Aspen Aerogels, Inc.

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels fourth quarter 2018 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. John Fairbanks, you may begin your conference.

Thanks, Rob. Good afternoon. Thank you for joining us for the Aspen Area Gels Conference call. I'm John Fairbanks, Aspen's Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don Young, Aspen's President and CEO. Press release announcing Aspen's financial results and business developments. as well as a reconciliation of management use of non-GAAP financial measures compared to the most applicable GAAP measures, is available on the investor section of Aspen's website, www.arajel.com. Included in the press release is a summary statement of operation, a summary balance sheet, a summary of key financial and operating statistics for the quarter and year ended December 31st, 2018. In addition, the investor section of Aspen's website will contain an archived version of this webcast for approximately one year. Please note that our discussion today will include forward-looking statements, including any statement regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans, and any other statement that is not a historical fact. Such statements are subject to risks and uncertainties. Aspen Aerogel's 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 in Aspen's press release issued today. They're discussed in more detail in the reports Aspen files with the SEC, particularly in the company's most recent annual report on Form 10-K. The company's press release issued today and filings with the SEC can also be found in the investor section of Aspen's website. Forward-looking statements made today represent the company's views as of today, February 21, 2019. Aspen Area Jealousy claims 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 U.S. generally accepted accounting principles or 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 of and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. The discussion of why we present these non-GAAP financial measures is also available in today's press release. I'll now turn the call over to Don Young, President and CEO of Aspen Air Results.

Thank you. Good afternoon. Thank you for joining us for our Q4 2018 earnings call. I will start by providing comments about the business, our performance, and our outlook. Next, John will review our Q4 and fiscal 2018 financial performance and provide 2019 guidance. We will conclude the call with a Q&A session. I plan to cover four topics in my prepared remarks. First, I will review Q4 and the year 2018 overall, including our three 2018 performance indicators. Second, I will describe the current commercial environment and introduce our performance indicators for 2019. Third, I will provide an update on our strategic relationship with BASF, which includes a second $5 million prepayment that we received from BASF last month. And fourth, I will explain our strategy to address global opportunities for resource efficiency and sustainability through the leveraging of our Aerogel technology platform. At a summary level, our fourth quarter revenue trends were strong on a quarter-over-quarter basis. Total revenue of $35.7 million was nearly 50% higher than Q3 and on par with a strong Q4 last year. Base revenue in Q4 grew 26% year over year to a record $29.4 million. Project revenue was more than 15% of total revenue in Q4 and in line with our outlook at the time of our last earnings call. This fourth quarter project revenue was a significant improvement to the first three quarters of 2018 when projects represented less than 5% of total revenue. This Q4 momentum in both base and project revenue is key to our 2019 revenue outlook. With respect to the full year 2018, despite the strong finish in Q4, revenue was down 7% from 2017. Adjusted EBITDA lagged our expectations and was hampered throughout the year by repeated cost increases in our raw materials, especially in the Silane's value chains. We continue to work to reduce our exposure to certain raw materials, and we have put in place an offsetting price increase for 2019, both of which we expect to help mitigate the issue. I'll now turn to our three 2018 performance indicators. As a reminder, they are growing our base revenue, driving year-to-date growth in both revenue and adjusted EBITDA, and expanding capacity through the EP20 initiative. Base revenue is a good indicator of day-in and day-out maintenance and small-scope project work, our version of a recurring revenue stream. We initially targeted $100 million in base revenue for 2018 from our 2017 level of $88 million and consistent with our goal of long-term annual growth in base revenue of more than 10%. At the time of our last earnings call, we projected that base revenue would grow between five and 10% in 2017 levels. Base revenue for the year grew by 6% to a record $93 million. The second performance indicator for 2018 relates to growth in year-to-date revenue and adjusted EBITDA as measured at the end of each quarter. During our last earnings call, we projected that we would not achieve growth in total revenue or adjusted EBITDA in 2018. However, we anticipated that solid Q4 revenue would set the stage for us to accomplish our 2019 objectives of revenue growth in excess of 20% and a return to positive adjusted EBITDA. The strong Q4 base revenue, an active and near-term project pipeline including sub-C, LNG, and petrochemical prospects, and our 2019 price increase have strengthened our confidence in our ability to deliver on our 2019 objectives. In fact, we have already received $12.4 million in sub-C orders for delivery in 2019, which compares favorably to the $8.2 million in sub-C projects we delivered in all of 2018. The third 2018 performance indicator relates the EP20 initiative. Our goal for EP20 remains to implement low capital cost process technology improvements to increase the capacity in our East Providence, Rhode Island manufacturing facility by 20% by the end of 2020. The goal of EP20 translates to expanding our capacity from approximately 50 million square feet to 60 million square feet of aerogel blankets per year. Upon completing EP20, we project that our revenue capacity will approach $200 million and adjusted EBITDA has the potential to reach the range of $28 to $35 million per year. We made significant progress in 2018. We increased our manufacturing capacity to approximately 55 million square feet or approximately $180 million by the end of 2018. well on our way to our $200 million EP20 target. We plan to focus our resources in 2019 on reducing product variable costs and driving profitability. We expect to complete the remaining EP20 capacity expansion projects during 2020. My second topic today is to provide an overview of the anticipated commercial environment for 2019 and to introduce our 2019 performance indicators. We are confident that the commercial environment and our investment in sales personnel, new products, and enhanced marketing programs will support our projected revenue growth of 20% or more in 2019. We expect to benefit from continued volume growth in our day-in and day-out maintenance work, a net positive impact from our 2019 price increase, and a more robust and near-term project pipeline. We believe that project revenue as a percentage of total revenue will continue to improve in 2019 and 2020 with anticipated project wins in the subsea, LNG, and petrochemical markets. While we do not expect project work to reach historical levels in 2019, we do expect that projects will account for 20% of total revenue for the year. This change signals a strong improvement in market trends compared to recent years and is the basis for our 2019 projections for revenue growth in excess of 20% and a return to positive adjusted EBITDA for the full year. Our three performance indicators for 2019 will be first, 20% revenue growth and positive adjusted EBITDA. Second, project revenue comprising 20% of total revenue. And third, the formation of an additional partnership with a leading company aimed at leveraging our Aerogel technology platform into a new market. We will review our progress of these three performance indicators during our quarterly earnings calls. The third topic today relates to our partnership with BASF. In January, we announced an amendment to our supply agreement with BASF that expands our strategic relationship to include the initial commercialization of next generation high performance non-combustible building products developed under our joint development agreement. In addition, the amendment resulted in a second $5 million prepayment that we received during January. The enhanced supply agreement provides additional support for our commercial and technical efforts and has strengthened our financial position. Our partnership with BSF is important to Aspen and provides a model for how we might monetize our aerogel technology platform in new markets with other elite partners. The fourth and final topic before I turn it over to John is to review our strategy which is to leverage our Aerogel technology platform across our core, adjacent, and new markets. There are two key elements to the strategy. The first element is to grow our core and adjacent markets to fill the East Providence manufacturing facility, including the expanded capacity from the EP20 initiative in order to create a business with potential annual revenue approaching $200 million and potential adjusted EBITDA of between $28 and $35 million per year. The second element of the strategy is to leverage our aerogel technology platform by creating additional new businesses. We have jump-started the process with our promise in building materials work with BASF as we begin to penetrate our first commercial market outside of energy infrastructure. Our products with BSF are high performance and non-combustible, a perfect combination for a focus on common sense building safety and energy efficiency. As I said, we see the technical, commercial, and financial partnership that we have with BSF as a template that we want to replicate with other elite partners as we leverage our Aerojolt technology platform into additional new markets. We believe the key to maximizing long-term shareholder returns is to build a strong energy infrastructure business that generates cash to invest in realizing the substantial potential in our core and adjacent markets and to invest in business opportunities in new markets which can lead to significant breakout value. The goal is to unlock that potential and to reset meaningfully the valuation of the company. In summary, We are focused on growing revenue 20% or more in 2019, delivering positive adjusted EBITDA, and having project work reemerge to comprise 20% of our total revenue in 2019. We believe that by accomplishing these objectives and by implementing profit-enhancing process technology advancements, we will be in a position to generate in 2020 significant growth in adjusted EBITDA. The drive to profitability is our imperative for 2019. Now I'll turn the call over to John for a review of our financial results.

Thanks, Don. Let's start by running through our reported financial results for the fourth quarter and fiscal 2018 at a summary level. Fourth quarter total revenue declined by 2% to $35.7 million from $36.4 million in the fourth quarter of 2017. Fourth quarter net loss was $14.1 million, or 59 cents per share, compared to a net loss of 1.7 million, or 7 cents per share last year. Fourth quarter adjusted EBITDA was negative $3.2 million, compared to positive $2.2 million a year ago. We define adjusted EBITDA as net income or loss for interest, taxes, depreciation, amortization, stock-based compensation expense, and other items that we do not believe are indicative of our core operating performance. Our net loss and adjusted EBITDA for the fourth quarter reflected a $2.8 million reserve for uncollectible accounts receivable related to revenue we booked during 2017 for a refinery project in Brazil. In addition, our net loss for the quarter reflected a $7.4 million impairment charge the write-off of pre-construction costs for the Statesboro, Georgia facility. The Statesboro asset write-off had no impact on adjusted EBITDA during the period. For the full year, total revenue declined 7% to $104.4 million. Net loss was $34.4 million, or $1.45 per share in 2018, versus a net loss of $19.3 million, or 83 cents per share last year. The adjusted EBITDA for the year was negative $11.5 million compared to negative $3.3 million a year ago. Again, that loss for 2018 reflected both the $2.8 million reserve for uncollectible accounts receivable and the $7.4 million write-off of the state's borough assets, while adjusted EBITDA for the year only reflected the $2.8 million accounts receivable reserve. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. Fourth quarter total revenue is comprised of product revenue of $35.1 million and research services revenue of $534,000. For the year, total revenue is comprised of product revenue of $102.1 million and research services revenue of $2.2 million. During the fourth quarter, total revenue decreased by $700,000, or 2%, to $35.7 million, versus $36.4 million last year. This decline in fourth quarter total revenue was driven by a $6.7 million, or 54%, decrease in project revenue due principally to the conclusion of the South Asia Petrochemical Project. This decline was largely offset by a $6 million, or 26%, increase in base revenue, led by strong growth in our petrochemical and refinery markets, particularly in Asia. During the fourth quarter, total shipments decreased by 1% to 11.8 million square feet of aerogel blankets, and our average selling price decreased by 1%, $2.99 per square foot. principally due to a modest decrease in the mix of higher-priced subsea products this year. For the full year, total revenue decreased by $7.3 million, or 7% versus 2017. This decline in total revenue was driven by a $12.4 million, or 58% decrease in project revenue in the subsea market and due to the conclusion of the South Asia Petrochemical Project, offset in part by a $5.1 million or 6% increase in base revenue, led by growth in our Asian petrochemical and refinery markets and in the building materials market. For 2018, total shipments decreased by 8% to 34.4 million square feet, while our average selling price increased by 1% versus 2017, $2.96 per square foot. This increase in ASP reflected the favorable impact of our 2018 price increase, partially offset by a decrease in the mix of our higher price subsidy products. Our 2019 outlook anticipates total revenue in the range of $126 million to $134 million, representing growth of between 20% and 28% versus 2018. This projected growth in 2019 is based on our expectation of continued volume growth in our core petrochemical and refinery markets and in the building materials market, an increase in project revenue, particularly in the subsea and LNG markets, and an increase in our average selling price. We project that our average selling price for the year will increase by approximately 10% to $3.25 per square foot, plus or minus 5 cents. The increase in ASP is driven by the price increase we enacted in January 2019 to offset the significant increase in raw material costs experienced during 2018. Next, I'll discuss gross profit. Gross profit was $5.6 million or 16% of revenue during the fourth quarter of 2018 versus $7.9 million or 22% of revenue last year. Decrease in fourth quarter gross profit of $2.3 million and gross margin of six percentage points was driven principally by the increased cost of raw materials, and to a lesser extent, the decline in shipment volume and the decrease in selling price. As a reminder, we instituted a price increase in January 2019 that we project will increase our average selling prices by approximately 10% in 2019. We estimate that if our 2019 price increase had been in full effect for the fourth quarter of 2018, we would have generated an additional $3 million of gross profit and a gross margin in the mid-20s. For the year, gross profit was $12.7 million, or 12.1% of revenue, versus $18.7 million, or 16.7% of revenue last year. Year-over-year decrease in 2018 gross profit of $6 million and gross margin of 5 percentage points was driven principally by the decline in shipment volume, the increased cost of raw materials, and an unfavorable mix of products sold. Looking forward to 2019, we expect gross margin to be approximately 20% for the full year. As in past years, quarterly gross margins could run from the mid-18s to the mid-20s, depending on quarterly revenue levels. Expected increase in gross profit and gross margin is driven by the combination of a projected increase in revenue, output, and capacity utilization, and the impact of our 2019 price increase. This gross margin expectation is included in our 2019 guidance. Next, I'll discuss operating expenses. Fourth quarter operating expenses were $19.5 million versus $9.4 million last year, and included the $7.4 million impairment charge for the write-off of the pre-construction costs of the Statesboro, Georgia facility, and the $2.8 million reserve for uncollectible accounts receivable associated with the Brazilian project. The write-off of the Statesboro costs was based principally on a determination that our manufacturing technology improvements over the past three years have made the existing engineering designs for the second manufacturing facility increasingly obsolete. The write-off of the accounts receivable reflects the likely bankruptcy of a Brazilian engineering firm that purchased material from us in 2017 for a Petrobras refinery project. Excluding the two write-offs, our fourth quarter operating expenses were flat to last year at $9.4 million. For the full year, operating expenses were $46.6 million versus $37.8 million in 2017. Again, excluding the two write-offs, operating expenses declined by $1.4 million for 4% to $36.4 million during the year. Looking forward, our 2019 guidance includes our expectation that operating expenses, excluding the impact of the 2018 write-offs, will grow by approximately 10% to slightly more than $40 million for the year. This projected operating expense increase reflects the annualized impact of our investment in sales and research personnel and expense during 2018 to drive growth in our energy infrastructure business and to develop breakout opportunities in new markets. and a budgeted increase in incentive compensation. Next, I'll discuss our balance sheet and cash flow for 2018. Cash dues and operations of $8.7 million reflected our negative adjusted EBITDA of $11.5 million, partially offset by $2.8 million of cash provided by reduced investment in working capital during the year. Capital expenditures for the year totaled $3.6 million, down from $6.1 million in 2017. During the year, we also received prepayments from BASF in the aggregate of $5 million. We ended 2018 with $3.3 million of cash, net current assets of $14.2 million, $4.2 million on our revolving credit facility, and shareholders' equity of $70.3 million. And importantly, we had access to an additional $10.3 million available under our revolving credit facility at year end. I'll now turn to our full year financial outlook for 2019. Total revenue is expected to range between $126 and $134 million. Net loss is expected to range between $12.7 and $14.7 million. Adjusted EBITDA is expected to range between break-even and positive $2 million. EPS is expected to range between a loss of 53 cents and a loss of 61 cents per share. This EPS guidance assumes a weighted average of 24.1 million shares outstanding for the year. This 2019 outlook also assumes depreciation and amortization of $10.2 million. stock-based compensation of $3.9 million, interest expense of $600,000, a patent enforcement cost of $800,000. For the full year, we expect a gross margin of approximately 20%, an average selling price of $3.25 per square foot, plus or minus five cents. During 2019, we will continue our focus on controlling capital expenditures strengthen our balance sheet, and to maintain financial flexibility. Our 2019 capital budget of $1.5 million is comprised of $1 million of maintenance-related capital projects and a half a million dollars to complete a few EP20 projects that we initiated in 2018. Turning to cash at an aggregate level, within the context of the adjusted EBITDA range set out in our 2019 full-year outlook, we expect to exit 2019 with between $3 and $7 million of cash on hand and no outstanding borrowings under our revolving credit facility. As Dawn mentioned, we've amended our supply agreement with BASF, received $5 million in an additional prepayment in January 2019 to help support the development of next-generation building products and associated manufacturing technologies. This $5 million prepayment is included in our 2019 year-end cash guidance. Although we don't plan to provide specific quarterly guidance on a routine basis, we think it's important from time to time to provide our investors the general view to our expectations during the year. During the first quarter of 2019, we expect to achieve double-digit volume growth in terms of square feet shipped versus the first quarter of 2018. However, we expect our average selling price for the quarter to remain on par with our 2018 average of $2.96 per square foot and fall below our $3.25 per square foot expectations for the full year 2019. This first quarter price expectation reflects the impact of orders we carried from Q4 2018 into Q1 2019. both in sub-C projects and in our base business, which we booked with 2018 pricing. As a result of this lower pricing, we expect that our first quarter 2019 profit profile will remain in line with 2018 levels. However, we expect to deliver strong year-over-year growth in volume, average selling price, revenue, gross profit, and adjusted EBITDA over the final three quarters of the year. and to achieve our full year 2019 outlook. I'll now turn the call back to Rob for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of Eric Stein from Craig Hallam. Your line is open.

Hi, Don. Hi, John.

Hi, Eric.

Hey, maybe just starting with LNG, you provided some commentary there on the pipeline. Just curious, I mean, maybe some context. Is that something where you're seeing more projects? Are you seeing more content within projects, or how does it break down between the two?

We are – I would characterize it this way, Eric. We've had LNG projects in our pipeline, and they have become more near-term, and so we just have a variety of projects that are more near-term, and we believe that one or two of them will fall into 2019 and have a big impact.

Got it, and I mean, How should we think about that, I guess, in the context of this guidance? Just doing the math, you called out the sub-C work that I think you're at $12.5 million for 2019 already, so you're almost halfway to your project mix goal. You're going to get more orders in sub-C, so that doesn't leave a whole lot of what needs to be filled in by LNG? I mean, should we think of these as upside or are you trying to just build in the fact that the timing is very difficult to call?

I think we're being careful with your latter point there and make sure that we set expectations that we can meet or beat. And so I would think of the LNG revenue as important to meeting our goals throughout the year. And some of these projects are rather large and will span from not only 2019 but into 2020 as well and really support that year also. So these are pretty good-sized projects that we're talking about. Got it. You know, we've done maintenance work for lots of different facilities around the world, three dozen or so, And as you know, Eric, we did the three projects towards the end of 2017, $3, $5, and $8 million in size. And we're building on that momentum, and we think that will come to fruition for us here in 2019 and 2020. But your math is basically right. You know, we've got some more work to do to hit that 20% of total, and we've got a good shot at doing it.

Yep, okay. Thanks for that. And then just on subsea in that you gave the order number or the number you've got booked for 2019, I mean, when you think about the recovery that you're seeing now, how does that compare to past recoveries in that market? And, I mean, I would assume the strength you're seeing now, that's something you expect to persist throughout the year.

We think that this is the one area where we tend to have a little visibility on our projects. We get the purchase order in advance and then typically deliver it a quarter or two later. The way I would say it is we've got solid projects in hand, as the $12.4 million number suggests. We anticipate getting another order or two for this year. But the pipeline is strong, and we continue to believe that we'll continue to build on that business into 2020 and even 2021. So that market has some nice visibility for us right now, and there's reason for optimism.

Got it. Okay. And maybe last one for me, just turning to PowerGen, maybe just an update on that. On that product, it seems like it is tracking the same as some of your other applications have in the past. So kind of where do you view that application as we sit here today?

Yeah. You know, we have continued to win a series of smaller orders, you know, kind of maintenance and small scope work. And as you suggested in your question, you know, that's the pattern here. dating all the way back to 2007, 8, and 9, when we introduced pyrogel and cryogel into refinery and petrochemical and LNG business. You know, we started off doing smaller scope maintenance work mostly and small scope project work, and then, of course, we built into much larger size projects over time. The power market is playing out exactly the same way. Our revenue mix there – There's no one order that's been spectacular, but we're seeing green shoots all around the world.

Okay, thank you.

Thanks, Eric.

And your next question comes from the line of Chip Moore from Canaccord. Your line is open. Hey, John. Hey, John.

How are you guys doing?

Hey, how are you?

Good. I guess... Following up on your commentary around the strengthening pipeline and LNG potential, a little early to talk about 2020, but it sounds like your tone is a little more optimistic. Is a 20% growth rate something we should think about as being sustainable into 2020 when you combine that with the maintenance work?

So the way I would think about the pieces of that, you know, we've been able to grow our day-in and day-out business really dating back to 2008 in good times and bad times. And I believe that we'll continue to do that in 2019 and 2020 and 2021. You know, those numbers have been – If you look back over time, there have been double digit percentages throughout that period of time. The project work, what we're seeing is more diversity in project work. A lot of our project work used to be really driven frankly, by sort of crude prices, and that drove a lot of that early project work that we had. And we're still seeing opportunities there, so we'll continue to build on that. But the natural gas, the ample supply of natural gas is driving a different set of projects for us, which, of course, there's been a lot written about LNG, and we're playing really well into that. into that trend, but I would also say we're seeing things on the petrochemical side that are using natural gases feedstock and low-cost natural gases feedstock. So we're seeing broader set of projects in more markets across our geographies, and it gives us confidence that, and this is something that's not just set up here for 2019, but we think there's nice visibility in 2019, 2020, and 2021. And I would just remind you that when we grew significantly from 2008 through 2015, project revenue was 40, 45, even 50% in any given year of our total revenue. And as I said in my commentary, That number in the first three quarters of 2018 was around 5%. In Q4 it was 15%. And here in 2019 we're projecting it to be 20%. Those are relatively modest numbers even from any historical sorts of, for our history at least going back to 2008. So we think we have room to grow on the project side as well, you know, as just marked against, you know, total revenue. So we see a lot of opportunity for us to grow our maintenance business and to pile projects on top of it, really put together a growth track here in the 19, 20, and 21. You know, we've got a capacity chip using EP20 and And we did it with the expectation that the investments that we were making both in the facility but also in our sales and marketing team and some of the research and development work that we've done to make those sales more profitable. Again, we think those are good investments that will pay dividends in 19, 20, and 20.

Absolutely. Maybe if we turn to... BASF with the prepayment, we can get a little more update on commercialization and building materials and development of future products, where that stands. And then you did talk about hopefully signing up someone new this year. Maybe you can expand on that a little bit in terms of progress you've had in terms of negotiations already.

Sure. So BASF, you know, again, just has been a terrific partner for us. I believe we said in Q4 we received technical approvals in the European market for our first generation product, which really opens the market to our sales team and much more probably the BFF sales team to begin moving product of that first generation. We anticipate that playing a greater and greater role in 2019 and beyond. A lot of this expanded supply agreement that we had in the second $5 million prepayment was around the second generation product as well, which we're very excited about. It has great application, no doubt, in the building materials area, but we believe it also has application in some other markets as well. It's a really interesting product form, and it's got great characteristics in terms of thermal and non-combustibility. We're really excited with our partnership with BASF, and that $5 million obviously is a shot in the arm for us, both in terms of accelerating the work and just supporting our financial position. So that's been great.

Go ahead, Joe. The new product we see, it's really complementary to the existing Spacelock A2 Swentex product in the building materials market. I just want to... emphasize the point that Don made, that it will help us to open up applications within other markets for that product form as well. So we and BASF are very excited about the potential of that new product.

And then in terms of new partnerships, we have a long history of working in government research programs on other forms of aerogel. And we've said before, we're very focused in areas around energy storage, around filtration, and we've advanced that work. We're working with two universities right now to continue to move that work forward. There are a handful of very logical partners in these areas, and we have conversations going on with them all on these topics. As I said in my notes, that BFF model, if you will, technical, commercial, financial, monetizing our aerogel technology platform, those are all sort of the key elements that we expect to put forth later this year with one of those good companies.

Got it. And one more on the price increase. I think you said it was in January. Has that been successfully implemented, and what's your confidence that that gets pushed through?

Yeah, we're very confident that the 10% marker that John talked about, taking our ASPs from the very, very high, just shy of $3 to $3.25, plus or minus nickel. We're very confident about that for the year, Chip. You know, the price increase ranged, frankly, across our product mix, across our geographies, et cetera. And so when you boil it all down, we're very confident about the 10% sticking for the year.

Understood. And, sorry, one last one on the bankruptcy in Brazil there, the AR issue. Is that sort of a one-off situation or any other outstanding collections that that we should be concerned about?

Nothing. It really was a one-off for us, highly unusual for us in our history. It was in Brazil. Brazil's a tough country at present to do business in, and we just got it. It was a Petrobras project we felt was well-capitalized, but the contractor just ran into financial difficulties there. We actually won a lawsuit against them. Any payments that Petrobras was making would be diverted to a court account on our behalf. But ultimately, the agreement that this contractor had with Petrobras was terminated, and we believe that they're likely to go bankrupt. So that's why we reserved it. But we have no other exposure to speak of.

Great. All right. Thanks a lot, guys.

And your next question comes from the line of Sean Hannon from Needham & Company. Your line is open.

Yeah, thanks. Good evening, folks. So first question here, just wanted to see if we could get, and maybe I missed this, just a little bit of detail on that impairment specifically. What should we be thinking about what is behind those numbers? And what should folks think about Georgia here going forward? Is this Obviously, we've moved forward with EP20, and we've been on that whole track, and that's very clear. But is everything regarding Georgia just completely dead and off the table now?

So, Sean, I'll go back just to provide a little color. But, you know, during 2016, we completed the design of that second event in St. Clair, Georgia, right? And we had an incentive package from the local government included Freeland. And back in 2016, we delayed that project. But those engineering designs, it cost us about $7.4 million.

Okay, so that's all engineering design work dollars.

That's all it is. And essentially, it's the full value. So in 2018, we decided that we were unlikely to use those designs going forward. And first, the local government, our contracts with them got to the point they had a right to terminate the incentive package unless we broke ground by February 2019. We obviously did not meet that deadline. And so they indicated they were going to terminate the incentives and we wouldn't have rights to the land. And so some of the value of the designs was associated with the plot of land it was on. And secondly, our EP20-related capacity gains have expanded the timeframe in which we expect demand will exceed capacity, and then pushed out the need for that second facility. And finally, I think probably most importantly, our cumulative manufacturing technology, process technology advancements since 2016 have been significant, and we continue to make advancements. Over the next couple of years, we expect for our technology to advance further, working on it. I think we're putting quite a bit of investment into it. And so from that perspective, it's making the technology that underlies the old plans increasingly obsolete. And so when you look at it from those three factors, it just made us come to the decision in the fourth quarter that we just were not going to use it going forward.

Sean, I would just add to that very good description. You know, We are, and really just to build on that, we're focusing very hard on low capital process technology improvements, not only in our existing plant, but in the plant of the future as well. And we've made some really interesting advancements in that area. So that's one thing. The second thing is, and it's consistent with the low capital sort of version here, is we're really working hard in our partnerships and And so we'll see how those partnerships play out, not only in terms of product development, distribution, and those sorts of ideas, but also, you know, next lines of capacity. There's a lot on the table here, but we're very focused on being, you know, low capital and driving to profitability. That's what we're all about right now. We need to do that. And so that's our focus.

I follow. Okay. And actually, Don, on that note, as we are looking to focus more on profitability, that brings me to another question for you and John. As I think about the revenue opportunity for 2019, that really kind of gets you at a high number, you know, versus some historical levels. But when I look at how we flow through to EBITDA, We're certainly not realizing what we had realized, say, you know, back in 14, 15, 16. And I'm just kind of looking at this quickly, but, you know, it's really an op-ed factor. The growth margins we're looking to be tracking to a better number for this year. I recognize that sales and marketing is a conscious effort to have more dollars in that, but... in the aggregate, the OpEx number seems to be a fair bit higher than I think a few of us may have, would have expected to get to, uh, for that type of a revenue number. Um, how should we think about the OpEx here? I mean, is there, is this the right type of number? Is the GNA number appropriate where it is? Um, What are some opportunities we could have in order to perhaps become a little bit more driving in that EBITDA? I just wanted to get some perspective on that.

Yeah, actually, Sean, there's really actually two pieces, and we acknowledge that our operating expenses are up since 2015, 16, 17 levels. And those are conscious investments in driving sales, because that's clearly been what's been missing recently. from the mix over the past few years. So you hit the nail on the head. And we have added about $3 million to research and development over that 2015 to 2019 time period as well. And that's, once again, conscious decision to invest in our air gel technology platform and ultimately to open up new markets. We'll take those off the tables because those are conscious investments. One of the other pieces, though, with this increase in our raw material costs, which we've taken with the price increase, taken the efforts to mitigate. It's actually changed our breakeven. Essentially, our material costs went up by effectively 10%. Our revenue went up by 10%. It's changed the old dynamic that we used to talk about. We talked about our breakeven being about $110 million, and our breakeven – now is essentially 10% higher than that, $30 to $32 million, $32.5 million, depending on mix. But a lot of that is because of the increase in raw material costs and increase in pricing. It's just changed the old algebra that I think that you're familiar with. But ultimately, we still will be able, when we fill that East Providence plant that $200 million revenue, we can still generate between $28 and $35 million of EBITDA. So that the dollars haven't changed, but the percentages clearly have.

Okay.

And also, Sean, I would just add, you know, I talked about the EP20, and we made good progress in our first year, and we'll complete the capacity expansion portion of that next year in 2020. We're very focused here in 2019 on what I was referring to as profit-enhancing process technology advancements. And we believe there are efficiencies that we can bring to our manufacturing technology, to our bill of materials, that drive progress. profitability to numbers that would be, I think, more satisfying to you and to us.

Okay. Last question here is I think about the core work that you do and then the project work. And, Don, you had hit on this a few times in the conversation. You know, prior years, early years, project was a really big percentage in some of those growth years. Recently that had come off the table. Your core had been coming up a fair bit. We're now looking at about 20%-ish project work in 19. What should the model be? Because clearly there's a lot of volatility that you can get in that project work. Can you lend us a perspective around what do you think it should be? Where are your comfort levels for a given range? Help us provide some perspective as, you know, you implement strategy and tactfully execute and the balance of the nature of your revenues.

Yeah. So, you know, for a seven-year period, we were in the 40-plus percent range of project revenue. And if you look at some similar companies to ours, you know, I've talked about Thermon before. You know, not exactly our business, but works to the same kinds of, factors that we do, you know, they're roughly 50-50 between maintenance and project work themselves. I believe that we will continue to move to our historical norms in 2020 and 2021. We're already on that track here in 2019. And I also know that we need to have more consistency in our project success here. You know, just winning a big project and have it work through over the course of, you know, two quarters or four quarters or even six quarters, that's not good enough. We need to have consistent project wins. And so we're really doing two things about that. One is, over a year ago, we changed our organization to include – a very dedicated team to project wins. And that's about getting into the specifications very early in the process and taking advantage of our $800 million of Pyrogel and Cryogel installed in these kinds of facilities, using them as case studies and winning projects day in and day out. So it's a consistent part of our revenue. And the second thing, and I mentioned this earlier in the Q&A, we were pretty crude or crude oil price oriented in our earliest days, and I think we have more breadth now with natural gas, not only on the LNG side, but also on the petrochemical side. So the opportunities we have to win projects over the course of many years is much greater. So we're targeting 20% this year. I believe that number on an ongoing basis, that a third of our revenue year in and year out should be in that range, a third of our revenue. That makes a lot of sense to me. And yeah, I think some years it should be, it will be a little higher than that, and some years it will be a little lower than that. but we cannot have it be 5% or 10% or 15% of our revenue. It needs to get into that, you know, one-third of our revenue coming from projects year in and year out. And I believe we've got the ability to do that.

Okay. All right. Thanks so much. Thanks for addressing the questions here.

Thank you, Sean. Thanks, Sean. And there are no further questions at this time. I will turn the call back over to Mr. Don Young.

Thank you, Rob. We appreciate your interest in Aspen Aerogels. We look forward to reporting to you our first quarter 2019 results in early May 2019. Have a good evening.

This concludes today's conference call. You may now disconnect.