Aspen Aerogels, Inc. (ASPN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Aspen Aerogels' update conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, John Fairbanks. Please go ahead.

Thanks, Tanika. Good morning, and thank you for joining us for the Aspen Aerogels update call. I'm John Fairbanks, Aspen's Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don Young, Aspen's President and CEO. Press release announcing the detail of Aspen's agreement for a private placement of common stock with Koch Strategic Platforms is available on the Investors section of Aspen's website, www.aerogel.com. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately 1 year. Please note that our discussion today may include forward-looking statements, including any statement regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact. These forward-looking statements are subject to risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in these forward-looking statements. A list of factors that could affect the company's actual results can be found in Aspen's press release issued today they are discussed in more detail in the reports Aspen files with the SEC, particularly in the company's most recent annual report on Form 10-K. The company's press release issued today and filings with the SEC can also be found in the Investors section of Aspen's website. Forward-looking statements made today represent the company's views as of today, June 30, 2021. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. I'll now turn the call over to Don.

Thank you, John. Good morning. Thank you for joining us for this call to provide additional commentary on our $75 million private placement with Koch Strategic Platforms or KSP. Today, I will describe the transaction itself, the value of KSP as a long-term investor in Aspen and the intended use of proceeds. John and I welcome questions following my brief remarks. The private placement was comprised of 3,462,124 common shares at a price of $21.63 which represents a 10% discount to yesterday's market close. The shares are unregistered, but we are committed to register them within 75 days. The transaction is expected to close today. Koch Strategic Platforms, KSP, is part of Koch Industries, one of the largest privately held companies in the world. KSP is focused on investing in companies with significant growth potential, that is reinforced both by accelerating disruptive trends and also where Koch's broad knowledge, capabilities and resources can add value beyond the investment dollars. We believe we have the opportunity to double revenue every 24 months through this decade. The challenge associated with this level of growth is significant and the investment and resources from KSP strengthen our ability to implement our growth strategies. We are focused on ensuring that our PyroThin thermal barriers become OEM-agnostic and the industry standard. We are accelerating the development of our carbon aerogel program within Aspen battery materials. We are leveraging our existing strength in energy infrastructure, including in emerging energy technologies. We are also focused on building Plant 2 and the supporting supply chain. With these opportunities in mind, it is terrific to have KSP's world-class global capabilities available to our team. With the close of KSP's investment today, we will have approximately $100 million on our balance sheet at the end of Q2, which aligns our balance sheet with the size of the opportunity before us. It demonstrates to all automotive and battery OEMs that we have the resources to be an outstanding technology partner and supplier for the long term. The strength of our balance sheet also allows us to remain aggressive in making strategic investments, including for the construction of our Plant 2. We are completing site selection, are engaged in design and engineering and are preparing to purchase long lead time items and initiate construction. We plan to build Plant 2 in a modular way and the exact size and cost of Phase 1 of the plant will be determined by the number of additional PyroThin thermal barrier contracts we win this year. In time, we may require additional capital. And if so, we will explore a variety of paths that may include customer or partner financing, debt or additional equity. Our shareholders' best interest will always be central to our approach in how we finance Aspen's future growth. KSP's investment bolsters our strategy to leverage our aerogel technology platform into multibillion dollar opportunities in high-growth, high-value markets and strengthens our position to be a global technology leader in sustainability. I now would like to turn the call back to the operator and to welcome questions. Thank you.

[Operator Instructions]Your first question comes from the line of Eric Stine of Craig Hallum.

Congrats on what you've announced. So curious, I mean, the doubling -- the commentary on doubling revenues every 2 years through the end of the decade, clearly, that's different commentary, more bullish commentary than you have ever provided. Just curious what you're seeing, what gives you the confidence to put that in print, say, that on the conference call just generally from the market and the specific OEMs that you are engaged with?

Yes. Thank you, Eric. We've been clear for some time now that we are targeting a doubling of revenue from '21 to '23, which gets us that $225 million level approximately 30% gross margins associated with that. We've also said that we have the opportunity to continue to double revenue, including we've been specific '23 to 2025 as well. We do feel that we have the opportunity to continue that doubling, and it really comes from the breadth of opportunities that we have, certainly, within the PyroThin thermal barrier market addressing thermal runaway, but also in some of our activities in energy infrastructure, and in our battery materials business as well as we get a little deeper into the decade. And there's no question that the investment from KSP supports and bolsters that -- those opportunities or our ability to fulfill those opportunities. So we're feeling very strong about our business today and feel like we're in a very, very strong position to live up to those high expectations.

Yes. And then, clearly -- well, with what you have secured here, you're moving forward on Plant 2, I mean, I would assume, though, that beyond 2025 or if you get into 2026 and these are the growth opportunities developing as you anticipate, as you said, that would likely mean that you would -- there'll be more capacity to come. Obviously, a high-class problem, but more needs in support of that, but you can get to at least 2025, I would think, please confirm, but would plan to.

Well, what we have said is that we -- our Plant 1 has roughly $250 million of revenue capacity. And that Plant 2, again, just rough estimates as we build out Phase 1 in subsequent phases, we have about twice that much capacity. That's our outlook today for that facility. We would move as we require additional capacity to perhaps an additional plant when the time comes. But we think the $500 million manufacturing plant is a substantial size plant. And it's been clear also with some of our large customers with the longer-term contracts that they would like to have a diversity of supply. And given the protected nature, our version of that is to have multiple plants and for them to drive diversity of supply in that manner. And so, yes, it's -- a $500 million Plant 2 is our target.

Yes. No, that's great. I guess my mistake. I did not know that it was planned to be that big. So that is great news. I guess last one for me. As this market develops on the EV side, you've certainly seen OEMs, I mean, pretty much on a -- it seems continual basis upping their targets, upping their aspirations. So just curious what has that meant for kind of movement in the 3 buckets that you always talk about in terms of level of engagement?

Yes. Thanks, Eric. The -- you are right, we see it every day upping the commitment, the number of models, doing them more sooner as well is a real positive for us as the world moves to electrification. I think you will -- we're seeing significant activity levels within that business development funnel really at all 3 levels, additional players coming into that, let's call it, the initial engagement part of the funnel, but also significant activities in Stage 2 in the final stage as well, we'll continue, of course, to update you and our investors on progress that we're making. And of course, we have our earnings call coming at the end of July, July 29.

Your next question comes from the line of Alex Potter of Piper Sandler.

I had a follow-up question on that one. Obviously, I agree it's basically indisputable at this point that OEMs are focusing more and more on electrification. The question I had specifically for you is, do you have visibility on the downstream products that you are being spec-ed into? Are these high-volume mass market type products? Are they higher-end luxury type products? Just any commentary you can give around how comfortable you feel with revenue visibility would be helpful.

Yes. Interesting, what -- and I know you're a keen observer of these things out, what we have seen, we're active in all 3 major regions. Let me start there. And that sort of suggests, I think, that there's a range of vehicle sizes and models across those regions. We have seen an orientation from certain of the automotive OEMs to start at the larger end of their fleet, maybe the more luxury end of their fleets as they convert. And we have seen that. And John and I have said in the past that a ballpark number of content per vehicle is in the range of $275. We've also said that, that can range from $100 to $300 per vehicle, depending to your question, depending on the nature of the vehicle, the size of the vehicle: sedan, SUV, truck, et cetera. And so our visibility is really around the announced rollout of various models. And it's a range, I would say, from SUVs and trucks to, I would say, smaller SUVs and sedans, type equals. Those are the ones that we're furthest along on. I know that's kind of a broad answer, but it's really kind of across the board and multiregional where we're having our success. It's critical for us, and I mentioned it in my comments to be OEM-agnostic and to become the industry standard in these -- for these thermal barriers. And because of -- not every OEM is going to win. And so it is important that we're kind of across the board opportunities and that we are associated with the winners. I can tell you that the ones that we're working most closely with are extremely committed to electrification and the amount of investments that they are making is significant.

Okay. Great. That's helpful. And then maybe one last one, thinking longer term, if you focus on this submitted set of global auto OEMs, but clearly, they're thinking beyond sort of the 3- to 5-year rollouts for these vehicle platforms that are coming out in 2022, 2023, if you look toward the end of the decade, how far along are you with these folks in your discussions for more advanced battery materials looking beyond just thermal runway?

Yes. It's interesting. So many of the meetings that we've had with the automotive OEMs, we have been -- let me say that there have been representatives from the automotive OEM that are focused on, let's call it, Gen 1 and the rollouts that we're seeing of model year 2022, 2023, 2024 kind of time frame. But we've had cases to where the team has included representatives who are already focused sort of on the Gen 2 part of their launches and their battery platforms. And so that's reinforcing for us. We -- as you know, we also have our carbon aerogel program, our Aspen battery materials with a first focus on silicon-rich anode materials. And we are making investments in that to be able to keep up with the demand for evaluation samples that to provide to significant battery OEMs and automotive OEMs and their development programs. And we are going to be able to do that as early as this coming month here in July. And we've, of course, announced previously our work with SK in Korea and with Evonik in Germany. Again, we have a small handful of others that were quite deep in, and I would characterize them as automotive OEMs, battery OEMs and emerging companies on the battery side as opposed to some of the standard large companies. And so that development, we're very excited about it. And we do, especially when we think about the decade, we know that it will be a value contributor to us and we're confident it will be a value contributor to us throughout that, especially in the second part of the decade as we work through these development programs. We've also I would say expanded our -- at least the articulation of the opportunity to not only be focused on supplying that silicon-rich anode material, but also to provide our carbon aerogel host materials, our scaffolding material for others to in-print, if you will, their own silicon programs on to this very unique structure that we have, this carbon aerogel nanoporous highly conductive, our ability to manipulate pore size, and uniformity of those pores. It's -- we've made significant advancements technically as we've continued to expand our team and our capabilities. So again, it's an important area. This investment from KSP allows us to continue to keep our foot on the accelerator for these kinds of opportunities.

Your next question comes from the line of Doug Becker with Northland Capital Management.

I was hoping to get a little more color on what Koch actually brings to the table as a strategic investor. It looks like yesterday, KSP also made an investment in the lithium ion battery maker. And so maybe if you could just expand on, yes, the capital is very helpful and needed. What else do they bring to the table that maybe we might not appreciate?

Well, as you know, they are a very, very significant company with significant resources, and let's just say a business of their own. And those businesses include, for example, Georgia Pacific, a very, very significant company with significant operations in the state of Georgia and many other places as well. We're focused on building our second plant in that area. And so as we work through the details of site selection and engineering, frankly, the resources that a Koch can bring to us from their experience base are just invaluable to us almost feel like it's -- well, just to have that strength on our team is just -- is terrific. And for us to be able to call on those resources are very important to us. KSP itself has focused on a range of investments, one of which you cited, but they've made several investments in the energy transformation that is going on. And so if you think about our own process, let's face it, 90% of our revenues is in energy infrastructure, and we've been very focused on advancing that and being sure that, that is an important part of our business. And we've made initial strides in areas, of course, in LNG has been a major contributor to us over the course of the past 5 years. We believe there are additional energy technologies within energy infrastructure where we can continue to advance, and Koch is very focused on many of those. So again, we feel like we've got an excellent teammate. KSP has made a variety of investments in e-mobility and I think that creates an ecosystem of itself. Again, that can be very beneficial to our company as we move into these new markets.

Makes sense. And I know in the past, you've mentioned that the balance sheet was definitely of interest to the automotive OEMs. Would you characterize it as a sticking point as being -- from preventing the announcement of a second or third thermal barrier contract or just a logical step to moving toward that? And ultimately, just trying to get comfort that another 1 or 2 announcements before year-end is still reasonable expectation.

It's a good question. There is no -- there is -- it is clear that -- and we know it from our meetings with various automotive OEMs that they do spend some time on what might be called business continuity, right? They are designing us in to significant platforms and programs that they have, and they just want to be sure that we have the ability to keep up with them. And so having a more robust balance sheet I think, puts some of those kinds of questions to rest. And frankly, to your earlier question, Doug, I think the alignment with KSP also, frankly, supports those kinds of ideas. And so we're -- we feel that this was a very, very important investment for us, both from a dollars point of view and also just from the broad shoulders that a KSP brings to the party.

And just to try and pin you down, but still reasonable to be expecting an additional announcement or 2 before year-end, not trying to get too focused on the timing, but...

That's a fair expectation.

Okay. And then just one clarification. Do you think you can get to revenue capacity with Plant 2 of $500 million in 2025 without additional financing? I didn't know if that's what you were trying to imply or just wanted to clarify on that.

No, I did not. I hope I did not mean to imply that, if I did. No. Again, we'll build this in a modular fashion. And so the Phase 1 portion of it will have both our first operating line for additional capacity, but it will also have the infrastructure that will support subsequent lines. It's a little bit out of the playbook of our building of Plant 1. We're we actually built that in really in 3 or 4 different stages over the course of time. And the modularity aspect of it just -- it works well in the sense that -- you do not have to necessarily build a gigantic facility with the hope that somebody comes, we can build it as we win these contracts and as we have continued visibility on winning these kinds of contracts. So it's a -- we're able to make those investment decisions with more confidence building it in this manner. But we'll be able to continue to expand it in subsequent phases until we get out to that kind of $500 million revenue target number. That's our current thinking.

Right, right. Got it. And just fair to say that with $100 million give or take on the balance sheet, shortly. Don't need to raise additional capital in the short term, but in the intermediate term, probably likely.

I think that's a good assumption as well, Doug, yes. We're in a good spot right now.

Your Next question comes from the line of Jed Dorsheimer of Canaccord Genuity.

Guys, congratulations. It's -- this is -- it seems like it's perfectly aligned. So nice job.

Thank you. Thanks.

I guess first question, regarding -- so I guess just with respect to KSP, was their interest spread equally between the energy side and transportation side? Or was there a heavier weighting in terms of the opportunity as they looked at and kind of went through their diligence process?

KSP itself is very focused on new energy technologies in the transformation. And so I would put them a little bit more on the spectrum of our electrification opportunities. Having said that, I think it's also fair to say that KSP can well relate to the transformation that we're making as a company. Again, as I said earlier, 90% plus of our revenue from energy infrastructure. We've laid a strategy that we're executing, I think, quite effectively to have our own service transformation, and it's not that we're going to move entirely from one to the other, we're adding. Our energy infrastructure remains interesting and important to our company. And we believe that our value propositions really are around resource efficiency, asset resiliency, safety, will resonate yet even more in the next sort of phase of, let's call it, traditional energy. And as we've talked about before, Jed, the LNG business has been interesting and successful to us. We also have further opportunities from there. And let's call it, as we've talked about, say, in the hydrogen space and the significant opportunities around thermal management there, and we're deeply rooted in cryogenic thermal management and fire safety around the storage and transportation of these liquid fuels. So there are some terrific emerging companies in that space, but I also believe that, that space will have large traditional companies play major roles in the development of the hydrogen economy. And those are many of the companies we've worked with for 15 years. And so...

Got it. So good strategic fit kind of interested in the overall business with a heavier weighting on sort of your Pyrogel and the electrification, but not to discount their interest on the other opportunities that you're working?

That's fair, Jed.

So just jumping into the Pyrogel and specifically your auto OEM customer a bit more. I guess, a specific question, have you validated your samples with them because there is a specific process of going through the qualification? So I guess, have you validated your A samples to this OEM or any other OEMs for the -- specifically for the Pyrogel?

Well, so on the thermal barrier side, our PyroThin thermal barriers as we refer to them as, we have gone through a rigorous program and not only with our initial North American OEM win first in a development phase and then in a very rigorous or acute process, but also our development funnel in this space. That second stage is where they're doing fundamental testing of our materials in the context of thermal runaway. But it's that third stage where we've advanced to fabricating multilayer parts doing system testing, system integration and specific models or specific battery platforms. And participating in prototype fleets of vehicles as well. So it is highly tested and integrated into their program.

Got it. But there is -- autos, even in EVs, has a very specific validation process. So maybe have you -- or it sounds like you have, but just to be clear, have you already gone through the sample A validation process at this point and you're moving towards your C sample process?

Yes, I know -- I understand what you're referring to from a sequence point of view. The answer is yes. We're responding to specific purchase orders today to have 4 vehicles to be delivered later in 2021. And so I would just -- we're through that process with our most advanced customer and working our way through that process with the next group, and it is moving relatively quickly. And that's why I was confident to answer an earlier question that we will have additional production contracts coming in the months ahead.

Well, that's great. So I guess last question for me, and then I'll jump back in queue. But if I think of the sequence and you we're kind in terms of pointing out the doubling of revenue every 24 months, which requires and necessitates that new facility. So you have about $100 million of headroom in your current facility that you've gone through the validation and the qualification process with this customer, as you point out, to deliver on product this year. As you think through the adding of the plant, there's going to be an important sequence in terms of -- in order to hit that doubling because that new plant is going to require a qualification process. So could you just help me on the timing associated with the call process of bringing a new plant and from -- not just building and getting it running, but actually running validation of the qualified products through that plant before you can then recognize those revenues?

Yes. That's a good question. So our roadmap to that includes a qualification period. And that comes as we get into the latter part of 2023, and we expect to have that facility, let's say, fully qualified as we move into 2024, Jed. That's our -- that's the timing that we've laid out, and we're very much on that schedule.

Well, listen, congratulations again. It seems like you -- this is a great opportunity. KSP seems well aligned with your strategic vision, and it's really encouraging to see the progress.

Thank you, Jed. Really appreciate it. We feel very, very fortunate to have this investment in hand.

And your final question on the line of [indiscernible] H.C. Wainwright.

It's Amit from H.C. Wainwright. Congratulations on securing this investment. Is there any concentration in revenues guys in terms of this outlook at this point, at least?

Well, so the first doubling, which we've been a little more specific about in terms of the path to it, so the first doubling $225 million, 30% gross margin in 2023. John and I would not have laid that out if we didn't feel we had multiple paths to that number. And those paths include a restoration of our energy infrastructure business back to our 2019 pre-pandemic levels. And we have said along the way that we are confident that there is pent-up demand on that side, both on the maintenance side of the business, and on the project side of the business. And we've been encouraged in the early signs here in Q2 of seeing some of that pent-up demand start to play out, especially in regions that are further along in the pandemic than other parts of the world. And so that portion of the $225 million feels solid to us. We also have the contract that we have announced previously, which calls for approximately $75 million of revenue in 2023. So those 2 things alone get us very, very close within $5 million or $10 million of that $225 million target. Having said that, we have additional paths of course, by -- with more automotive OEM wins in the thermal barrier side of the slate. So we have those additional pathways. And perhaps by 2023, the energy infrastructure, just simply saying we're going to get back to 2019 levels. Maybe that's a relatively modest goal. And that we do believe that we can continue to grow that side of our business over a longer period of time. So again, I would just say that we have multiple paths to that $225 million target number for 2023. Again, that's accompanied by a 30% gross margin.

Yes, that was going to be my other question, Don. Just thinking about contribution from many adjacent efforts, you're working on the battery technology itself. Would it be too optimistic to assume any contribution from -- or any material contribution from some of these adjacent efforts as a part of this outlook? Or is most of this outlook based on your view of the opportunity associated with that runaway product?

Yes, certainly, the doubling from 2021 to 2023 is made up of energy infrastructure and thermal barrier work on the automotive OEMs. So I think as we look at subsequent doublings, we do have the opportunity to bring in additional revenue sources that I would say, include the Aspen battery materials work that we're doing. And I think some of the -- let's call it, new energy parts of the energy infrastructure side of the -- there are certainly opportunities there that could contribute. Again, those energy infrastructure products can be produced, of course, at our first plant and at our second plan as well. So I haven't mentioned this earlier, but the great part of our Plant 1 and Plant 2 is designed in such a way that we're able to produce both energy infrastructure and PyroThin thermal barriers on the same assets with the same team. And so we have some flexibility in there as well. And I would add LNG and hydrogen, for example, some of the thermal management challenges on the cryogenic side, again, from that same equipment. So it does provide us flexibility in terms of being prepared to meet a broad range of demand opportunities.

And at this time, there are no further questions in queue.

Thank you, Tanika. I appreciate it. Thank you for joining us this morning and for your interest, of course, in Aspen Aerogels. This is a terrific day for our company, and we look forward to being with you again to report our second quarter 2021 results to you on July 29. Thank you very much. Have a great day.

This concludes today's conference call. You may now disconnect.