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

Good morning. Thank you for attending the Aspen Aerogels, Inc. Q2 2026 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to your host, Neal Baranosky, Aspen's Head of Investor Relations. You may proceed, Mr. Baranosky.

Thank you, Holly. Good morning, and thank you for joining us for the Aspen Aerogels Second Quarter Financial Results Conference Call. With us today are Don Young, President and CEO; and Grant Thoele, Chief Financial Officer and Treasurer. The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide presentation and earnings release. 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'd also like to note that from time to time in connection with divesting of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officers will file to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the excess price of options. I'll now turn the call over to Don. Don?

Thanks, Neil. Good morning, everyone. Thank you for joining us for our Q2 2026 earnings call. My comments will cover our Q3 outlook, our commercial activities, including the growth projections for energy industrial the evolving demand environment in our electric vehicle business and the progress we are making to develop battery energy storage systems as a potential third growth segment for Aspen. I will cover the strides we have taken in staging the restart of our aerial manufacturing plant in these Providence and the efforts made to mitigate any supply disruption to our customers. We are pleased to announce both another European OEM design award, this one from Jaguar Land Rover and a strong outlook for Q3 performance. Grant will amplify these points with his comments. Turning to the third quarter. Our outlook calls for revenue of $65 million to $80 million and adjusted EBITDA of $7 million to $15 million. The underpinning strength is broad-based, robust energy industrial project deliveries increased North American demand for PyroThin thermal barriers as GM raises production to align with EV sales and targeted inventory levels and elevated production ramps by several European EV OEMs and in anticipation of growth in 2027. Let me provide some additional perspective on each of these drivers. Our Energy Industrial segment continues to target approximately 20% growth in 2026 despite the East Providence disruption and relatively subdued refining and petrochemical activity. Strong project demand is driving our second half performance and is an important contributor to our robust third quarter outlook. In Energy & Industrial, we bring proven technology, deep experience and an excellent record of customer service to the segment's demanding applications. Market conditions remain favorable, and our customers have amassed significant project backlogs. Our team continues to build a robust pipeline of opportunities extending throughout the decade which represents a strong foundation for continued growth. In LNG, we are actively engaged with customers, EPC contractors and construction teams. We have opportunities to expand our scope on several projects, increasing the size of our 2026 opportunity and extending our visibility into 2027. LNG has become one of our clearest and most dynamic growth lanes, particularly in the United States, the Middle East and Africa, where large-scale infrastructure investments are advancing into executable commercial opportunities. We expect our LNG-related activity to more than double in 2026 compared to 2025 and to provide continued momentum throughout the decade. As I noted earlier, refinery and petrochemical activity has lagged our expectations. We believe customers are prioritizing uptime and high utilization rates, compressing certain maintenance windows. Over time, reliability requirements should bring this work back into scope, and we remain well positioned to support customers as turnaround activity normalizes. Taken together, these market dynamics support our expectation of approximately 20% growth in Energy Industrial in 2026 with additional strong growth anticipated next year. More broadly, the growing need for Energy Security, supply diversification and reliable power to support electrification is driving a multiyear investment cycle in global energy infrastructure. We believe these underlying market drivers will create significant growth opportunities for Aspen through the balance of the decade. We remain focused on scaling Energy Industrial into a $200 million high-margin business without the need for incremental capital investment. Turning to our PyroThin Thermal Barrier business, where we saw 81% quarter-over-quarter growth in Q2. U.S. EV demand has recently stabilized at approximately 6% of new vehicle sales, roughly half the level reached in 2025 when incentives and regulatory support were more favorable. Within this market, GM LTM captured approximately 13% of U.S. EV sales during the first half of 2026, implying annual sales of more than 120,000 vehicles. GM produced EVs at a rate below its sales volume during the first half, resulting in a significant reduction in finished vehicle inventories. GM now appears positioned to increase production to align with current sales rates while modestly rebuilding inventory, consistent with its stated demand-driven approach. The resulting increase in demand for PyroThin is already evident in the third quarter and represents another important driver for our strong Q3 outlook. On the European front, we see increasing momentum with strong structural drivers for battery electric vehicles, resulting in new vehicle registrations approaching 25%. Most recently, we added Jaguar Land Rover as our seventh European OEM customer. Our PyroThin Thermal Barriers have been chosen for select JLR vehicle architectures, which will support multiple models across its portfolio of iconic brands. This award further validates the value of our technology and represents another meaningful building block for our European business. On our past two earnings calls, we projected 2026 revenue from European OEMs between $10 million and $15 million. We are now increasing that outlook to $20 million to $30 million, based on first half revenue of approximately $11 million and the growing breadth of our awarded business, now spanning 7 OEMs and 9 vehicle platforms. This expanding European opportunity is a third important contributor to our strong Q3 outlook. More broadly, we are encouraged by the momentum across our European portfolio and continue to believe the region will become an increasingly important contributor to our revenue in 2027 and beyond. Looking beyond our current segments, we are investing to establish Battery Energy Storage Systems or BESS as a promising adjacent growth opportunity. These systems present complex thermal challenges that closely resemble those we have solved on demanding EV platforms, positioning Aspen's proven technology, application expertise and domestic manufacturing capabilities to serve this growing market. We are actively engaged in technical qualification programs and commercial discussions with leading utility scale and critical power developers. While full commercialization will require time, we continue to expect initial BESS revenue in the near term and believe this opportunity can become a meaningful contributor to our growth and profitability. At our East Providence aerogel manufacturing plant, we initiated a stage restart on May 14, just over a month after the explosion in the high-temperature oven cause damage confined to a specific area of the facility. We continue to make progress toward restoring full production capacity, which we expect to complete during the first half of 2027. To date, we have avoided significant supply disruption to our customers through a combination of existing inventory, production from our external manufacturing facility and more recently from the staged restart of the East Providence plant. We have more work to do, but we believe the actions we have taken are expanding our short- and long-term supply flexibility strengthening both our operational resilience and our ability to serve customers most reliably. During this period, we are incurring certain extraordinary operating and capital expenses as we maintain supply to our customers and restore full production capacity. We maintained property damage and business interruption insurance are fully engaged in the claims process and expect a significant portion of these losses to be referable. Grant will provide additional detail in his remarks. Most importantly, we are extremely grateful that no employees were seriously injured in the incident. I also want to recognize the Aspen team for its tireless efforts to achieve a safe and disciplined restart in the plant and for its unwavering commitment to our customers and to the success of Aspen. Grant, over to you.

Thanks, Don, and good morning, everyone. I'll cover our Q2 2026 results and Q3 outlook along with key drivers for the remainder of the year. Second quarter revenue was $49.8 million, including $20.4 million from Energy Industrial and $29.5 million from Thermal Barrier, which included $4.9 million of previously deferred revenue recognized in connection with the GM settlement received in Q1 of this year. Total revenues increased 32% quarter-over-quarter. Energy Industrial revenues declined 6% quarter-over-quarter, below expectations as customer demand remained constrained by logistics and inventory challenges tied to the conflict in Iran, along with some demand push from Q2 to Q3. We expect a significant rebound in Q3 as Subsea project revenue land for the year. Thermal Barrier revenues exceeded our expectations due to two factors: First, GM vehicle production ramped up to levels reflective of underlying sales rates after a soft Q1. More on this later, but we believe production and sales rates will track closer together than in past cycles. Second, European Thermal Barrier revenue grew 14% quarter-over-quarter, from $5.1 million to $5.8 million. Volumes may be lumpy as these customers manage preproduction inventory, but it's increasingly clear that these programs will ramp. Gross profit was $3.3 million or 7% gross margin, reflecting lower production volumes that couldn't fully cover fixed manufacturing costs. This includes $5.3 million of incremental costs from the April incident at East Providence, which are not indicative of normal operations. Excluding these incident-related costs, adjusted gross profit was $8.6 million or 17% margin. Adjusted operating expenses, excluding impairments or similar losses, restructuring charges and other onetime items, were $23.1 million in Q2. Reported OpEx of $32 million included an $8.9 million loss on property damage related to the April incident. That loss was offset by a corresponding $8.9 million insurance receivable recorded in other income, which we concluded proceeds were probable and expected in Q3. GAAP net loss was negative $23.3 million in Q2 versus negative $23.7 million in Q1 and adjusted EBITDA was negative $6.6 million in Q2 versus negative $12.7 million in Q1. That's nearly a 50% earnings improvement on 32% revenue growth. Our EBITDA add backs typically see little movement from quarter-to-quarter. But the April incident introduced a new temporary category of charges not indicative of our core operating performance. We add back these incident-related charges in the quarter incurred and submit these types of costs under our business interruption insurance policy. From a cash perspective, these insurance proceeds are expected to lag the related charges by approximately one quarter. These incident-related charges generally fall into three primary categories: First, expedited freight for finishing roles in parts in our Thermal Barrier business; second, professional fees predominantly for services at East Providence to restore production capacity. And third, starting in Q3, the incremental cost of temporarily sourcing certain Energy Industrial products from our external manufacturing facility. In Q2, charges were limited to the first two categories and totaled $5.3 million, which was added back to adjusted EBITDA. We have initiated the claims process under both our property damage and business interruption coverage and expect our claims submittals will largely match these expenses incurred. While East Providence resumed production through a stage restart in May and continues to produce high-quality products for both business lines, full production capacity has not yet been restored. As a result, we expect to continue incurring incident-related charges until the facility's full production capacity is restored in the first half of 2027. Turning to liquidity. We ended the second quarter with $153.4 million in cash, cash equivalents and restricted cash down $22.2 million from $175.6 million in Q1. Three items drove that activity. First, investing and financing activities used $9.4 million, in line with our expectation of approximately $10 million per quarter, given lower capital spending and quarterly debt amortization. This was partially offset by a $3.5 million draw on our revolver for a net outflow of $5.9 million. Second, we incurred $5.3 million of incident related charges and increased purchase orders with our external manufacturing partner for approximately $3 million. This activity will likely vary based on anticipated volumes and our ongoing supply mitigation efforts until East Providence returns to full production capacity. Third, Cash used by operating activities when excluding incident-related charges, was $8 million, representing our underlying quarterly burn. With our Q3 outlook calling for return to positive adjusted EBITDA, we expect our cash trajectory to improve in the near term. Debt payments in Q2 were driven by $6.5 million in principal amortization connected to the term loan, resulting in a term loan balance of $79.5 million at quarter end. We drew $3.5 million on our revolver, increasing the balance of $10.9 million and have ample availability under this facility. As a reminder, our primary financial covenant under the MidCap facility requires us to maintain cash equal to at least 100% of the term loan balance, with $153.4 million of cash against the $79.5 million term loan, we continue to have substantial covenant headroom. Turning to Slide 6. Before turning to quarterly guidance, let's take a pulse on how our prior assumptions are tracking. We anticipated revenue growth throughout 2026, supported by three primary drivers. First, we assume GM production would continue to recover as inventory levels normalize and destocking subsides. We're on track as production rates are ticking up. Second, the ramp of our European Thermal Barrier programs, which we initially guided to approximately $10 million to $15 million of revenue in 2026. We're outperforming and we're raising that outlook to $20 million to $30 million of revenue given our first half run rate. Third, we expect approximately 20% growth in Energy Industrial with a greater concentration of project activity in the second half. We're still on track with Q3 project work building toward two strong back-to-back quarters. For the third quarter of 2026, we expect increased revenue and profitability relative to Q2, with total revenue expected to be between $65 million and $80 million. This range represents between 30% and 60% growth quarter-over-quarter. The wide range is driven mainly by our GM vehicle production assumption. Breaking down our revenue guide. We anticipate Energy Industrial revenues to land at approximately $40 million for the quarter, roughly double Q2 revenues, headlined by LNG and subsea projects. Our Q3 guidance for the Thermal Barrier business has two primary drivers. We've assumed GM production at an annualized rate of approximately 90,000 to 125,000 vehicles in the quarter, a noticeable step up relative to the first half of the year. Given recent sales rates and activity levels we're planning internally to meet demand at the high end while keeping in mind historical volatility and thus guiding conservatively towards a broad range of outcomes. GM sourced approximately 40,000 vehicles annualized in Q1 and 100,000 vehicles annualized in Q2. The current IHS forecast has GM producing approximately 112,000 vehicles annualized in Q3. Our European Thermal Barrier customer volumes have been consistent in 2026 with revenues of $5.1 million and $5.8 million in Q1 and Q2. In fact, with $10.9 million of revenue generated this year, we have already surpassed all of 2025 European Thermal Barrier revenues of $8.6 million. With that momentum, we're confident in raising our 2026 outlook to $20 million to $30 million of European Thermal Barrier revenue. As a reminder, these European programs have not reached serial production, but most of them will SOP in 2027. Looking ahead to 2027, it's very exciting to land Jaguar Land Rover as another design award with volumes anticipated to ramp in 2027. Our Thermal Barrier awarded pipeline of $135 million revenue reflects customer provided full production volume assumptions and normal platform ramp profiles. We model these programs conservatively and even under moderated volume assumptions, we are targeting meaningful growth by doubling our 2026 outlook to $40 million to $60 million of revenues in 2027. Given the product mix included in our revenue range, we expect Q3 adjusted EBITDA to be between $7 million and $15 million, which includes adding back incident-related charges of approximately $5 million to $10 million. Again, these costs are comprised of expedited freight, professional fees and the incremental cost of temporarily sourcing certain Energy Industrial products from the company's external manufacturing partner until East Providence returns to full production capacity. Turning to our liquidity outlook. Let's start with what we can control. CapEx and scheduled debt payments should total around $10 million in Q3 when excluding East Providence restoration CapEx. Working capital will be more variable, driven by where we produce and sell finished goods, safety stock builds tied to EP's recovery pace and supply chain -- and a supply chain that has lengthened during this period. Insurance proceeds paid in arrears relative to the cost they cover could also create period-to-period timing differences. Regardless of that timing, we're confident we'll at least maintain and likely grow our approximately $63 million net cash position by year-end. When it comes to the sale of Plant 2 assets, the previously disclosed nonbinding letter of intent expired without a definitive agreement. We had a handful of buyers at the time we reached this agreement, have reengaged them and also continue to actively market the assets. As a result, proceeds from the potential sale of Plant 2 assets are most likely a 2027 event, and would be applied directly to reduce our term debt on a dollar-for-dollar basis. With all levels of liquidity today, we still see flexibility to further delever the business, and we're evaluating a host of options while staying nimble to opportunistically invest in strategic growth initiatives. As we continue to navigate 2026, driving incremental profitability with new commercial activity and maintaining balance sheet strength remain our top priorities. Don, back to you.

Thanks, Grant. To close, we believe our current growth strategy to scale Energy Industrial, to drive growth and diversification for PyroThin Thermal Barriers, to expand into attractive adjacent markets and to target breakthrough R&D opportunities represents the best path to deploy our financial strength and to deliver long-term value for shareholders. We expect our performance in Q3 to be a good indicator of sustainable growth and profitability in 2027 and beyond. With that, we'll open the call to answer your questions.

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

So maybe if we could just start with Energy Industrial. I know that these two large subsea projects had been expected to hit in 3Q. It sounds like maybe it's more of a 3Q, 4Q event, but you're still guiding to an extremely strong quarter. So just curious, clearly, there are some other positives going on there. So maybe talk about how that breaks down between certainly subsea, LNG, the more subdued maintenance business today? And then maybe what you're kind of thinking about sequentially for Q4?

Thanks, Eric. Our subsea work is primarily falling into Q3. We have strong LNG activities in both quarters. And so that is really what is supporting the growth outlook or the strong Q3 outlook that we provided, we think we'll continue to have an active Energy business in Q4 as well. Our guide in Q3 does not particularly count on any recovery or robust refinery or petrochemical work, although we do believe that over -- as I said in my comments, over any period of time that, that work will come back into scope as those facilities focused on reliability and maintain those facilities, as I know they will.

Got it. And then I guess for my follow-up, maybe just on Thermal Barrier, you've kind of done this in the past in terms of laying out what your OEM -- what your OEM partners are communicating in terms of what your Thermal Barrier awards could be worth, and I know you have cut that in terms of your outlook. But just curious, I mean, you're not seeing any necessarily hedging on that amount. You talked about your $135 million. This continues to just be you're being conservative given how you've kind of approached the outlook in the past?

Yes. So Eric, I think the $135 million is full volumes from the customers at the -- just the kind of the price per part. So $135 million is obviously -- we're ready to supply that as the demand comes. But that's why we're -- we've always kind of taken this conservative approach because these programs do ramp. There's other supply chain considerations. So our $20 million to $30 million '26 outlook, we believe and we're very confident in growing that into 2027.

Sorry, Eric, I was just going to add just one. I think that the interesting thing here in our Q3 outlook and in our comments this morning, we've won these design awards now over the course of the past couple of years. And what's encouraging is that we're turning awards into revenue, and we're seeing that here -- we saw it here in the first half of the year. We're seeing it as well in the second half of the year. And it's a visible ramp. It's a diverse group of OEMs and it really builds, I think, our PyroThin business in a productive, more sustainable long-term manner.

And just one other note on that, Eric. I think that what is really important is that we already have the manufacturing capability in place to serve all of these European Thermal Barrier customers. and it requires a minimal CapEx from this point on. So we're ready to supply as that demand comes in.

Your next question comes from the line of Colin Rusch with Oppenheimer.

As we think about the third quarter guidance and the balance of the year in preparation for this 2027 ramp in the EU, how much selling, do you think is really required to start meeting the needs of those production ramps and when do you expect it to start?

Selling on our part, Colin, I mean, look, these are.

Yes, selling inventory for production because they'll need some inventory on...

Got it, sorry. Yes, there's no question that we -- as they move to SOP, there will be a bump. And we do expect this to be a little bit lumpy over the course of these quarters, including probably the quarters in 2027, but the trajectory is definitely up and to the right. We have a very favorable EV market structurally in Europe. As I said in my comments, I think getting close to 25% EV penetration in the EU and our design award OEMs are benefiting from that and will benefit from that. And so we are confident that we can grow that business through the remaining part of this year in really served launch mode for a robust 2027, as we shared in Slide 6.

Okay. And then from a cost perspective, we're seeing a handful of inflationary pressures around raw materials in various parts of the supply chain. I just want to get a sense of how that's trending for you guys and any sort of mitigation strategies that you have in place that we should be thinking about from a cost management perspective?