Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Aspen Aerogels incorporated Q1 2020 earnings Conference call. At this time all participants are in in listen only mode. After the speakers presentation, there will be a question and answer session.
Yes. Good question during the session you only.
Did you press star one on your telephone.
If you require any further system.
Please press Star Zero I would now like to have the conference over to your speaker today John Fairbanks. Thank you. Please go ahead Sir.
Good afternoon. Thank you for joining us for the Aspen Aerogels Conference call.
I'm, John Fairbanks, Aspens, Chief Financial Officer.
There are few housekeeping items I would like to address before turning the call over to Dawn Young Aspens, President and CEO.
The press release announcing aspens financial results and business developments as well as a reconciliation of management to use of non-GAAP financial measures compared to the most applicable GAAP measures is available on the Investor section of Aspens website, Www Dot era gel dot com.
Included in the press releases, a summary statement of operations summary balance sheet, a summary of key financial and operating statistics for the quarter ended March 31st Twentytwenty.
In addition, the investors section of Aspens website will contain an archived version of this webcast for approximately one year.
Please note that our discussion today will include forward looking statements, including any statements regarding outlook.
Spectator funds beliefs projections estimates targets prospects business plans and any other statement that is not at historical fact these forward looking statements are subject to risks and uncertainties Aspen Aerogels actual results may differ materially from those expressed in these forward looking statements.
The factors that could affect the company's actual results can be found and aspens press release issued today. They are discussed in more detail on the reports Aspen files with the FCC.
<unk>, particularly in the company's most recent annual report on form 10-K.
Companies press release.
Issue today and filings with the FCC can also be found in the investors section of Aspens website.
Forward looking statements made today represent the company's views as of today April Thirtyth 2020.
That's been errors tells disclaims any obligation to update these forward looking statements to reflect future events or circumstances.
During this call we refer to non-GAAP financial measures, including adjusted EBITDA. These financial measures are not prepared in accordance with U.S. generally accepted it.
<unk> running principles or gap.
Non-GAAP financial measures are not intended to be considered in isolation press a substitute for results prepared in accordance with gap.
The definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and discussion of why we present. These non-GAAP financial measures are included in today's press release.
I'll now turn the call over to Dawn young President and CEO of Aspen Aerogels.
Thank you John.
One business results and by sharing our current perspective on the business environment. During this particularly uncertain period framed by code at 19.
I will also discuss our ongoing strive to keep to address global opportunities promoting resource efficiency and sustainability by leveraging our air Joe Technology platform.
That's part of this up this strategic discussion I will include comments related not only to our core energy infrastructure business, but also to our two electric vehicle initiatives.
Yeah, John will review, our Q1 financial performance and describe the set of actions we have taken to ensure the long term financial strength at the company.
We will conclude the call we'd acuity session.
I should note that John and I are operating from two different locations, so bear with us.
During the QNX session.
[laughter].
Before I begin with my normal business comments I do want to wish could help you your family and friends and to your work colleagues.
The 300 of us at Aspen are staying close to the team and support each other our families and our communities.
Our goal is to keep everyone safe and healthy and to keep the company's strong.
We're also focused on quote the next normal and what it means to our strategy into our drive to profitability.
To this end we have formed to cross functional teams. One team is focused on the next 30 to 90 days and is tasked with positioning us to regain our full momentum as quickly as possible.
The second team is focused on Aspen Aerogels, one year from now in tasked with harvesting certain of the positive work practices and efficiency from this cobiz 19 period that are worth adopting permanently things that make us more profitable structurally.
I will add additional comments on impacts some kobe team throughout my remarks.
Our first course.
Our first quarter performance built upon the significant revenue growth and gross margin expansion that we experienced in 2019.
Product revenue in Q1 increased 6%, which was tempered in March by the uncertainty presented by Kopec 19.
Well it is hard to know exactly what would have happened without cook.
With 19, we are confident.
We will.
Talented R&D team entirely on a valuable commercial development opportunities.
Importantly, even with relatively modest revenue growth, we expanded our gross margin in Q1 by 800 basis points to 21% reflecting in part.
The sustained impact.
Okay.
Adjusted EBITDA on a trailing 12 month basis.
One point to note is that we strategically increased our inventory balances by $4.7 million during Q1.
We made this decision as koby 19 was unfolding.
To backstop against any potential operating restrictions on our manufacturing plant.
As an essential business and with the ability to keep our employees. They we believe at this point in time that we are unlikely to face operating restriction.
We plan to normalize our finished goods inventory levels.
During Q2, which we expect will balance out the impact on cash gross gross margin at adjusted EBITDA from the Q1 inventory going.
We made significant strides on our path to profitability in 2019 and in the first quarter of this year. However, there's no question that the disruption at Cobiz 19 into dramatic decrease in energy prices, well handicap, our commercial momentum.
At this.
Point in time, there's too much uncertain.
Oh maintenance revenue and larger scale project revenue.
On the maintenance side of our business, we're seeing some refinery.
In petrochemical work expand and.
Side of the business projects under construction, we are continuing or will continue was killed in 18 work restrictions are eased are removed.
We remain on schedule with PTT LNG and are now serving additional LNG project Caucus show pass LNG, just south of Lake, Charles Louisiana, and a new subsea project for India as oil and natural gas company.
As we've described in the past inflation materials come late in the construction cycle and most projects are not stopped or even delayed after significant construction has commenced.
It makes sense.
Yes.
Maintenance and project work is to sell our value proposition centered on simplified logistics and reduce workforce requirement to continue to gain market share in the energy infers.
Okay.
MCCSR space, even in a down market.
When oil prices dropped precipitously in 2014 in 2015, we grew our maintenance business every year and since that time, we've strengthened our sales organization to more consistently wind project work.
There's no question that the doubled in passive Cobiz 19, and low oil prices is new territory for all of us, but we will do our best to meet the challenge.
During the first quarter and here in April of Q2, we took a number of steps to be sure that we kept the company's strong.
In February just prior to the covert 19 outbreak in the drop in oil prices, we raised $15 million of equity capital and in March we extended.
Our working capital line with Silicon Valley Bank.
In late April we were approved for a 3.7 million dollar loan from the SB eight paycheck protection program.
The PPP loan was necessary during its uncertain time to avoid layoffs or furloughs of our valued and oil workforce.
We also took early auctions to conserve cash including reduction in salaries elimination of 2020 married increases elimination of cash cash remuneration for the board of directors reductions of manufacturing and ask DNA expenses and the lowering of capital expenditures.
In addition, senior managers at Aspen receive a meaningful portion of their compensation based on revenue and adjusted EBITDA performance versus plan.
Given the 2020 plan was established prior to cobot 19, and the oil price collapse. It is unlikely that variable compensation will be earned.
For 2020.
Okay.
Warrants.
These broad measures have reduced our expenses strengthened our balance sheet and positioned us to withstand this uncertain time.
It is also important however to note areas, where we have chosen not to reduced discretionary expenditures as we stay focused on executing our plan.
We are committed to fully funding our planned R&D activities in support of expanding gross margins to bill of material reduction initiatives and process technology efficiencies and of our broader strategy to leverage our aerogel technology platform into new and diverse markets, including both of our opportunities to parts.
He is paid in the Mega trend.
On the subject of gross margin improvement you will remember that in 2019, we implemented two of our three bill of material reduction initiatives. These initiatives contributed to the doubling of gross margin from the beginning of 2019 to the end and supported our expanded gross margin in Q1 20.
20.
We expect to begin to see the benefits from the third bill of material reduction initiatives in Q2.
Your perspective, the third initiative if fully implemented during the first quarter would have added over 200 basis points to our gross margin and over $600000 to adjusted EBITDA.
In addition, we now have a fourth initiative in developing which relates to the capture and reuse of industrial gases in a more sustainable and cost effective manner.
This project is doubly important because it will enhance our supply chain security.
In an area that has caused us problems in the past.
In addition to enhancing the surety of supply the fourth initiative has the potential to add 200 basis points. The gross margin on an ongoing basis. Upon completion early next year.
In the face of Cobot, 19, and lower oil and gas prices. We believe we have found the write downs among strengthening our balance sheet prudently, reducing certain cash costs and continuing to implement key programs to drive profitability in our core business and to leverage our aerogel technology platform into new.
New exciting businesses.
We will continue to monitor the situation on a daily basis to ensure that we maintain the correct balance.
With respect to the remainder of 2020 and driven by the uncertain duration in the impact of Cobot 19, we're withdrawing our financial guidance, which was issued on January 27.
During our most recent earnings call on February 20, I outlined a series of performance indicators for 2020, which sets stretch targets that were outside of our financial guidance.
Given the current period of uncertainty and after only a single quarter. The three performance indicators involving financial metrics are difficult to gauge at this point in time I plan to comment on down at our next earnings call. After we have given the current environment more time to play out.
I will however, comet now on the three performance indicators that are strategic in nature.
These are.
To complete our E. P 20 expansion in order for the East Providence manufacturing facility to have the capacity to generate $200 million of revenue and at least $35 million of adjusted EBITDA.
Began adoption for or generate initial revenue from the thermal runaway opportunity in the TV market and to continue to validate our carbon air gel technology for battery materials through an expanded partnership with SK C or ivanek or through new partnerships with additional.
Industry leaders.
The EPA 20 project was initiated at the beginning of 2018 and promise to deliver 20% greater capacity from our existing assets in east Providence.
Plan was to gain the additional volume through process technology advances and operating efficiencies with minimal capital expenditures.
We made significant strides in 2018, when we created additional capacity capacity that was critical to us in Q4 2020, when we generated revenue of over $46 million.
During 2019, we primarily focus the team on the raw material reduction initiatives with the goal to drive gross margin expansion.
In 2020, we have a clear low capital path.
Optimization of our silicon based error, Joe blankets to provide better solutions to E.D. manufacturers to manage thermal right away.
Dominant where a selling a lithium ion battery pack has a sudden release of energy that initiation unstoppable chain reaction potentially resulting in a fire.
<unk> optimization is well within our wheelhouse, we have delivered nearly a billion dollars.
Product to our energy infrastructure customers driven in part by our products extraordinary fire protection properties.
The thermal runaway product leverage is our existing silicone gel technology can be produced using our current manufacturing assets and is protected by our existing intellectual property.
We remain actively engaged with our key partners in this program and it makes significant technical progress.
We remain confident that we will gain adoption for or generate initial revenue from the thermal run away opportunity in the E.V. market in 2020.
With respect to our carbon era El efforts, we continue our work to validate and accelerate the potential adoption of our carbon era, Joe technology within the battery materials market.
Our efforts centers on taking full advantage of the unique attributes of our carbon air jokes with the ultimate goal to improve the energy density of lithium ion batteries.
A key enabler in expanding the drive range of electric vehicles.
We are working closely with our our evaluation partners F.K.C. and Ivanek and they're actively engage with other industry leading companies both battery any v. manufacturers with a goal to improve the performance costs durability and safety of lithium ion batteries.
Technical and partner in partnership progress is promising we continued you believe that we will both expand our relationships with our existing two partners and enter into additional agreements with other industry leaders in 2020.
[noise] our goal with these two opportunities that leverage the mega trend towards electric vehicle vehicles is to build additional attractive and diverse era, Joe based businesses and to further demonstrate the value of our technology platform.
Again, we will report out more fully at the time of our <unk> G. two earnings call on these three strategic performance indicators and on our three find annual performance indicators, which relate to revenue growth margin expansion and profitability.
Finally, and to recap we believe we are taking the correct actions and this unusual time to fortified the company to prepare to regain or commercial momentum and to continue to advance our strategy.
Now I'll turn the call over to John for a review of our financial results <unk>.
I think stephane.
Like to start by running through our reported financial results for the first quarter of 2020 at a summary level.
First quarter total revenue grew 2% to $28.4 million from $27.9 million in the first quarter of 20 nineties.
First quarter net loss improved to $3.2 million or 13 cents per share from $6 million or 25 cents per share last year.
First quarter adjusted EBITDA was positive a half million dollars compared to negative $2.6 million a year ago.
We define adjusted EBITDA as net income or loss before interest taxes depreciation and amortization.
Based compensation expense and any other items that we do not believe are indicative of our core operating performance.
And that provide additional detailing the components of our results.
First I'll discuss wrapping up.
During the first quarter total revenue increase by 2% to $28.4 million.
The total product revenue grew $1.5 million or 6%.
<unk> $8.3 million.
Increasing first quarter product revenue was dripping principally by continued strong shipments to the P.T.T.L.N.G. Nonfat project and solid growth in our core U.S. petrochemical and refinery markets offset in part by a decrease in project based revenue in the sub C. and Canadian market.
<unk>.
Total revenue reflected a decline in research services revenue of $1 million, resulting from our decision to focus our r. and D. resources on improving the profitability of our existing businesses and on leveraging our air gel technology platform into new markets.
Total shipments during the quarter decreased by 6% the 8.2 million square feet of era, Joe blankets, what our average selling price increased by 13% $3.47 per share.
Per foot.
Increased average selling price reflected the full impactable.
Our annual price increases over the past two years.
Nextel discuss cross profits.
First profit was $6 million or 21% of revenue during the first quarter of 2020 versus $3.7 million or 13% during the first quarter last year.
Improvement in gross profit in gross margin was driven by the 13% increase in average selling price and decrease in the cost of raw materials offset in part by the 6% decrease in shipment volume and increase in manufacturing expense and the decline in contract research.
Went to highlight that our first quarter <unk> gross profit included a 1.5 million dollar benefit associated with our 4.7 million dollar increase in inventories during the quarter.
Strategically increased inventory balances in March to provide a cushion against potential coded 19 based disruptions to our manufacturing operations.
Next tell discuss operating expenses.
First quarter operating expenses decreased by $600000 or 6% versus last year to $9.1 million.
Decrease in operating expenses was result of 700000 dollar decrease in general and administrative expenses into 200000 dollar decrease in sales and marketing expense offset in part by a 300000 dollar increase in research and development expense in support of new business development focused primarily in the elect.
Trick vehicle market.
Next I'll disgusted just to D., but.
First quarter adjusted deep into was positive half a million dollars compared to negative $2.6 million a year ago.
Approximately 3 million dollar increase in adjusted EBITDA 'cause result of the 2.3 million dollar increase in gross profit 600000 dollar decrease in operating expenses and increase in depreciation and stock based compensation expense of $100000.
Nextel turn to our balance sheet and cash flow for the first quarter.
Cashews and operations at $1.4 million reflected in investment in working capital of $1.9 million, partially offset by our positive adjusted eat that's a of a half million dollars.
Investment and working capital was driven by our decision to increase inventory, including both raw materials and finished goods by $4.7 million to provide a buffer against potential operational disruptions rising from the coded 19 pandemic.
Capital expenditures during the first quarter totaled $927000, we're focused on investments to improve plant reliability.
During the quarter before covert 19, an oil price volatility negatively impacted the stock market, we strengthen our balance sheet by raising net proceeds of $14.8 million to an underwritten public offering of our stock.
In early March we also extended our revolving credit facility was Silicon Valley Bank through April 2021.
We ended the first quarter with $11.8 million of cash that current assets at $28.3 million no borrowings under our revolving credit facility.
Shareholders equity of $70.4 million.
We also had access to an additional $8.8 million available under our revolving credit facility at quarter and.
And I read <unk>, Rhode Island subsidiary was approved for a 3.7 million dollar P.P.P. loan under the cares Act during April.
We'll use the P.P.P. loan proceeds to avoid the need for for a lot furloughs or layoffs at our east Providence plans.
It's done noted in his comments, we believe our March 2020 product revenue would've been higher if our customers had not been impacted by the Cove at 19 pandemic and volatile energy markets.
At present, we expect demand for our products will continue to be adversely impacted.
19, pandemic and volatile oil markets, they've created considerable considerable uncertainty for our business they make accurately projecting our 2020 revenue difficult at this point in time.
Accordingly, we've redrawn are prior 2020 financial outlook did not include any impact from the Cove at 19 pandemic, but a significant volatility in the global energy markets.
However.
In response, we've taken a number of actions to reduce expenses and improve cash flow.
Instituted a wage decrease for executives and managers eliminated planned annual pay raises for all employees cut to discretionary expenses and reduced our plan 2020 capital expenditures.
Board of directors also elected to <unk> for go cash compensation during the current period of business uncertainty.
We're also prepared to curtail operations in our east Providence plant, if required to ensure employee safety or to align capacity with demand.
Although projecting our revenue in the current economic environment is difficult we believe the fundamental economics of our business remain intact.
In general, we'd expect revenue a $30 million in a given quarter drive a 20% gross margin and break even adjusted eat it.
As we discussed in past earnings call.
Are variable contribution margin is approximately 40%.
As a result, and increase or decrease of $5 million in quarterly revenue, but generally lead to a 2 million dollar increment or detriment in gross profit and adjusted eat at the.
And again as we discussed and pass calls product mix changes in finished goods inventory balance it unforeseen events, including those associated associated with covert 19, pandemic and volatile energy markets and have a significant impact on our profitability in any given quarter.
But for our purposes today, most important point here is that we believe our business fundamentals remain intact.
Overall.
We believe we have the balance sheet liquidity and available credit required to support operations and to continue to fund our plants strategic investments.
We believe we've taken prudent actions to date to reduce expense levels and to approve our cash flow.
We believe far it business fundamentals remain intact.
And we remain committed to monitor sitting all aspects of our business and are prepared to take the actions necessary keep the company financially sound and to execute our strategy.
[noise] Oh, now turn the call back to Jason for a <unk>.
There's some I would like to remind everyone. If you have a question. Please press star.
One on your cell phone keypad, we will pause for just a moment chicken barbecue and a roster.
Your first question comes from the line of Eric's time from Craig how long.
Your line is open.
<unk>.
Hi, or care or.
Hey, Hey, so <unk>, yeah, I know <unk>, you're kind of in uncharted territory here and you know I know low oil dogs impact the upstream part of your business, which is relatively small bit.
If you're able to if you think about kind of where the businesses now in the the impacts you anticipate going forward I mean, how would you break this down between <unk> in oil if you're able to do that keeping in mind that your day to day, you're refinery in Petrochem business.
You know in in the past is held up pretty well in the face alone oil.
Yeah that May let me start I I would say.
That I think Kobe it had the most immediate impact on our maintenance work you know I think.
Many of us where it you know sort of frozen in place as we were trying to do the right thing and making sure that we could keep workers say safe et cetera, and I think that that applies to our to our customers in the end users as as well I maintenance is something that needs to go on and they do.
Have some latitude with respect to the you know the scope of any given.
Activity and again, we we think that that the Kobe side of it is is temporary and that that you know that demand. We'll we'll we'll come back you know for US all so we have a relatively low market share and most of the market that we serve and so our ability at our folks.
This is is to try to gain market share as well and and try that minimize the the negative impact of these kinds of the of these kinds of it that.
I I think they I think the low oil and gas price again as I said that my comments has a bit more of I would say a longer term impact potentially on on our project side of the of the business. We certainly noticed that in 2014 2015 and.
Any historian of our company would know that we continue to grow or maintenance business throughout those years, including 16, 17, and 18, but how to drop off in our project work and and that was really that that learning was the basis for our creating a projects oriented.
Team that is solely focused on.
Pipeline being sure we're in specifications and winning projects consistently and I I guess, there's no question that these two things coded and and and low oil well, we'll have some impact on on that again I think it will impact is mostly as time passes our project.
<unk>.
<unk> for the most part moving moving forward here and and and Q2 and then you know foreseeably through through this year.
Yep.
You just picking on the project side I know L.N.G., it's a little bit of a mixed bag. I mean, you mentioned, we know about P.T.T. you mentioned the project in India and Kelsey She passed really the only export project that.
As moving forward here as of late.
But I would I mean, what do you see it on the M. Court side I would think a low price environment for a country like Thailand is is a pretty positive set up you know so just wondering maybe what the pipeline on the import terminal side looks like.
Yeah, I I think wherever wherever you see and and the P.T.T.L. and G. project that we are serving today and and Thailand is very good example of this this is.
A country that is display thing, it's cool and obviously this lower or gas pricing makes LNG ever more competitive with with coal overall, so we see a lot of the displacement in especially in some of these are emerging.
Countries, drawing more Allen J. and again displacing Nicole so that part of the equation. I think is that is is a positive for us I think that the export side might be a little tricky or for for the next here are so until until the market settles, but again, we we've got.
Our site set on on on some projects here and and and 2021 of which we we've already one.
But are are are real focus is to be sure that as we complete deliveries of.
Have a T.T.L. and G. and.
Late this year or quite possibly <unk> next year.
That we that we replace that the that project with a lot of other projects as well.
Yep, Okay. Thanks for that and then last them for me just on the the thermal runaway opportunity on the east side.
I know you you were working with the number of companies one of them more advanced than other it's just I'm curious since the last call. If you can expand on that a little bit you know at that at the number of <unk> or potential only m.'s grown have you advance with that with that one customer I, just any details or it'd be very.
Yeah, we we have done both of those things frankly, I would say we have expanded the number and also the depth of the of the trials has has increased as well with.
With our principal target and the.
That.
The the back and forth from a technical point of view that sampling the testing the optimization of the materials I I would say has been pretty intense actually <unk> you know very regular conversations I.
I would say almost daily and so <unk>. This is this is an important problem that we are.
Trying to contribute a solution to and and I were we remain.
Really excited about the opportunity and and again as I say you know this idea of passes fire protection.
Exactly what we do and we've we've applied that capability to hydrocarbon plants for for more than a decade now and we we really know our way around this space of course, there are some special considerations in an electric vehicle and and we're we're really folk.
Based on that optimization process, and and it's been it's been exciting and and we we remain confident.
Okay. Thanks, a lot.
<unk>.
You are next question comes from the line of Thomas.
<unk> SBR your line is open.
Good evening Guy flag this call find any both well.
Okay.
Uh-huh Don <unk> when it comes to your energy infrastructure and Marcus how would you rang insulation projects in order resilience and on the maintenance I, what percentage or or percentage range of annual spending is generally considered mandatory or in some way required by regulation, even if you know.
Thursday latitude there in terms of the the the scope of it or you know allowance for temporary pause.
Yep.
The <unk> hard to give exact percentages of course, but my my my I think that the way I would think about it is that are.
Or materials are usually part of are are used as part of broader turn arounds and and.
People are going in for <unk> inspection, often times and displacing or we play thing pipe corroded pipe et cetera, and and and that is that that is probably the principal driver a lot of the work that is a lot of the value proposition that we.
Going to refineries and petrochemical plant and if you think about that portion of the market that is not really a discretionary maintenance item that is a significant safety issue and and <unk> is it important driver. So we believe the value that we bring it.
Demonstrated now for a long time in that market to the premier companies and in that space. You know that let me to say that that that business tends to go well through thick and thin and and and I think the the history through the low oil price era of you know late 14, 15 and 16.
I demonstrated that that part of that again.
What we saw.
In this or what we're seeing I should say and around the spring turn around work I think might be. Another example, here. We did we did see a number of locations, particularly perhaps over on the petrochemical side, but there were finding side as well sort of expand their scope during the low that was <unk> no way.
Near the majority, we we saw a much more conservative actions of of doing that doing that.
The the minimum <unk> shall we say or or or pushing out to the fall.
So you know little little bit a little bit of a mixed up again I would call. It a net negative, though I don't want to paint too rosy picture of that but it's work that.
That you know hasn't been pushed out of debt from hearing Q2, and we we think that it will very likely start to come back here in the fall turn around season.
And then just in terms of on the project side.
How would you oh rank.
Your your end markets when it comes to project <unk> you know from from most recently in terms of exhaustion shocks too you know likely to be first to pause or or delay a an F.I.D.D.C.
You know you know I I think <unk> I think you know well time they they they.
<unk> <unk> oftentimes. These projects really have you know a multiple multiple years scope to that to the F.I.D. process. It itself and and you know there's no question that that we have seen some pausing going on just prior.
Over to the F.I.D. being made we we we have not seen once F.I.D.'s have been determined how we we've not seen.
Turn backs, if you well from from that process and so.
You know from from a <unk> resilient look I think the petrochemical guys or you know probably you know <unk> healthier and more determined right now than they were finding side again I would say the LNG receivers are are are are more resilient. If you will or more aggressive then the exporters' with this at this point.
<unk>.
It's pretty early days too.
This is really bad.
You know I. This is really bad really something that.
Really kind of Ah you know as we all know really started to impact the market <unk> you know really over the course, the last 45 and 60 days at approximately and so I I think a lot I think a lot of people are seeing where they can take it down to the situation and and other times, where they need to where they need to.
Hunker down and and just just hit survivability mode. Most of our end users are not.
They're not this not about survivability Ah for them. These are these are big strong entities that have been through this type of thing you know in different forms for a long period of time.
[noise] I can appreciate that and then.
You know when it comes to the pacifier protecting opportunity related to D.V. several runaway <unk>.
Given how you you you just describe the evolution of your discussions how they deepened and expanded.
What does that suggest for the original timeline you shared for when you might be interesting to announce.
First partnership and then go on to see first sales.
Could.
Could you actually see remain on on track, we're not original timeline despite disruptions.
Represented by could be 19.
Yeah.
So far.
On the other on the thermal barrier side on the fire protection side, we have.
Not seen meaningful.
<unk> you know our our research teams.
Are are working call in in sort of a staggered outweigh in in the sense that there in the last for two or three days and then typically instead of going to their desks for two or three days to capture their work <unk>.
There are obviously going home instead, and so that that has been able to lower the density if you will and our research and development labs, and and and and and our counter parties are counterparts I should say on this work <unk> more or less seem to be having the same pattern.
It's interesting on our on our carbon era, <unk> and the battery materials side.
Again, working with a large south Korean company and a large German company as our evaluation partners you know they they they are a bit ahead of us up in terms of coming back to work and and so that that part I don't want to say, we haven't skipped a beat because again I think this has been unsettled.
Time for everyone involved but.
We're not anticipating significant delays and in network.
It's encouraging thanks for taking the questions.
Yeah.
[noise] [noise] again, if you're about to ask a question. Please <unk> normal one on your telephone keypad.
Question comes from the line Shamir Joshi from H. <unk>, we'll write your line is open.
Thanks, John Saint sounding session.
<unk>.
<unk>.
<unk> Botching D. also <unk> to have any meaning to them and use on these are just done much I know me Archie do does that you'll see somebody avenues.
<unk>.
Yes, I, if I, if smear if I understood correctly wet the the the portion of the two opportunities we have an electric vehicles the the thermal barrier.
Opportunity is one.
That we believe yeah, well generate initial I I want to emphasize not large, but initial revenue and and 2020 and and we would hope to to to build meaning fleet from there on the on the carbon era, Joe side or the battery materials side, you know that for.
<unk> is more of a three to five year revenue opportunity again, who are are real focus in 2020, <unk> that I guess as a as a marker of success and validation would be too deep in the relationships that we have with S.K. and and Ivanek.
And to enter into some additional.
Relationships with some some brand company sort of speak when it comes to battery manufacturing and electric vehicles.
Hi, Mr. Thanks about classification on the the England 20 build up front and.
Needs to the <unk>.
<unk> 90 lab that you learned last year.
I'm going forward a whole much all slow.
Revenues would you support for supported by this.
And and he's like Jane disruption.
<unk>.
Then gross margin.
<unk>.
Yeah, Yeah Oh.
<unk>.
Yeah, I, just so well so so so the finished goods inventory at the at the end of the first quarter.
Which support roughly 10 $10 million worth of of rather know so now that that that build up put us in a position where you know we we we could handle a significant amount of orders even if we we had lost access to the he's profits plan, which we don't expect to it at this point in time.
<unk> will it will have a modest delay to the sort of the benefits that we would otherwise received from the re formulation of of a few of our products because we've we've we've brought in a the raw materials.
Support the prior formulations, but but frankly that will be relatively insignificant once we fully implemented all three of the building material cost reduction initiatives.
During the second quarter, well will very quickly start to reap the benefits of those those costra duck.
I understood.
The last ones from the the cost reduction so leisure deductions.
What.
<unk> or just in terms of person.
Reductions or.
<unk> calls.
Operating expense.
[noise] John anyway.
Yeah. So so so we took a there was we we we we made the decision not to provide the annual wage increases which.
I would have run in the range of 3% to 4%. So that was a savings against our our plan are are are are 2020 plan. We then it for a executives and managers, we had a 5%.
Wage decreased but I think as as dawn noted the the the bigger impact is the the likelihood that we will not pay out any incentive compensation.
Data to our performance in Ah.
In in 2020, and and as a you know it dawns <unk> variable <unk> <unk> it'd be up to 50 per cent of his total compensation and so are more and and so so there really is a very significant overall wage reduction associated with.
Yeah, we've taken today.
Okay.
Thanks.
<unk>.
You are next question comes from the line Jed Dorsheimer <unk>. Your line is open.
Hi, Thanks to take my question.
I guess I just had a question around the.
Away application and [noise].
If you're using the.
The phone in the.
It is that due to.
Reduction of airflow since most of the batteries are are error cool how is that could you just tell me better understand that.
Well, it's yet.
I I think.
<unk>.
<unk> the R. and R. material is is focused on our carbon era, Joe program and and the thermal barrier. These are really separation.
But materials.
Between cells and and around modules and and so.
Are what we're trying to do is not.
It's not eliminate the the chance of the fire or or the energy, but rather.
<unk> or or <unk> impede the propagation of it from settled a salad module to module so.
Oh, but from an air flow perspective, so the thermal runaway you're trying to actually reduce the airflow. So you don't I have that I'm, just I guess curious in terms of that maybe I am conflating Ah the two.
But it would seem like there is they Ah.
Did there would be still way I guess, it's a balance in terms of the thermal runaway product versus the cooling needs correct.
Correct.
<unk> it cracked and we're we're not we're not claiming a direct role in that in the cooling.
Fluids.
But rather again, creating a thermal barriers again to try to contain.
The the the sudden energy loss to the <unk>, let's call. It the bad Sal, if you well and yeah and trying to.
Keep the.
The the the energy isolated to that to that style or at least impede the propagation of that and H.G. from cell to cell.
[laughter] in your discussion is with the battery.
<unk> <unk>, so I guess I'll formant is the question.
You know our <unk> would you split the discussions with cell manufacturers wishes battery or slash module or you know auto Oh, yeah ones that are.
You don't have assembly process.
Yeah, our our our primary work.
The thermal barrier side has been with E.V. manufacturers themselves.
Our our primary work on the carbon error Jal battery side has been either with a battery manufacture of course, like like S.K. or or a battery material Claire like like Ivanek and so that has been.
Said that.
Do you talk about expanding the scope or the and the number of partners. We have on the carbon error gel side and and and we are having discussions that include the auto manufacturers to them themselves. So we we think that it's quite likely that will touch.
All of those bases battery materials battery manufacturing and the T.V. manufacturers themselves in these in these discussions got it and maybe just a.
A neophyte question, but.
So in those discussions.
Are you starting to find in formulate where there is kind of a sweet spot in terms of battery size or battery chemistry, I guess on that on that yeah, no or a a a certain energy density that your solution it tends to.
Work best wet.
[noise] well one of the benefits of our evaluation agreements and and and in particular with with with S.K.C. part of F.K. group I've been this targeting.
Performance, and coughed, frankly, and and so and and and with some of the other companies that we've worked where they've given us very specific targets.
And the chain of saying you know if you can reach the targets. If you can demonstrate this performance there's always the cost copy out in there too you know so it's a cost performance deal we would like to take this to to another step and so.
So again the answer is yes, our our our research team is very much focused on a core set of of targets in it and it does really I think outline stage to stage in in our in our progress and so again, our our our team is is you.
Using these partnerships for this sort of targeting purpose.
Got it could you elaborate on that on what you know I I recognize that you have found the you know areas that are sweet spots, but.
Oh, there for <unk> chairs happy to but and and of course I'd really like to have our a portion of our team join me in that in that discussion to really focusing on those on that kind of technical detail.
Perfect Great. Thank you very much for the for all the details on the court. Thanks.
I get.
There are no further questions or this time I turn the call back to Don Young so close.
<unk> Hey, Jason we appreciate your interest in in Aspen Air jobs, we look forward.
Reporting to U.R. Q2, 2020 results at the end of July I'd be well and have a good evening. Thank you.
That concludes today's conference call you may know disconnect.
[music].