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

So we don't know of any company quite like Aspen Aerogels. We often talked about transferable skill sets in our energy services, our products and services in traditional energy that have new emerging markets and new energy. Well, no one has done it quite as well or as quickly as Aspen Aerogels with an established product line in traditional energy, seeing a step change in revenue and profitability as a supplier to electric vehicle batteries. I'd like to introduce Mr. Ricardo Rodriguez. He joined Aspen in November of 2021. Serves as the company's CFO and Treasurer. Prior to CFO, he was Chief Strategy Officer. He has a wealth of experience in the auto industry, having worked for Aptiv, Clearmotion, GM, Amazon and a number of other players. Ricardo, thank you very much for joining us today.

Thanks. Thanks for having us. Thank you.

So let's just start with the basics here and just sort of familiarize everybody with your business here. Can you just talk about the basics here? What are aerogel products and kind of what makes them superior to traditional products?

Yes. So aerogel at the core is a material with a very open nanostructure. And in the case of our insulation products, which are based on silica, they are, in essence, a very good thermal isolator. And by very good, I mean, 5x to 10x better than anything else that would be second. You can go on YouTube and you'll see -- literally, you could have 800-plus degrees Celsius or 1,500 degrees-plus Fahrenheit on one side of a centimeter of our material, and you could hold your hand up at room temperature on the other end of it. And so the first market that we cracked, as you mentioned in your opening remarks, was the energy industrial insulation market. Think of oil refineries, basically very hot applications with piping there where you want to preserve the energy that you spent warming up something within a very tight envelope. Then we moved on to cold applications with a set of cryogenic products in LNG, liquefaction, LNG storage, very cold tanks, et cetera. And then more recently in EV as a cell-to-cell barrier, right? And again, it all really stems from this notion of the material being an amazing thermal isolator, very extremely fire resistant. And then in the case of EVs, the new requirement was added to the list, which was basically a very compressible and recoverable mechanical properties. So anything that you put next to the cells of an EV needs to be able to get compressively compressed without placing any undue pressure on the cells. Otherwise, you cause what you're trying to solve, which is thermal runaway, and that's what our product has been doing here for a couple of years now.

So maybe let's just start off with the industrial energy business and kind of where you started here. So maybe just kind of start initially, I think this is about 20 years ago, so initially kind of how did this develop and what was the initial applications for the aerogels?

Yes. So the initial applications for aerogels were actually spacesuits with NASA. Again, on this quest to find a material that would provide a lot of thermal isolation with a very thin profile. And then as the team really honed in and developed the process, which is highly patented and proprietary to us, and it's, in essence, taking a glass fiber substrate and impregnating it with a solution of -- its in essence, blended ethanol rock in ethanol, and then creating the aerogel. Because anybody can make aerogel in the lab, but it would be a very brittle material. Think of it as an ice cube if you could take out the water, that's what it would -- and it'd be kind of useless because you wouldn't be able to mold it around any shapes. It'd be so brittle and fragile that if you dropped it, it would just shatter. And so what the company pioneered is making it in a form that you can actually apply and wrap around pipes and cut into shapes and mold, et cetera, right? And that was the breakthrough. And so the first market that the company worked over a long time to build the demand in was the energy industrial insulation market. And if you get certified by the likes of an ExxonMobil or one of these large asset owners, then you only have to deal with 8 people to capture what can be a pretty large market. And that was the strategy that the team took. Right now, we have about $150 million of supply to meet that demand in that end. But we -- over the past couple of years, we've seen demand really increase coming out of COVID as these asset owners think longer term around the value that everything that's in these sites provides. And we believe that we have more demand in the energy business than what we can supply with our little $150 million external manufacturing facility.

So you're putting -- basically, this is upgraded much more efficient insulation on mining and petrochemicals. What are some of the other end markets that...

LNG facilities. We recently announced in our earnings call that we were in a carbon recapture project as well. And then there's also a market of subsea pipe and pipe insulation. So if you think in the Nordics, the heavier this insulation is, the more the pipes can sag and it's critical to keep the oil at lukewarm temperature so it can flow through the subsea pipelines. And that's a market that we pretty much had to ourselves here for the past 10 years. And as we've optimized our way to supply it and more recently set up our operations so that we can supply that profitably, we're now leaning more into those projects and they're helping us get to the margins that we've had here recently.

So you recently shifted a lot of -- all your manufacturing, I think just about all your manufacturing, for this business from East Providence to China, correct? Can you talk about kind of why you did that and some of the benefits you've seen so far?

Yes. So I mean, we have an amazing sales team that has been with the company, in many cases, from the beginning. And so when General Motors came and gave us the award to supply the Ultium battery platform with our earlier iterations of our cell-to-cell thermal barrier design, we knew that we were going to run out of aerogel supply at some point from Rhode Island. And it's kind of insane, right? I mean we -- the company has spent 20 years building up demand in this energy industrial market. We've always believed that it could be a very profitable segment if the revenues were above $140 million a year. And to have that get sundown simply because we can't supply it because we're ramping up the EV thermal barrier business was extremely painful. And so our head of sales on the energy industrial side, along with the rest of the team, started looking for alternate sources of supply at around the middle of 2023. And we went to China, had a bunch of conversations with folks that had assets that could potentially make the product. And it wasn't until February of last year that the team could actually go to China to physically validate how they were making all of the samples that were being shipped back and forth. And that's when we saw that there were about 9 months of remaining work to do in order to validate them to the point that we could put our brands on their products and sell them as if they were ours. And then some initial tests of the product, the feedback was very positive. The product is actually less rusty than some of the stuff that we were producing in Rhode Island given some changes in the formulation that our team made in order for that to work with the assets that the external manufacturing facility had, and it's worked out very well. And this year, we just continued to certify more and more of our 11 SKUs within that product line. And as I said, we'll do over $150 million of revenues this year, most of that being supplied by the external manufacturing facility.

When do you anticipate reaching full capacity in China? And do you have opportunities to expand from there?

I think here in Q4, we will very likely reach the maximum of the capacity that's there. It's no secret. It's implied within our guidance that the energy segment needs to do at least $42 million of revenue per quarter here in the second half. And so yes, we're expecting that supply to be fully on for all SKUs definitely in the fourth quarter. And then there's potential to increase our capacity further with some of the investments and the development that we've made there in Q3. We've had a brief shutdown that the team is managing here in Q3 to enable further supply. And our team also continues chasing additional demand. So we believe that, that business can grow in like the low double digits.

So this has been your established business, which has kind of been there for -- kind of provides this base revenue, base margins. But the real story is about thermal barriers in this new market that has kind of developed. So maybe can you explain, first of all, what is thermal barrier -- one of the thermal barrier use is for thermal runaway, but can you explain kind of what thermal runaway is and how your products solve for this?

Yes, absolutely. So you may recall those Samsung tablets in 2018 that were catching on fire in planes, or when people put them in their bags and they got squeezed between stuff or when they sat on them, these tablets would literally just ignite. That, in essence, is thermal runaway as you read about it on USA Today, I guess. But what it really is, is for various different reasons, you have the positive and the negative side of the cell short, and the lithium-ion electrolytes that are in between are highly flammable. And various different things can cause the anode and the cathode to come in contact. The main one is a buildup of all old -- basically like dried-out lithium on the anode side of the battery. And that buildup happens as you charge, discharge and just use the battery in -- outside of how people expect you to use it. You charge it very quickly at very low temperatures, you build up these dendrites. The buildup becomes enough that it breaks through the separator and then, boom, the cell goes. If a vehicle is involved in a crash, your in essence rupturing the cell, somehow you can make the positive and negative side come together and there you go. And so -- at the same time, it's -- this whole notion of thermal runaway is also the expression for -- let's remember, these battery packs in these vehicles are made of hundreds of these cells lined up in a bank, right? In the Tesla with cylindrical cells, you have thousands of these cells. So if one starts heating up, it will heat up the one next to it and the one next to it and the one next to it. And the temperatures are pretty high. I mean these are 800-degree Celsius thermal events. And so the #1 job was to prevent the spread of this heat inside. Like before you have the explosion, which is, again, super low probability, you'd want to be able to manage the current, the power and the temperature of each cell individually and the controls in the vehicle enable you to do that. But if physically you cannot constrain the hot cell which is heating on its own, then you've got a problem. And so that's where GM came to our team looking first to address thermal runaway or thermal propagation, which is -- and then over time, the requirements have tightened up and have been developed further. And this whole notion of having that material behave like a very pliable foam has become more and more important. And so that is what we're solving. And a lot of the EVs that you see today, before we were around with this type of solution, OEMs would put a barrier to shield the overall battery pack. Something like a mica sheet or a sheet of metal, and that buys you a little bit of time. But you've seen how some of these fires on EVs that only have a pack barrier, they require a ton of water and a ton of time to put out. And so OEMs are now thinking about addressing this closer to the source. And if you address it at the cell level and you isolate the cell that's heating up, then you're able to get a lot more performance out of the battery. So I mean, we are seeing OEMs that truly leverage our design for a cell-to-cell barrier and go from a cell to pack design, they're able to regen energy faster, charge batteries faster, have to worry less about dealing with high temperatures. And they're able to adopt a very different control strategy than an OEM that doesn't really know what's happening inside of the battery pack thermally between one cell and the other.

So you said your anchor customer is GM, and so are you providing thermal runaway to all of their batteries?

Now we are, yes. So since the Bolt was taken out of production, we've been supplying every single vehicle -- every single EV that GM makes on the Ultium battery platform. So this year, GM expects to make anywhere between 200,000 to 250,000 EVs on that platform.

An entirely new market that wasn't there a year earlier.

Correct. Yes, I mean when I joined the company at the end of 2021, we did $7 million of EV thermal barriers. I'm not joking, we had about 250 people in the room about the size of this room with tables hand-assembling all of the parts in order to ramp up production for General Motors in 2021. And then now we have two 150,000-square foot facilities with about 600 people and a bunch of automated equipment cranking out, I believe, it's about 130,000 parts a day.

And it's essentially the same manufacturing process as with your industrial energy, correct?

For the aerogel rolls themselves, yes. This is actually where the company has gotten a lot of operating leverage, right? So if you look at our process in Rhode Island, the main constraint is volumetric. So we take the rolls and put them into a cylindrical mandrel, which is where we pump supercritical CO2 and make the aerogel. Our energy industrial products are anywhere between 10 million and 20 million meters of thickness. On the automotive side, the product is a close cousin of Pyrogel. But the thickness is anywhere between 2 to 3 millimeters, in some cases even thinner. And so what used to be maybe a 120-foot long roll of insulation is now 6,000-foot long roll of insulation. And assuming that you're selling each square foot of area at about the same price, that's where, all of a sudden, we've gotten all of this operating leverage out of the Rhode Island assets to support the EV business, to increase our capacity to about $500 million per year out of the same equipment that was making -- the same equipment and the same process that was making the energy industrial insulation.

And that was about $120 million, right? So you went from basically $120 million up to $500 million.

Correct. What we did have to add was all of the assets in Mexico. And the team actually developed an automated process for taking the roll, feeding it through a die cutter, outcome a bunch of rectangles that need to be encapsulated with resistant film, dimensionally checked at every step of the process. And then in some cases, we actually assemble some foams, some seals and other materials to be encapsulated rectangles of aerogels to ultimately end up at the cell-to-cell barrier part. And so the average vehicle would have about 100 of these parts inside of the pack, one between every single cell. And I think we've said before that on a vehicle that has pouch cells, it's about $900 to $1,500 per car, depending on the size of the battery pack. And on a vehicle that uses prismatic cells, it's about $350 per vehicle. And it's not a total net add for the customer because in the place where we take it between each of the cells, they would usually have to buy some sort of polyurethane foam that's pretty expensive. So in the case of the pouch cell vehicles, they'd be buying about $350 to $400 a foam. And in the case of the prismatic cell vehicle, they'd be buying about $150 to $200 a foam. And so -- but that foam, that 300-degree Celsius basically adds fire -- adds fuel to the fire. And so we think we provide quite a bit of value and protection for a small increment. And when you put that within the context of the overall battery pack, the battery pack costs at 150-kilowatt hours, you're talking about $13,000, $14,000 batteries. So $900, $1,000 which you could save makes a lot of sense. Especially when you have recalls like the one of the Chevy Bolt, where GM learned the hard way. That recall cost them about $1.8 billion. Even to this date, they're paying some customer $6,000 to have them sign away the liability claim, if the vehicle burns anything around it, if it goes into thermal runaway. And so I think we're seeing OEMs become more and more safety oriented around thermal runaway, especially as they try to push the energy density of these packs to the max, right? If you look at all sorts of EV consumer surveys, they will all tell you that in the West, people want an EV to have 400 miles of range. Right now, realistically, there's only 3 models, out of our plethora of models that have been launched, that meet that requirement. And so as all of the OEMs go and try to provide 400 miles of range, for better or worse, they can only work with the chemistries that are currently developed, that are already on the shelf, that are tested and validated to be sold to consumers. And those chemistries are NMC, NMC and then pick your form factor, right? And so trying to make NMC work and to provide consumers with 400 miles of range, do it safely and to really push the edges of controls, you kind of need to address thermal runaway at the source, which is in between the cells, and that's what we're trying to help them do.

So is foam the only other competing product that prevents thermal runway? Is there any -- who else you compete against? What are the other options that the OEMs have?

Yes. So initially, we were tested alongside some ceramic-based materials, like ceramic papers or mica sheets, but you would need about 2x to 3x the thickness and the weight to deliver the same level of thermal isolation. And then those materials are very brittle. So they actually don't meet the mechanical requirements and they could actually cause thermal runaway. And then if you are stacking something that is 2x to 3x thicker, 50x over on each side of the pack, then you cut by up to 20% your ability to add material that actually stores energy. And so that's what we've been competing with initially. But now that we've built our own dataset and customers are becoming more understanding of what we do and their requirements and particularly the mechanical one, they're really seeing us as having a nice lead on the market. There are some other solutions that are aerogel-like, some of the work around our IP is you could make aerogel particles and put them together inside of some form of vacuum-sealed bags. But those products, after even 10 mechanical cycles, you end up with just a bag of dust and they don't deliver the thermal life solution that's required. And so that's another material that the OEMs loosely tested about a year ago, and we're seeing -- we saw a lot of press releases from companies announcing those products. But they really only scratched the surface at meeting the requirements of the OEMs.

So how are you thinking about growth in thermal barriers over the next few years? You have GM, which is ramping up this year. Would you expect them to kind of stay at that kind of 200,000 vehicle range there and then are you adding on other player on top of that? So ultimately, what are you thinking about in terms of growth for the segment?

Yes. So for us, I mean, the way we look at General Motors, it took them a while to ramp up. Right now, they're working their way up to a healthy base of about 200,000 vehicles. For our guide, we actually have them at 180,000 vehicles. The Honda Prologue is actually made by General Motors. We were really encouraged in July and throughout the second part of Q2 to see the sales of that vehicle. So we actually expect about 45,000 Honda Prologues made by GM to have our product. So we think GM will probably end up at around 225,000 vehicles this year. Now we know that the regulatory environment in the U.S. is calling for a much higher EV mix than where the EV market is today. So if you look at the EV market this year, just year-to-date, it didn't grow at all compared to last year. Tesla is losing a lot of share. And the gainers have basically been the OEMs that we supply, Toyota, GM. We'll start production next year with Audi, with Stellantis, with Porsche. And then we have another German OEM that nominated us for the business that we haven't announced yet. And so we'll ramp up other customers in the second half of next year. But for General Motors, which is a big driver of our revenues in that segment, we know in 2026 that the U.S. EV market needs to be at least 15% of new vehicle retail sales. Right now, even if you include Tesla, Rivian, Lucid, the 100% EV makers, the U.S. market is scratching 8%. So the EV market, if the regulation sticks and there's 3 sets of regulation, right, the CAFE standards, the EPA emission requirements and the car emission requirements that Rule 18 states that make up over 40% of the U.S. car market, the EV mix needs to double in order for all these OEMs to comply in 2026. And so even for General Motors and these other OEMs, we kind of know what the 2 dots are. So where we are in '24 and where we need to be in '26 for these guys to not have to pay a ton of fines. And so 2025, I think is likely going to be a bit of a midpoint. I think IHS has GM at 312,000 EVs next year. If GM gets there, we'd be ecstatic. But we're pretty focused on continuing to add other OEMs in addition to the ones that we have. And just through process of elimination, similar to on the energy side how there are only so many energy companies, the next ones for us to chase are Ford, Volvo, the Koreans and the rest of the Europeans, and I think we can build a pretty valuable business now that we've demonstrated that we meet the requirements and that the business model works, and that we've got healthy margins that will enable us to pay back all of the capital that we're deploying.

All right. Now, you're just focused on the U.S. market right now for this?

Europe as well. So I mean, Europe is -- I think a lot of these awards, actually, the vehicles are being made in Europe. So Audi, the next generation Audi A6 that's made in Germany. The Stellantis vehicles that we'll be supplying, the cells are actually made in France and the vehicles will be made in Europe. The Porsche, it's the all-electric Boxster and Cayman platform, that will be made in Europe as well by Valmet. So yes, I think we're getting ourselves pretty well positioned to cover the West.

And I'm sure people are probably wondering Tesla. Tesla is not customer because of their cylindrical batteries, right?

Correct.

So what are they -- how do they handle thermal runway?

They sort of don't. If a cell in a Tesla like goes into thermal runaway, the car will burn to the ground. The way they handle it is, I think they're relatively conservative in terms of how they use the cells and how they charge them. And if you take a Tesla Model Y, theoretically, it should deliver you 400 miles of range. But you see about 310 advertised. And in the real world, you probably get about 270 miles. And so that's how they do it, right? The way people try to manage for thermal runaway in these cells is there's theoretical models of how the cells are supposed to behave and they just kind of charge, discharge them and use them on the fringes of it. And so I told my wife when she charges her EV, she thinks it's at 100%. It's not really at 100%, it's probably at about 80%. And when she's discharging it down to 0, it's not really 0, it's probably closer to 30%.

Right. Sort of staying within the governance there. Just got one last question for you in terms of kind of the broader EV market. You're seeing kind of a decline in sales near term or kind of overall in the U.S., you're seeing at least risk flattening. Is that a concern for you at all or is it just the OEMs are kind of all building up so that you don't really have to worry about kind of, I guess, end market demand right now?

Yes. I mean I think this is where not supplying Tesla kind of helps. When I read the earnings reports of some of the Tier 1 suppliers that we're riding the EV wave, supplying some of the earlier entrants, yes, I mean, today you're seeing your volumes just consistently decline. But we were starting from 0. I still think we're in the first innings of the game. And so -- and I even said this during our last earnings call, I truly believe, and we're seeing it in the numbers and the incentives, that for 2024 and I think a good portion of 2025, EV demand is not being driven by overall consumer wanting more EVs versus a nice vehicle, et cetera. Like EV demand is being driven by the OEMs' willingness to incentivize it. And so with a bunch of cheap leases with the $7,500 tax credit and some cash on the hood of these cars, they're going to sell as many as they need in order to position themselves to continue selling ICE vehicles in 2026. And so for some of them, it's a lot of EVs. For some of them, it's not that many depending on their mix and what other vehicles they're selling as part of their fleet, right? And so -- and actually, Barclays has a really good study that we leverage, where we look at what mix does Ford, GM and Stellantis need in the U.S. to comply with the regulation in 2026. And it's all around 15%-plus of their mix, right? GM is doing 2.6 million vehicles at retail here in the U.S. in a given year, 15% of that is a lot more than the 200,000 to 250,000 that they're talking about for this year.

Thank you very much, Ricardo. So for those who don't know our story, I have an initiation report that came out 2 weeks ago. I actually used to cover this company about 10 years ago. I've reinitiated. It's a fascinating story. Just look at what the numbers have done over the last 3 quarters. It's truly remarkable change here. Ricardo, thank you very much.

Thank you. Thanks for having us. Really appreciate it.

Thank you.

Thank you.