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

Good morning, and thank you for attending the Aspen Aerogels, Inc. MidCap Financing Announcement Conference Call. [Operator Instructions] I would now like to turn the conference call to your host, Neal Baranosky, Aspen's Senior -- excuse me, Aspen's Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may proceed.

Thank you, Karli. Good morning, and thank you for joining us for Aspen Aerogel's financing announcement conference call. With us today are Don Young, President and CEO; and Ricardo Rodriguez, Chief Financial Officer and Treasurer. The press release announcing this transaction and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com. 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 Page 1 of the slide deck as the content of our call will be governed by this language. I'll now turn the call over to Don. Don?

Thanks, Neal. Good morning, everyone. Thank you for joining us to discuss the debt financing that we completed yesterday with MidCap Financial. My brief comments touch on the background and expected strategic impact of the financing. Ricardo will describe the financing in more detail, including its impact on our financial strength and flexibility. We will conclude with a Q&A session. We are pleased to complete this financing with MidCap Financial. The financing is designed to provide the financial strength and flexibility for us to continue to drive profitable long-term growth. Earlier this month, we reported Q2 performance with record revenue, 44% gross profit margins and 25% adjusted EBITDA margins, leveraging and extending the momentum that we built throughout 2023 and during Q1 of this year. This performance and trajectory were key to our ability to attract the MidCap investment. As we pursued the capital, the 3 primary goals were to create financial flexibility, to lower our long-term cost of capital and to structure the financing such that it would fit hand-in-glove with our previously disclosed potential debt option for accelerating the longer-term construction of our second aerogel manufacturing facility in Statesboro, Georgia. We believe we accomplished all 3 objectives. Ricardo, over to you.

Thank you, Don, and good morning, everyone. I'll start on Slide 3 to describe the transaction at a high level. During our last couple of earnings calls, you may recall us mentioning that we were working on a range of debt options to reduce our cost of capital and fund our strategy. We thought that having a call to explain it now would be helpful to get everyone on the same page and to openly answer a broad range of questions that folks may have. Yesterday, thanks to our team's performance and the support of MidCap, we executed on a good part of these plans through a $225 million credit facility that is made up of $125 million term loan and a $100 million revolving credit facility. Both have a maturity of 5 years and then all-in cost of capital of under 10% assuming a SOFR rate of 5.3%. The term loan has a rate of SOFR plus 4.5% and a SOFR floor of 4.5% plus a ceiling of 7.5%. The revolver has a SOFR rate -- has a rate of SOFR plus 4.6% and a SOFR floor of 2.5% with no ceiling. The revolving credit line also requires a minimum drawdown of 30%, while the make-whole provisions of both notes during the first 3 years are of 3%, 2% and 1% prepayment penalties. Yesterday as this transaction closed, we used $150 million to cash-redeem the convertible note that subsidiaries of Koch Industries underwrote to Aspen in February of 2022. This note was accruing interest at a 9.5% PIK interest rate. The note also had the potential to be converted into equity at approximately $29.94 per share upon meeting various requirements. The redemption of this note is an action that we initiated to gain capital structure flexibility and to prevent this conversion value from placing an overhang on the company's equity. Yesterday, we drew down $43 million from the revolver in addition to the $125 million term loan. And this in combination with our cash balance at the end of the last quarter puts our post-transaction liquidity position at over $100 million with the potential to access an additional $57 million of the revolver as our asset base grows. This growth will primarily be driven by our accounts receivable. On the right side of the slide, we'd like to highlight a key feature of this transaction, which was engineered to provide flexibility for project financing for Plant II in Georgia. By excluding the collateral of Aspen Aerogels Georgia LLC, we are enabling project financing akin to our loan application pursuant to the DOE's advanced technology vehicle manufacturing, or ATVM loan program, which we've been discussing for almost 2 years at this point. Turning over to Slide 4, I'd like to spend a bit of time clearly describing the benefits of this transaction. The first is flexibility, as Don mentioned. The $100 million revolving line of credit is a very low-friction way to fund what may be an accelerated but very profitable growth of our business. The collateral structure enables attractive project financing to fit into our overall capital structure for Plant II. Lastly, as we've gotten to know MidCap over the last 9 months, we see in them a partner that Aspen can continue building a mutual benefit relationship with for the long term. The speed and transparency of this transaction is serving as a solid foundation for us to jointly build on. The second benefit, and one that we've been speaking about for some time, is the never-ending pursuit of the lowest cost of capital possible. We believe that not having a low cost of capital is like pedaling a bike on the wrong gear. By not having an equity-linked component doesn't place any overhang due to potential further dilution on our equity. The SOFR rate premium is better than what we've seen from assessing the debt market over the past 2 years and the floor is low enough to provide a lower cost of capital in a potentially decreasing interest rate environment. Moreover, potential Plant II project financing that is enabled by the collateral structure of this $225 million debt transaction is expected to be at approximately U.S. treasury rates. As typical with project financing, this will also likely be debt that doesn't enter repayment until the plant is commissioned and more than capable of generating its own EBITDA to cover debt repayment. Turning over to Slide 5 and to drive home the point on our focus on lowering our long-term cost of capital. If we look at our capital structure, these recent financing actions put us on a path to have sub-10% annual cost of capital debt in anticipation of project financing debt that could have an even lower rate. Our updated capital structure strengthens our liquidity position and enables potential operational performance to continue working disproportionately at creating earnings power for the equity. We believe that continuing to optimize this capital structure over the years, coupled with our team's collective talents and our asset base, puts us in a unique position to solve a broad range of mission-critical problems in large and dynamic markets. And with that, I'm happy to hand the call over to Q&A. Thank you.

[Operator Instructions] Our first question comes from Eric Stine of Craig-Hallum.

So can you just talk about -- I mean, obviously, you just had the call 2 weeks ago and it sounds like the DOE loan, you're well down the road there and quite confident in the outcome. But how does -- what you are announcing with MidCap, how does that impact the potential timing? Can you start earlier if necessary? Is there equipment that might be longer lead time that you need to access? Maybe just talk through that process and how you're thinking about it.

Yes. So I mean the equipment is already there. The equipment was ordered a while back, and we actually have a lot of flexibility within the project to be able to restart it as soon as we'd like, depending on when we need to plan buy. And so this doesn't affect the timing of our work stream with the DOE one way or another, Eric. As we mentioned, we're expecting a decision around the conditional approval imminently, right, from the DOE. And what this transaction does is it actually provides funding for the parent to be able to access those funds if and when they're available, and also to just help us fund the business here in the near term, right? As we've mentioned earlier, we're not expecting to resume the construction of the plant until we have a decision on the project financing for it, and that is still the goal or the timeline that we're sprinting on here.

Okay. I mean that's kind of what I was getting at there. So is this something where what you have executed on, I guess, yesterday that the DOE loan kind of needed that piece in place? Or are the 2 processes kind of just moving forward side by side?

Yes. I mean I think they both just complement each other, and we felt the need to have this done to fund the business in the near term to address the overhang of the Koch note, which I mentioned in my remarks, but then also to have the flexibility and the structure that would accommodate something akin to the DOE loan or the DOE loan itself as it materializes.

Our next question comes from Colin Rusch of Oppenheimer.

Guys, as you get rid of these Koch notes, can you talk about the importance of eliminating some of the approvals that were necessary because of that note from Koch on any sort of corporate decision-making?

I mean the note was actually very benign. Oh, sorry, Don. Go ahead.

No, no, go ahead. You're on the same track I was on. Yes, go ahead.

Yes. So the note is actually -- that's what happens when we're in different places. Yes, so the note was pretty benign. I mean in essence, the only limitation that it had being an unsecured note is that we couldn't put any debt ahead of it, in the capital structure, but also we couldn't add more than $50 million of indebtedness over a running 12-month period of time. And so we knew that we were going to have to deal with getting that consent one way or another. And we felt that, that consent was very likely going to come. But at the same time, even with that consent, we would have this note, but not necessarily have the ability just from a structural perspective to be able to add things like a meaningful revolver or this term loan that we've put in place and to have all of the collateral carved out in a way that we've landed here. And so that was really the main -- that was really the only slight approval that we would have needed in order to take on something like the Department of Energy loan for Plant II.

Colin, if I could just add one quick point to Ricardo's comment, which is, we did have some experience with this. You will remember an earlier financing that we did, we lowered the conversion price from approximately 35 to approximately 30, 1.5 years ago or so. And so we had some experience with working with Koch on this issue. And we could foresee that kind of thing occurring again in the future.

Okay. That's super helpful, guys. And then I guess from a customer perspective, what does the incremental liquidity and flexibility do for you in terms of the sales process? I don't know if that had been part of the process -- or part of the decision-making process here. But I just want to get a sense of any sort of customer engagement nuance that might have changed or shifted as a result of the incremental liquidity and increased flexibility here.

Yes. I mean on that regard, not much changes -- sorry. I think there's a delay on this thing. Go ahead, Don. Sorry.

No. I was just saying, broadly speaking, we know that our OEMs where we've had design awards and our prospective design awards from other OEMs are -- have an eye on our capabilities to build capacity to meet their needs as we get out in that '26 and '27 year -- year 2026 and 2027 time frames. And this is clearly an important step and I think a good indicator that we're on a strong, self-sufficient path here as we put the pieces together. So I just think it's a confidence builder for any OEM.

[Operator Instructions] Our next question comes from Ryan Pfingst of B. Riley.

Ricardo, you talked a bit about the potential interest rate for the DOE loan, but is there any color you could provide around how we should think about term and if it's a 30-year loan, or you're just expecting to pay the 30-year treasury rate with no additional fees?

I believe the DOE loan website references the 10-year rate, and that may be the best source of information for this, to be honest. There's not a ton that we can disclose beyond the website there, and that's a better source than us going into it. But I think they do reference a 10-year treasury rate.

Got it. And maybe just to switch gears here a little bit, but there was a report the other day about 1 of your customers potentially moving most of its line up to hybrid-only models and away from gasoline-powered vehicles entirely. Could you just remind us what Aspen's opportunity is when it comes to hybrid vehicles?

So battery packs in -- depending on the hybrid vehicle, I'm assuming you're referring to plug-in hybrid vehicles?

Yes.

Right? So yes, so a plug-in vehicle would have a battery that's roughly 1/4 to 1/3 of the size of an EV, so at least a good plug-in. And so the CPV would be about 1/3 of our CPV on prismatic cell vehicles. Most plug-ins tend to have prismatic cells. And so it's about $100 to $150 per vehicle roughly.

We currently have no further questions. So I'd like to hand back to Don Young for any closing remarks.

Thank you, Karli. Thank you again for joining us this morning to discuss the MidCap financing. And we appreciate your interest in and support of Aspen Aerogels. Be well, and have a good day. Thanks so much.

This concludes today's call. Thank you to everyone for joining. You may now disconnect your lines.