Q4 2022 Aspen Aerogels Inc Earnings Call
Good morning, Thank you for attending Aspen, Aerogels, Inc. 'twenty to 'twenty financial results call all.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
I would now like to turn the conference over to your host Looker-on Aspens, Vice President of Investor Relations and corporate Communications. Thank you you May proceed Ms <unk>.
Thank you Elliot and good morning, and thank you for joining us for the Aspen Aerogels fiscal year, 2022, and fourth quarter financial results conference call with US today are John Young President and CEO and Ricardo Rodriguez Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don.
The press release announcing aspens financial results and business developments as well as a reconciliation of management's use of non-GAAP financial measures compared to the most applicable U S. Generally accepted accounting principles or GAAP measures is available on the investors section of Aspens website Www dot.
Oh, Jeff Dot Com included in the press release is a summary statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the 2022 fourth quarter and full year ended December 31 2022.
In addition, I'd like to highlight that we have uploaded to our website a slide deck that will accompany our conversation today you can find the deck at the investors section of our website and an archive of today's webcast will be on our website for approximately one year.
Please note that our discussion today will include forward looking statements, including any statements regarding outlook expectations beliefs projections estimates targets prospects business plans and any other statement that is not historical fact these forward looking statements are subject to risks and uncertainties Aspen Aerogels actual results may do.
For materially from those expressed in these forward looking statements a list of factors that could affect the company's actual results can be found aspens press release issued yesterday page one of the presentation and are discussed in more detail on the reports <unk> files with the SEC, particularly in the Companys. Most recent annual report on Form 10-Q the company.
<unk> press release issued yesterday and filings with the SEC can also be found in the Investor section of Aspens website.
<unk> looking statements made today.
Present, the Companys views as of today February six 2023.
That's been Aerogels disclaims any obligation to update these forward looking statements to reflect future events or circumstances.
During this call we will refer to non-GAAP financial measures, including adjusted EBITA. These financial measures are not prepared in accordance with GAAP. These non-GAAP financial measures not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP the definitions and reconciliations of these non-GAAP final.
<unk> 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 limit your questions to two questions at a time if you have additional questions beyond the initial two please get back into the queue.
We will get to all questions I'll now turn the call over to Don Don.
Thanks, Laura Good morning, everyone. Thank you for joining us for our Q4 2022 earnings call I will start with comments on our performance our Q4 financing our outlook for 2023, and our highlights from our EV OEM development work.
Ricardo will discuss business results and outlook in detail, we will conclude with a Q&A session.
During the fourth quarter, we had record paraffin thermal barrier revenue slightly surpassing the $25 million, Mark and a robust energy industrial order book, which together enabled us to achieve our target of $180 million with growth for the year of <unk>.
Nearly 50%.
Pirates in thermal barrier revenue for the year surpassed $55 million up nearly nine times from the 2021 levels.
As we look out over 2023, we expect pirate's and thermal barrier revenue to build over the year as automotive Oems scale their operations, which we believe will result in materially more pirates in thermal barrier revenue in the second half of the year compared with the first half at the same time, we expect our <unk>.
<unk> industrial business to remain strong through the year and provide a steady baseload of revenue.
Yes.
Our demonstrated capability, both supply and demand to generate nearly $60 million of revenue in Q4, 2022 supports our target of reaching approximately $240 million of revenue. This year consistent with our objective to double revenue from 2021.
2023.
The Q4 gross margin of 24% demonstrates the value of higher capacity utilization and the progress we are making to eliminate eliminate redundant costs as we scale.
Our teams did an outstanding job in Q4 and are now focused on continuing to make additional productivity gains in 2023.
While our longer term gross margin target remains 35%. We are pleased with the progress we've made in Q4.
We continue to deepen our technical and commercial engagement with both current and prospective automotive customers. During Q4, we experienced a record number of Oems ordering prototype parts.
Several of the Oems entered our thermal barrier development pipeline during 2022, driven at least in part we believe by their earlier non piracy and designs being unsuccessful at mitigating the risk of thermal runaway propagation.
As we have described in the past mitigating the dangers of thermal runaway presents a challenging and multifaceted problem.
We believe our value to the automotive Oems is based on our unique technical solutions and our deep subject matter expertise and that we are well positioned to achieve our goal of deepening our technical and commercial relationships with existing customers at the same time that we add important new customers.
Yes.
There were several interesting developments since our last earnings call.
We received a letter of intent from the luxury brand if a major German OEM group, where the thermal barrier parts are targeted for a battery platform intended for use across several of their models.
The LOI captures the advanced stage of the qualification process and related negotiations and we believe puts us on a firm track for our full design Award.
We also received an order for approximately $1 5 million prototype parts for our commercial vehicle brands within the same German OEM group.
We believe that this LOI NDA beds parallel work with other brands within the group positioning us well to earned broad adoption with this important German OEM.
More broadly we have been invited by existing and prospective new customers to approximately $15 billion of pirate than thermal barrier business.
Again, we believe we are well positioned to succeed.
On the energy industrial side of our business, we have a deep order book, we have already we already have purchase orders for 2023 of over $100 million.
We have robust commercial activity levels across our refining petrochemical LNG and subsea segments and across all of our major regions.
We have implemented price increases for all products across our energy industrial business, which should positively impact Q2 and beyond.
Furthermore, we are competing successfully in both maintenance and project work.
Even with the probability of a slowing global economic growth, we believe our strong outlook for energy industrial is fueled by our value drivers of efficiency resiliency and safety by geopolitical pressures that promote LNG and by the balance sheet strength of our end use.
There's the.
The energy industrial revenue stream is a valuable base load for us as we manage our overall revenue growth. During this early stage of the EV Mega trend.
This flexibility is a good example of the benefit of our strategy to leverage the aerogel technology platform into a diverse set of large and dynamic markets.
During the fourth quarter, we executed a successful publicly marketed equity offering raising approximately $265 million, including $100 million from Koch industries.
We intend to use the proceeds from the offering to partially fund the construction of phase one of our second aerogel manufacturing facility in Statesboro, Georgia and for other general corporate purposes.
At the same time, we entered into a definitive loan agreement with general Motors for a secured lending commitment of $100 million in connection with the equipment and construction of our plant two.
The loan proceeds can be drawn on a periodic basis as construction milestones are met.
The financial commitment from General Motors adds another dimension to our longstanding technical and commercial relationship. We are deeply involved with Gm's current and next generation battery platforms and of course, our building plant to impart to meet Gm's demand in the coming years. We appreciate.
<unk> commitment to our success.
During our last two earnings calls I've said that plant two would not be immune from the macro challenges marked by supply chain and inflationary challenges that are impacting virtually all major construction projects. We are proactively managing the project in order to try to minimize.
<unk> cost and schedule pressures and doing so such that phase one has more than adequate manufacturing capacity to achieve our 2025 revenue target of $720 million.
This level of manufacturing capacity will be critical as we serve general Motors Toyota and we believe other EV Oems who are now deep in our business development pipeline.
Demonstrated by our recent LOI from the German OEM.
Sure.
With the successful financing completed in Q4, we will continue over the next couple of years to take in all of the above approach to financing our growth plan as.
As we explore prospective sources of equity and debt capital. We will continue to focus on strategic investors on more fully utilizing our significant assets as collateral and on government grant and loan programs to supplement private sector capital.
We believe these avenues are most efficient validate our business strategy and of course strengthen our balance sheet.
We believe battery performance and safety and the resiliency of our supply chains in the U S, especially for critical areas of energy transformation and electrification will continue to attract capital from a wide range of sources.
We are confident that the all of the above approach to raising the necessary capital for us to execute our long term strategy is correct.
Before I turn the call over to Ricardo I would like to express my appreciation to the employees of Aspen.
The past year presented many macro challenges, but our team stayed focused on executing our plan to double revenue from 2021% to 2023 and are preparing to triple revenue from 2023 to 2025.
We are guided by our desire to create a positive cycle of mutual benefit with our customers suppliers and communities. We have a very talented and dedicated group of people working here at Aspen and I am happy to be part of the team.
Require over to you. Thank.
Thank you Don ill.
I'll start on slide four and our financial highlights for the fourth quarter of 2022 and recap on the last year.
Starting with revenues, we delivered $59 $6 million of revenue in Q4.
Which translates into 90% growth year over year.
This record level of run rate in Q4 contributed to our delivery of $184 million of annual revenues for the year.
This is a 48% year over year increase over our revenues in 2021 of $121 6 million.
This growth rate is well in line with our long standing target of doubling our 2021 revenues by the end of 2023, and then tripling them by the end of 2025.
I am truly thankful for our team as it came together in Rhode Island, Mexico, The Boston area and all our international sales locations to produce high quality EV thermal barriers.
And get all the last possible energy industrial deliveries out the door.
In Q4, we prove that when the EV thermal barrier Mendes there are assets can deliver in a world class way.
Speaking of EV thermal barrier demand. This came in line with our expectations for the quarter, thanks to our supplement or different from general Motors that spans Q4 of 2022.
Q1 of 'twenty three.
This order is meant to stabilize the volumes as GM ramps up their demand in the second half of 2023.
This order also enabled us to leverage the productivity of our manual Assembly operation in Mexico to deliver a total of $25 2 million in EBIT thermal barriers during Q4.
This is a 111% increase over the prior quarter.
In a five times increase over last year.
Our total EV thermal their revenues in 2022 were $55 5 million and almost nine fold increase over the prior years.
Our Q4 energy industrial revenues of $34 4 million.
39% higher than the prior quarters.
And the 31% higher year over year.
They brought our total for the year to $124 8 million, an 8% year over year increase that would be higher if we weren't allocating aerogel production capacity towards EV thermal barriers.
Our Q4 product mix demonstrated that when it is tilted towards EV thermal barriers a revenue run rate can start aligning with our growth plans.
I couldnt be more excited about our prospects to continue growing profitably as we get more productivity out of our aerogel plant in Rhode Island, and implement those learnings on plant two in Georgia.
Into more detail on this later.
Next I'll provide a summary of our main expenses.
Material expenses of $24 4 million for the quarter made up 41 percentage points of sales.
Which was close to where we want to be long term actually within single digit percentage points.
This quarter over quarter improvement of 17 percentage points of sales is indicative of what can be delivered at a higher run rate.
It's also worth highlighting that our margins in Q4.
We're slightly enhanced due to the fact that the scrap costs of manufacturing aerogel debt was converted into EV thermal barrels in Q4, but made in prior quarters was accounted for during those prior quarters.
For the year, our material costs of $92 2 million made up 51 percentage points of sales.
And as we've mentioned previously these or at least 11 percentage points away from our long term target.
Conversion costs, which we describe as all production costs required to convert materials into finished products.
$29 million and made up 39 percentage points of sales in Q4.
These costs include all elements of direct labor manufacturing overhead factory supplies.
Rent insurance utilities process logistics quality and inspection.
These compare with costs of 61.
<unk> points of sales in Q3.
At three five percentage points of sales within 15 percentage points of where these need to be as we continue to grow revenues.
It is encouraging to see our team's ability to drive towards our conversion cost targets.
Our revenue run rate increases and we expect to continue making improvements in these areas to increase our operating leverage and continue driving down the cost of making every incremental unit.
For the year, our conversion costs were $83 $1 million and these made up 46 percentage points of sales.
In Q4, our investments to increase the productivity of our agile flattened, Rhode Island combined with the establishment of our assembly facility.
Ladies and Mexico.
Enabled our gross profit margins to go from negative 17% in Q3 to positive 24% in Q4.
Both product lines contributed positively to our gross profit of $14 3 million in Q4 with $78 million of that coming from our energy in the fuel segment and $6 $5 million is coming from EV thermal barriers. These.
These represent positive gross profit margins of 23% and 25% respectively for the quarter.
For the year.
Gross profit was $4 9 million, reflecting a 3% gross profit margin.
Margins in our energy industrial segment to 15%.
Negative, 25% and EBIT thermal barriers.
Or a gross profit of $18 8 million and a gross loss of $13 9 million respectively.
Operating expenses, which are enabling our growth were up $22 million.
These increased by 2 million quarter over quarter versus an increase of $4 6 million in Q2 over Q1.
<unk> had an increase of <unk> 6 million in Q3 over Q2.
As I've mentioned in prior quarters, we're leveling off our opex increases and have focused them precisely on delivering three things.
One <unk>.
Tangible productivity benefits through new process development and implementation of systems that streamline our methods and drive productivity.
Two new OEM production awards through our EV thermal barrier technical sales efforts in managing these awards and pursuits with world class levels of service.
And three <unk>.
Clear milestones in our R&D efforts.
Putting these elements together, our adjusted EBITDA was a negative $4 5 million in Q4.
Compared to negative $12 2 million during Q4 of the prior year and negative $23 2 million during the prior quarter.
For 2022, Alright, adjusted EBITDA was negative $66 million.
Compared to a loss of $26 million in the prior year.
As a reminder, we define adjusted EBITDA as net income or loss before interest taxes depreciation amortization stock based compensation expenses and other items that we do not believe are indicative of our core operating performance.
In Q4. These other items included $2 7 million of stock based compensation and $50000 of net interest income.
Our net loss in Q4 decreased to $9 6 million or <unk> 26 per share versus a net loss of $16 4 million or <unk> 50 per share in the same quarter of 2021.
Our quarter over quarter net loss was reduced by $20 million from $29 6 million.
For the year, our net loss was $82 7 million or $2 10 per share.
Which compares to a net loss of $37 1 million in 2021 or $1 22 per share.
It is worth clarifying that for all these earnings per share calculations are number of fully diluted shares outstanding was $30 4 million at the end of 2021.
Our weighted average of $39 four.
4 million shares in 2022.
And our number of shares outstanding at the end of 2022 was 70 million shares.
On the topic of share count I would like to note that over the next two weeks in connection with divesting of restricted stock units issued in the ordinary course under our long term equity incentive program. Our section 16 officers will file form fours to report the withholding of shares by the company to set.
Assai statutory tax obligation related to the vesting of these Rs use.
I would also want to emphasize that the shares that were held by Aspen will not be sold into the market and it will remain an issue.
Next I'll turn to cash flow and our balance sheet.
Cash used in operations of $18 6 million reflected our adjusted EBITDA of negative $4 5 million.
And then increase in cash needs of $23 4 million.
That reflects a quarterly increase in accounts receivable of $33 million.
These split our operating cash needs for the year at $89 million.
Capital expenditures during the quarter of $64 $1 million included the partial construction of the main buildings in Statesboro, Georgia for plant two.
Assembly equipment for our automated thermal their operations.
Upgrades to our R&D labs and.
And significant progress in the construction of our advanced thermal barrier development center in the Boston area.
This brought our total capex in 2022 to $183 4 million.
Below the $200 million to $225 million range.
Press on these projects is in line with our expectations.
As progress on the construction of our second Aerogel manufacturing plant continues we have incurred $165 $5 million and capital expenses through.
Through the end of 2022 towards at.
I will provide a more meaningful update on plan to later in this presentation.
Net cash provided by financing activities of $262 9 million during Q4 <unk>.
Included $267 9 million of net proceeds from.
From our equity offering and a $5 million repayment of BSS prepayment balance, which was originally received in February of 2018.
2022 was the pivotal year for funding our growth.
With $478 4 million and net financing activities that featured proceeds driven by $100 million from the issuance of our convertible note and $50 million of common stock issued to Coke industries at a price of $27 90 per share.
$73 3 million of net at the market offering proceeds from the sale of common stock at an average price of $17 70 per share.
And most recently.
$267 9 million in net proceeds from our Upsized public equity offering.
At $9 50 per share on November 30th.
We ended the quarter with $281 $3 million of cash and shareholders equity of $443 $3 million.
I will now turn to slide five and walk you through our thinking and full year 2023 outlook.
Having expressed a target of doubling our revenues every 24 months since our Q4 2020 earnings call.
It would be logical to expect our 2023 revenues to be double the $121 $6 million that the team delivered in 2021.
That would be $243 2 million.
And our Q4 2021 earnings call.
We reiterated our plan to double our 2021 revenues to 2023 and to then triple them into 2025.
With what we know today about our customers' demand for pirate's and thermal base in 2023.
We're setting our revenue outlook for the year.
B of between $200 million and $250 million.
This is equivalent to a growth of between 11% and 39% compared to 2022.
We realize that this is a wide range that will tighten as the year progresses.
However, just as in 2022, our revenues are being driven to a significant extent by what we expect to be an increasingly steep ramp in the production of all <unk> battery platform powered vehicles by General Motors.
This ramp was subject to a delay in the second half of last year and this may continue.
Doubling our 2021 revenues for the year continues to be our target and Northstar.
With 2023 in a year of continued transition for the Oems that we're supplying.
Because we expect the second half of this year.
A significant number of new nameplate launches we.
We expect that at least 60% of our total revenues to materialize during the second half of the year.
This split is of at least 70% and our EV thermal barrier revenues.
Therefore, we believe that our quarterly revenue run rate will not surpass our Q4 2020 to a run rate until Q4 of 2023.
Optimizing our aerogel production capacity throughout the year will play a critical role in executing a steep ramp towards the end of 2023.
Last year we.
We demonstrated that we're flexible and can rise to this type of challenge when the demand is there.
With this in mind, we also expect 95% of our gross profit in the second half of the year.
We are executing several initiatives that would improve our profitability in 2023.
And that we believe can reduce our cost of goods sold by over $10 million for the year and our opex by approximately $5 million.
However, this early in the year. We're also conscious of the fixed expense base that we're carrying in anticipation of revenues in the second half of the year here.
Historically, the team has exceeded our expectations at minimizing the fixed expenses.
But given the high variance in quarterly demand that we expect investing and flexibility will pay dividends.
Our investments in personnel and resources to capitalize on the growth that we're expecting will be more tempered in 2023, as we optimize our opex and aimed at commissioning plant two.
Driving productivity through processes and systems, and maintaining our technological and commercial lead in EV thermal barriers.
With these actions, we expect adjusted EBITDA of between negative $50 million and negative $60 million and EPS of between a loss of $1 46.
And a loss of $1 31 per share.
This EPS outlook.
Assumes a weighted average of 70 million shares outstanding for the year.
In addition, the 2023 outlook assumes depreciation of $22 3 million.
Stock based compensation expense of $11 million in.
And interest expense of $8 6 million.
We also expect to incur between $350 million and $400 million of capital expenditures during the year.
Principally for our plant two project.
In 2023 as Don mentioned in his earlier remarks, we will continue strengthening our balance sheet by raising capital from a wide range of sources.
In the near term, we can rely on the $100 million secured loan commitment that we announced from general Motors in November of last year to support the ongoing funding of planned to.
We've also made progress to supplement that with up to $100 million of equipment backed financing.
We also continue managing several strategic discussions to ensure that we have them that we make the most of our collateral and profitable growth potential as we fund our strategy and a very supportive regulatory landscape.
Turning over to slide six I'd like to provide an update on plant two.
It's design has evolved how the team has been navigating a rising construction material cost environment.
And the results of efforts in 2022 aimed at increasing the productivity of our processes and the flexibility of our overall capacity.
In December of 2021, with a roughly 15% completed design our team estimated that the cost of phase one of plant two would be a $575 million.
Now two weeks after having completed 85% of the design and having spent the $165 million towards the project through the end of 'twenty two 2022.
We estimate the cost of phase one to be a $710 million.
$135 million increase.
Approximately $90 million of this increase or 16%.
Is driven by higher material and construction costs.
With the backdrop of a 21% rise in the cost of industrial building construction of.
A 15% rise in the cost of cement in the 14% rise in the cost of industrial valves over the last 12 months.
The team is optimistic about being able to manage through what is proving to be a difficult time to commission a construction project of any scale.
The remaining increase of $45 million or 8% is driven by a higher level of clarity in the design of the plant for example at 15%. The same completion, we were defining the length of the plant piping well at 85% of the same completion. The team has a plan spicing specifications involving the <unk>.
Finally in detail.
In light of this and what we all know is the higher cost of capital environment. We've challenged the team to increase all our aerogel production capacity flexibility by implementing our latest design and production process improvements in 2023.
We've also thought about how to optimize our product mix.
As we optimize our revenue mix, our total annual revenue capacity for plant in Rhode Island can be of up to $400 million per year.
And the capacity of phase one of plant two can be of up to $1 2 billion for a total annual revenue capacity of $1 6 billion.
This compares to our prior revenue capacity estimate from just over a year ago of $250 million for our plant in Rhode Island, and $650 million for phase one of plan too.
At the time, we estimated that these assets provided a total revenue capacity of $900 million.
In light of having to spend an incremental $135 million on phase one of plant two.
We focused on driving the flexibility to not just deliver our 2025 revenue plans, but to be ready for additional opportunities.
We're seeing the long term volume plans for our EV thermal barrier awarded business increased to the point, where we believe that these can make up anywhere between 80% and 170% of our target 2025 pirate than revenues.
Finally, let's focus our attention on slide seven.
Throughout last year, we laid out our views on the battery Chemistry Center form factors that were most logically compatible with Paris.
Later, we use the map to relay our team's level of engagement with various customers around the world.
Today wed like to dive deeper into our award quote pipeline through 2030.
In North America.
We assess that we have the potential to capture an estimated $10 billion of revenues between 2023 and 2030.
Our discussions have progressed with a second north American OEM from their testing of the material to us providing quotes and being engaged on various nameplates.
In Europe , we estimate the value of our active quotes to be of approximately $3 billion. These include the revenues from the potential vehicle platform award linked to the letter of intent that Don mentioned in his remarks.
We mentioned this LOI because while it isn't an award.
In this particular OEM sourcing process. It serves as an important communication to a supplier that its technology has been selected to be procured and that it is being packaged protected for in the platforms design.
The value of this award can also expand as more nameplates are announced for this EV platform.
We're also scheduled to supply the same Oems commercial vehicle division with a meaningful prototype part order for approximately $1 5 million parts as part of the development work required to get sourced on a commercial vehicle platform.
In Asia. The team continues making progress and we assess our quoted and awarded opportunities to be of over $2 billion through 2030.
As one can see.
NMC and LSP chemistries with prismatic and pouch fill opportunities alone can provide $15 billion of revenue.
By 2030.
LSP Chemistries that are popular in China, but we're seeing some Oems in the west inquire about solutions to enable safety in <unk>.
And several of our quotes are for these types of programs.
Our teams have also built relationships with battery tier ones or entities that have been established to supply multiple Oems with assembled battery packs as part of a battery platform.
This presents a significant opportunity to expand within multiple Oems and we have two of these opportunities within our active pipeline.
With that I'm happy to turn the call back to Don.
Yes.
Thank you Ricardo.
Have covered a significant amount of ground today in reviewing 2022 and in setting the stage for 2023 and beyond.
I would like to emphasize four points.
First we had record revenue in 2022 finished with a strong Q4 and positioned ourselves to achieve our target of doubling revenue from 2021 to 2000 $23 million to $240 million.
Second our business development pipeline for paraffin thermal barriers is robust between existing customers and new customer prospects. We have been invited to $15 billion of piracy and thermal barrier business. We are in a strong position to serve existing customers and to add important new customers.
<unk>.
Third we are actively managing cost and schedule pressures of plant two in a way that enables us to achieve our 2025% revenue target of $720 million and provides maximum flexibility to meet the potential for significant customer demand.
And fourth we are focused on leveraging our operating efficiencies to achieve our gross margin target of 35% and to drive significant profitability as we scale.
Elliot, let's turn the call to Q&A. Please.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
I'd like to withdraw your question. Please press star followed by two.
I wanted to ask your question.
The device is on mute.
Yeah.
First question today comes from Eric Stine from Craig Hallum Your line.
Good morning, everyone.
Eric how are you.
Great Great. So maybe we can just start with <unk>.
<unk> two.
And I know over the last couple of months. The thought process has been to get away from kind of phase one phase two because it was a bit confusing but I.
I guess maybe first.
So given that you still are talking about phase one here and at $1 6 billion of overall revenue capabilities, that's where you were.
When you were talking about where you'd be for phase two so maybe thoughts on.
You don't.
What you would be able to get to when phase. Two is completed and then also maybe just more detail on some of the steps how are you expanding this it's pretty meaningful.
In Georgia, but also in Rhode Island.
Yes no.
That's a good question Eric.
In an ideal world, we wouldn't be talking about faces anymore.
We just use the phase one label given that we had put that out there.
Just over a year ago alongside phase II as well.
It is worth.
Highlighting though that phase one has.
It's still the infrastructure too.
To pave the way for us to.
The capacity that had been outlined for phase III, but obviously, if you recalculate that that is now a much higher amount.
Using the methods that were now.
Referencing and so I would argue that phase two would now be more.
Like faces for through phase two through five and so we have the ability to more incrementally.
AD.
Equipment to the plant.
Particularly in.
What happens to be the longest cycle time process of the <unk>.
Our facility.
Which is the.
The extraction of the.
The year of the liquid from their roles.
And so.
Right now frankly, we're more focused on just the demand being there in the second half of 2023 before.
Going to plan for these additional phases of expansion to the plant.
But as I've outlined in my remarks, we think that.
We're planning to do with plan to know does give us the flexibility to capture our 2025 revenues and to flex well beyond that as we allocate.
Capacity and to your question on really what changed in the process I think it's I mean, it's really been multiple things that the team.
It has.
As supplied to our site in Rhode Island, frankly to get us to the run rate that we delivered in Q4 that was a big meaningful step.
But it's also worth.
Within our product range the role length that we can make at the plant actually vary significantly between one product in the other.
As we prioritize those products that we make in higher roll links.
We're able to get more square feet of aerogel.
Assuming the price is the same for all of them, which which is not you can see how it's just a much leaner mix on the plant and we're able to crank out more.
As a result.
Yes.
Eric.
A key point.
Just to reiterate.
Just one point I would just reiterate is.
As we as we were managing as we are managing the build.
First and foremost was our ability to be sure we were able to meet our 2025 revenue target that tripling our revenue to 720 <unk>.
Design does have.
That capability and more frankly as.
As we see.
Potential upside as we as we.
Scale, our business and as the Megatrend continues to.
Two to take shape.
Got it.
But maybe another way to think about this you were targeting with phase 216 billion in revenue capacity and I think the Capex number was $700 million. So effectively I mean, yes, you are increasing $5 75 to 710, but youre really it's an increase of $10 million.
For a like amount of capacity I mean is that is that a fair way to think about it.
Sure.
It is I mean, I think there's more.
Product mix tradeoffs that that are implied in the in the $1 6 billion.
So our revenue number, but yes, I mean, the math the math is the math right.
It is a lot more capital efficient now with how we planned the capacity.
Got it.
And then maybe just on the the award and cord pipeline and thanks for all the details there.
But I do notice that.
No longer have people in kind of the.
The testing phase they've all moved to the cold phase I mean is it.
Is it still fair to say that although you are not in charge of when you are able to announce these things.
The OEM is that your expectation is that youll be adding more I mean beyond the German OEM and the opportunities that you've detailed today.
Yes, I mean.
We're sort of.
Playing with two charts here one is the map that we had before and now with this assume on.
On the quote pipeline.
I would argue that the those Oems that were testing that are testing the material or frankly that.
Where we've quoted and sold prototype parts too there are several who we're quoting.
Those testing parts or prototypes that would need to be added to this list.
When we actually caught up production program for them. So one one thing Thats worth clarifying is that here on slide seven what we included our only.
Production vehicle quotes. So this is our production vehicle quote pipeline.
Got it.
One other point.
Correct, Yes, Eric I think one other point I'd make.
One observation I would make Eric is I would say that our.
The testing period seems to be shorter.
And then then maybe originally and it's I think in part.
Because our.
Our domain expertise our knowledge is much greater our product.
Is.
Better characterized as we've gone through the process with several of these Oems and so.
And I think there is more urgency.
The Oems part to move through the process more quickly as well and so for a combination of reasons I think that that testing period is tending to be a little shorter.
Then it was a year or so ago.
Got it Okay, I will take the rest offline. Thanks.
Thanks, Greg Thanks, Eric.
Our next question comes from Colin Rusch from Oppenheimer. Your line is open.
Thanks, So much guys could you talk a little bit about the pricing dynamics as you conscious client process how much.
Leverage you guys have from a pricing perspective as well.
I'm a content per vehicle.
It's trending.
I mean, we definitely have not seen any weakness.
We as Don mentioned, the fact that the testing goes through much faster and that we're able to leverage some.
Our own testing data to advance the pipeline further has given us.
Leverage to not only accelerate these discussions but.
I think when.
We have a pretty.
I wouldn't say simple or easy message to deliver to customers, but when one looks at the capital that we're investing here.
We're laser focused on paying it back and more.
And I think with that.
We can justify the pricing.
And not really.
Go into the pricing dynamics of selling something thats been commoditized and so.
We saw a very special need here.
We're well aware of that but at the same time, we realize that we're.
Having to spend a lot of capital to supply that and and we're focused on paying it back in more and therefore the prices the price.
And we're very focused call. It of course on our our stated target of 35%.
Gross margin as a business here as we as we as we scale here.
And that.
Near future so.
That.
That underlies our pricing strategy that concept. We also believe we're bringing significant value to <unk>.
These customers that has also given us the.
The latitude.
Two.
To be firm.
The quoting process, it's funny, we have a short list.
Yes, we have a short list of companies that sell into our markets.
That are doing.
70% plus gross margins on a good year.
And we've actually shown that here across our team.
Because.
I mean in some ways.
We really shouldnt be having to apologize for being profitable I think.
When you have something unique and when youre solving a problem.
We strongly believe in cut in capturing our fair share of the value, but most importantly, paying all this capital back.
That's super helpful. And then as you scale. This business, obviously you need to grow the team a fair amount could you just talk a little bit about the cadence of Opex spend then.
And the investments that you need to make here over the next 12 to 18 months to that sort of support the growth trajectory that you guys are talking about.
Yes so.
You've probably heard in my remarks here over the past three quarters, where our tone on this has changed so I think we've gone through I would say two significant step.
Function increases in Opex, one big one in in 2021, and then another one at the beginning of last year. Then it was really during the second half of last year, where we started seeing that we could actually leverage a lot of the work that has been done.
I mean literally throughout all of our functions.
To get more efficient and ultimately.
Change how we work.
And we've started switching.
The spigot from investing in just adding more people.
Two investing in our it systems implementing more processes.
And.
And really.
The hiring has slowed on on the Opex side, and we've only focused at.
As I've mentioned in my remarks on just delivering very clear R&D milestones that are time bound and that are not research expeditions, but that are actually driven towards improving our processes and reducing our manufacturing costs.
And then on the commercial side, it's really been encouraging to see the.
How the team has been able to leverage baseline work.
From win from when we were initially working with General Motors.
To actually build an archive of Av.
Our own test data that we use to accelerate these commercial discussions.
And.
And then I mean.
On the on the support functions I think we've added capability and we've hired a lot of new people from the outside who are bringing.
Are there ways of working and their tools.
Their knowledge of these different tool change that we're now working to implement and they're yielding results. So.
I mean, our hope is that we actually taper the opex growth this year.
But at the same time this need of being flexible and and this transition as we implement new tools and processes.
I think we will we will sign up to take more opex out of this or it's actually start taking opex out of this ramp that we've had.
As these things start being implemented on the support function side, particularly.
I would just I would just emphasize that we have invested in our opex in anticipation and so as we scale as we grow.
Youre going to see a disproportionate amount of growth relative to any opex.
Increases at this point by a wide margin.
I mean, maybe to summarize.
In my mind, Opex as our North star should not be more than 10 percentage points of sales.
So right now were pretty high.
The revenues would need to be a $1 billion for us to absorb all of our Opex run rate.
So we're just we're not just focused on.
Letting the revenues get to $1 billion. We're also bringing the opex back down to something that aligns with 10% on the $725 million in 2025.
Really increasing that target that's hopefully helpful for understanding the long term model. Thanks, guys.
Anytime thank you.
Our next question comes from Chris shelter from B Riley Your line is open.
Hey, guys. Thanks for taking my questions here.
Can you give us.
Any sense of the timing of the German Oems platform I'm curious if that win.
So the 225 visibility.
Do you think Thats 2026, plus and then I think on the call you said the awarded business represents anywhere from 80% to 170% of the target for 2025.
Is that saying.
In future years beyond 2025, we see those programs kind of growing beyond the 225 target or.
Is that including any of the people that you are quoting.
Yes, so I'm happy to take the one on the platform first and then go into.
Into that remark around the <unk>.
Percentage of.
The revenue of the 2025 revenue target that is made up by the existing awards. So yes, I mean, the LOI is for NSO fee I think the first SLP on that platform is in 2025. So we do expect a little bit of revenue from that in 2025.
And then.
<unk>.
I mean, we.
We have been fairly conservative as we estimate the value of these awards right.
And.
And yes, I mean at the same time, it's one of those things, where if you put together all of the volumes of all the Oems you end up with a market that is two times larger than the vehicle market right everybody has high aspirations here as they ramp up their production forecast.
And we just want to be cautious, but at the same time.
Just given how profound this transition to electrification is looking.
Whether 2025 is the year when all of this becomes mainstream or 2026, we just don't want to be wrong, and that's why we thought that.
Expressing that in and just showing what.
With the value of these awards can be not just in 2025 and beyond plus the the.
The quote pipeline that the team is actively working.
If people see the scope of that one can then understand why we are pushing the team to flex our capacity in the way that we're doing it.
Okay.
Certainly makes sense.
So the incremental move from 60% visibility I think you had previously talked about the 80% interest.
More confidence around the volumes with just those two folks.
Yes, I would say, it's the same level of confidence applied to more volume.
Okay got it.
And then maybe just.
It looks like the gross margins are going to fluctuate pretty largely from the beginning of the year to the end of the year. It sounds like a lot of the pirates.
Going to be producing kind of ahead of time to be shipping in the second half. So we probably have a.
A similar phenomenon, where scrap costs are incurred in the first half of product you ship later, but maybe you could give us a sense what you think.
<unk> gross margin should land for the full year.
And then looking at like the exit rate, probably pretty similar to what we saw.
In the fourth quarter here.
How does that trajectory shape for 2024.
The ramps kind of continue or stabilize.
Yes, I mean, so really for us.
The profitability of tire then it's hard to go into that one because it really all hinges on the volumes during the second half of the year.
However, if our expectations.
Really align there, particularly in the middle of our revenue range. Then we do believe that we can make pyro thin gross margin positive for the year.
And then have that progress.
In 2024, and 2025 to the point that our gross profit moves into the mid teens in 2024, if the growth rate continues.
I mean.
You can draw a line from from 35% of where we're at today and.
I think we've shown in Q4 that when the demand is there we can easily dig ourselves out of negative gross margins.
And.
And we think we'll dig up higher than this year. If the demand is there in the second half.
Got it.
Helpful.
Thanks, guys.
Thanks Christian.
Our next question comes from Alex Potter from Piper Sandler Your line is open.
Hi, guys.
So first question I was wondering if you could comment on whether you think youre going to draw on any of the loan from general Motors I know that some of that money was.
Contingent on construction milestones at plant two in that you aren't necessarily going to draw on the money in the first place. So just curious on your updated thoughts on that topic.
Yes, so we basically have a window.
Between now and the end of September of this year to drive the requirement to draw. The first $33 million is that we complete the site work.
In Georgia, which has actually been completed already.
And that we spend the $100 million that we got from the.
Public offering.
From from Coke and.
We will most likely have spent that here by the end of March early April and at that point. This when we.
We would draw this these first $33 million from the alone.
We've been in close contact with General Motors.
On this and they are basically ready to receive our draft form.
Here at the end of March early April .
Okay very good.
Then.
Maybe just going back to two pricing.
I can appreciate the comments you were talking about earlier with regard to.
Aspen is adding value you don't have to apologize for being profitable things like that.
I'm just curious when you go into these conversations like the LOI for instance, with the German Oems.
Is pricing more or less set in stone like our users coming into it saying. This is the price now let's talk about everything else or is pricing sort of a you have a placeholder there that you will come back to and finalized at the end of the agreement.
Much visibility do you have on pricing at this stage in the discussion with that relationship.
<unk> in particular and with others.
Yes, I mean I think at this point there have been several turns on a lot of these quotes.
You usually go through an iteration of them and the team knows what the art of the possible is right.
And.
And at some point I mean, you just really stop making sense.
But I mean, yes at this point indicative pricing has been agreed on that.
We think it's worth allocating the capacity for it and.
And then that may evolve really more.
It's more driven by the design of the part itself, then I would say any sort of negotiations.
Yes, I think Alex the.
The LOI.
Both technically and the commercial terms are.
Pretty fully negotiated at this point theres not much mystery left on that.
Great. Okay. Thanks, a lot guys.
Thank you.
Our next question comes from Josh <unk> Canaccord Genuity. Your line is open.
Hi, Good morning, everyone. Thanks for taking my question Hi, George.
You bet.
To focus.
I'd like to focus on.
On General Motors.
And there's obviously been a lot of ink spilled.
On the potential decision to move some of their manufacturing battery manufacturing capacity cylindrical.
Just your thoughts.
On that the fourth plant et cetera, any guidance there as to what it means for your volumes and second.
I'd like to ask about forward.
Appears that.
I'm, just going to venture I guess that that might be the north American <unk>.
OEM that you are quoting.
<unk>.
I guess, they've halted production of the $4 50, an overnight there's been discussion in the press around.
That production halt being related to a battery fires. So if you could just touch on pause for questions I'd appreciate it. Thank you.
Okay.
Well.
The GM on the GM question.
I would just kind of categorize it as.
Speculation as most of that ink.
<unk> has done and.
We're we're closely engaged with.
With general Motors, not only on there on there.
Current activities, but.
With.
Development activities as well so.
I don't want to comment too much on that I think it makes sense for any OEM to be exploring various chemistries various form factors.
As they think through.
Their ultimate lineup of vehicles.
And so so all of these things I think.
One can imagine.
Companies doing those sorts of things but.
So specifically to general Motors I would just put it in the category of speculation.
We don't really have.
Any particular knowledge of.
Anything that was talked about in those.
And those Korean trade publications.
With respect to Ford.
Yeah, we we've.
Red and come to understand I think the same things that you have George that you highlighted.
Stopped production stopped shipments.
Really articulated around a battery issue I think.
Now a more.
Refined and this may fall into the category of speculation, but in fact.
Sure.
I read at least.
Around a battery fire up.
Storage storage vehicle that propagated.
Across the battery platform into at least two a vehicle another vehicle next to it and so I think.
My view of <unk>.
Ford is that they are highly focused on battery performance and safety and.
And there they are engaged and getting these these platforms right for the long term.
They are certainly sensitive to creating any any brand damage that comes from these kinds of these kinds of events. So.
That's sort of our RVO, we don't know a lot more about this specific situation than you do.
Yeah.
Yeah.
Can I just go back to the General Motors question just for a second because I think ultimately this is about Ken Aspen hit their 'twenty, they're tripling our revenue.
By 2025, yes, if GM decides and the fourth plant or maybe even a third plant to switch some production to cylindrical and therefore, they don't they might not need your material is that something we should worry about or has this have these other potential win. This quality. These LOI is have they kind of reinforced our conviction.
That's a real target in those out years. Thank you so much.
Yes, Thank you George.
125 in and Mccarter knows this better than I do 2025.
Is.
Is not very far away when it comes to building battery factories, and having battery factories, and having products form factors and chemistries.
And so I.
I don't really view this as a 2025 issue.
<unk>.
And I should say potential.
Speculative issue.
And again I think it will make sense for four.
All Oems to experiment with form factors.
And Chemistries.
Yes.
That may differ over.
Certain parts of their fleet and again I'm not finding this to general motors.
Winning this to just logic.
But but 2025 is.
<unk> again.
Very short time away.
And sort of.
Hi.
Battery development in battery factory building.
So again, we don't think Thats an enormous.
An enormous risk for us today.
Yes, I mean, it's kind of interesting I think that.
For every 100 people that are out there, writing and speculating about what direction any particular OEM will take theres, probably about one engineer working on this stuff.
And.
And Theres also some pretty significant capex decisions behind the direction that these Oems decide to take.
And I mean, when we speak to engineers that were quoting stuff too I mean, they basically tell us. This train is moving the track.
<unk> has built.
And it's not really switching direction.
And even if a payer.
Parallel track is being built and some of these cases, that's really more of I would say a seven year decision.
Then.
Then a quick switch of one train from one track to the next.
Thank you.
Okay. Thank you George.
Yes.
Our next question comes from Jeff <unk> from Cowen and <unk>.
Your line is open.
Thank you Hey, Don in your prepared remarks, you mentioned some references to failed attempts to mitigate.
Application.
As sort of a driver potentially for the order in Europe or for other engagement I was just wondering kind of a question I get from investors is that your <unk>.
<unk> technology and other approaches.
Why those fail and why you win and so that's something you could articulate.
Laura.
Well I think what I would say.
Jeff is that it's.
It's a complex problem.
And there are thermal management.
Your safety issues involved there are.
Uh huh.
Mechanical.
Self stabilization issues involved.
And I think it is not an easy task to triangulate on on those various.
Constraints or or or FAP.
Factors and.
Our material.
Touches upon each of those.
Critical areas, I think very effectively and very uniquely and.
We do believe that there are materials that do one thing or the other perhaps but again it is that combination of.
Attributes that I think is setting our material apart and.
Has us in the position that we're in.
Today, both with existing.
Customers and.
With perspective customers here during this during this really critical stage of this.
Of this EV activity here.
Got it that's helpful and then maybe for Ricardo I Might've missed this but on Mexico, obviously showed.
The ramp up.
In Q4, and the margin potential, but can you give us a sense of perspective on where we are with the automation I think you made reference that most of the products in Mexico is manually made but are those automation plans in place or have they been fully validated are up and running or when will that transition take place.
Yes that transition basically takes place in the second quarter.
Fully and then our so our production in the second half would be off of the automated equipment.
We're still.
We're still keeping the.
The manual equipment to be able to flex up.
If the demand is higher.
But that transition.
We will be fully in place for the second half of this year.
Excellent great to hear that's all I had.
Thanks, Jeff as a reminder.
Any further questions. Please press star one on your telephone keypad now.
Our next question comes from Amit Dayal from H C. Wainwright Your line is open.
Thank you good morning, guys.
Justin Good morning items were mixed.
<unk>.
Hey, guys good evening.
Yes, perfect yes.
Okay. Thank you.
Just wanted to see how much.
Concentration from GM there is in the guide for 2023.
I mean quite a bit.
Got there.
Their volumes from IHS there on the slide right. So they are a big driver there were a big driver and in.
In Q4 as well in there.
They're a big driver right now.
They make up.
A.
A portion of a portion of our thermal barrier demand.
Yes.
Okay understood.
And then just with respect to the energy industrial orders.
You guys I know you did 100 million worth of orders for you that you have at hand.
Or is this all expected to be delivered in 2023.
Yes.
Those orders.
Our.
R R.
People, who would like to receive those materials and we will again, we're trying to be.
Mindful of keeping that business strong at the same time, when we have the single plant.
Making sure that we feed the EV thermal barrier side of this as well. So we do have some flexibility in the way, we deliver that material, but all of those purchase orders.
<unk>.
All have been requested for.
For 2023, and even even in the first cut.
Couple of three quarters of that.
Of the year.
Okay.
Thank you.
Thank you.
Thank you Amit Thanks, Amit.
This concludes our Q&A I'll now hand back to Mr. Young for closing remarks.
Thank you for your help today.
We appreciate your interest in Aspen, Aerogels, and we look forward to reporting to you our first quarter 2023 results in April .
And have a good day. Thank you.
Today's call is now completed we'd like to thank you for your participation you may now disconnect your lines.
[music].
Okay.
Yes.
Sure.
Yeah.