Aspen Aerogels, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Aspen ERA Jails Q4 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference to your speaker today, John Fairbanks.

Thanks, Monisha. Good afternoon. Thank you for joining us for the Aspen Aerogels Conference Call. I'm John Fairbanks, Aspen's Chief Financial Officer. There are a few housekeeping items that I'd like to address before turning the call over to Don Young, Aspen's President and CEO. The press release announcing Aspen's financial results and business developments, as well as a reconciliation of management's use of non-GAAP financial measures compared to the most applicable GAAP measures, is available on the Investors section of Aspen's website, www.arajel.com. Included in the press release is a summary statement of operations, a summary balance sheet, and a summary of key financial and operating statistics for the quarter. and year ended December 31, 2019. In addition, the investor section of Aspen's website will contain an archived version of this webcast for approximately one year.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. These forward-looking 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, 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. Companies 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 20, 2020. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA, These financial measures are not prepared in accordance with 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. The definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and the discussion of why we present these non-GAAP financial measures are included in today's press release. I'd also like to note that over the next two weeks, in connection with the vesting of restricted stock units issued under our long-term equity incentive program, our Section 16 officers will file Form 4s to report the withholding of shares by the company to satisfy statutory tax obligations related to the vesting of RSUs. I want to emphasize that these shares that are withheld by Aspen are not sold into the market and will remain unissued. I'll now turn the call over to Don Young, President and CEO of Aspen Aerogels. Thank you, John.

Good afternoon. Thank you for joining us for our Q4 2019 earnings call. I will start by providing an overview of our business and strategy. Next, John will review our Q4 and fiscal 2019 financial performance and provide detailed 2020 guidance. we will conclude the call for the Q&A session. I plan to cover several topics in my prepared remarks. I will review Q4 and the year 2019 overall, including our four performance indicators. I will discuss our strategy to address global opportunities promoting resource efficiency and sustainability through the leveraging of our aerogel technology platform. As part of the strategic discussion, I will include comments related not only to our core energy infrastructure business, but also to two initiatives driven by the projected rapid growth of electric vehicles. Next, I will introduce our performance indicators for 2020. And finally, I will discuss the rationale for our recent equity financing where we raised $15 million. Our fourth quarter performance built upon the significant revenue growth and gross margin expansion that we experienced in the third quarter of 2019. Revenue in Q4 increased 30% to a record $46.5 million, and for the year grew 34% to reach a record $139.4 million. Importantly, we expanded our gross margin in Q4 to 24%, and doubled gross profit from the first half of the year to the second half. With this exceptional revenue growth and margin expansion, we again delivered positive adjusted EBITDA in the fourth quarter and improved adjusted EBITDA year over year by over $11 million to nearly break even. Overall, we created the commercial and operational momentum required for significant additional gross margin expansion and adjusted EBITDA growth in 2020. I'll now review our 2019 performance indicators. Our three initial performance indicators were, first, to achieve 20% revenue growth and positive adjusted EBITDA. Second, for project revenue to constitute more than 33% of total revenue. And third, to form an additional partnership with a leading company aimed at leveraging our Aerogel technology platform into a new market. In addition, during the year, we established a fourth performance indicator, which was to achieve gross margins in the 20s for the second half of 2019 and to reach 20% for the year overall. With respect to our 2019 performance objectives related to revenue, we substantially exceeded the targets for both revenue growth and project revenue. Total revenue growth reached 34% and project revenue returned to its historical norm in the 40 to 45% range. Our formation of a dedicated global project-focused sales team, working in concert with our regional teams, contributed to our revenue growth in 2019, and we expect a continued significant return on project-related investments in 2020, 2021, and beyond. With respect to our performance objectives related to gross margin and adjusted EBITDA, we realized one solid win and one near miss. Gross margin for Q4 reached 24% despite the two-quarter delay in implementing our third bill of material reduction initiative, which would have added two to three gross margin points to our Q4 2019 performance. As a result of our deliberate approach to the third initiative, we just missed positive adjusted EBITDA. We remain confident, however, that the initiative will be in place and fully contributing to profitability in Q2 2020. We also expect to benefit during 2020 from the full year impact of the first two bill of material reduction initiatives that we implemented during the second and third quarters of 2019. The final 2019 performance indicator was to form an additional partnership with a leading company aimed at leveraging our aerogel technology platform into a new market. As I discussed throughout the year, we positioned ourselves in the battery materials market by leveraging more than a decade of work creating proprietary and patented carbon aerogel technology. Our effort centers on taking full advantage of the unique attributes of our carbon aerogels with the ultimate goal to improve the energy density of lithium ion batteries, a key enabler in expanding the drive range of electric vehicles. During 2019, our team characterized our carbon aerogels and expanded our IC portfolio. We optimized our carbon aerogels for lithium ion batteries and shared initial results with industry leaders. We were successful in our effort to demonstrate our potential value as evidenced by active engagement with a number of battery manufacturers and EV companies. Our objective was to use this technical progress to attract one or more development partners who could validate and further target our battery materials efforts, much as BASF has done for us in the area of building materials. As we described in our business update released on January 27th, Aspen signed in November an evaluation agreement with Evonik Industries, an innovative $16 billion German specialty chemicals company, to assess the potential of incorporating Evonik silicon-based nanoparticles in Aspen's carbon aerogel anode materials. In January 2020, Aspen entered into a joint evaluation agreement with SKC to explore the potential use of Aspen's silicon-rich carbon aerogels in the anode of a lithium-ion battery. SKC is part of SK Group, a $200 billion Korean conglomerate and a leader in the development, manufacture, and sale of lithium-ion batteries for the electric vehicle market. We are eager to continue our work with Evonik and SKC as we validate and accelerate the potential adoption of our aerogel technology within the battery materials market. Our initial objective with these partners is to continue to optimize and target our carbon aerogel materials to improve the performance, cost, durability, and safety of lithium ion batteries. We will continue to engage with other industry-leading companies to help us realize the full potential of our aerogel technology in the emerging electric vehicle market. Our goal is to build another attractive aerogel-based business and to further demonstrate the value of our technology platform. The megatrend EV market also holds an additional opportunity for us. Separate from our battery materials initiative utilizing our carbon aerogel technology, we are engaged with several EV manufacturers to address the challenge posed by thermal runaway, a phenomenon where a cell in a lithium-based battery pack has a sudden release of energy that initiates an unstoppable chain reaction resulting in a fire. The heat then propagates from the failing cell to neighboring cells and ultimately from module to module, creating a significant hazard. Thermal runaway typically happens either during charging or in the event of an accident. As EV manufacturers strive for batteries that store yet greater amounts of energy to increase drive range, the batteries become more vulnerable to the potential catastrophic event caused by thermal runaway. In response to inquiries from several electric vehicle manufacturers, We are optimizing our silica-based aerogel blanket to provide more flexibility to EV manufacturers to manage thermal runaway. Such optimization is well within our wheelhouse. We have been providing passive fire protection for energy infrastructure assets for over a decade. It is at the core of our technology. And importantly, we can produce the products from our existing manufacturing assets in East Providence, Rhode Island. We could see adoption of materials or initial revenue in 2020, which could grow substantially in the one, three, and five-year time periods. To put the opportunity in perspective, we estimate that market share of five percentage points in 2025 could equal $100 million in potential revenue for Aspen. This illustration suggests that this market opportunity could be as large as or larger than our energy infrastructure business in a relatively short period of time. And again, the thermal runaway product leverages our silica aerogel technology and be produced using our current manufacturing assets and is protected by our existing intellectual property. In considering 2019 overall, we performed well by most metrics, revenue growth, gross margin expansion, adjusted EBITDA improvement, and the creation of exciting opportunities and partnerships related to our new business development. We executed our strategy effectively and continue to demonstrate the breadth and value of our technology platform. We know, however, that we have the potential to perform yet more effectively and to enhance significantly our profitability and value. With respect to 2020, we introduced our financial guidance in the January 27th business update, which John will reaffirm in his presentation. We believe our guidance is sound and prudent. In addition, as we considered our performance indicators for 2020, We wanted to set stretch targets that are outside of our guidance. The goal is to exceed expectations and to build additional momentum leading into 2021. With this point in mind, our 2020 performance indicators are as follows. We want to achieve double-digit revenue growth, expand gross margin to the mid-20s for the year, and have at least one quarter with a gross margin above 30%. Continue our drive to profitability with at least two quarters with positive EPS. Complete our EP20 expansion in order for the East Providence Manufacturing Facility to have capacity to generate $200 million of revenue and at least $35 million of adjusted EBITDA. Gain adoption for or generate initial revenue from the thermal runaway opportunity in the EV market. Continue to validate our carbon aerogel technology for battery materials through an expanded partnership with SKC or Avonic or through new partnerships with additional industry leaders. The achievement of these performance objectives during 2020 would likely translate to another very strong year for aspen aerogels and set the stage for additional value creation in 2021. We will report out on these performance indicators each quarter. Before I move on, I want to discuss what impact the coronavirus may have on aspen aerogels. In 2019, we averaged revenue per quarter from China of approximately $1 million and have a similar number planned for 2020. We did not purchase raw materials from China in 2019. China as a future source of raw materials and of expanded commercial opportunities is something that we are studying carefully. At this point in time, we do not expect the current situation to have a profound impact on our 2020 plan. As you know, we completed a secondary equity offering on February 18th and raised $15 million. The strategic rationale for the equity raise is clear. to strengthen our balance sheet such that our financial resources are aligned more closely with the size of our opportunities. We have operated in recent years with a lean balance sheet and a working capital line with Silicon Valley Bank. We will continue to make prudent decisions that are consistent with our drive to profitability. Our operating plan anticipates that we will be approximately free cash flow neutral in 2020, which includes repaying PTT-LNG the remaining $4 million of its prepayment and investing nearly $4 million in capital expenditures and $9 million in research and development. The strategy to use our demonstrated strength in the energy infrastructure market to generate cash for investment in new markets that leverage our aerogel technology platform is working. The goal remains to unlock our potential and to reset meaningfully the valuation of the company. Now I will turn the call over to John for a review of our financial results.