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

Thanks, everybody, for joining us again at the 37th Annual ROTH Conference in Dana Point. Very pleased to have with us today Don Young, President and CEO of Aspen Aerogels. My name is Chip Moore, Senior Research Analyst on the sustainability team. Don, we've done a lot of these over the years. So it's good to see you. I guess maybe start with a quick high-level overview for those that might not be familiar with what Aerogels are, why they're important, sort of your moat in IP, and we can go from there.

Thank you, Chip. Let's see. The company is approximately 20 years old. We went public in 2014. An aerogel, our strategy is to leverage our aerogel technology platform into large, diverse, interesting markets. Think of us as a thermal management company, I think, at the end of the day. And we're involved today in 2 different businesses. What we call our traditional energy industrial business provides thermal management and fire safety characteristics into traditional energy settings, refineries, petrochemical plants, LNG terminals, power stations, et cetera, more recently, carbon capture and some of the newer energy activities that are going on. Subsea pipelines has been a big part of our business for a long time. Again, bringing thermal management and fire safety into these settings. About 5 years ago, we were able to take advantage of both the thermal and the fire safety aspects of it and move into providing thermal barriers into lithium-ion batteries for EVs. And we have since won 8 different design awards in that space for a wide range of automotive OEMs, most notably in our largest customer, General Motors. We've grown that overall EV thermal barrier business over the course of the past handful of years from around $7 million to $55 million to $110 million in last year to over $300 million. Just to put in perspective, the energy industrial business last year was between $140 million and $150 million, and it's a pretty steady low to mid-teens percentage grower year in and year out. Both of these businesses have 40% gross margins. So to -- last year, we had over $450 million of revenue, 40% gross margins, and we generated about $90 million of adjusted EBITDA.

Great. And that's maybe a good segue. GM, maybe talk about kind of analogous to what you saw with ExxonMobil, right, in energy infrastructure. Where you stand now in terms of current visibility, sell-through dynamics as they've been rolling out vehicles? And then, of course, it's Ultium and Honda Prologue and other vehicles.

The reference to ExxonMobil was we really sort of cut our teeth, if you will, in the traditional energy business with Exxon as our sort of lead customer and did all of our technical specifications and product development really hand-in-hand with ExxonMobil. And today, we're in virtually all energy facilities around the world. And so Exxon was an important launch partner for us, if you will. And General Motors is playing that role in the EV space. So our goal for this year is to have our other OEMs providing roughly 20% of our EV revenue for us by Q4 of this year as they begin to ramp. But we are -- General Motors activities this year are very important to us. And there, I would just say, a wide range of potential outcomes with respect to General Motors. They have been quite clear that their target is to produce 300,000 EVs this year and utilizing the Ultium battery platform. Honda is also utilizing the Ultium battery platform. So just rough numbers, that would be an additional 50,000 vehicles in 2025. We think that's an optimistic number. We're cheering them on, and we're prepared to serve that level of demand. But we think that just given the environment that it's more likely that they would be lower than that, let me just say. So IHS, one of the independent companies is suggesting a number closer into the mid-2s. And we're in the mode right now of waiting and seeing what the demand pulse is as we work our way through the year. But again, we're -- we've -- did some cost containment activities or cost reduction activities earlier this quarter, as you know, Chip, where we took between $35 million and $40 million of cash expenditure out of our spend and just preparing for an environment with uncertainty. And the areas of uncertainty for us really relate to EV demand, the $7,500 tax credit, which is still in place today, various emission standards and the potential relaxation of those kinds of standards. We have a manufacturing partner in China. We have 2 plants in Mexico. We have a large plant here in the United States. So there's a lot of tariff noise out there as well. And we think we've done a very good job anticipating and preparing to mitigate those and -- but they still create a lot of noise. And then from just an automotive demand point of view, creating a recessionary environment, we're not there today. But if that were to transpire, that's another uncertainty, I think, that we're contending with. And so instead of providing a full year 2025 guidance, we provided at our last earnings call, Q1 guidance alone. We've come off a period of 6 quarters in a row of meeting and exceeding guidance, and we didn't want to get ourselves in a position given the amount of uncertainty of having to backtrack on that. So we're trying to let the dust settle here a little bit, figure out what the new rules are, and we'll play the game extremely well once those rules are set.

Great. Great job on sort of the uncertainties and noise sort of near term on visibility. Maybe if we look out 2, 3 years, you've got a number of great wins, right, beyond GM. Talk about the potential of those, how you think about those and then obviously, capacity and we can get into the new plans there.

Yes. At our last earnings call, we announced a new OEM award from Volvo Trucks. The earnings call before that, we announced a call with -- or a win, I should say, with Mercedes-Benz. We have Stellantis, ACC, Porsche, Audi, Scania, 8 in total. And they are in the midst of ramping here in 2025. And in the case of the 2 new ones, Mercedes and Volvo, those are more ramping in the 2026 time frame and scaling, I would say, in the 2027 time frame. This ramp is very consistent with what we've seen from all the OEMs. You win your design award, they have a launch and then they scale. And that typically takes a couple of years from beginning to end. And that's been our experience. We serve our automotive OEMs from our manufacturing plant in East Providence, Rhode Island, where we produce our aerogels. And then we take those aerogels and we move them to Mexico and we fabricate our parts for these automotive OEMs. For the very most part, just on that tariff issue, our automotive OEMs actually pick up the parts in Mexico. So our exposure to at least to the Mexico tariff, the potential Mexico tariffs is indirect, I guess, I would call it. We supply our energy industrial business principally from our -- what we call our external manufacturing facility or EMF from China. And about 40% of that product. Again, it was about $140 million last year. About 40% of that comes back into the United States. And again, is going into a whole -- a range of different kinds of energy settings from refineries, petrochemical plants, subsea pipelines, LNG terminals. And we do have the ability to source those products if the tariffs sustain or get elevated. It's important to remember that in 2024, we were already paying 30% tariffs on the material coming in from China, and we were able to have 40% gross margins on that business. But our 2 sources of capacity, if you will, are our East Providence facility, where we have approximately $600 million of revenue capacity, if you will, and then EMF where we can have, let's say, $200 million in the present configuration of energy industrial business, but they also have the ability to incrementally build capacity.

And maybe a follow-up there on capacity, right, where you stand in the process of -- I guess, maybe walk us through, right, you've qualified energy product there and fully qualified it. And as you look to go asset-light on the PyroThin side, how far along you are there? And then just talk about that process.

Yes. So we have studied the idea and explored the idea of producing some of our aerogels that would be automotive-specific or battery-specific from our EMF partner. And so I would say that we're in the early to mid-stages of that process. And we have a range of variants and the variant that we have focused on is really, I would say, sort of a first cousin of the product that we produce for our energy industrial business. And so that gives us a nice flexibility to be able to meet additional demand beyond what we have today with incremental capacity from that supplier without spending capital.

And I believe you're paying tariffs on that already, right? So you're putting up the profits.

Yes. We have -- again, that business has had 40% gross margin. So again, the tariffs are so hard to plan around right now. Again, that's when I say once the rules are set, we'll play the game well, but because we do have some ability to move capacity around and mitigate some of these. But it's hard to do something on Tuesday and then do something else on Thursday.

Maybe, Don, we could talk batteries a little more, chemistries, form factors, right, NMC, LFP, pouch prismatic, you're not in cylindrical, but implications for content per vehicle, some of those dynamics, LTM, right, moves there.

Yes. So we're -- in our General Motors business, these are pouch cells, nickel pouch cells and our content per vehicle, it's a pretty wide range, to be honest with you, because they do everything from the Hummer to the Blazer. So -- but on average, we anticipate that it will be in the range of $850 to $900 per vehicle here in 2025. And that's down a little bit. But to a great extent, it's down because they first launched the larger vehicles and now they're getting more and more traction with the Equinox and the Blazer and some of the smaller vehicles. So that's the -- that part of it. Our other OEM wins have principally been with prismatic cells. And those have a -- it's a simpler part and they have a lower content per vehicle. I would -- again, rough numbers because there is quite a variance across these companies. But think of it as a number closer to, say, $250 to $350 per vehicle. In that particular environment, we are displacing a foam-based material that is there today for mechanical reasons. And that material is roughly, say, $150 per. So you can do the subtraction, but that's the way we're looking at that prismatic. We are also working on programs for LFP style batteries, lower energy density, but nevertheless, requiring thermal barriers, both for fire and mechanical -- fire safety and mechanical reasons. And we anticipate that we'll have a role to play in -- on the LFP side as well. You are correct that we do not have a role at least today in cylindrical batteries that are used by Tesla most notably, but also by the Tesla sort of offshoots, if you will, Rivian and Lucid.

Yes. But I think you have impressive share, right, ex Tesla. So it's been good to see. Maybe energy storage, right, stationary, we see fires, right, [ Moss Landing ], or other applications, e-bikes, things like this that you read about. Is that -- are those markets that wouldn't be of interest? Or is there a potential role there?

On the energy storage side, it is interesting to us. And our -- one of our value propositions or value drivers, though, is where you have space constraints or weight constraints. And as you can well imagine, within a battery module, you tend not to have those in energy storage. You tend to have more space, if you will. And so I'm not saying there is no opportunity there, and we are exploring a couple, but I think there's some work to do to get to a final answer on those things. The e-bike issue, it's a dangerous situation in certain ways because you tend to park them indoors and they store plenty of energy. Not obvious to us right now that there's an opportunity for us to play a mitigating role in those smaller batteries.

Maybe energy industrial, we can get into it because it's doing very well right now. Obviously, it can be more cyclical. Maybe your visibility, talk about what you're seeing there and then project outlook, LNG mega projects that you've won in the past.

Yes. We are doing -- this administration, I would say, while it has created some uncertainty around -- on the EV side, has probably created some certainty on the energy and industrial side or the traditional energy side of this. And we believe that we'll be beneficiaries of that. We have -- we're strong on the natural gas side, whether it's LNG or other sort of sources of electrification, these are powerful tailwinds for us. Certainly, on the refining and petrochemical side, we continue to be strong, not only in the U.S. but around the world. We've made a bigger push into the Middle East here in the past year or 2, and we believe now that we have capacity, I should say we've been capacity constrained in this market over the course of the past couple of years, but we made our transition to EMF, which has opened that up, and it has given us the confidence to go into some additional markets. So we feel confident that we can grow that business in this range of mid-teens kind of growth rates for a good period of time and serve that market well. And again, 40% gross margins and with minimal capital requirements.

I think we're at 5 minutes. So if anyone has questions, please feel free. Otherwise, I'll keep going. Maybe Don, talk about -- you mentioned the restructuring, you did pretty substantial savings. Maybe talk about cash flow breakeven, right, and how you're thinking about cash, cash needs down the road? Or you think you're okay?

Yes. We finished 2024, a strong year for us, cash generating net income positive year for us with $220 million of cash on the balance sheet. We'll spend, just to put that in perspective, less than $25 million of capital here in 2025. We did do a reduction in force and other cash expenses, about roughly $30 million in OpEx and another $6 million or $8 million above the gross profit line. And look, we did that knowing we're going into a period of uncertainty, and we had grown quite substantially as a company. And this felt like the right thing to do. I think we did it relatively quickly and preemptively, if you will. And again, those are difficult things to do, but we're -- we believe it was the right decision to keep us strong. That did lower our breakeven down pretty substantially for 2025. We'll talk a little bit more about that in our next earnings call. But again, we want to make sure that we're strong and opportunistic in what we're doing when we see a good opportunity. So again, part of our strategy is to continue to invest in our research and development and try to create that third business and that fourth business. And I believe that's -- those will be major value drivers when we again demonstrate a new market.

Maybe just talk about thermal management in general. You have a pretty impressive product in terms of performance. If we look out in the future, right, maybe new applications, hydrogen may be slower to progress. But what about other areas? Would you play in data center? Is there -- thermal management is big there? Are there other potential opportunities?

The one that is most active right now, I would say you are right about the hydrogen infrastructure, and we'll see how that plays out in time. But those fuel systems tend -- especially the transportation of those tend to be liquid fuel systems and needing cryogenic type materials. And so think of it as sort of a first cousin of our LNG business. And we have a strong value proposition there for sure. The ones that we are most engaged with today are carbon capture programs. They're being done by some of our very largest traditional energy companies as well or engineering companies that serve those companies. They have significant thermal management needs and -- both hot and cold. And that's where we excel. And there are customers and they're at a scale that are interesting to us.

Don, maybe on the assets that you have in Georgia still, just update us there, what you can do with them? And maybe move some to Providence or other things you can do?

Yes. So as some of you may know, we ceased construction of a second U.S.-based plant that we had scoped in Statesboro, Georgia, in Bulloch County. And we basically have 3 buckets of assets there or 3 buckets of expenditure. One is equipment. And some of this equipment is specific to aerogel production, but a lot of it is, I would call it, generic industrial equipment pumps and what have you. Second is a substantial building that is hazardous material capable and a very substantial building on 90 acres, which we have the right to purchase over the course of the coming couple of years, prenegotiated. And those 2 buckets are opportunities for us to be able to generate cash, if you will, out of that operation or that part of our operation. We still do have some expenditures required to close the facility fully, but we're confident that those -- that level of expenditure can be met through equipment sales and what have you. So we do not expect that to be a burden on our cash going forward.

Great. Okay. We'll stay tuned for updates. Thank you very much. I think we're at time. Thanks, Don.

Thank you.