerating EV thermal barrier product development and commercial launch activity, with specific customers tied to unannounced OEM awards. Putting these elements together, our adjusted EBITDA was negative $7.3 million in Q3 compared to negative $23.2 million during the same period last year, resulting in a $16 million year-over-year reduction in our EBITDA loss or a reduction of 68.5%.

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 Q3, these other items included $2.8 million of stock-based compensation, $1.3 million of interest income, and $2.2 million of employee retention credits from the government. Our net loss in Q3 decreased to $13.1 million or $0.19 per share versus a net loss of $29.6 million or $0.75 per share in the same quarter of 2022. Our quarter-over-quarter net loss decreased by $2.3 million from $15.4 million. Our year-to-date net loss of $45.3 million is $27.8 million lower than our loss of $73.1 million during the first three quarters of last year, or down by 38%.

Next, I’ll turn to cash flow and our balance sheet. Cash used in operations of $7.5 million reflected our adjusted EBITDA of negative $7.3 million and cash used for working capital of $1.5 million, offset by interest income of $1.3 million. The key items that resulted in a usage of working capital were an increase in accounts receivable of $10.2 million, an inventory of $1.1 million offset by an increase in accounts payable of $1 million, and accrued expenses of $6 million, and a decrease in prepaid expenses of $1.9 million. Our capital expenditures during the quarter were of $32.3 million. These put our operating cash needs for the quarter at $39.8 million. $10 million of our CapEx was spent in closing the main buildings of Plant 2 in Georgia and helping bring the Plant 2 a healthy resting spot while securing the site.

While the remaining $22 million was spent on continuing to tool up our facilities in Mexico to support the EV thermal barrier capacity ramp of 2024 and 2025, while covering the last invoices of the construction of our recently opened Advanced Thermal Barrier Center. The conversion of our remaining lines in Rhode Island to making PyroThin is also covered by these $22 million. We have incurred $255 million in capital expenses through the end of the first quarter – through the end of third quarter towards Plan 2 in Georgia. We ended the quarter with $94.6 million of cash and shareholders equity of $409.8 million. This balance is over $20 million higher than our expectations going into the quarter, as we have manage to reduce the quarter-over-quarter cash burn of the company by $33.9 million or 46% to $39.8 million versus $73.7 million in the prior quarter.

Turning over to Slide 5, I’d like to spend some time recapping the last 15 months and cover where we’ve been before going into our updated financial outlook for the remainder of 2023. On the left side, you can see how we’ve improved the company’s gross profit margins from 11% in Q1 of this year to 17% in Q2 and 23% during the most recent quarter. Our adjusted EBITDA loss has also shrunk from a loss of $23 million in Q3 of 2022 to an adjusted EBITDA loss of $7 million in the most recent quarter. In Q3, it’s no surprise that the lion’s share of our 26% quarter-over-quarter revenue ramp was driven by 160% increase in demand for PyroThin EV thermal barriers for General Motors Ultium platform vehicles. GM has more than doubled its production run rates for Ultium powered vehicles from Q2 into Q3, and barring any interruptions we expect this ramp to continue.

This ramp in demand from General Motors drives a revenue guidance range to above $225 million for 2023. Running at an implied $70 million or above quarterly revenue run rate for Q4 enables us to lower our EBITDA range to a loss of $30 million to $40 million a loss reduction of $15 million versus our prior range of negative $40 million to negative $55 million of adjusted EBITDA for the year. As we factor in the effect of meaningful interest income and a different amortization schedule as we operate with less deployed capital, we’re also lowering our net loss guidance for the year from a loss of $75 million to $85 million to a loss of $52 million to $62 million. This improvement of $17 million represents an 18% and 17% reduction on the lower and upper end of our prior guidance range, respectively.

This also brings our earnings per share guidance to an updated loss range of $0.76 per share to $0.90 per share. With $147.7 million of CapEx spent year-to-date, we realized that we’re very close to our previously stated CapEx guidance of $150 million for the year. Last quarter, we mentioned that we would only increase this amount if we saw a very clear picture of a 2024 EV thermal barrier demand increase as the second half of 2023 materialized. Now that we’ve experienced this ramp, we think that it is prudent to spend up to an additional $25 million in Q4 of 2023 to enable additional capacity improvements for thermal barrier assembly in Mexico and improvements to our aerogel plant in Rhode Island, as well as preserving the value of our assets in Georgia.

For Plant 2 in Georgia, October was really the first month at which the spend level crossed below our target level to preserve the site. Now that it has arrived at a healthy resting spot with all the equipment that is on site secured in a temperature controlled environment. These $25 million would bring our CapEx spend for 2023 to $175 million and enable us to flex up to supply a plan that isn’t as constrained as our original expectations for 2024. In the near-term, we continue focused on managing the company with at least $75 million of cash on the balance sheet and are pursuing non-dilutive sources of financing such as working capital, lines of credit, asset backed loans, equipment leases, and other instruments that leverage our current asset base.

You may remember that on June 15, we terminated our ATM program and that we have not sold any equity in 2023. Turning over to Slide 6. At this point, you’ve heard Don and I outline for several quarters and in every meeting that our team is focused on making the most of our existing assets and leveraging our partner in China to have approximately $550 million of revenue capacity and deliver 35% gross margins as we get close to maximizing this capacity. While I’ll let you digest this slide on your own, showing how our quarterly results of 2023 compare with this North Star, it’s easy to see how on a run rate basis, the profitability of our business has been positively evolving during the first three quarters with progressive increases in gross profit from 11% in Q1, 17% in Q2, and most recently, 23% in Q3, at a $244 million annual revenue run rate, that is still only 44% of our potential capacity.

When we compare the last 12 months – to the prior 12 months, our revenue run rate has increased by 41%, while our material costs have decreased by 17 percentage points of sales and our manufacturing costs have decreased by 10 percentage points of sales. Our OpEx has basically remained flat as a percentage of sales and these have enabled us to shrink our EBITDA loss by 47%. These results are the benefit of right sizing and right timing our capacity ramp. And as we look ahead to 2024 and 2025, we will continue adopting the same approach to posting results on the board without being influenced by headlines of a slowing demand for EVs and retimed OEM investments. We believe that we may have been very conservative and cautious in our plans and are encouraged to see the updated reality continue to be above our expectations.

The OEM ramp delays of the past 18 months and rising costs of capital have taught us a lot, and we are confident that these learnings will enable us to continue playing offense by posting results and then making investments versus the treadmill of constantly playing defense by working the other way around. With that, I’m happy to turn the call back to Don.

Don Young: Thank you, Ricardo. We have covered a significant amount of ground today in reviewing Q3 and our near-term outlook. Before we move to Q&A, I would like to emphasize our focus on driving significant profitability from our existing resources and opportunities. We believe the near-term business profile as we have it constructed and again consistent with our current assets and commercial opportunities has the potential to produce on an annual basis approximately $550 million of revenue, approximately $200 million of gross profit, and approximately $140 million of EBITDA. We believe Q4 will be the next significant step towards this level of business performance. At the same time, we believe that we maintain our full longer term upside potential as we continue to win design awards from EV OEMs to expand our profitable base load of energy industrial revenue and to leverage our aerogel technology platform into additional high value markets, including our ongoing work in battery materials.

The key point is that we are seeking to avoid unnecessary dilution for our shareholders by optimizing the use of our existing assets and opportunities to create a dynamic and cash generating business. With that, we welcome the Q&A session.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Colin Rusch with Oppenheimer. Your line is open.

Colin Rusch: Thanks so much, guys. With the cadence of these incremental wins and the start of production, can you talk a little bit about the dynamics around sell in to just fill the channel and get these guys supplied up to start production and how much actual sell through you’re seeing on the vehicles at this point.

Don Young: Sorry, Colin, maybe just to clarify, so sell through on the end of General Motors specifically, or is this more related to additional OEMs?

Colin Rusch: The dynamic we’re trying to get after is how much of the growth is really coming from selling into the OEMs. And as you have an incremental cadence of new program wins, there’s going to be growth to support the production. But there’s a lot of concern around how these vehicles are selling and potential stagnation in terms of growth at some point. So that’s the dynamic we’re trying to get after.

Don Young: Yes. I mean, I think there’s sort of two parts to thinking about this one, right? I mean, we’ve known that some of these EVs have been sitting in lots for over a year at this point, right. And we factor that into our conservativism as we factor in the volume plans, not only when we are making our own plans, but also when we’re quoting these opportunities. And when it comes to Ultium specifically, it’s a little tough to assess how close General Motors is to hitting the demand limit when they only produced, we estimate around 14,000 vehicles in Q3. And there’s roughly 3,000 to 4,000 Chevy dealers in North America. And that doesn’t even come close to getting up to the limits of consumer demand for these vehicles.

So we do think that GM has ways to go in terms of ramping up production before they start to see any limit on consumer demand. Now, as we look at additional opportunities, kind of going to the second part of the question, I mean, we – in the same way as we plan the ramp from GM, and we truly have learned a lot through the delays with GM’s ramp on how to deploy capital in these opportunities, how to design the processes to execute them. And we apply a very similar level of discounting to some of these opportunities in 2025 and 2026 that we’re being awarded here in the near-term. And it’s worth noting that, once an OEM puts together a sourcing package for a vehicle that is two to three years away, a lot of work has already been done and a lot of investment has already been made.

And so we do feel pretty good about our ability to get more wins for this 2025 and 2026 time frame. Now, additional programs, I think for that 2027 and 2028 timeframe, we do expect that to continue being retimed and frankly, see the recent news of some retimed EV investments as something that was kind of inevitable, just given everyone’s cost of capital. And we were surprised that it actually took this long to ratchet back some of these investment expectations. But we still feel very good about the opportunities that we have in the horizon for 2025, 2026. And even if we go back to our plans in 2021, we have not had to adjust those downward based on what we’re seeing.

Ricardo Rodriguez: Colin, I would just add, I think the momentum that we’ve had moving from Q2 to Q3, I think you’ll see that momentum continue for us here as we move into Q4 into the new year.

Colin Rusch: That’s super helpful. Thanks so much, guys. And then as you work through contracting on new product wins with these new customers, the value of both mechanical and the thermal performance of the material is becoming really well understood. I guess, I’m curious about any potential for price leverage on your part or at least price preservation, even as you get into higher volumes with some of these customers, given that mechanical performance.

Don Young: Yes. I mean, for us, it’s really not just about the underlying merits of the material and the critical problems that it solves, but also the amount of capital that we’ve deployed and that we will continue to cautiously deploy here and an emphasis on paying it back, right. So we will manage pricing in a way that kind of come hell or high water, we really align with the gearing that we’ve presented here on Slide 6, for example, right. I mean, we want all programs and all sales that we execute here to not pull us away from this path of getting 35% gross profit margins, and we’ll manage pricing to do that.

Colin Rusch: Thanks so much, guys.

Don Young: Thanks.

Operator: We now turn to Eric Stine with Craig-Hallum. Your line is open.

Eric Stine: Hi, Don. Hi, Ricardo.

Ricardo Rodriguez: Hi, Eric.

Eric Stine: Hey. Good morning. So maybe for me, I know in the past you had talked about that $550 million run rate, 25% EBITDA margin, and very good slide appreciate that, that you gave this morning. I think previously you’d said thought that was possible in the next four to six quarters. And I know you’re managing the contract manufacturer and ramping things up and you’re constrained in EI and all of that. Is that still something that you see as possible on a run rate basis by, I guess, your expectation had been 3Q of 2024.

Ricardo Rodriguez: It’s not unlikely, I mean, we actually included a slide in the back for everyone’s benefit on. If you just look at GM alone and the ramp that they’re in, right, so kind of in spite of the headlines, if you just look at the IHS ramp and if you see GM’s intended ramp, it’s even higher than this. But there’s the potential for them to just continuing doubling production every quarter for at least two more quarters, right. And the implications of that on our revenue run rate, supplemented by the supply from China for our Energy Industrial business, put us on this path to be able to get there. Now, whether it happens in Q2, Q3, Q4, we’re just cautiously managing it. But we do see it as something that is still possible.

Eric Stine: Understood. Yes. Just making sure that’s still kind of the expectation that is helpful. And then maybe for my follow-up, maybe just an update on the DOE loan that you’re in the mix for. I know previously you’d talked about potentially hearing kind of next steps by year end and the expectation that if you’re invited for further diligence, that’s a great sign towards the eventual award or possible award. Just curious if that’s still the view.