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 In addition, the investor section of Aspen's website will contain an archived version of this webcast for approximately one year.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.