Aspen Aerogels Inc. Q1 2023 Earnings Call
[music].
Good morning.
Thank you for attending the Aspen Aerogels, Inc, Q1, 2023 financial results Conference call.
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.
Barry now ski Aspen senior director of corporate strategy and finance. Thank you you May proceed Mr. Barry <unk>.
Thank you <unk> good morning, and thank you for joining us for the Aspen Aerogels in fiscal year 2023 first quarter financial results conference call with.
With us today are Don young President and CEO , and Ricardo Rodriguez Chief Financial Officer.
There are a few housekeeping items 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.
WWE <unk> Aero gel 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 2023 first quarter ended March 31 2023.
In addition, I'd like to highlight that we have uploaded to our website a slide deck that will accompany our conversation today you.
You can find the deck at the investors section of our website.
An archive of today's webcast will be on our website for approximately one year.
Please note that any discussion today will include forward looking statements include any statements regarding outlook expectations beliefs projections estimates targets prospects business plans and any other statement that is not historical fact these.
These forward looking statements are subject to risks and uncertainties.
Aspen <unk> actual results may differ 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.
In more detail on the reports aspens filed with the SEC, particularly in the company's most recent annual report on Form 10-Q.
The company's press release issued yesterday and filed with the SEC can also be found in the investors section of Aspens website.
Forward looking statements made today represent the company's views as of today may four 2023 aspirin.
Aspen 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 EBITDA.
These financial measures are not prepared in accordance with GAAP. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP definitions.
The definitions and reconciliations of these non-GAAP financial measures.
The most directly comparable GAAP financial measures and 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 and we will get to all questions.
I'll now turn the call over to Don Don.
Sure.
Thanks, Neil and welcome to Aspen Good morning, everyone.
You for joining us for our Q1 2023 earnings call. My initial comments will focus on our Q1 performance our highlights from our EV OEM development work and our strategy for balancing demand supply and financing.
Who will dig deeper into our financial results, our business and our strategy, we will conclude with a Q&A session.
The performance in the first quarter sets us on a path to reach our 2023 outlook of revenue between $200 million and $250 million and positive EBITDA in Q4.
We anticipate sequential revenue growth as we work through the year.
This growth outlook is a function of a very strong energy industrial backlog and the expected ramping of our EV customers, especially general motors.
This anticipated EV paraffin ramp is the key factor impacting whether we're at the low or high end of our 2023 revenue outlook.
During Q1, we saw continued improvements in operating efficiencies, which resulted in an 11% gross margin, which with continued revenue growth. We believe keeps us on track for longer term gross margins at or above 35%.
We also maintained careful control of Opex.
During our last call, we announced that we received both a letter of intent from the luxury brand of a major German OEM group and an order for approximately $1 5 million prototype parts from the commercial truck brand within the same German OEM group.
Recently, we converted the prototype parts order into a multi year award with the start of vehicle production in early 2024.
We expect to announce the name of the commercial truck brand during the latter part of 2023 as we commenced delivery of production parts.
With respect to the LOI from the sister company within the German OEM group, we believe we will convert it into an award in the very near term.
These volumes commenced in 2024 and ramp in 2025, we believe the awarded business and the advanced stage of the letter of intent position us well to earn broad adoption by other brands of this important.
German OEM.
In other EV news, we continue to have a deep technical and commercial engagement with general Motors and of course, our financial relationship through the $100 million term loan, which we have yet to draw upon.
In addition, we believe that we are on the cusp of winning more awards with other EV Oems. We are confident that we will complete 2023 with awards from abroad and interesting array of customers.
As we look out over 2023 in addition to adding OEM awards, we expect paraffin thermal barrier revenue to build over the year as automotive OEM scale their operations and at the same time, we expect our energy industrial business with purchase orders received for 2023 of.
$180 million to remain strong through the year and to provide a steady baseload of revenue.
Even with our large backlog in energy industrial.
And our growing list of Bebe customers, we have carefully considered our near term strategy, especially as it pertains to manufacturing capacity and financing.
The current macro environment, the unfavorable financing market and the potential for a more drawn out industry wide EV ramp have caused us to reevaluate our current plan.
There are several parts to this thought process.
During this possible and even likely recession scenario, we are taking a conservative approach to the preservation of our capital, which equaled $205 million at the end of Q1 2023.
During this period of time, we plan to reduce our opex and capex to grow our revenue significantly and to focus on our profitability.
The key pivot is to write time the final stages of the construction of plant two in Statesboro, Georgia and in the meantime to largely dedicate our plant one aerogel manufacturing capacity in east Providence to pirate the thermal barriers in order to serve our <unk>.
OEM customers.
We estimate that we have the ability to generate approximately $400 million.
Pirates in thermal barrier revenue from an EV dedicated plant one.
Our goal is to time the startup of plant two to match the revenue ramp of our EV Oems beyond the approximately $400 million of revenue capacity available for plant one.
To put the approximately $400 million revenue number in context.
We anticipate theyre more barrier revenue of between 70 and $100 million for the year 2023, and between 250 and 300 million.
For 2024 to.
To be clear, we plan to slow our capital investments during 2023, and 2024, but not our growth and at the same time, we will remain poised to take full advantage of our opportunities.
With respect to supplying our valuable energy industrial business. After one year of development and negotiations we have reached a manufacturing agreement with the Chinese aerogel manufacturer to supply energy industrial product to US beginning no later than January 2020 for the <unk>.
Product will be produced to our quality specifications and shipped by us under our labeling through our distribution and to our customers. We believe that the manufacturing agreement enables us to maintain and grow our energy industrial business and to largely dedicate plant one to our EV pirates.
Thermal barrier business.
In this scenario.
From our current manufacturing assets and supply arrangements, we could have annual revenue capacity of $5 million to $600 million.
Gross margins at or above, 35% and EBITDA meaningfully positive.
This strategy enables us to reduce opex and capex to generate positive EBITDA and to preserve our existing capital and to serve successfully both our EV and energy industrial businesses.
Again, we would write time the remaining construction of plant two to coincide with the ramp of our EV Oems beyond the approximately $400 million of revenue capacity of plant one.
We anticipate that it would take approximately four quarters. After the restart of full construction to complete plant. Two we believe that we continue to have our full upside opportunity, but during a period of potential period of economic uncertainty and while our EV Oems.
Ramp we optimize the use of our existing assets to create a cash generating business and to avoid unnecessary dilution.
Yes.
Our strategy is to leverage our aerogel technology platform into large dynamic markets.
Central to that strategy is our investments in the research development commercialization and the protection of our proprietary technologies.
Our patent portfolio has been consistently validated in courts across the United States Europe and Asia.
Chinese made aerogel products had previously been found to infringe our patents in multiple jurisdictions globally.
As we announced in April we filed patent enforcement actions in Korea against Baron Berg, and Norwegian reseller and associated entities, including their Chinese aerogel manufacture related to the unlawful import and sale of infringing aerogel products.
The actions allege infringement of patents covering our high performance reinforced aerogel compositions, and our process technology, including the Korean counterparts with patents previously enforced successfully by us against Chinese Aerogel manufacturers in Germany, and the United States.
With these actions against <unk>, we again send a clear message to the markets that we will continue to aggressively enforce our intellectual property rights against any manufacturer and distributor or end user of aerogel products that infringe our patents.
These actions are coincident with our entering a supply agreement with the Chinese manufacturing company.
In essence, we have created and an extension of our aerogel supply capabilities controlled by us to meet the demand of our energy industrial customers again under our label and to our quality specifications. While also taking any necessary actions to prevent infringing products from entering the market.
<unk>.
Aspen continues to be the innovation leader in Aerogel technology, and we have the IP portfolio to back it up.
Before I turn the call over to Ricardo I want to mention a couple of activities, we have ongoing and public policy.
Aspen is actively in dialogue with lawmakers on Capitol Hill, as well as the department of energy and the department of transportation, including the National Highway traffic safety administration around strengthening United States.
<unk> surrounding safety and battery electric vehicles International.
International Harmonization around safety regulation has taken place in China, India, Korea, and Japan, but not formally yet in the United States, We believe stronger safety regulations, and most importantly safe for electric vehicles enhanced consumer confidence in electric vehicles protect lie.
Lives protect property and help our first responders, we expect that as battery electric vehicles become more prevalent communities insurers and the federal government will advocate for enhanced safety measures and requirements we.
Intend to be an important part of that conversation.
The U S Department of Energy loan program office was created to grant loans for large scale energy infrastructure projects with the goal of supporting the development of more fuel efficient products, including the expansion of domestic manufacturing of electric vehicles.
Our team, including our external advisors have been in consultation with the loan program office related to our proposed application for a significant loan as part of its advanced technology vehicle manufacturing program, which offers loans to support U S manufacturing of fuel efficient.
Advanced technology vehicles and qualifying components.
The <unk> process is uncertain and can be drawn out in time and there is no guarantee that our proposed application would be looked upon favorably.
In fact, our first application for our U S Department of Energy Grant for advanced battery materials as part of the bipartisan infrastructure Act was not funded in 2022.
Since that time.
We have put considerable effort into the <unk> process.
And we believe we are a very good candidate for a direct loan as part of the advanced technology vehicle manufacturing based on the importance of batteries performance and safety.
Timing can be drawn out but in our case it may match, well with the right timing strategy for our plant two.
Ricardo over to you.
Thank you John I'll start by providing an update on plans to it.
Construction progress the latest on timing and our previously projected spend plan towards it.
As you can see on the left side of slide four the site work and foundations have been completed while.
While the building construction along with the electrical distribution are unscheduled.
Our team is on track to power the site at the end of June of this year.
Team was on track for commissioning the plant at the end of the first half of 2024.
We believe that our near term EV thermal barrier demand is on track to ramp up in 2023.
And that this ramp will fluctuate within the range of our revenue expectations.
Thanks to the development of contract manufacturing supply from China in 2024.
The investments in our aerogel plant in Rhode Island, we now have the flexibility to be able to write time and align the startup of plant two for when it is ultimately needed to ensure alignment between supply and demand.
This three timing allows us to reduce our total 2023, capex guidance to less than $150 million, including the $40 million that have already been spent or plan to in Q1.
And discussions with our current and perspective EV thermal barrier customers were reassuring them that our aerogel and Rhode Island combined with our assembly operations in Mexico and <unk>.
More than meet their demand in 2023, 2024, and the portion of 2025, depending on their volumes.
Don mentioned in his remarks, our aerogel plant in Rhode Island can support multiple customers and deliver over $400 million of annual revenue capacity and we estimate that the contract manufacturing capacity can add another $150 million of revenues from energy industrial customers, resulting in.
Total revenue capacity of at least $550 million per year all available in 2024.
Turning over to slide five.
As we move to startup of plant two to a different timeline our capital needs over the next 18 months or more than met as we manage the business towards generating positive cash flow.
Which we believe will in turn enable a lower cost of capital for Aspen.
We continue having several discussions with different parties to raise capital that minimize dilution to ensure that when we decided to reaccelerate our investment in plant two we'd be funding it with a mix of operating cash flow and funds already on the balance sheet at that point in time.
Before the end of May we will also be applying for a loan from the Oes Atvs program, which is exactly focused on situations like ours.
That can satisfy a broad and long term set of sustainability and the American competitiveness objectives.
Potential positive decision towards the end of this year and the Reacceleration of our investments and plan to coincide.
Our cash balance at the end of the quarter.
$208 million combined with a $100 million.
Prospective equipment backed financing will provide us with $308 million of total liquidity to manage the company towards generating positive cash flows without investing in plant two.
As a reminder, we currently have an open loan commitment of $100 million from General Motors that is limited to being used for plant two.
We intend to work with general Motors to extend the availability of these funds for when we decided to resume investing in plant two.
We estimate that we need to spend $150 million to drive the company towards generating positive cash flows and the expected liquidity of $308 million, so without considering the GM loan.
To provide us enough flexibility to do that.
Before moving onto the next slide I'd like to outline our ATM or at the market stock sale volume and price of the last 12 months.
As one can see we have restrained ourselves from using ATM sales to fund our plans since August of last year and raised net proceeds of $72 7 million at an average net share price of $13 88 per share.
At the recent range of Aspen share price, we've refrained from selling shares and do not intend to sell equity below the share price of our most recent equity offering of $9 50 per share in December of 2022.
To recap with the right timing of plant two.
Have more than enough capital to fund, our near term growth and get to generating positive cash flows.
Our revised execution plan is a re timing of our investments not a delay in our growth and this aimed at accelerating our path to profitability.
Although we are managing our capital strategy for at least eight quarters ahead, we remain focused on short term execution.
I'll now step back to cover the main highlights of the last quarter on slide six.
But also because legislation is in the process of making this a requirement over the next few years.
All major markets have participated in the enactment of the United Nations Global transportation requirements, which requires a five minute delay before.
Europe and the U S have followed the lead of the United Nations by participating in the UN GTR face one enactment.
Meaningfully positive.
Being dedicated to <unk> thermal barriers and this.
The next question comes from the line of Alex Potter with Piper semi you May proceed.
Hi, there Ben Johnson on the line for Alex.
<unk> contract manufacturing, we'd be modeling capex 2024 and beyond.
Yeah, I mean for us it.
I see two capex scenarios rate for 24 and beyond one is.
Which is really the one that we're focused on here until we are we resume plan too.
But that I mean, it's pretty front loaded and we think that the capex that will deploy in.
Both in Mexico and.
Rhode Island. This year will set it up so that I mean, we should not be investing more than $15 million of Capex in 24 25 26.
If we don't restart plan too.
But given the demand that we're still seeing out in the 25 2000 2006 timeframe.
We'll have to pretty much re time or.
Expectations for investing in plan to for that point in time, after we decided to restart.
Restart investing in the plant.
But trust me on maintenance.
Maybe I'll just add one thing really quickly I mean for us really the the.
The main driver towards.
This change in strategy in this right timing of plan too.
Is that if you lay out the.
These lower Capex numbers I mean.
There is a really good chance to to create meaningful value here is we start delivering on our revenue later this year and going into next year, because we actually start paying back all of the investments over the past two years.
Just as the business continues makes its way towards generating positive cash flows here in the near term.
Got it thank you and how much you guys willingness to disclose regarding financial terms of your relationship with a contract manufacturer.
Well, let me just.
Let me say.
This way.
That through the negotiations we.
We are.
We're focused on having a profitable energy industrial business and we we.
The terms of that enable us to do that and and of course that was an important part of it wasn't just serving.
Market in this temporary period, it is serving that market profitably for us.
And being consistent with our gross margin goals et cetera. So so we're not going to get into the.
The the arrangement and deep detailed but but it's attractive to us and and again.
As part of that $5 million to $600 million revenue capacity.
The combination of plant one in that supplemental.
Supply agreement.
We we have the ability to have these 35% gross margins that we've talked about it in the past.
Thank you very much.
Thank you Bob Thanks [noise].
Thank you for your question.
The next question comes from the line of calling Rush with Oppenheimer. You May proceed.
[noise] icon.
Hey, guys, sorry, sorry for the trouble.
Could you talk a little bit about the competitive.
I don't landscape that you are seen.
At this point.
With with other solutions around he management you know obviously, if we're gonna have it stuck levels standard that we're working to tour, they're gonna be multiple entrance and just curious what you are seeing in terms of early days competition.
Yeah. This scenario, where we've actually been spending a lot of time and.
And actually went through.
Pretty comprehensive process with the help with some experts in our team here internally too.
To frame out all of our market views and.
As we outlined a year ago right. This is this.
This is a systems problem right and so there's a bunch of active measures and passive measures that one can.
Can implement to try to tackle it.
Without necessarily without having the option of swapping one for the other right. So you.
You're bringing there's no there's no silver bullet at addressing thermal runaway and propagation, there's only multiple lead bullets in in the passive side, we think that.
Depending on our objectives, we can be a pretty good.
Lead bullet.
What we're seeing on as.
As we go and quote business I mean, we're still seeing the same dynamics of last year and the year before more accelerated in from a competitive point of view I mean.
We were seeing that it's fairly easy to pull up a web site.
Started calling a product thermal barriers and grab some stock photos and and try to get market traction, but the technical dialogue that is required to actually get an award is a completely instead a completely different level of these Oems are not just assessing the.
<unk> of the material, but they're also assessing the capabilities of our process to deliver consistency.
At.
Sicknesses that frankly, two years ago, our team did not expect to have to make.
And so we we do feel very good about how we're position.
Right now.
And we don't see that changing dramatically because we just continue extending our lead.
That's that's helpful. And then just in terms of some of the financing options that you are going through obviously, it's a pretty dynamic environment in the commercial and and space I'm just curious what you're seeing in terms of.
Not necessarily right around terms and limitations, you'll undervalue and things like that in terms of some of these discussions and how 'bout tomorrow and you know obviously in a pretty bad asthma.
Yeah. So I mean, we've been pretty focused on.
On options that minimize the dilution right. So.
If you look at our menu of financing options selling equity at the bottom of the list, especially.
The prices that we're currently trading at and.
And just where we know the companies that relative to when we were at $60 a share.
And so the markets that we still see open R. For example on the on the equipment back loan financing or capital lease market.
You could.
You can get something in the you can something with the rates in the mid teens, but obviously, you're pledging specific assets and there's there's a bit of an administrative burden and getting that we do have a pretty clear line of sight.
To the $100 million that we've outlined there and if it weren't for the GM loan we could even take on more of that type of financing.
As we fund our growth now that our Capex plans.
R R lower I mean, there's only so much that.
You can put on those facilities given that they have to be.
Backed by a specific piece of equipment.
And then the other area that we're seeing.
Is is just.
We get pitched a lot of convertible products, but are not really focused on that.
And instead are seeing the private market is still pretty much alive looking at opportunities, where there is some equity upside.
They are reasonable around the.
The near term coupon.
But at the same time I mean, the timing of those this is important.
And when we combine those with the with the <unk> the loan program office I mean, obviously that one.
This is extremely attractive and now under this new plan, we can actually move that ahead and as the timing will potentially lineup.
From when we get a decision and when we ultimately will need to make a call on unruh swimming or investment implant too. So I would say that those are really the three options.
That we.
We see still alive.
And.
And where the funding probabilities are good.
And I think the one thing I would add to to that is.
In this scenario, where a different looking company as well, we're a cash generating business that that's our that's our plan as we as we think through.
And execute on.
On the.
One dedicated to <unk> in the supplemental off supply agreement, we have the we have the ability.
Two.
Generate cash them and we all know that's.
Those are the best investment dollars or you can have them and and we're very focused on.
On that.
Mmm.
Thanks, so much faster.
Thank you. Thank you.
Thank you for your question.
The next question comes from the line, Jeff <unk> with Peter Kelly <unk>.
<unk>.
Great. Thank you just two quick ones Ricardo is that I was confused on the equipment back financing that you mentioned $100 million.
That in place or what's your degree of comfort that it will be in place and if you could be more specific as to what specific equipment you're back leasing there.
Yeah. So I mean, we feel pretty good about that we mentioned during the previous quarter's call that we actually had.
Three different term sheets already we've.
We've signed we've sent back.
Binding commitment with two of them and are now basically going through the the formalities of the underwriting process and so we feel pretty good about getting those hundred million dollars and.
The the type of equipment that can be put under those facilities is a lot of the equipment that we're using to upgrade the.
The plant in Rhode Island is going to be.
Put on there those.
Same thing with our.
Both are manual and they're automated equipment, that's going into our facility in Mexico.
<unk> I mean, everything from some of our I T infrastructure investments that will be making.
There is a fairly large allowance for soft costs in that as well are approximately 30% and so.
So.
We're going to try to.
Put it.
A fair amount of our Capex on that as we line that up here at this quarter.
That's that's helpful. I, just Wanna make sure it wasn't affiliated with the Georgia facility given the call Sir.
And then think.
Think about the the contemporary vehicle on the truck side, you've given helpful anecdotes or detail on the passenger car side, historically, but haven't talked about the truck opportunity.
Yeah, I mean, so it's it's a fairly big opportunity because these packs are very large right. So we're talking about.
100, 8200, plus kilowatt hour batteries.
And so.
I mean this is potentially at 12 to 1500 dollar content per vehicle opportunity for us.
Even even even though they're prismatic.
Got it and is that an all electric or a <unk>.
It's all electronic via television.
These are all electric great Yep.
Perfect. Thank you.
Extra thanks.
Thank you for your question.
The next question comes from the line up towards <unk> with Canaccord Timothy you May proceed.
Hey, good morning, and thanks for taking my questions.
I'd like to have it George asks about Toyota.
Hey, guys ask about Toyota and any color you can share what you think their future plans are with electric vehicles that seems to be.
A lot of press back and forth and what any way you can help us understand the opportunity.
Thank you.
Yep.
Yeah I was in I was in Japan.
Last last week or two weeks ago and with with it.
Senior team at Toyota and we've seen.
And we've all.
Read about it and they talked extensively about it.
<unk>.
Sort of a change in administration, sorta speak and and and very much a.
A focus on on.
Being more aggressive with their <unk> program and we all know they had the dominant position.
With the Toyota Prius and and their heads stir.
Strategically sort of jumped.
Right out to the idea around fuel cells, and what have you and they I think they have.
Come to realize that they've got an important through franchise.
With that <unk>.
Prius platform, if you will or success of that vehicle and so they have they have.
Announced in disgust.
10 Eevees.
Different name plates.
To be launched by 2026 I believe.
They have sat in.
We're we're obviously close to the close to the company and.
And doing everything we can to be in that newly designed battery platform.
There's work to be done, but we have a strong relationship with with the company.
Thanks, and maybe on the just to focus on the opportunity any.
Timing you can share with us any.
Expectation on your part is to win any decision will be made there. Thank you.
I mean, we expected before the end of this year.
Yeah George.
We have been in consultation with the loan loan program office and and and.
And we have.
We have put together a strong internal team with with very capable external resources.
So we've we've really leaned into.
This in and.
We're playing to win here and we're putting the resources in place to to do that and and as both Ricardo and I I said that.
The timing of it.
Could align very neatly with.
With this right timing strategy that we have for for our for our plant too.
But we expect.
To work through the <unk> process over the course of 2023.
Thanks.
Okay.
Thank you for your question.
The next question comes from the line of Chris out there with the O'reilly you May proceed.
Hey, this fall.
Following up on the <unk> can you give us the size of that application.
Let alone you are applying for their and then.
You weren't successful with the <unk> last year, but you you've talked about kind of the.
Next round with that I, just wanted to see if that was.
Something that was potentially on the table for for for this year as well.
Yeah, I mean, we've been we've actually been advised.
And through our dialogue with the loan office.
And the <unk>.
That.
Size doesn't matter, which is kind of odd.
As we put together the application together, but we we've actually framed outta size, but we're just not in a position to disclose that at this point in time.
Yeah, and with respect to the the <unk> our focus.
[noise] has been now with with a loan program office, and the and the and the and that process. We are.
Aware that a next round invitations could be issued around the grant program as as we described last time and as you well know many of the awards in I believe it was the October .
Timeframe last year.
Were given to interesting companies.
Principally working inside the cell.
There was some thought that the next round of.
Grants could be.
For manufacturing capability.
And related components, what have you outside the cell so.
We're keeping an eye on on that program, but we've really put our resources behind the LPR.
Got it okay.
Maybe just saw on the market and kind of the path to profitability.
The gross margins in the first quarter essentially hit.
Well you can cut it back into with the guide.
Assuming opex stays pretty flat, which seems to be the case.
On the prior cause you'd given you know expectations of the vast majority of gross margin b.