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

Our final slide of the day is -- we've got Aspen Aerogels. We've got Mr. Don Young, who's the CEO of Aspen Aerogels. He's been there since 2001, and we also have Ricardo Rodriguez, who is the CFO. Aspen Aerogels is based in Northborough, Massachusetts. The company manufactures aerogel products out of the facilities in Rhode Island and is planning to expand into Georgia for the next leg of growth. Initially, these aerogel products have been used for as a superior insulation in industrial and energy applications, where it derives the majority of its energy today. Over the last several years, an entirely new end market for aerogels has been created by providing superior thermal barriers for lithium batteries using EVs.

Gentlemen, thank you so much for joining us today. Maybe we could just start, Don, just maybe talk a little bit about your company just for people who aren't -- or maybe who're unaware of kind of what you're doing and how you kind of developed here, maybe just talk a little bit there that would be great.

Great. Well, thank you for having us as well. Our company, we're a material science company. We're 20 years old. We're sort of centered on what we refer to as our aerogel technology platform. And our strategy is to leverage that platform into large, important markets, especially those with sustainability themes, electrification. We started off in traditional energy settings, refineries, petrochemical plants, subsea pipelines and more recently, very active in the LNG business. And our value proposition, we're on pipes and vessels. Our value proposition is around thermal management, energy efficiency, asset protection and safety. And we started off with ExxonMobil in around 2007 or 2008, leveraged that work from our lab to their lab, on to their facilities and created these products dedicated to that market. And soon thereafter, we were serving all of their peers around the world. We have approximately $1.5 billion of material now installed in those sorts of settings. So tried and true and well-characterized material, working with virtually all the major companies and engineering firms around the world. I talked about this idea of leveraging into new markets. So -- and I also talked about the idea of safety, the safety nature of our product, in particular, the non-combustibility feature of it sort of in the land of hydrocarbon. So that was very important, of course, in petrochemical and refining settings. We were able to take that attribute in 2019 working with General Motors and using it, really optimizing that product. Think of this as a sort of flexible blanket material, optimizing that product to provide risk mitigation for thermal runaway in lithium-ion batteries in electric vehicles. So we're providing cell-to-cell protection with the goal of isolating, slowing the propagation or better yet, isolating the bad cell in the event of the thermal runaway. And we have had significant success in this space. We started with General Motors, and we're in their lithium -- sorry, in their Ultium battery platform, providing these materials for all of their Ultium platform vehicles. They obviously have great ambitions in this space. We followed that with Toyota. And we have, at our last earnings call, mentioned a third design award contract win. We're not quite able to name that company, although we anticipate doing so soon. And we have said that it is a commercial truck company within a large German automotive group. So I've kind of narrowed it down fairly well there. And we anticipate having as many as half a dozen of these awards by year-end. Our focus here in 2023 and finishing the year is to achieve our revenue targets. We have a rather wide guide of between $200 million and $250 million of revenue. We are in the midst of dedicating our first manufacturing plant, which is located in East Providence, Rhode Island, purely to our EV PyroThin business. That facility will have approximately $450 million of revenue capacity as a dedicated facility. And in support of our energy industrial business, we'll do approximately $150 million in that area this year and growing double-digit. We are using a supplemental supply of a manufacturing partner that we worked with over the course of the past year or so. So we're just initiating that and that provides another $150 million to $200 million of, let's just say, revenue capacity from that format. So where we are today puts us in a very strong position to drive our margins, to drive our positive cash flow and be a strong company financially. I might ask Ricardo to talk a little bit more about the financial profile of the company.

Thanks, Don. Yes. I'll use the slide that we actually used during our last earnings call to kind of paint the picture of what we can build here in the near term. As Don mentioned, I mean, our plant in East Providence, Rhode Island, gives around $400 million of revenue capacity that I think can actually flex up by potentially another $50 million as we change the mix towards supporting more prismatic cell vehicles with a thinner profile. And then Don mentioned, the $150 million of revenue capacity that we get from our contract manufacturer in China, so we have a company here that in the near term has a capacity of about $550 million plus. And from the get-go, we've been basically gearing it so that our material costs still make up more than 40 to 45 percentage points of sales. Our manufacturing costs were driving those to be between 20 and 25 percentage points of sales. And so that leaves us with gross profit potential of $200 million. And if you ask me, the true measure for us is being able to deliver 20% EBIT margins with this revenue capacity. And depending on the acceleration of demand that we see from General Motors and some of these other awards that we've gotten, that's what will really determine when we'll hit up towards that $400 million revenue capacity out of East Providence. I think that could be, on a run-rate basis, somewhere in the middle of next year or later depending on how that demand ramps up. And here on the right side of the chart, we basically showed how we've been tracking towards getting there over the past 5 quarters or so. And one of the main things that we've been focused on recently has just been even though the demand from GM hasn't come to the rate that it would enable these profitability metrics, we've been focused on driving down our costs and in essence, narrowing down the loss even though the run rate from GM is still when Q2 was pretty similar to what we did in Q1. But right now, as we are well into the second half of the year, we're seeing that demand from General Motors to ramp up. Our run rate on the EV thermal barrier side will enable us to start showing our ability to generate gross profit there, and our OpEx, I think, is at the point where we're not focused on growing it anymore. We're actually optimizing it with the intent of keeping that at about $100 million a year. And so that is kind of the walk of how we'll be pretty well positioned next year to start demonstrating that the business model works and that the cost structure is set up to make the most of this $550 million of revenue capacity that we'll have.

So if we think about the kind of pace of EV adoption in the U.S. that we're talking about. You're talking about 3 suppliers, maybe I think you'd say up to half a dozen maybe by next year. How do you see that ramp-up happening? What are you following? Is it the Gigafactories that are being built and they're building the cells and your products going to those cells. So are you kind of watching all those happen? Are you concerned there's any delays in that kind of building up? So how are you kind of -- you're sort of on the tail on all this. So I'm just kind of curious how you're sort of thinking about this and your visibility on this growth over the next few years.

Well, it is hard to predict and there are a lot of macro factors that are there. I made the comment sometime that in 2021, we had a financial market and a lot of projections around the pace of EV adoption that we would say in building our capacity, we can't afford to be late. And in this more challenging financial market, in some sense, we're in a position where you almost can't afford to be early in some sense. You can't build hundreds of millions of dollars of capital expenditures, building plants in anticipation of it. You have to time it fairly well. And that's been one of the nice parts of this strategic move that we've made of the supplemental supply and the dedication of our Plant 1 to get the kind of profile that Ricardo has described. So there's no question. I mean, General Motors is behind in their projections from a couple of years ago. Having said that, we -- first half of the year, we had between $25 million and $30 million of revenue from General Motors in support of their Ultium program. And for the -- we're projecting for the year $70 million to $90 million from General Motors. We haven't -- so you can start -- and we're feeling the acceleration now of that ramp. For this late in the year, our revenue guidance outlook is between $200 million and $250 million for the year. That's an enormously wide range right now. And I think it's just reflective of the fact that it's hard to predict that ramp. There's a lot of talk right now about the UAW strike as well or the potential strike, which is kind of interesting. We feel, at least with respect to 2023, to be highly interested in it, and it could impact our revenue a bit, but not to the point of getting us outside of our range. And so it's one of the reasons why we've maintained that range and that kind of level. In terms of the adoption of the EVs, but also the adoption of thermal barriers, just maybe it would be helpful for me to describe what these thermal barriers do actually. They really have a dual purpose. I talked about the thermal management part of it, the fire safety aspect of, again, cell-to-cell protection in the event of a thermal runaway, isolating that bad cell and to avoid -- to enable any evacuation and to avoid the car melting fire that it inevitably occurs when this happens. And so it's that. But the second part of this is that we provide a mechanical aspect. As those cells expand and contract with each charge, we're holding them in place, providing constant face temperature or pressure, I should say, on those cells, which is a critical aspect of just the day-to-day use of these cells. And we are either reducing or replacing foam-based materials that have served that purpose to date. And so there's a -- it's a complicated set of requirements in a very difficult environment and we have an excellent solution to it. So our feeling is that all EVs and battery platforms will have some version of bioprotection and risk mitigation, whether it's because of regulation or for, let's say, internal purposes, it's clear to us that all companies are going to adopt these kinds of solutions.

And right now, they don't have any. There's no requirement for this. And we just -- there is a foam solution. So...

Well, the foam solution does the one aspect of it, it does the mechanical part of it. But I mean, these foams are fuel in some sense. I mean, they're gone in a second and so -- in the event of a thermal runaway. So they're providing one of the aspects, and they're quite expensive. And so our ability to displace them and do both roles, again, helps our value proposition.

So does the GM or will the other OEMs have to redesign their cells in order to accommodate the...

We're seeing them do it already anyways. So if you think of the EVs that are on the road right now, right, those are first-generation EVs or a mid-cycle refresh on those EVs. For us, when we think about the opportunity, right, we're really focused on the EVs that are being developed today or that are being launched right now. So is the case with General Motors and some of the Germans. And the main thing that sort of gates compatibility for us is the form factor of the cells inside of the battery pack. So the EVs can be made with cylindrical cells, which are -- think of it as a bunch of literally thousands of D-sized cells put together to make the battery pack. And we're not very directly compatible with those. But we see that 70% of the market as early as 2025 is going to be either prismatic or in the pouch cell form factor. And that's where -- I mean, literally, right now, we're in discussions with every OEM that has that form factor as they develop their vehicles. And we've got -- if you add up the value of all the quotes that we have out there, where we're engaging in development and negotiations that combined with the awards that we've gotten, it's about $15 billion of revenue potential through the end of this decade. And so that's what we're tracking in essence, which OEMs are launching the biggest opportunities with prismatic and pouch cells. And our content-per-vehicle opportunity is significant. I mean on a vehicle with pouch cells, right now, depending on the size of the pack, we have anywhere from $700 to $2,500 a vehicle and on a vehicle with prismatic cells, we have around $350 to $450 a car. And so yes, I mean, a lot of OEMs are developing their launches as battery platforms, which is the case with GM, and that's a very unique and large opportunity. Some of the Europeans have vehicle platforms that will underpin multiple nameplates for different brands. And that's where one of those is where we've gotten the LOI with the luxury division of a German OEM and then others are literally going nameplate by nameplate, but there's also battery joint ventures that are making battery packs for multiple OEMs, and we have several of those opportunities in the pipeline as well. And so that's, in essence, what our commercial team is adding to their pursuit list and managing as we work our way into creating the market for this year.

Let's say project out, so let's just say, 5 years or maybe 2030, whatever the best way to kind of look at, but a little bit more longer term. You just said there's different types of batteries, not all of which are applicable to what you're doing. We also have LFP coming out, which is going to become a growing part. So I'm just kind of curious from your projections, what percentage of that EV market is a potential market. I'm just -- is it like half? Is it 70%?

70%.

70%.

Yes, so I mean the 2 big variables are really the form factor, which we already covered. And then the other one is the chemistry, right? And so right now, as all of these OEMs are chasing range, they're all having NMC or nickel-rich chemistries with LFP being pushed particularly in China, given the cost. A lot of these LFP vehicles, you can't park them in a parking structure in China, given that they're also likely to go into thermal runaway. And as some of the OEMs in the West are using LFP and pushing that chemistry to the max, we're already seeing some opportunities that we're quoting for LFP cells.

For LFP vehicles. I thought it was...

Yes. And so if you put LFP and NMC chemistries combined, I mean, that's 90% of the market here through the end of the decade. And we actually had some slides in our Q1 deck around this. And so the main gate for us is really just the form factor, not really the chemistry in the near term.

So who do you compete against? You mentioned of, is it just traditional technologies on the foam or...

Yes, it's really an emerging -- we don't really -- the foam is doing an element of it, but again, not really addressing the thermal parts. So for the foam in some of our configurations, we're actually mating up with that product ourselves and having a combined package, if you will. The competition really, this is an emerging area for us today. And so we're not unlike our traditional energy business, where we were displacing materials that have been used for decades really in a relatively low-tech environment. This is really in sort of new territory. And the vast majority of vehicles prior to now have been without thermal barriers, at least as we think about them from fire protection point of view. So we see materials that sometimes can do the fires part of this and sometimes can do the mechanical part. But I think we stand alone in our ability to address both of those characteristics with a single solution.

So you're focused in the U.S. right now, all the OEMs, you mentioned of all U.S. manufacturers. What about in Europe? How are you thinking about the rest of the market? Obviously, a much bigger EV market outside the U.S. right now.

Yes.

Yes, I mean we're supplying Toyota right now as well. So we're on our nameplate with Toyota, and they're actually -- the Aerogels goes to Japan because that's where the vehicles' final assembly. And then yes, I mean, in Europe, we've got 2, one award and one LOI that's being developed. The Aerogel will still come out of the U.S. But eventually, there will be a need for part assembly in Europe to support some of these other customers.

If we were to ask our -- so 2 points, one is we've always been very much of an international company, just again with our traditional energy business, 2/3 of our revenue historically has been outside. So we've got a nice footprint and are oriented, if you will, as an international company. If you ask our development team, our sales group on the EV side, which region will be largest for us in 5 years, none of them would hesitate, they would all say Europe. And I think some -- the adoption rates, I think that some of the sensibilities around engineering and safety and thermal management are such that there's a good chance that the European market could very well be our largest market.

So how do you think about your manufacturing footprint in East Providence, giving a visit about 10 years ago, I think, so really not sure how much different it looks today. You were talking -- you're in the process of building out in Georgia, I think you're slowing that -- you discussed slowing that down a little bit. Can you talk about kind of the pace of that? And also, I'm curious do you think you're going to need manufacturing internationally as well?

So today, our footprint, if you will, is our manufacturing facility in East Providence, Rhode Island, again, being dedicated to our PyroThin EV solution supported by our supplemental supply for our energy business. In addition to that, so we take our aerogel blankets. Think of these as 5-feet wide and several hundred feet long. And we fabricate them in Mexico. So we're making our parts alongside other Tier 1 suppliers in Mexico and then move those products back up into the United States or abroad. It is clear to us that we will have to replicate the fabrication portion of this in Europe as that business ramps up. They'll want us to shorten the supply chain. We're not anticipating needing to build an aerogel plant per se there, just that fabrication capability. But -- so that's the way we're thinking about it. You did mention Plant 2. Yes, we have paused the construction of that, and we've taken it to a point where we are within 12 months of being able to turn on of the capacity. So in the meantime, our focus is on creating that $550 million business, 40% -- 35%, 40% gross margins, generating cash, EBITDA over $100 million and managing our costs carefully at the OpEx level, and really demonstrating the profitability of this business and enable people to project out that when we do, in fact, bring on the second plant, and we continue to win OEMs, that we can have a business substantially larger than that. But at least we've really shown that the model is strong and cash-generating.

So this is sort of proof of concept a bit over the next year or proof of manufacturing, I guess, if maybe that [indiscernible].

It's really -- for us, this is really strong blocking and tackling, frankly. We're not creating new technology. We're just executing our strategy, and we've got a terrific group of people where revenue today between $200 million and $250 million for this calendar year. But as Ricardo said, our OpEx and our structure can support that $500 million business. So we do not have to add costs associated with getting to that scale at next point.

Just my last query, just curious about the kind of input costs, a lot of chemicals. Can you talk about some of the chemicals that are involved in the process and how much of those fluctuate? Can you hedge those? How do you keep control? I'm sure it's something that keeps Ricardo up at night.

Yes. I mean the volume is actually pretty simple. So I'd say 70% of it is made up of 2 things, silanes and this glass fiber batting, which is used as the substrate for the product. And then the rest is made up of CO2, a few chemical additives, energy and, of course, labor. When it comes to the glass fiber batting, there we've actually gotten some pretty long-standing relationships with several suppliers, companies like Saint-Gobain, other suppliers in China. And that's actually pretty steady. We've invested in capacity within those suppliers to enable the ramp, and we're pretty well positioned there, and the cost of that has been pretty stable, and it's actually going to come down as we scale up our production. On silanes, I mean, that did get tight during COVID, and there was a lot of demand for that last year, in particular. And that did bring our costs up, but now it's interesting. It's all reversed back and further to the point that we have pretty large suppliers of silanes trying to get us to commit to longer-term buys. And we've been pushing that out. I think we'll have to commit at some point here in October. But that's been a very favorable cost tailwind here that actually gave us some incremental performance in Q2 that we were not originally expecting when we were planning for the year. So they brought our cost down by about 4% that when we were budgeting, we just didn't expect.

Great. Gentlemen, that's all the time we have. Thank you so much, Don.

Thank you very much.

Ricardo, thank you very much.

Thank you.