Q2 2022 Aspen Aerogels Inc Earnings Call
Prepared in accordance with GAAP, the definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of why we present. These non-GAAP financial measures are included in yesterday's press release and one final note during the Q&A session in the interest of time, we ask that you. Please limit your question.
Two questions at a time, if you have additional questions beyond the initial two please get back into the queue and we will get to all questions I'll now turn the call over to Don Don.
Yeah.
Thanks, Laura Good morning, everyone. Thank you for joining us for our Q2 2022 earnings call I will kick things off with a progress report on our financing activities and recent business developments and Ricardo will discuss business results and outlook, we will conclude with a Q&A session.
Over the past 16 months, we've raised over $300 million.
Scale, a company that is targeting revenue of $1 6 billion.
And EBITDA of $400 million as we seek to fully utilize our second aerogel manufacturing plant in the years to come.
We have existing manufacturing capacity to meet our two X revenue target of $240 million for 2023 and expect to utilize phase one of plant two in order to meet our three X revenue target of $720 million for 2025.
We expect to continue to raise capital in order to build out the required infrastructure to capture our full opportunity.
On June 29th we announced our decision not to proceed with concurrent public offerings of common stock and convertible notes, while we had significant demand from investors, including a $100 million indication of interest from Coke strategic platforms overall market conditions were unfavorable.
And as such the terms of the offerings were determined not to be in the best interest of Aspen shareholders.
As we have said in the past and is especially true in the current financial markets. We are taking in all of the above approach to financing our growth plan.
As we explore a variety of perspective sources of capital. We have continued to focus on strategic investors, who know our company and the markets, we serve and who have the potential to make equity investments in the business.
Coke strategic platforms has done in the past and indicated its interest in doing so again in our June financing effort.
In addition to potential strategic investors and the public equity and debt markets. We are engaged with government programs as potential 2023 sources of capital for plant two.
We have applied for a $150 million U S Department of energy Grant for advanced battery materials as part of the bipartisan infrastructure Act, which is which is designed to support U S based companies dedicated to the electrification economy.
We are also exploring other programs that are focused on battery performance and safety.
Programs target American manufacturing in an effort to address the resiliency of supply chains in the U S, especially for projects in critical areas of sustainability, such as energy storage and related materials.
While such do programs can take time and are unpredictable. We believe we are a very good candidate and that our pursuit is consistent with our all of the above approach to raising the necessary capital for us to execute our long term strategy.
We also believe that as additional public market investors learn the Aspen story with its secular growth trends and sustainability focus themes. These investors and of course, our existing investors will again be a source of capital for our fast growing dynamic company like Aspen Aerogels.
Despite the challenging markets. We are confident that we will raise the necessary funds to execute on our strategy to become cash flow positive in 2024 and to create value for our shareholders.
We appreciate your continued support.
Our business performance in Q2 remained strong despite lingering supply chain and staffing challenges.
We had a strong start to the year in Q1 with 37% year over year revenue growth in Q2 built on that momentum with 44% year over year revenue growth.
The first half performance reflected continued penetration in the EV market and high levels of activity in the energy industrial market.
With this commercial momentum and of course, our existing awarded programs with General Motors and Toyota. We are confident that we will have high year over year growth rates in 2022, and we believe that we are in a strong position to meet our $240 million revenue target for 2023.
Paraffin thermal barrier revenue was $11 million was nearly $11 million in Q2 compared to $7 6 million in Q1 and less than $7 million for all of 2021, we.
We anticipate that multi year thermal barrier revenue will be substantial and we are investing now to meet the demand.
We also recognize that automotive Oems will be impacted from time to time by their own supply chain challenges that could impact their growth ramps in any given period. We are trying to build in optionality to manage our overall revenue growth. During this early stage of the EV Mega trend by continuing to have a.
Deep order book and the energy industrial side of our business.
The strong outlook for energy industrial is fueled by pent up maintenance demand high energy prices and strong long term activity levels and LNG.
This flexibility is a good example of the benefit of our strategy to leverage the aerogel technology platform into a diverse into a diverse set of large and dynamic markets.
I would also like to provide a brief update on plant to our aerogel manufacturing facility under construction in Georgia.
With long lead time items purchased starting in Q4 of last year. The first phase of plant two remains on our projected timeline for completion in late 2023.
While the project is not immune to challenges related to supply chain disruptions and inflation. Our team supported by Coke project solutions is focused on building a first class aerogel manufacturing facility.
The first phase of plant to target $650 million of annual revenue capacity and will bring our total annual revenue capacity to approximately $900 million.
As we approach full capacity utilization at this revenue level, we are targeting EBITDA of approximately $225 million per year.
With reports, indicating that the auto industry is on track to invest half a trillion dollars in the next five years to make the transition to electric vehicles. We believe that we are well positioned to play an important role in battery performance and safety.
In addition to investments in plant two in Georgia and in our high volume Assembly facility in Mexico, We continued to make important investments in people systems and automation.
These actions enable us to scale rapidly to transition to positive cash flow in 2024 and to monetize our investments in building our dynamic business.
We also continue to invest in the strategy to leverage our aerogel technology platform into other high value markets with sustainability themes.
Our teams have been extremely productive this year, expanding our intellectual capital position across the aerogel technology platform with over 60, New inventions captured 33 patent families filed or in draft year to date.
We believe these investments in technology and new business development will continue to validate the richness of our aerogel technology platform and create significant shareholder value.
We expect our carbon aerogel initiative within aspirin battery materials to be next in line to commercialized products.
<unk> has completed the development phase of its next generation silicon anode material that targets, both lower costs and increased energy density and is now preparing qualifying materials for select automotive and battery Oems.
While these enterprise wide investments require capital and burden margins in the short term, we believe they set us up structurally so that we so that with full utilization of plant two we're positioned positioned to generate $1 6 billion of revenue and $400 million of EBITDA.
And at the same time have the opportunity from new businesses for potential additional breakout value.
We have important work still ahead of us, but I am encouraged by the progress we are making towards achieving our goals.
And finally.
I would like to continue the practice of highlighting our ESG work during quarterly earnings calls for the past two decades ESG has been linked to the success of our business. It is a natural fit for us to explore new uses for our aerogel technology platform with the goal of improving the environmental performance and safety.
Of our customers' products and processes.
It is also at the core of our culture to respect and celebrate our employees by striving to create a diverse and inclusive environment.
We believe we have the responsibility to make.
A positive impact on our communities and we are committed to creating a corporate culture that pursues its mission with the highest standards of integrity.
We will be releasing aspen's inaugural ESG highlights report and launching our Es Jeep webpage in the coming days, which will provide a comprehensive overview of our overall ESG strategy.
We look forward to your feedback.
I will now turn the call over to Ricardo.
Thank you Don.
I'll start on slide four and our financial highlights for the second quarter.
Starting with revenues high demand across all our markets and the successful execution of various initiatives to increase our throughput has.
Have enabled us to deliver $45 $6 million of revenues in Q2.
It is close to our company's quarterly revenue record of $46 5 million in Q4 of 2019.
And translates into 19% growth over the previous quarter and 44% growth year over year.
Year to date the team has managed to grow revenue by 40% year over year to $84 million.
Well, we have mentioned that the EV thermal barrier opportunities materializing faster than originally expected.
I will start by highlighting that our energy industrial revenues increased by 13% over the prior quarter to $34 9 million.
This is driven by very strong demand from our distributors as we continue to fulfill a meaningful backlog of delayed maintenance demand, while continuing to displace competitors materials and new projects that are being built the higher efficiency standards with tighter timelines.
Delivering this level of growth in our core business, while also increasing our EV thermal barrier revenues to $10 8 million or.
42% quarterly increase.
Demonstrates our team's continued ability to deliver the growth that is required to meet our long term objectives.
Now I'll highlight our main expenses, while reminding everyone that despite the growth that we've been able to deliver during the quarter both of our business segments still arent running at the annual revenue run rate that is needed to properly absorb our fixed expenses and meet our target profit objectives.
Accordingly.
We continue to manage every cost element to ensure that all our recent productivity investments start delivering results.
I'll return to this point in more detail and cover how implementing operational elements beyond simply having a higher revenue base will drive meaningful gross profit increases.
Elements, Fortunately and require no radical new process invention or development. It is simply a matter of putting them in place and validating them.
Material expenses of $26 million for the quarter made up 57 percentage points of sales, which is over 10 percentage points higher than where we want these to be long term.
This variance is currently driven primarily by the scrap levels required to accelerate our EV thermal barrier throughput with processes designed for lower volumes and nonrecurring inbound freight expenses to ensure uninterrupted production.
Various product design changes aimed at simplifying our assembly and reducing the number of parts in the bill of materials of our EV thermal barriers will help us address these nonrecurring costs.
Conversion cost of $20 8 million reflected the last quarter of our thermal barrier Assembly facility in Rhode Island, delivering most of our production.
To illustrate the burden of this are our temporary hourly labor cost of this facility. We're a $4 5 million to deliver $10 7 million of revenues during the quarter.
More broadly the higher revenue run rate of our energy industrial business enabled our total conversion cost to decrease by four percentage points of sales quarter over quarter to 46% or $20 8 million.
Operating expenses, which are key to delivering our revenue and profitability goals of 2023 and beyond.
There are $21 4 million.
These increased by $4 6 million quarter over quarter versus an increase of $6 $7 million in Q1 over the prior quarter.
As we go into the second half of the year, our opex increases will be more modest and focused precisely on delivering three things.
One tangible productivity benefits through new process development and implementation of systems that streamline our methods and drive productivity.
Two new business awards through our EV thermal barrier technical sales efforts.
And three clear milestones in our R&D efforts. These include our silicon anode carbon aerogel development efforts, along with R&D efforts and our silica aerogel based installation formulations.
These are the developments that drive lower chemical waste expenses through re formulation and enable throughput improvements such as longer rollings and faster line speeds, while ensuring the same quality standards.
Accordingly, our net loss increased to $24 million or <unk> 68 per share versus a net loss of $6 7 million or 23 per share in the same quarter of 2021.
Adjusted EBITDA was negative $18 3 million in Q2 compared to negative $3 4 million in Q2 of last year.
As a reminder, we define adjusted EBIT net income or loss before interest taxes depreciation.
<unk> stock based compensation expenses and other items that we do not believe are indicative of our core operating performance.
In Q2. These other items included $2 3 million of stock based compensation and a $1 4 million of interest expense.
Next I'll turn to cash flow and our balance sheet.
Cash used in operations of $10 million reflected our adjusted EBITDA of negative $18 3 million and the reduction in operational cash needs of $8 3 million that was mainly driven by a $12 $9 million increase in accounts payable.
Capital expenditures during the quarter of $37 $9 million.
<unk> included the ground clearing foundation.
And building a plan to <unk>.
Assembly equipment for a higher volume thermal their operations and the R&D lab upgrades for our carbon aerogel battery material efforts.
As progress remains on track for planned to come online at the end of 2023, we have capitalized $62 5 million through the end of Q2 towards it.
Cash provided.
Bided by financing activities of $4 9 million. During Q2 included $4 8 million of net proceeds from our ATM offering transactions at a gross average price of $20 18 per share.
Year to date, we have raised $67 9 million.
Opportunistically through ATM offering transactions at an average price of $14 46 per share.
As Don mentioned earlier, we are employing and all of the above approach to raising capital.
And as we consider all markets and avenues, the ATM offerings play a very small role in our broader financing efforts.
We ended the quarter with $162 2 million of cash no borrowings under our revolving credit facility.
Shareholders' equity of $164 7 million.
Our outlook for the year remains unchanged.
We are geared to deliver revenues of $180 million with potential upside to $200 million.
And net loss in the range of $79 8 million and $86 8 million and adjusted EBITDA in the range of negative 55 and.
$62 million.
Our capital expenditures for the year are expected to range between $250 and $300 million.
Delivering a $100 million to $120 million of revenues during the second half of the year in place at 10% to 32% increase in our Q2 revenue run rate.
This increase is subject to various external factors beyond our control.
Such as our thermal Bayer customers' ability to fulfill their stated vehicle production volumes.
And the supply chain of our raw materials, such as Stylings batting cotwo and the local labor market, particularly for our aerogel facility in Rhode Island.
We are proactively managing our supply chain risks and have ensure that where supply those filings and batting to execute our production plants.
Recent nationwide Sidoti shortages, and a tight labor market post the highest near term risks through our continued throughput <unk> increased plants.
And managing Capex, we arent seeing the same inflationary pressures of Q1 and are cautiously and ensuring that we pay the latest prices for some of the key commodities going into plan to versus the cost at which some contractors built inventory earlier in the year.
Turning over to slide five and going back to my earlier point on profitability.
During the quarter, our EV thermal barrier segment run at a roughly $40 million annual run rate.
Our energy industrial business ran at a roughly $140 million annual revenue run rate.
At these run rates, we're still not quite getting the most out of our overhead and fixed asset base.
Above our run rate of $150 million per year.
Our energy industrial business can deliver 20% plus gross margins.
Our EV thermal barrier segment requires an annual revenue run rate of around $120 million to deliver 15% plus gross margins as we ramp up production in Mexico.
The introduction of simpler designs and more automation will help it will help us lower the run rate requirement.
Our EV thermal barrier business has been quoted to deliver our target margins of capacity.
And our energy industrial pricing environment as favorable enough to see.
Support price increases that will take effect on every order fulfilled in 2023.
Beyond fixed cost absorption or operating plan includes several initiatives that we're executing on both segments to pay our path to 35% gross margins at full capacity.
On this slide we'd like to illustrate for you how the implementation of specific initiatives in our operating plan will drive gross margin improvements as our revenue growth at the same time.
As I mentioned earlier, we're not reinventing processes and don't carry technical risk because we do this it.
It's simply a matter of getting these initiatives done as.
As we have year to date with the successful startup of our thermal barrier facility.
Assembly Assembly for Assembly in Mexico.
Our EV thermal barrier business is undergoing a meaningful operational transition.
As we mentioned earlier our production over the past three quarters has been delivered.
With a set of low volume processes in the manual facility in Rhode Island.
To illustrate this the number of thermal barrier Assembly hourly staff into this facility increased from 278 at the end of November of 2021 to a peak of 428 in June of this year.
We are back down to 280 people and have approximately 600 people in Mexico ready.
We're ready for the volumes of the rest of this year in 2023.
As we move this work to Mexico and introduced processes designed for higher volumes, our conversion costs are going to decrease significantly and improve our gross margins by over 30 percentage points in 2023.
For Q1 of next year. We also have planned various automation processes for the encapsulation of the aerogel and the assembly of the thermal barrier parts.
These will further reduce our conversion costs by reducing cycle times and labor cost per part and at the same time increase our production yields.
The reduction in part complexity by implementing various engineering changes working with our customers. It's also streamlining our processes.
Aiding with pricing and driving productivity over the next two years.
And our energy industrial business portfolio management longer product runs with less changeovers and re formulations in our base chemistry to reduce our chemical waste expenses will continue to drive conversion cost reductions.
Longer installation production rollings and faster in line speeds will increase productivity by Q4 of this year.
Our recently expanded supply chain team, it's also more than making up for the incremental fixed cost by streamlining our logistics and driving the negotiation of raw materials to a larger scale.
Plant two in Georgia will also improve our cost position overall with a linear process that will require little manual material handling and circular processes for key chemicals, such as cotwo in ethanol.
This will reduce our material cost significantly along with our environmental impact and the cost of this impact.
Our target margins also factor in the DNA of planned too that will kick in as it comes online in 2024, and we grow into its full capacity.
As one can see here our plan is to not just rely on higher revenues to improve profitability. Most of the improvements come from the successful implementation of productivity improvements and the launch of operations in flexible and more productive locations with processes designed for higher volumes.
This plan is well within the capabilities of our current team and recent milestones keeps us motivated to continue on our path to 35% gross margins have capacity.
Turning over to slide six we would like to provide a brief market update on what we're seeing in the automotive EV market had these dynamics validate our strategy.
And the effect that these are having on our commercial discussions with the world's most relevant Oems.
Here you can see that seven of the top eight Oems that are expected to command over 65% of the EV market are focused on high energy density high nickel content Chemistries.
We are also focused on prismatic or power cell form factors.
These configurations are most compatible with cell to cell barriers like pirate's.
Several Oems are also evaluating lower energy density Chemistries, such as <unk> and we are actively quoting LSD programs as well.
When we look at the market, we see pirates and incompatible with at least 19 million vehicles.
And what Piper Sandler forecasts to be at $24 7 million unit market in 2025.
We are creating the market for aerogel based cell to cell barriers.
We do this by leveraging the innovative.
The thermal isolation fireproofing and mechanical properties of our material having.
Having a system level approach and building unrivaled scale.
All in all the size of the market and <unk> positioning as a unique solution presents an increasingly compelling opportunity.
Turning over to slide seven.
Here, we can see some other encouraging news and a summary of some of the most relevant UN global transportation requirement updates for EV safety that are bringing additional focus to the issue of thermal propagation and thermal runaway around the world.
This issue is currently not at the top of consumers' minds, when he's make up less than 10% of the new vehicle market, but will become more relevant as evs make up a higher share of the global vehicle park and more than 25% of global new vehicle sales in 2025.
The update to the global transportation requirements is focused on providing drivers with a five minute warning intended to give them time to evacuate the vehicle in the presence of a danger costs by thermal propagation or runaway in a single cell.
Current battery management systems can already triggered this morning, but.
But the hard part is enabling five minutes or more of safety.
With <unk>, we can enable Oems to turn what is currently a catastrophic event into a serviceable event.
The GTR updates became mandatory new vehicle regulation for new vehicles last year in China, South Korea and Japan.
They are being considered for implementation in the U S. This year and come into effect in India next year.
Helping Oems to not just meet these warranty requirements, but provide real protection in the rare case of thermal propagation and runaway and proactively developing the capabilities and scale to meet their standards is ensuring that we maintain our lead position as we create this market.
In slide eight.
The results of our market building efforts are illustrated.
We are attempting to provide you with an accurate and constructive view of our commercial efforts in this chart. The size of the circle is the vehicle volume in millions that Piper Sandler is forecasting for these Oems in 2025.
And their placement on the map is their approximate headquarters location.
The color of the circle, then determines whether we have been awarded business by that OEM.
Are actively quoting business undergoing testing.
Or not active with that OEM.
It's no surprise that GM and Toyota are the red circles with $2 3 million vehicles in North America, and half a million vehicles and Japan, respectively.
You can see that our team has successfully entered the quoting stages over the last 18 months with the largest customers in Europe and Asia that will be relevant on a global basis in 2025.
We feel confident in their ability to convert this activity two additional awards over the next 12 months and are glad to see the value of these quotes surpassed the value of our current awards with GM and Toyota.
As you all know the timing of these awards is linked to an Oem's readiness to award the business and it will be as forthcoming as possible with our communication as these awards materialize.
Assessing the value and probability of these quotes taste.
Paves the path for us to become a company with a $1 6 billion of annual revenue capacity delivering over $400 million of EBITDA. Shortly after we achieve our near term objectives through 2025.
With that I'm happy to turn the call back to dawn.
Thank you Ricardo before we turn to the Q&A session I would like to reiterate two important points first both our EV and energy industrial businesses are going strong and are providing a favorable backdrop for us to reach our 2023 and 2025 revenue targets and.
Second we are laser focused on turning the investments that we are making today into a business that is cash flow positive in 2024 and is on the way to its longer term goal of $1 $6 billion of revenue and $400 million of EBITDA.
Form.
Let's turn to the Q&A. Thank.
Thank you.
Absolutely.
I would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove that question. Please press star followed by Q.
Again to ask a question Crestar one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
First question comes from the line of Eric Stine with Craig Hallum.
Eric Your line is now open.
Good morning, everyone.
Hi, Eric.
Hey, Jonathan.
First just thanks on slide eight.
That's a great slide very informative so thanks for including that.
Maybe just thinking about the acceleration in activity on the EV side I'm just curious how are you.
Intercity value is playing into that.
And how it's playing into discussions and also plans that you are making on your side.
As you work towards phase one here have pointed to.
Well, let me just start by saying that.
It is important that.
We demonstrate our ability to build out our capacity as we've said many times we have the we have the capacity in place.
To meet our 2023 targets and we will be relying on phase one.
For our 2025 revenue targets, but it's even more than that.
We know that even in the 2025 timeframe, if you take energy industrial General Motors and Toyota.
It represents.
A significant majority of.
That of that capacity. So it's important that we continue to.
To demonstrate this next wave of.
Oems that will have the capability of.
Of supplying them and we think we're doing a good job of.
Of communicating that.
So today I mean.
It sounds like today that is not necessarily a concern of OEM. This although I would think it is something that.
And then two given the importance of this issue to want to maybe be further up in line in terms of the decisions they make around the coding that you've done.
I think that's a fair I think that's fair, it's Eric I think Thats, a fair sort of instinct.
That they have and it's again it's.
Part of our communications as we as we as we go out and win these.
Next set of awards.
Yes, Okay, and then just on the second one.
The fire containment.
That is.
It seems to be a pretty important.
Thing that Youre able to do.
What type of awareness in the industry are you seeing I mean, how does that play into the acceleration of activity as well, making it more of a.
Our service event, rather than catastrophic as you put it.
Wow.
The way I think about that and Ricardo I think articulated well.
Both in his script.
And the related slide.
That we're seeing some of the regulatory.
Standards.
Begin to be implemented.
Those are I think those are positive for us for sure.
Most of the Oems, we're working with are setting a higher standard for safety.
And then then those baseline requirements.
And we've.
We've discussed openly in the past that our that our work.
And the design of our products are striving.
Not only to slow the propagation.
But to isolate the bad cell and that is a very dramatic.
Mindset change from having that catastrophic fire that.
That is well understood up to again to up to a service of that that impacts our cell or a module itself that can be replaced.
And more of a service oriented manner than the replacement of the automobile overall so.
We think those standards are excellent we've never really.
Relied on regulatory.
Aspects to drive our business, but we think those are foundational and very positive for our business.
Okay. Thanks, a lot.
Thank you Eric Thank you.
Thank you for your question. Our next question comes from the line of Alex Potter with Piper Sandler Alex Your line is now open.
Great. Thanks, guys.
So I did and good morning.
Interesting slide.
Slide eight it's encouraging to see how that quoting activity.
Including on I guess landmasses other than North America, but one of the questions I had.
On that obviously <unk> is going to be primarily a north American platform.
But some of these other.
Say European or Asian Oems.
Clearly they have their own platforms and they have their own plans in those regions a lot of those places are pretty far from Georgia. So how.
How much of a concern is that for some of these customers. If people are looking more and more localizing battery supply chains are you able to supply all of their needs out of Georgia are any of them insisting on having more localized capacity either in Europe or Asia to support their ramp.
It's a very good.
Good observation.
The way, we're thinking about it today and the way we've communicated it to the to the Oems is there.
We will we will have our first one 6 billion.
<unk> of revenue capacity here in North America between our Rhode Island, and Georgia plants, but what we are also.
Committing to is to have.
Fabrication assembly facilities.
Regionally.
Just as we have our north American operation.
Principally expanding very rapidly in Mexico, it's clear to us that.
A European OEM.
OEM will want to have that capability and move that supply chain.
That aspect of the supply chain closer to their own assembly plant. So.
I guess I would also just say that while we locate.
The circle, if you will in their home base.
Many of these companies are global in there and there and they're in their nature. So.
And they are located in their location so.
The regional locations I guess, I should say and so.
Anyway, so we.
We are mindful of that Alex and I think depending on how.
Our demand builds out over time and as we fully utilize plant two.
We will certainly be mindful.
Of that mix geographic mix of our business as we think about building a second.
Today, we are highly focused on phase, one and add on phase two or two and getting to that $1 $6 billion of revenue and $400 million.
EBITDA target.
Great perfect, Yes, one thing at a time.
Okay. So the second question you alluded this.
A couple of times in the prepared remarks.
Hoping maybe break down a little bit it sounds like.
You may be experiencing some staffing bottlenecks.
It sounded like that was primarily in Rhode Island, but it also sounded like you had.
Now that the Mexico facility is opened up you are able to I guess downsize a bit in Rhode Island. So if you could just maybe elaborate on.
Hiring staffing any potential problems you are having either in Rhode Island or in Georgia that will be helpful as well. Thanks.
Yeah. Thank you Alex.
We have.
Improved the staffing of our aerogel manufacturing facility here over the course of the past.
Six months it was a it was a bit of a struggle for us the latter part of last year, our Q4 in particular.
Coming into this year and Q2 and here here in July we have made good progress.
And staffing that facility and.
And so it has less of a less of an issue for us.
The.
We do.
Ricardo alluded to this.
And it really in the margin walk and what are we doing to improve we have redundant activities going on today as we as we ramp and I think the Rhode Island Assembly to the Mexico assess.
Assembly facilities.
Mexico has really met for the high volumes that we're ramping up to here right now we have sort of both of them operating.
That won't be required going forward I will always have some capability here, but it will be more in the prototyping.
<unk> early stage work that we that we do so so being able to eliminate.
Those redundant activities being able to eliminate.
Get to some of the nonrecurring activities get those off.
Our income statement.
It will improve our gross margins improved significantly and we're very we're very focused on that.
Yes, if I may add another.
Another key thing here is particularly when it comes to the aerogel plankton.
In Rhode Island.
Our HR team and the operations team have come up with an incentive scheme.
Aimed at managing retention.
And.
We I know you mentioned that we currently have over 200 people.
Still on the thermal barrier Assembly side.
In Rhode Island.
That.
We'll drop here its a less than 100 before the end of this month as well so that transition is actually a pretty quick one in Q3.
So while we're highlighting the risk.
We do think that the team has implemented enough measures to.
To get it under control.
Yes.
Alright, perfect. Thanks, guys.
Thank you Alex.
Thank you for your question. Our next question comes from the line of Chris <unk> with B Riley Chris Your line is now open.
Hey, guys. Thanks for taking my question here.
Could you provide a bit more color on the commercial progress slide just how should we think about quoting and testing versus the way you used to discuss the three stages.
Should we should we think about testing according as kind of the last step.
Before Toyota and GM orders came in and maybe just the timelines.
From the different steps with GM and Toyota.
How that kind of timeline.
<unk> was consistent would be helpful.
Well certainly.
Quoting phase was very much in that and that.
And the stage III.
Part of our earlier kind of stage one stage two stage three sort of concept.
And I think testing is.
Solidly in probably the later stages of <unk>.
Two is we.
Again use those use those.
Those concepts, but when we are when we are quoting.
We have gone through.
Significant.
Amount of testing and qualification.
And.
Around quality systems right through to product.
Performance in specification. So this is this is pretty late.
Late stage and are in our development work with a given with a given OEM. So.
Where you see the.
The blue circles on that slide eight that.
Is that is definitely stage III work that where we're trying to translate into <unk>.
Awards here over the course of.
Coming 234 quarters.
Got it Okay, and then just kind of looking at.
The awarded OEM forecast Youre exciting here in the ranges you've talked about content per vehicle. It looks like you guys are being really conservative with that $540 million 2025 higher than target.
Neither the volumes or the content per vehicle.
So maybe you could just kind of walk through where you guys think you are.
Setting yourself self up particularly nicely because.
Obviously, it gets towards the mid point of that.
We're already looking at filling up.
He's one of plant two pretty quickly there. So I just wanted to get a sense of.
How we should think about that and then.
Our content per vehicle still kind of coming in that range. You guys had initially talked about not.
Not initially but.
Subsequently, we were talking about.
Yes, I mean this is an interesting one so we are seeing.
Different than the content per vehicle between prismatic cell configurations.
And those Oems where.
<unk>.
Where our technology is going in between.
Which sells and so for example, <unk> is running pouch cells and so they are content per vehicle is.
Some are.
Well above 1000 answer vehicle.
But we think it'll settle to around $600 a vehicle.
And Youre right I mean, when we take.
All of the external assessments of Gm's volume or Piper Sandler here on slide eight at $2 3 million in 2025 that will put us well above the $540 million.
That we've communicated for thermal barrier so far.
We are going through may.
Making our own assessment of avoid Gms volumes will will truly lie and in order to CTV will land.
Right now, we still think that.
The tripling of revenue with that mix of thermal barrier and.
Energy industrial revenues in 2025.
Is still accurate to the best of our of our knowledge and with all the purview of the information that we have.
But yes, I mean theres definitely.
The chance to.
And which we could very well find ourselves in a situation here I think.
Accelerate.
Buildup.
Phase III.
In order to accommodate.
Yes.
An expansion of the current awards and these other awards that the commercial team is on the final stages of.
I think one other thing Chris that I, just mentioned is that.
If you.
If you look across the spectrum of <unk>.
General Motors.
In the vehicle.
The model that we're on with with Toyota.
General Motors has started off with some fairly large vehicles frankly.
If you look at their rollout here.
Articulated very clearly.
Over the course of 2023 2020 for 2025, you get quite a broad range of vehicles, including.
Some smaller higher volume vehicles.
And we know that that those vehicles have fewer modules, making up the battery pack and CPB sort of translate from from there. So.
Your question is a very good one and we're mindful of it.
We've.
Continued to try to have people focus on on CPE.
<unk> in that 303 hundred $50 kind of range.
<unk>.
Even though the numbers are higher than that today.
And I guess this also goes back to why phase one was scoped out the way it is because when we look at the Capex of phase one it really is around $200 million of equipment inside of $375 million building that is already equipped to handle both phases.
And so then we're able to bring in phase two within around 12 months notice at any given point in time and so here is.
As these quotes convert into awards.
We could very well ask.
Accelerate phase III and.
And Thats why.
Our mind really yes at this $1 $6 billion of revenue level and $400 million of EBIT.
As we look into the future.
That that spending.
In phase one to create the infrastructure to support both phases phase two.
We estimate.
Cost an additional $125 million.
But clearly we're spending in advance to be faster and bringing up that second wave of capacity in class II.
I'd say Thats. Another example, and Ricardo and I talked about it in our our scripts of.
The investments that we're making now to be able to handle the volumes that we see in 2023, and four and five and whether those are in people in.
And processes and automation.
Making those investments.
To a great extent here in 2022 to prepare ourselves for those for those higher volumes.
And we understand that it's it's it's pinching our margins today, but we do believe in combination with the actions that Riccardo articulated in his script.
Doing those doing those two things are good business practices.
And.
And our margin walk.
Leveraging the greater volumes.
The math works out very favorably for us as we as we strive for those 35% gross margins that we've articulated.
Okay. That's very helpful and just could you kind of add up all the people that you are already quoting one six is probably not enough here.
If you were to kind of with everything right. So I'm curious how you would think about kind of capacity beyond that is there additional space around the facility, where you could kind of have a phase III there or is it.
Something that you think you kind of look to build elsewhere to kind of piggyback on someone else's question.
Yes.
These are these are good these are good questions.
And from that.
We do try to focus on.
Preparing for success and we feel we're doing that with a lot of the investments that we're making here I believe that when.
When we when we have flat too.
Fully fully utilized at that one 6 billion.
Our revenue level and generating significant amount of cash in the business.
That we are likely to.
I want to build our third aerogel manufacturing facility elsewhere.
And quite possibly in an international location.
It's getting back a little bit to Alex's question as well.
That that those Oems may very well want.
To shorten that supply chain, and we think that will make them, we think that will make a lot of sense.
For us too.
To do it to think about it that in that matter, yes, I mean, another thing worth noting on slide eight is that.
The I mean.
These arent exactly the volumes that we're quoting with these Oems right. These are these are the market sizing of how many.
<unk>.
The 5% of their forecast expects these Oems to sell in 2025.
And in many of these quotes we were quoting a platform that has a subset of their total EV volumes.
Or.
Or a nameplate that is being that is being rolled out.
<unk> 2025 as well so so we think we can manage within the one six pretty well here over the next three to four years.
Okay.
Helpful. Thanks, guys.
Thank you Christine.
Thank you for your question. Our next question comes from the line of Jason Bernoff on behalf of Colin Rusch with Oppenheimer. Your line is now open.
Sorry, this is actually Collin.
<unk> does so.
Okay.
The.
The energy and industrial revenue here and the diversity of customers. It looks like you guys are making some good progress in terms of expanding that customer base and also the visibility on growth from this year to next year, which looks pretty substantial.
Yeah.
It is.
Really rewarding and we have a.
These are.
This is our initial market, obviously, we have extremely strong team.
Around the world.
Serving that that business that continues to be a business. While we have tremendous growth here in the U S. It continues to be a majority.
The majority of the business outside the U S. So I really like the footprint if you will of the.
Business geographically.
I would just say that.
The diversity is also quite outstanding.
Array of applications that we're serving our maintenance work.
Continues to be an important part of that business and maintenance work is always felt to us a lot like baseload.
Apart from the Covid interruption.
That business grew nearly every quarter since we introduced those products on the maintenance side and then we get the swings a bit more on the project side and and we're seeing.
We're seeing interesting project opportunities.
In our traditional sort of pipe in pipe subsea pipeline activities, but also of course from the LNG business, both on the liquefaction side and on the receiving terminal side.
<unk>.
And in all regions really and so we're really excited about that about that business, sometimes I think it gets lost in that in our discussions about.
The EV megatrend for sure, but it is a it is a significant business that we that we think that we can continue to grow and we also believe that our our products focused on efficiency asset resiliency and safety.
Our our spot on as these facilities.
Think about their own ESG goals.
<unk>.
And sustainability commitments. So again I appreciate the question, it's really an important part of our business.
Okay excellent and then on the Capex numbers it looks like you've kind of a 66 $67 million through the end of <unk> and <unk> got.
A fairly substantial amount left to go to 100 or a little bit more for the balance of your plan. This year I guess can you talk a little bit about the cadence of how that money is going to flow out.
And any of it that you can defer into next year without any real impact of Timeframes.
Yes, I mean, theres a good chance to defer some of the Q4 spend which would be of around $150 million.
And then this quarter, it's looking like it's going to be anywhere between $70 million to $100 million of Capex.
Yeah.
Sure.
We're actually seeing the expenses come in later than we originally planned.
And.
And yes, there is a good chance for around <unk>.
<unk>, 15% to 20% of our total capex budget for this year to spill over into next year.
Okay. That's super helpful. Thank you so much.
Yes, we're very focused on that Colin as you can imagine we.
We want to balance obviously, there are our balance sheet and.
And the importance of building.
Flat to in a timely timely way so we're.
We're very focused on making sure we are in good shape on both of those fronts.
Thank you okay.
Yes.
Thank you for your question. Our next question comes from the line Tom.
Tom Curran with Seaport Global Hogan.
Tom Your line is now open.
Thank you good morning.
Good morning thermal barriers.
For thermal barriers when I model guidance suggests you should hit that annual revenue run rate of $120 million for the second half of next year. So potentially just 12 to 15 months out and.
Do you expect to be able to achieve a gross margin of 15% at that run rate.
<unk> would you please revisit and bridge for us.
The expected upswing in gross margin from the steep negative level being inherited at 40, million% to 50% and $120 million could.
Could you. Please just breakdown it and quantify each drivers expected contribution to that target margin improvement.
Yes.
Sure. So I mean conversion I mentioned in my script that over 30% of an improvement at least in 2023, when we look at the.
The full year.
We think that will be closer to 35, as we think about that than our ability to.
To improve the way we absorbed fixed expenses.
Thats about another 10% improvement.
Then some of the engineering changes that we're implementing.
Our actually reducing the overall material cost as well.
And that.
I think we're being a little bit conservative as we assess that but that could be anywhere from.
<unk> two five percentage points of sales here as that shakes out.
Logistics as we as.
As we go from shipping aerogel from.
As we go for shipping.
Less aero gel, because we're improving our yields in Mexico, that's about a six percentage points improvement.
In 2023.
And so when we put these all together.
Okay.
That's what gets us to that.
To the positive 15, plus on a run rate basis closer to the third quarter of next year.
Okay.
So that's how it would break down I mean I think the.
The negative 66 of Q2.
Can't be totally.
After the 2023 point because of the.
Of the variable labor expense.
The temporary labor expenses that I outlined right. So if we take that all right and Thats why it wasn't we're on.
Annualized $40 million was that negative net negative 66%.
Steeply negative right.
Exactly.
Yeah Okay.
I think it is.
As we look at Q2, I mean Q2 was better.
Q1 was better than Q2 got worse.
Q3 is probably going to be about the same and then we'll see our improvements really kick in in Q4.
And it really goes to a lot of these first half the first half of 2023.
Really be that big inflection point.
In terms of correct, yes, yes crossover into.
Profitable and then double digit gross margin.
Yes, we will.
We will have <unk>.
<unk> eliminated the majority of some of the redundant operations that we have we will have addressed a lot of the nonrecurring.
Expenses that we have as we as we scale up right now and.
Those are those are big drivers in the numbers as well, especially compared to where we are here in Q2 and Q3.
Great.
Helpful. Thank you for that and then for the $150 million deal. We grant application what would be the timing and nature of the next milestone on the path to approval and if you do qualify and it certainly seems to me that you feel like Youre certainly an ideal candidate when should the granby extend it.
It would have it would have a 2023 impact on on on our capital.
And this will.
The process is going to play out here over the course of the next six months, Tom and these things are.
These things can be a little opaque, but we have good advisors.
Sure.
We are.
Very engaged and we think we have an excellent.
An excellent application if you will for the graph, we're well engaged with the Doe.
And.
So again I think it's a little hard to.
I think I said in my script that these things play out.
A little bit of it.
Unpredictable manner, but again I think we are a very good candidate and it fits neatly into our all of the above.
Strategy and.
We're encouraged I think by.
Where we stand in this but but we will give updates on a certainly on a quarterly basis as we make progress through that through the process that the Doe has.
As outlined.
Great Best of luck with it.
Thank you.
Thank you Tom.
Thank you for your question, ladies and gentlemen, as a brief reminder, it is star one to register your question.
Yeah.
Our next question comes from the line of Amit Dayal with H C ran right.
Amit Your line is now open.
Thank you good morning, everyone. Most of my questions and good morning.
Just on the battery development side any updates for us.
Are you any closer to moving forward testing.
Testing et cetera with customers.
Yes.
On that and we've pretty much exhausted the testing that we can do and in coin cells and are transitioning to testing on larger pouch cells.
And as we do that I mean, obviously.
Doing that.
With some partners.
Whose core competencies, making larger form factor cells is ideal and thats what.
What the team is right now focused on really trying.
Trying to find the right relationships. So that we can accelerate our testing just given the encouraging results that we've seen on coin cells and and.
And as we do that Thats one of the really the pace of validation will will ramp up here in the second half as we try to meet our goals for the year.
We have made in the past 12 months.
So meaningful investments in that team and equipment and.
And that is that is paying off where we are as I said in my script, we are now.
Abel and in the process.
Around.
Producing.
What we referred to as qualifying materials.
And those are those are destined for a select group of automotive and battery Oems and so we will see that play out here in the in the coming quarters. This is this is not a fast process.
We don't underestimate how this works and with the progress that we're making technically we think is outstanding both from a performance and a cost point of view points of view.
And we also really believe in the in the market itself.
That is to say the importance of of.
Introducing silicon.
And greater percentages.
Lithium ion batteries as a means of of <unk>.
Improving.
Energy density and drive range.
Understood that's all I.
Nowadays I appreciate that thank you.
Thanks, Kevin I appreciate it.
Thank you for your question. Our next question comes from the line of Chip Moore with Es Hutton ship. Your line is now open.
Thank you good morning.
Good morning, I wanted to follow up on on that funding.
You should be a great candidate there for a grant I'm actually more curious about LTM securing their conditional loan do you think.
Central there to accelerate pirate than sales or.
Do you think thats largely contemplated in their existing plans.
Yes that was that was terrific that was part of a different program, but at the same themes right.
That was alone and we've applied for a grant.
But again, we were encouraged by.
By what general Motors and <unk> and.
LG I think together.
Sure.
We were awarded in that in that process because.
I think.
We havent upped our numbers to GM because of that but again, we just find it really encouraging.
That that businesses well supported both internally by.
Bye Bye General Motors in LNG in an externally in such programs as $2 5 billion.
From a from a DIY.
Understood.
That's helpful.
One more for me on battery.
Cereal you talked about.
Qualifying materials can you give us maybe a sense of.
How much of a replacement for graphite.
Materials could be in.
Maybe sort of a sense of path to future iterations.
While we are.
We're working through much much of this.
Today.
Our team has articulated.
Goals of 20% to 40%.
Replacement cost or I should say silicon content and.
And that's a fairly large range obviously.
A lot of times that range has as much to do with the overall chemistry and system. If you will as it does with the capabilities of our materials. So we think that that range will vary.
According to.
Yes.
The.
The cell manufacturer in the battery design it.
Self but meaningful improvements.
Relative to.
The relatively small amount of silicon and in some of today's lithium ion batteries.
Single digit typically at best.
Alright, thank you.
Thank you chip.
Yes.
Thank you for your question Eric currently no further questions waiting so I will pass the conference back to Don Young for closing remarks. Thank you.
Thank you for thanks for your help.
We appreciate everyone's interest in Aspen Aerogels, we're very excited about the work we're doing in finishing the year strongly.
And we look forward to reporting out our third quarter 2022 results in October .
Be well have a good day. Thanks, so much.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.