Q2 2023 Aspen Aerogels Inc Earnings Call
Good morning, Thank you for attending to Aspen Aero Gel Inc.
Q2, 2023 financial results 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 House Neocart Hausky Aspen Senior director of corporate strategy and finance. Thank you you May proceed Mr. Brodsky.
Thank you Henry and good morning, Thank you for joining us for the Aspen Aerogels fiscal year 2023 second quarter financial results Conference call.
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 most applicable U S. Generally accepted accounting principles or GAAP measures is available on the investors section of Aspens website, Www dot Aero gel dot com.
In addition, I'd like to highlight that we have.
Moving to our website, a slide deck that will accompany our conversation today.
Can find the deck the investors section of our website.
On today's call management will make forward looking statements about our expectations.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially.
These risks and uncertainties include the factors identified in our filings with the SEC.
Please review the disclaimer statements on pages, one and two of the slide deck, because the content of our call will be governed by this language.
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 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 limit your questions to two questions at a time.
You have additional questions beyond the initial two please get back into the queue and we will get to all questions.
Okay.
Thanks Neil.
Good morning, everyone.
Thank you for joining us for our Q2 2023 earnings call. My initial comments will highlight the implementation of several critical elements of our strategy, our EV OEM development pipeline and Gm's ramp and the financial benefits of key operating efficiencies.
I will complete my remarks by drawing a picture of aspens business profile, given current assets and opportunities.
Ricardo will dig deeper into our financial performance and various elements of our business strategy, we will conclude with a Q&A session.
During our last earnings call.
Introduced the idea of our supplemental supply arrangement and the related plan to supply our energy industrial customers with products sourced from our aerogel manufacturing partner.
The product will be produced exclusively for Aspen to our quality specifications and shipped by us under our labeling and through our distribution to our customers.
The implementation of this supplemental supply arrangement support several critical elements of our strategy.
First it allows us to serve our energy and industrial customers with shorter more dependable lead times and to continue to grow that base load of revenue without supply constraints and in a manner consistent with our goal of achieving overall company gross margins of at least 35%.
Second it allows us to dedicate plant one in Rhode Island to produce pirate <unk> thermal barriers in order to support the ramp of our EV Oems.
And third it allows us to maintain a strong balance sheet by right timing the final phase of the construction of plant two in Georgia.
In whole the implementation of the supplemental supplier arrangement allows us to focus on driving significant profitability from our existing resources and opportunities.
We believe that we are building a business around our current assets and near term commercial opportunities that has the potential to produce annually approximately $550 million of revenue approximately $200 million of gross profit and approximately $140 million of EBITDA.
We are striving to hit this level of business performance on a run rate basis over the next four to six quarters.
At the same time, we believe that we maintain our full longer term upside potential as we continue to have talented teams garnering more design wins from EV Oems to build out our AR.
Our profitable Baseload of energy industrial revenue and to leverage our aerogel technology platform into additional high value markets, including our ongoing work in battery materials.
Regarding additional design wins from EV Oems, we continue to build our reputation as an industry leader in the mitigation of the risk associated with thermal runaway.
We are working closely with several EV Oems as they finalize the designs of their battery platforms.
As we announced earlier, we received our third design award from an important commercial truck subsidiary of a major European OEM group.
We are now delivering production part to this customer.
In addition, we believe we have near term line of sight on design awards from at least three other EV Oems with volumes expected to commence in 2024 and ramp in 2025.
In the meantime, we anticipate an acceleration of the revenue ramp from General Motors later this year as they enter the production phase of the higher volume Silverado Blazer equinox and bright drop electric vehicles.
Turning to slide four and our energy industrial business, both financial performance and demand are strong.
Driven by product mix operating efficiencies and a more normalized supply chain environment, we achieved a record energy industrial gross margin in Q2 of 27%.
We believe we are on track of having the energy industrial business provides strong support for our overall company gross margin target of at least 35%.
We have significantly greater demand than we can produce from plant one, especially as we dedicate additional manufacturing lines to producing paraffin thermal barriers.
The supplemental supply arrangement is key to balancing supply and demand for the energy industrial business.
We previously said that we plan to test our supplemental supply strategy. During 2023 before the full program begins to contribute in Q1 2024.
To that end we are currently focused on the completion of our product qualifications with our aerogel manufacturing partner, which when completed we believe has the potential to drive incremental energy industrial revenue gross profit and EBITDA during 2023.
Yes.
Okay.
Turning back.
To the earlier slide in many ways Q2 was about blocking and tackling with a keen focus on strategic advancement and unit economics and profitability.
Progress in operating efficiencies resulted in a 17% gross margin with significant improvements in both the pirate than thermal barriers and energy and industrial segments.
To illustrate the financial impact of the improved operating performance. It is interesting to compare Q2 2023 with Q2 2022, where we had $2 5 million.
Incremental revenue and $9 $6 million of incremental gross profit.
Each contributing factor falls under the umbrella of our intense focus on our goal of reaching near term profitability and achieving gross margins of at least 35%.
<unk> with these goals, we are maintaining careful control of opex with three quarters in a row at the $25 million level.
Yes.
Before I turn the call over to Ricardo I want to reiterate that our vision for Aspen is built upon the successful execution of the three pillars of our strategy, namely the implementation of the supplemental supply arrangement.
Dedication of plant one production to pirate than thermal barriers and the right timing of plant two.
Again, we believe that from our existing resources and opportunities. The business has the potential to generate on an annual basis approximately $550 million in revenue approximately $200 million.
In gross profit and approximately $140 million and EBITDA, we believe that we maintain 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 and opportunities.
To create a cash generating business and to avoid unnecessary dilution.
Ricardo over to you.
Yeah.
Thank you Don and good morning, everyone I'll start by covering the results of the second.
And the first half of this year and then move on to our 2023 outlook and briefly discuss the key near term demand drivers across our business segments before handing the call back to Dawn I'll also spend some time framing out how we're gearing the company for continued improvements to near term financial performance as we can.
You need to grow without requiring a second <unk> plant in Georgia, which we've historically referred to as planned.
To cover our results from Q2 of 2023 I will start on slide five.
Beginning with revenue, we delivered $48 $2 million of revenue in Q2, which translates into 6% growth year over year.
These revenues were supply constrained during the quarter as our aerogel plant was down for planned upgrades and maintenance on two of its three production lines.
With the lines down for seven and eight days during the quarter.
And an operation that is running 24 hours a day seven days a week. This is the loss of productivity of at least 8% on those lines during the quarter.
This downtime and production was necessary to ensure that we're ready to fulfill an expected ramp in power within demand during the second half of 2023, particularly in Q4.
Year to date, we have delivered $93 $7 million of revenue, which reflects a 12% year over year increase.
Energy industrial revenues in the first half of the year were $69 4 million or 6% year over year increase.
Given our capacity constraints in Q2, we continue to focus on optimizing our energy industrial production mix.
To lighten the load on our operations by making those products that required the lease standard hours of processing and delivered $35 $5 million in sales.
Reflecting a 5% quarterly increase and a 2% year over year increase.
Adding to that answer earlier remarks on our energy business.
We have approximately $138 million of backlog and orders to fulfill over the next two to four quarters.
To fulfill this excess demand we are focused on continuing to optimize our mix for steady supply during the second half of the year and bringing in contract manufacturing supply as soon as possible.
EV thermal barrier revenues of $12 $6 million were up 17% year over year and 8% quarter over quarter.
Reflecting an expected delay in the demand increase from general Motors that we communicated during our Q1 results and steady volumes in the Toyota nameplate that we supply the BC Forex.
Our EV thermal barrier revenues of $24 3 million during the first half of 2023 represents a 32% increase over the first half of 2022.
Next I'll provide a summary of our main expenses.
Material expenses of $17 4 million for the quarter made up 36 percentage points of sales.
Reflecting the work that our supply chain and procurement groups have put into reducing the cost of some of our main raw materials, particularly stylings.
In a normalized environment. It is encouraging to see these costs come in four percentage points of sales below our usual target of 40 percentage points of sales.
Q2 performance enabled our total material costs.
The first half of 2023 to be up 36, $36 million or <unk> 38 percentage points of sales or 200 basis points.
Below our target of 40 percentage points of sales.
Conversion costs, which we describe as all production costs required to convert raw materials into finished products.
$22 4 million or <unk> 46 percentage points of sales in Q2.
These costs include all elements of direct labor manufacturing overhead factory supplies.
<unk> insurance utilities.
This logistics quality and inspection.
These results compare favorably to conversion costs in Q1 of this year.
Which was a 48 percentage points of sales.
As previously mentioned our long term target for these costs.
At a higher revenue run rate is a 20% to 25 percentage points of sales.
We still have work ahead of us here.
While we've made improvements primarily thanks to the efficiency of our operations in Mexico, we need to continue capturing additional opportunities to reduce these costs.
As our plant in Rhode Island is fully converted to making pirating and it finds its flow. We will continue driving several reductions in the cost of a standard hour of product conversion at the site.
Year to date, our conversion costs of $44 $2 million.
Reflect 47 percentage points of sales on our performance improvement year over year here has been primarily driven by fabricating $99 million of subsea products within our energy industrial segment in Mexico versus Rhode Island.
In Q2 company level gross profit margins were up 17%.
And our gross profit of $8 $4 million.
A $9 $6 million improvement over our gross loss of $1 2 million during the same quarter last year on revenues that were only 6% lower.
Highlighting how we haven't just been relying on higher revenues to drive profitability.
The material cost tailwind.
Unhelpful, but we still need to keep pushing for a lower fixed manufacturing cost base through process updates.
Our energy industrial segment delivered $9 6 million of gross profit or 59% year over year increase.
And EV thermal barriers, we had a $1 $1 million gross loss in Q2 if.
If we compare this quarter with Q1, our EV thermal barrier gross loss improved by $2 7 million, an incremental revenue of only $900000.
Our second quarter of 2023 gross loss in EV thermal barriers was also 84% lower than the gross loss of $7 $2 million that we incurred during Q2 of last year in this segment.
Collecting the benefits of automation and our assembly facilities in Mexico.
The resulting gross profit margins during the quarter or 27% and negative 9% for our energy industrial and EV thermal barrier segments, respectively.
For EV thermal barriers.
Through Q1 of 2023.
We needed a quarterly revenue run rate of $20 million to achieve a positive gross profit.
Thanks to additional assembly automation that the team has been implementing we have now lowered the breakeven point to approximately $15 million of quarterly revenues.
For the first half of the year, our gross profit of $13 $5 million.
Flex of $16 5 million improvement in gross profit versus our loss of $3 million during the same period last year.
Operating expenses, which are sized for our near term projected annual revenue capacity of over $550 million, we're at $25 5 million during the quarter.
We continue to level off our opex increases with three consecutive quarters are under $25 million range.
And have ensure that any additional costs that are focused on streamlining how we work and increasing productivity through new process development and the important system upgrades with 12 month paybacks.
Approximately one third of our quarter over quarter Opex increase of one $5 million.
It was driven by strategic investments and resources tied to accelerating EV thermal barrier sales and commercial launch activity with specific customers.
Putting these elements together, our adjusted EBITDA was negative $10 8 million in Q2 compared to negative $18 3 million during the same period last year.
Resulting in a year over year reduction in our EBITDA loss of 41%.
When we compare our year to date adjusted EBITDA loss of $24 8 million with our original expectations for the first half of 2023 were $14 million ahead of those plans on our EBITA losses, lower by $8 1 million during the first half of this year versus last 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 Q2.
This other items included $2 7 million of stock based compensation.
And $1 6 million of net interest income.
Our net loss in Q2 decreased to $15 4 million.
Or <unk> 22 per share versus a net loss of $24 1 million or <unk> 68 per share in the same quarter of 2022.
Our quarter over quarter net loss decreased by $1 4 million from $16 8 million.
Our year to date net loss of 32 $2 million is $11 $3 million lower than our loss of $43 5 million during the first half of last year or down by 26%.
Next I'll turn to cash flow and our balance sheet cash.
Cash used in operations of $7 7 million reflect that our adjusted EBITDA of negative $10 8 million and a decrease in cash needs of $3 2 million.
The key items that enabled us to free up working capital during the quarter were an increase in accounts payable of $4 1 million.
A decrease in accounts receivable of $3 $3 million.
While our inventory increased by $6 3 million and consume working capital.
Our capital expenditures during the quarter were $66 million.
<unk> put our operating cash needs for the quarter at $73 7 million.
$40 7 million of our Capex was spent in closing the main buildings of plant two in Georgia and in helping bring the plant healthy resting spot.
From General Motors, we haven't yet broken through the $50 million quarterly revenue run right in the past five quarters, but at the same time, we've improved the company's gross profit margins from a low of negative 17% in Q3 of 2022.
Two positive 11% in Q1 of this year and 17% in the most recent quarter.
Alright, just said EBITDA loss.
Also shrunk from a loss of $23 million in Q3 of 2022.
Two and adjusted EBITDA loss of $10.8 million in the most recent quarter.
Since 2021, we've communicated our plans to double R 2021 revenues by 2023.
And we've increased our emphasis on reducing our fixed cost base to accelerate our path to profitability.
This doubling of 2020 one's revenues into 2023 is still a possibility.
But it is heavily dependent on demand from general Motors in Q4.
Our ability to fulfill this demand alongside that of our energy industrial businesses growing order backlog.
With this high level of variability in demand from GM, we still maintain a range of $50 million in our revenue outlook for 2023 from $200 million to $250 million.
Go into more detail in a minute on how we think about general motors expected Ram.
Where we are updating our guidance for 2003 2023 isn't profitability.
We're seeing positive results from key initiatives, such as optimizing our energy industrial revenue mix reducing.
Reducing our raw material costs.
Driving process improvements in our subsea nev thermal various assembly operations in Mexico.
And managing our structural cost a yield of near term payback.
As these efficiencies materialized versus our original plans.
We're already $14 million ahead of where we were expecting to be by this time as we were planning the year.
At the same time, while the higher revenue run rate is required to further.
Drive near term efficiencies, we're revising our adjusted EBITDA arrange to a loss of $45 million.
Two $5 million to $55 million, a loss reduction of $5 million versus our prior range of a negative 50% to $60 million of adjusted EBITDA for the year.
As we factor in the effect of meaningful interest income and a different amortization schedule as we operate with less deployed capital were also lowering our net loss guidance for the year from a loss of $92 million to $102 million.
To a loss of $75 million to $85 million. This.
This improvement of $17 million represents an 18 and 17% reduction on the lower and upper end of our prior guidance range respectively.
This also brings our earnings per share guidance to an updated loss range of one dollar seven per share to $1.21 per share.
With $115 $4 million of Capex spent here today, we're focused on keeping our capex for the remainder of the year.
Below $34.6 million aiming to still not spend more than $150 million of capex in 2023.
We will only increase this amount if we see a very clear picture of 2024, EV thermal barrier demand as.
As the second half of Q3 and Q4 materialize.
To provide flexibility we've recently come to an agreement with an asset backed lender to fund up to $25 million.
Of Capex and are in discussions with other lenders to provide us with additional liquidity during the next few quarters and.
In the near term.
Focused on managing the company with at least $75 million of cash on the balance sheet and are pursuing non dilutive sources of financing such as working capital lines of credit.
I said back loans equipment leases and other instruments that leverage our current asset base.
You may remember that on June 15th we terminated our ATM program.
And then we have not sold any equity in 2023.
To provide flexibility for reaccelerating the construction of plan to Seb thermal barrier demand starts pointing towards exceeding our current revenue capacity of over $400 million of annual revenues.
We have applied for a loan with the U S Department of Energy's loan program office.
L P O.
As a reminder, the LPR 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 are theme has continued consultation with the loan program office and was invited to apply.
For a significant loan as part of its advanced technology vehicle manufacturing program, which we did on may 31st of this year.
<unk> process, so uncertain and there is no guarantee that are proposed application will be looked upon favorably. We believe however that we are a very good candidate for a direct loan as part of the ATV M program based on the importance of battery performance and safety.
And then while the timing can be drawn out it may match, well with our right timing strategy for plan too.
We have also gotten positive feedback on the quality of the materials provided as part of our application.
Turning over to slide seven.
I would like to provide more color into how we think about general motors expect that ultimately the production ramp in the second half of 2023.
And beyond with the help of some data from IHS markets light vehicle forecast.
Which is we've seen over the past couple of quarters has been adjusted downward since the beginning of the year from an expectation of 140000, all home base vehicles to be produced in 2023.
To 76000 vehicles in the most recent forecast a 46% reduction.
As we built our revenue projections for 2023 late last year.
We anticipated this delay and still believe this forecast to be high.
89% of the expected volume for 2023 is expected to be produced from the second half of the year.
Putting most of the revenue variability in the second half of Q3 and particularly in Q4.
G. M has cited sell manufacturing supply automation issues as the <unk>.
Source of this production delay.
But has said that it remains confident in its ability to resolve these challenges in 2023.
Reiterating their target for 100000 Eev's in the second half of the year.
A figure that includes the Chevy volt a legacy vehicle that is currently not yet based on the <unk> battery platform.
With a 30% increase over our part demand from Q2 from General Motors in Q3, and Q4, we'd be able to achieve the low end of our revenue guidance.
Informing the upper end of our guidance is a higher revenue ramp that is currently being communicated by general Motors and the most recent IHS market forecast projecting GM to triple its all Kim <unk> production in Q3 over Q2 levels and then more than doubled up production into cue form.
We are geared to capitalize on any potential demand scenario, but as you can see the range of outcomes here is wide, but encouraging particularly for Q4.
The production ramp any vehicles in the second half of 2023 of the name. Please that have already been launched such as the <unk>.
A large price drop van and the Cadillac lyric can drive a significant portion of this demand increase.
The Silverado EV and the blazer that recently launched along with the equinox that will begin high volume production in queue for will provide additional volumes.
GM reiterated the start of production dates during its earnings calls last week.
And we're ready to support the ramp image broader uncertainty brought by the upcoming UAW.
Negotiations of the Detroit based automakers, including General Motors.
While our 2023 outlook remains wide as GM begins hits ramp.
We believe that in the long term.
The outlook remains strong.
This belief is supported by our ongoing conversations with G M other suppliers and IHS.
G. M has continued to reiterate its long term commitments to significantly ramp up.
Production capacity over the next few years.
It continues to emphasize targets of producing 400000 av's from 2022 through the end of the first half of 2024 and is investing in capacity for producing 1 million units per year in North America by 2025.
The trends within the latest IHS market forecast also align with these expectations for 2024 and 2025.
Turning over to slide eight I'd.
I'd like to cover our questions. A question that most investors have asked us since announcing the right timing or second marriage of pattern, Rhode Island or plan to.
The question is this.
What business are you building during next during the next 4% to six quarters.
So what's your answer is now a lot simpler.
We're basically building a business with the potential of $550 million in revenue capacity available in 2024.
25% EBITDA margins as we feel that capacity.
Evolving easy thermal very demand will determine the timing of when we reach our approximate <unk> thermal barrier revenue capacity, which we currently estimate.
Estimated at $400 million.
Our energy industrial demand already exceeds the initial $150 million annual capacity enabled by our supply arrangements in 2024.
As a company we are working to have our material costs not exceed 40 percentage points of sales and we're focused on driving our manufacturing or conversion costs, the less than 25 percentage points of sales.
Deliver at least 35% gross margins.
Five percentage points of sales and variance between either of these two cost buckets makeup the range in cost structure differences across our product.
If we manage material and conversion cost is targeted we have the potential to deliver $200 million of annual gross profit on a run rate basis.
Opex shrimp that we've experienced during the last two years is coming to attend as we remain focused on managing this bill of $100 million on an annual run rate basis, which is less than 20% on $550 million, so revenues or $110 million.
We've illustrated this basic hearing and slide eight.
While also showing her historical quarterly financial performance compares with this near term hearing of our business plan on an annual run rate basis.
While the revenue run rate isn't there yet we've brought material costs and manufacturing costs down.
The opex shrimp as being managed in Q4 of 2022, when thanks to a supplemental order from general Motors, our revenue run rate increased one can see how are fixed manufacturing costs were better absorbed on our gross profit improved to 24%.
As Dan mentioned earlier, we have the percent the potential to deliver $140 million of EBITDA for.
25% plus gross margin.
An annual run rate basis by combining the elements that make up the core goering of our operating plan and the same corner.
Over the next four to six quarters, we are looking forward to posting results on this board and getting closer to delivering the profitability that has enabled by this hearing as demand increases across both are segments and we fulfil it with our current asset base combined with supplemental supply.
As one can see material costs are already there and our focus needs to remain on keeping opex need $100 million annually and cutting our manufacturing or conversion costs and have that as a percentage of sales with the assistance of higher revenues.
Turning over to slide nine.
I'd like to close by saying that this quarter has been a lot about near term execution setting up aspirin for what we believe is an eventual but not conditional surge in demand.
We believe that this is really a matter of when not if.
This growth is driven by the underlying global vehicle electrification trend in the high share of vehicles that will be launched with Poucher prismatic cells.
Our latest assessments of service.
Service Oval addressable market is that it can be of $8.7 billion annually in 2030.
Or an underlying compounded expansion of 27% per year between now and then.
Well, we don't have a crystal ball and process this market sizing exercise with caution.
It's clear that the wind this on our sales as we work on our way through the EDI plans of different Oems at their pace in most cases, enabling a safe transition to electrification.
We remain convinced that this is an opportunity worth capturing with all of our assets and energy to create value and post the results as the man gets closer to these markets icing estimates.
When we step back and compare these market size assessments that account for only a subset of the global easy market.
To see that with our $400 million a near term potential annual revenue capacity for pyro thing.
We are really only getting started at capturing a very large opportunity while building a business that is geared for profitability in the near term.
And with that I'm happy to pass the call back to <unk>.
Thank you Ricardo we've covered a significant amount of ground today in reviewing Q2, and our strategy before we moved to Q&A.
On driving significant profitability from our existing resources and opportunities. We believe the near term business profile as we have constructed and consistent with current assets and commercial opportunities.
Has the potential to produce on an annual basis, approximately $550 million of revenue approximately $200 million of gross profit and approximately $140 million of EBITDA. We're striving to hit this level of business performance on a run rate.
Within the next four to six quarters at.
At the same time, we believe that we maintain our full longer term upside potential as we continue to have talented teams garnering more design wins from <unk> building out a profitable base load of energy industrial revenue and leveraging our era, Joel technology platform into additional high value markets.
Including our ongoing work and battery materials.
Second we believe the implementation of the supply of the supplemental supply arrangement support several critical elements of our strategy.
How's us to continue to grow the base load of energy industrial revenue without supply constraints and in a manner consistent with our goal of achieving overall gross margins of at least 35%.
The supply arrangement allows us to dedicate plant one in Rhode Island to produce piracy.
Strong balance sheet by the right timing of the final phase of the construction of two in Georgia.
And the third point of emphasis in addition to having the large European commercial truck customer join and Toyota on the list of design Awards.
We believe that we have near term.
A line of sight on design awards from at least three other <unk> with volumes expected to commence in 2024 and ramp in 2025.
Even with this anticipated near term success. Our team believes that we're just getting started as the need for battery performance and safety and Eevees becomes yet more paramount.
With that operator, let's turn to the Q&A.
At this time I would like to remind everyone in order to ask a question press star and a number one on your telephone keypad.
Pause for just a moment compiled a Q and a roster.
Your first question comes from the lineup Eric.
Ricardo.
Hi, Eric.
Hey, good morning, So first glued to start with the guidance flat and reasons why the margins potentially some improvement from here and I know, it's dependent on the GM ramp how steep that might be in the fourth quarter, but you're EBIDTA guide seems to expect.
Very little if any improvement from.
What we've seen especially in the second quarter. So maybe just skew that and I know in the past you've thought the fourth quarter of this year was a potential EBITDA positive quarter weather curious whether that stalled.
Yeah. So I mean, I think being EBITDA positive in the fourth quarter is still very much a possibility if the GM ramp materializes.
Mmm.
However, at the same time I mean, just given the the range of outcomes.
And the fact that we almost have to protect for a scenario in which the ramp comes in Q1 of 2024.
Recorded as revenue.
In.
During this year.
And so we felt that.
That combined with.
In the end you can only optimized.
The energy industrial product mix, so much without totally not fulfilling.
There is for particular products and so we may be in a position here at the end of the year, where we have to fulfill some of the energy products that we've.
Sort of.
Postpone manufacturing off during the first half of the year.
Guides that conservativeness on and the lower end of the guidance I mean, I do feel pretty good about the savings and there's more.
Juice left to squeeze, particularly as.
As the revenue run rate increases, but we just want to be careful here Eric and.
And protect the range.
From some of these.
Lower probability.
Liddy, but but still potential Cindy.
Scenarios.
And there are really two two things that.
That.
Will cause us to to move higher in that in that range.
The GM rap and the second and I mentioned in my in my comments and and as did Ricardo.
To test the supplemental supply agreement I hear a bit in the latter part of this year.
If if we can get.
One or both of those things to happen of course, we moved.
Higher up in that revenue outlook range, and and I think you'll see us continue to improve our our EBIT outlook, but for now until we see those things fall into place.
While we did improve the EBITDA outlook.
I think we're very comfortable with where it is right.
Right now.
Okay, Yeah that makes sense.
Thanks for that [noise] excuse me and then maybe just on the second question I know you would had.
Shall we have if we looked out to say 2025.
Well we have.
We have.
Three to date Award design Awards.
Okay.
We feel confident that we will have a half a dozen.
Design awards by the end of this year and that will begin to contributor bid in 2024, but really ramp in 2025.
Those are the near term opportunities.
We continue to work with virtually all the companies around the world.
Who were.
Pouch prismatic designs.
In their battery platforms, and we believe that we will continue to make inroads.
With all of those with all of those companies, whether they turn into design awards or not.
Time, well time will tell but I can say and I think we all are seeing.
To address it to be to be ever more important and we are confident that all the <unk> are going to address this in some manner and again, we think we are industry leaders in.
The mitigation of that risk.
Okay. Thanks.
Our next question comes from Alex Potter from Piper Please.
Please go ahead.
Great. Thanks, a lot guys.
So maybe first question.
Profitability mm.
And the I guess, the things that give you confidence with the new contract manufacturer you mentioned on one hand with regard to revenue you could be.
The higher end of your range, if that contract manufacturers or Paul their weight and comes online sooner than expected her on time.
Which would which is easy to sort of conceptualize, but what I'm trying to get a better understanding of the impact that that would have on margins.
Margin, so what does that.
Do you feel confident that as you shift that mixed for the contract manufacturer somebody.
Somebody dropped the ball somewhere or there won't be priced dislocation costs dislocation uhm. So anything you can comment on in that regard would be great.
[noise] yeah, it's a good it's a good question so the way we think about it.
A couple of different ways.
Okay.
If you compare it to the current situation producing in this.
And that's in the East Providence plan, we take raw materials from from the U S from Europe , and several from from Asia, including China, and we bring them.
We put them on the water for eight or 10 weeks and we bring them into this country and we pay a 30 per cent tariff and.
We bring them up to Rhode Island.
We produce energy industrial product there and then we turn around.
And we export about two thirds of that much.
Much of it back out to Asia. So you can see there's a <unk>, there's a lot of cost and a lot of time and a lot of working capital associated with it.
With with all of that.
I guess the clarity that we have is for one thing we've got a lot to work with as I, just described and and I think the clarity as you know we know our pricing.
For our energy industrial products, well established and and and we also know our contract.
Arrangements from the supplemental supply so.
You know, there's not an enormous amount of mystery.
Left to that yes, we have to execute they have to execute we're working very closely with them, but but the math is pretty clear to us in and it says.
That is very much supports.
Our overall.
Overall targets of of 20 separate words excuse me Uhm 35 at.
At least 35%.
We were at the 27% level.
Level, even without some of these enhancements so I think a lot of our operating efficiencies are improving.
We're seeing sort of supply chain and raw materials, let me just say serve normal lives a little bit after of course, they're very hectic.
That's sort of the man, that's sort of both the atmosphere and the math I guess behind the supplemental supply.
And if I may add I mean.
The the margins aligned with.
With our expectations given all of the.
The room that there isn't the value chain to have.
Contract manufacturer support our energy business, but most importantly for us and really why the pressure is on us.
That you know, we don't really take Martinez to the bank, we take the incremental gross profit.
And here with with the backlog of roughly $138 million on the energy site.
Money there that we that we are just not taking by not being able to fulfill the demands.
Perfect. That's all very helpful color.
Maybe one other question goes to what you were alluding to their and the last question with Eric.
This is.
Potentially having to build some inventory given.
Par for the course on somebody turned out to be accurate like this but I've noticed that.
Inventory has been ramping up a bit sequentially here over the last couple of quarters, what is that is that reflecting.
Preparation for the G M ramp or I guess, just qualitatively, what's an inventory and will that continue.
Yeah, I mean at this point for us inventory really means flexibility and right and so when we look at the the men that we get from our customer like G. M. R. I mean on the automotive side.
You are in essence, unisons have a right to build an invoice the customer for the next four weeks of demand.
And the demand is changing on you roughly every two weeks and.
And you have a rough view of what the next 40 weeks are going to look like but again that can be changed every two weeks and so having some inventory on hand to at least give us.
A month to react here, particularly on the arrow gel side.
We think is important as we as we manage this ramp particularly with G M.
And so we're.
The roughly $6 million of inventory that we added included quite a bit of finished goods, Eric pyro thin inventory that is basically ready to get processed in Mexico.
So so far I mean.
Actually slide a that's really telling if you.
This is what we're going through now is almost a repeat of the movie that we saw in Q3 and Q4 of last year.
You see the the ramp that we had in Q4.
When we fulfilled $101 million of <unk> thermal barrier revenues on an annual run rate basis right.
That really came at the expense of energy revenues in Q3.
So.
So that's where the inventory bill is going it's really going towards enabling some.
Very helpful. Thanks for the card off she thinks everyone.
Okay.
Our next question comes from Jeffrey Osborne from T. D. Tailwind. Please go ahead.
Yeah good morning.
In terms of size and scope would be helpful.
Yeah, I mean I think.
And Toyota it's no secret that right now we're only supplying one named late so that's the smallest one and.
And then the award that we have here with the European.
On the commercial truck program.
Is is a second <unk>.
The smallest in the G. M. One makes up the lion's share of the near term volume.
However, the program in Europe with the commercial vehicle manufacturer.
We actually already started delivering production parts of them and that will ramp up significantly.
In.
In.
In 2024.
And.
It will make up a good portion of the run rate that we're currently seeing with G. M.
Jacqueline.
I was referred to as a three potential rewards that you are announcing before your and is there a way of.
You mean, the next <unk>.
Yeah, I mean, there's some pretty big ones right I mean, yeah. The way I would say, Jeff I think again just.
I I I would say that.
That were.
Very focused.
We have a strong team.
In Europe and.
That.
Even with significant growth from from General Motors, an additional north American wins.
Europe could be our largest market in in three to five years and so a lot of success, where we're anticipating here in the near term I think support spat or get that process started in a pretty significant way.
So you know general Motors, obviously, right in front of us and and.
Are are very large numbers, but we were really working hard to create diversity of oem's and geographies and and we think we're doing a pretty good job of that so we will be able to answer that question a little better as we.
And this year and enter and enter 2024 <unk>.
One key thing to keep in mind when thinking about the slicing of these European program says that they're all for prismatic cells.
So the the content per vehicle opportunity.
Is is lower but at the same time the process to manufacture those parts is a lot more streamlined and we think we can ramp that up.
Astor than some of the current designs oversupply.
That's helpful. Maybe just one follow up you mentioned a few of those maybe all three would started 24, but really ramps and twenty-five so keeping in mind the fourth quarter.
We don't think we need to do it that early next year. It really depends more on general Motors frankly than these other customers. That's the other benefit of of supplying.
Prismatic sell programs that the material tends to be thinner and so we could actually our capacity on the $400 million would be significantly higher we're supporting mostly prismatic sell programs that are thinner so.
Would be gms acceleration of the man.
Got it that's helpful. I appreciate a ricardo.
Thanks, Jeff.
Our next question comes from George G on <unk>.
<unk> from Kenneth cord.
Please go ahead.
Just to focus on the three Oems again, we just talk about the process that you've gone through and what has the bake-off looked like who are you competing against what are the requirements that they just kind of curious if you give us any more detail as to.
Yeah I mean.
So just the processes is very similar amongst all of them and I wish we had <unk> head of sales here with us to help US answer this one but.
<unk>.
The the.
The questions that we used to get around being compared with other materials like ceramic papers and micah she's like well, we don't get that anymore.
Able to leverage a lot of the data that the team has developed over the past year.
With customers demonstrating that we really are the only solution for solving the main three requirements that they're looking for they're looking for thermal isolation in and this is the thinnest and the lightest.
Envelope possible.
They are looking for fire protection and most importantly than the one that all of our.
Quote unquote aspirational competitors.
Miss is this requirement that run the mechanical properties of the material where in essence of spring inside of the battery in between every single cell.
So it's less about demonstrating the performance now and it's actually about just coming up with a design that will fit.
Designs that in many ways are already in flight and in progress.
This idea of.
Solving for thermal runaway.
Is new what some of these Oems and so we have to bring them up to speed on.
And then it's really.
I think that the tallest fall in the 10th is is their design timeline for making pyro thin fit within their designs.
And then a lot of the programs that we have quoted also have to go through their own approvals inside of the Oems.
To get capital that enables the supply teams two sources.
And and that's that's a drawn out process depending on the M. Right very few <unk> have the same approach the GM took.
Of going all in on a new battery platform that will underpin vehicles that haven't even been announced or or thought of inside of general motors.
Instead, it's more of a nameplate by nameplate application by application.
Exercise that the team is going through but again I think we.
It's not really a bake off now it's really more of a an engineering and development exercise.
And and that takes a while right I mean for us in Europe right now it's.
And the discussions are becoming more strategic in nature in nature, particularly with.
Some groups that have multiple brands, but don't quite have this sort of singleplatform approach that general motors has.
Georgia, I would just ask and I.
Do you agree with Ricardo the images.
Spitting.
Fitting into there.
Significant as you know, we're a lot better too we have really come to understand.
The challenges around the.
Around the mitigation of thermal runaway, but also.
Aw.
Sort of mechanical test as well and so.
So we bring a lot of expertise into.
Into these discussions and that expertise is increasing.
Every with every day that passes so.
I I do agree with with with Ricardo that the gating item tends to be at this point more about their own battery design.
Then.
Then it competitive bake-off.
Thank you and just as a follow up to make sure I understood. The.
The range of outcomes to hit your your guidance at the low end at the high M. G. M. So you have this on slide seven.
20.
And then in 47 in Q4.
Thousand and four G M and I'm curious if hitting those numbers did you say that would bring you to the high end of the range.
I think as well so I mean, it depends on which number's right. So if we look at G. M's.
Current demand right, which is basically a 40 week expectation we'd come in.
Like well within the range, but that can always change if we.
Worth of supply at the IHS right.
I think we would totally come in above the range.
At the same time, it's hard to tell how many parts G. M. Still has an inventory we don't have that.
Communication back from them.
So.
As I mentioned in my remarks, right I mean for us to come in on at $200 million of revenue. This year, we would only need to run right to increase by about 30%.
In the next two quarters over what we deliver to them in Q2, and that's I mean.
That's a realistic expectation right.
Thank you.
Thanks George.
Our next question comes from Chris Other E. Riley. Please go ahead.
Chris.
<unk>.
Can you hear me now.
Yeah sure.
Maybe just a little bit on the puts and takes on the gross margins for pirates in once the contract manufacturer comes on line does that change the breakeven 0.4 pirates and gross margins.
I'm just curious if there's like a step down in those margins.
All you're producing out of.
Out of Rhode Island.
No I mean that that breakeven point is really more driven by the assembly and I mean.
Don't get me wrong, I think they are still efficiencies on making only pyre thin in.
In Rhode Island, but.
I would argue that all of those sufficiency are ending up more likely on the.
Got it Okay and then just the last one to put a point on the EBITDA.
Guidance as it seems to reflect the low end of revenue.
Which were G I'm kind of slipped on the raft.
Where it affects shakeout if.
<unk> stays on their targeted schedule an issue at that.
EBITDA in the fourth quarter, just what is kind of the upside there since it seems like you're kind of getting people to the.
The downside case.
Yeah, I mean, I think there's <unk>, there's definitely a probability of coming in on the high end of the range of profitability. If we have a good cue for and if gm's demand ramp really starts in Q4.
Quite a bit of it would come at the expense of Q3.
So I.
Reflects that right it reflects.
Okay. Okay. That's helpful authenticated thanks, guys.
Mmm.
Our next question comes from Thomas Karen from Sea Port. Please go ahead.
Potentially converting into significant ETB into seeing again.
Just could you confirm that are are all three of those European.
And then.
Are each of the three.
Stinks automotive groups or or any of them.
Separate brands, but subsidiaries of the same automotive group.
It looks like you have a bingo board there [laughter].
Yeah, Yeah yeah.
Some are part of a group and some are are are separate are independent yeah.
Okay, and and all European.
And then just.
My second here that's left.
Actually my first call question on the energy industrial side in awhile back for that divisions LNG market could you update us on what LNG sales Street, a camp or as a percentage of revenue. This year are you also producing cryo jail product for LNG customers out of Mexico now as well.
And are you currently pursuing any visible large LNG projects by which I mean opportunities that could result in awards comparable in size to the P. T T <unk>.
Receiving terminal contract that you want and delivered over 2019 2020.
[noise].
Let me Peel that are back a little bit.
Start with the latter part and and.
And remind me if I missed the beginning part.
We are we are pursuing several of of the LNG.
Projects that are on.
The drawing board I mean, well well well along frankly on that on the drawing board, where we worked our way into the specifications of of these projects.
Not all of them of course are the size of the PTT project, which was about $45 million, but but they are they are significant significant orders PTT of course is also.
Expanding their facility with another receiving line as well and we're working hard to to participate in that and and we performed extremely well on on the earlier projects. So we think we're in we're in a strong position.
There.
We are first focused on the.
On the supplemental supply agreement around our pyro gel, our product, which which is.
The lion's share of our revenue in the energy industrial area in the range of three quarters, and and we will move to qualifying.
Our crowd gel products up next.
With with the supplemental supplier and.
So.
And that that breakdown is is roughly you you know.
Roughly three quarters on the hot side.
We're we're good at this business Thomas as I think you know and and and it was one of the reasons why it was so important for us to do the supplemental.
Supply, we would've been severely capacity constrained in that business and there's no question that we would have had demand destruction had we.
Not thought through.
And anticipated.
B business growing as it as it is and and consuming Platt one for now so.
So anyway, it's a really important part of our of our strategy and we think will provide excellent excellent service you know a lot of that business is in.
As in Asia and to service from Asia.
Again makes a ton of sense for us both from our customer service point of view and from an economics point of view.
I think there was also a question their own cryo Jelen, Mexico, and so maybe just to clarify so cryo Joe <unk>, Joe we're still selling just Arizona installation roles that come out of Rhode Island.
Our subsea products that are being where the.
Those rules basically goes through an additional process of being put inside of banks or they get encapsulated that cutting in and Capsulation is what is happening in Mexico for subsea projects not for a garage sale.
Got it Thomas.
LNG Craig.
No no I was just gonna say I know, you're kind of Ah Ah Ah reformed oil and gas sky.
So I would just say, it's really interesting because we're seeing a tremendous amount of activity and.
In our sub C.
Business as well.
Which is.
We've been a little surprised by but.
That business I think very well.
Great just just to wrap this up and could you just provide us with rough estimates for LNG and subsea respectively as as percentages of <unk> revenue.
I I liked the 70 525.
The power <unk>.
Got it okay I'll leave it there thanks.
For taking my questions.
Any of that.
For the following questions. Please limited to one question only a person thank.
Thank you. Our next question comes from <unk> from H C. Wainwright. Please go ahead.
Big Mondays.
Uhm.
<unk> anyone standing.
Just on the competitive side are you seeing any other.
Competitive solutions.
Dawson.
No I mean, we see we see websites and kind of press releases being put out.
But we don't see them gaining traction within the commercial processes that the theme is engaged in.
Patiently will see something that addresses part of the problem.
But to have a.
To address all dimensions of the problem.
Portance of our of our product and.
And and.
The work that our team has done and optimizing.
Around.
Understood guys. Thank you so much.
Thank you.
Okay.
Our next question comes from pollen brush from open Heimer. Please go ahead.
Thanks, so much guys.
<unk> suggested that some of the mechanical properties that you guys offer are critical critically important to.
When right here can you talk about what you're seeing at this point around the large from those mechanical properties, particularly as we get into structural battery packs, becoming more.
<unk> outside of just hotspot.
Yeah, I mean, I think the mechanical element just become continues to becoming more important right I mean.
And a lot of these structural battery packs now they're gonna have crush requirements put in as well.
So.
We think that'll yield to just more complex parts overall right.
And.
It's really interesting how everybody has to optimize for not just these mechanical elements in the structure.
Integrity of the pack itself, but now also there's this element of.
<unk> Assembly, and particularly cost right and a lot of the ciliary things.
To the cells were not considered I'd say in the in the prior generation of Eev's and now is we're seeing it. It's it's become a meaningful element of the design of the pack itself and and it's cost but.
I mean is packs get more.
Structurally focused I think.
We have plenty of room in there even for LSP sales and a lot of the structural packs are actually LSP.
Soapbox.
I think.
Call and also on.
The economics of it.
Mechanical cider are interesting as well in the sense that as we optimize our material to do not only the thermal but the mechanical we have an opportunity to displace.
Some existing materials and in some cases quite quite costly expensive materials and it helps our value proposition.
As as we tried to have the best the best possible solution.
And I think you know certain Oems started with.
The mechanical stability, if you will of the inserts and and and have come to the thermal part of it.
Or are coming to the thermal part of it.
Later, and so again.
Having a having a concept around displacing some of the existing materials that are cell to cell has been a really important part of our strategy and and it's been a nice economic opportunity for us as well.
Thanks in Wisconsin.
I will now turn the call over to see Oh, darn young for closing remarks.
Thank you Henry.
We appreciate.
Everyone's interest in aspirin era jealous and we look forward.
Two reporting our third quarter of 2023 results to you later later in the year be.
<unk>, well and have a good day. Thanks, so much.
Ladies and gentlemen that concludes today's call. Thank you for joining you may now disconnect.
See you later later in the year.
B, well and have a good day. Thanks, so much.