Aspen Aerogels, Inc.

Good morning. Thank you for attending the Aspen Aerogels Inc. Q1 2023 Financial Results Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to turn the conference over to your host, Neil Baranowski, Aspen Senior Director Corporate of Strategy and Finance. Thank you. You may proceed, Mr. Baranowski.

Thank you, Alexis. Good morning and thank you for joining us for the Aspen Aerogels fiscal year 2023 first 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 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 U.S. Generally Accepted Accounting Principles, or GAAP, measures is available on the Investors section of Aspen's website, www.aerogel.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 2023 first quarter, ended March 31, 2023. In addition, I'd like to highlight that we've uploaded to our website a slide deck that will accompany our conversation today. You can find the deck at the Investors section of our website. An archive of today's webcast will be on our website for approximately one year. Please note that any discussion today will include forward-looking statements, 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 Aero'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 yesterday, page one of the presentation, and are discussed in more detail on the reports Aspen files with the SEC, particularly in the company's most recent annual report on Form 10-Q. The company's press release issued yesterday and files with the SEC can also be found in the Investors section of Aspen's website. The forward-looking statements made today represent the company's views as of today, May 4th, 2023. Aspen Airdose disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA. These financial measures are not prepared in accordance with GAAP. These non-GAAP financial measures are not intended to be considered in isolation or to 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 discussion of why we present these non-GAAP financial measures are included in yesterday's press release. And one final note, during the Q&A session, in the interest of time, we ask that you limit your questions to two questions at a time. If you have additional questions beyond the initial two, please get back into the queue and we will get to all questions. I'll now turn the call over to Don. Don?

Thanks, Neal, and welcome to Aspen. Good morning, everyone. Thank you for joining us for our Q1 2023 earnings call. My initial comments will focus on our Q1 performance, our highlights from our EV OEM development work, and our strategy for balancing demand, supply, and financing. Ricardo will dig deeper into our financial results, our EV business, and our strategy. We will conclude with a Q&A session. The performance in the first quarter sets us on a path to reach our 2023 outlook of revenue between $200 million and $250 million and positive EBITDA in Q4. We anticipate sequential revenue growth as we work through the year. This growth outlook is a function of a very strong energy industrial backlog and the expected ramping of our EV customers, especially General Motors. This anticipated EV pyro-thin ramp is the key factor impacting whether we are at the low or high end of our 2023 revenue outlook. During Q1, we saw continued improvements in operating efficiencies, which resulted in an 11% gross margin, which with continued revenue growth, we believe keeps us on track for longer term gross margins at or above 35%. We also maintained careful control of OPEX. During our last call, we announced that we received both a letter of intent from the luxury brand of a major German OEM group and an order for approximately 1.5 million prototype parts from the commercial truck brand within the same German OEM group. Recently, we converted the prototype parts order into a multi-year award with the start of vehicle production in early 2024. We expect to announce the name of the commercial truck brand during the latter part of 2023 as we commence delivery of production parts. With respect to the LOI from the sister company within the German OEM group, we believe we will convert it into an award in the very near term. These volumes commence in 2024 and ramp in 2025. We believe the awarded business and the advanced stage of the letter of intent position as well to earn broad adoption by other brands of this important German OEM. In other EV news, we continue to have a deep technical and commercial engagement with General Motors and, of course, a financial relationship through the $100 million term loan which we have yet to draw upon. In addition, we believe that we are on the cusp of winning more awards with other EV OEMs. We are confident that we will complete 2023 with awards from a broad and interesting array of EV customers. As we look out over 2023, in addition to adding OEM awards, we expect PyroThin thermal barrier revenue to build over the year as automotive OEMs scale their operations and at the same time We expect our energy industrial business with purchase orders received for 2023 of approximately $180 million to remain strong through the year and to provide a steady base load of revenue. Even with our large backlog in energy industrial and our growing list of EV customers, we have carefully considered our near-term strategy. especially as it pertains to manufacturing capacity and financing. The current macro environment, the unfavorable financing market, and the potential for a more drawn-out industry-wide EV ramp have caused us to reevaluate our current plan. There are several parts to this thought process. During this possible and even likely recession scenario, we are taking a conservative approach to the preservation of our capital which equal $205 million at the end of Q1 2023. During this period of time, we plan to reduce our OpEx and CapEx, to grow our revenue significantly, and to focus on our profitability. The key pivot is to right time the final stages of the construction of Plant 2 in Statesboro, Georgia, and in the meantime, to largely dedicate our Plant 1 aerogel manufacturing capacity in East Providence to Pyrethin Thermal Barriers in order to serve our EV OEM customers. We estimate that we have the ability to generate approximately $400 million of Pyrethin Thermal Barrier revenue from an EV dedicated Plant 1. Our goal is to time the startup of Plant 2 to match the revenue ramp of our EV OEMs beyond the approximately $400 million of revenue capacity available for Plant 1. To put the approximately $400 million revenue number in context, we anticipate thermal barrier revenue of between $70 and $100 million for the year 2023 and between $250 and $300 million for 2024. To be clear, We plan to slow our capital investments during 2023 and 2024, but not our growth. And at the same time, we will remain poised to take full advantage of our opportunities. With respect to supplying our valuable energy industrial business, after one year of development and negotiations, we have reached a manufacturing agreement with a Chinese aerogel manufacturer to supply energy industrial product to us beginning no later than January 2024. The product will be produced to our quality specifications and shipped by us under our labeling through our distribution and to our customers. We believe that the manufacturing agreement enables to maintain and grow our energy industrial business and to largely dedicate Plant 1 to our EV, pyro-thin thermal barrier business. In this scenario, from our current manufacturing assets and supply arrangements, we could have annual revenue capacity of $500 to $600 million, gross margins at or above 35%, and EBITDA meaningfully positive. The strategy enables us to reduce OPEX and CAPEX, to generate positive EBITDA, and to preserve our existing capital, and to serve successfully both our EV and energy industrial businesses. Again, we would right time the remaining construction of Plant 2 to coincide with the ramp of our EV OEMs beyond the approximately $400 million of revenue capacity of Plant 1. We anticipate that it would take approximately four quarters after the restart of full construction to complete Plant 2. We believe that we continue to have our full upside opportunity but during a period a potential period of economic uncertainty and while our ev oems ramp we optimize the use of our existing assets to create a cash generating business and to avoid unnecessary dilution our strategy is to leverage our aerogel technology platform into large dynamic markets central to that strategy is our investments in the research, development, commercialization and the protection of our proprietary technologies. Our patent portfolio has been consistently validated in courts across the United States, Europe and Asia. Chinese-made aerogel products have previously been found to infringe our patents in multiple jurisdictions globally. As we announced in April, we filed patent enforcement actions in Korea against Barenberg, a Norwegian reseller, and associated entities, including their Chinese aerogel manufacturer, related to the unlawful import and sale of infringing aerogel products. The actions allege infringement of patents covering our high-performance reinforced aerogel compositions and our process technology, including the Korean counterparts of patents previously enforced successfully bias against Chinese aerogel manufacturers in Germany and the United States. With these actions against Berenberg, we again send a clear message to the markets that we will continue to aggressively enforce our intellectual property rights against any manufacturer, distributor, or end user of aerogel products that infringe our patents. These actions are coincident with our entering a supply agreement with a Chinese manufacturing company. In essence, we have created an extension of our aerogel supply capabilities controlled by us to meet the demand of our energy industrial customers. Again, under our label and to our quality specifications, while also taking any necessary actions to prevent infringing products from entering the market. Aspen continues to be the innovation leader in aerogel technology, and we have the IP portfolio to back it up. Before I turn the call over to Ricardo, I want to mention a couple of activities we have ongoing in public policy. Aspen is actively in dialogue with lawmakers on Capitol Hill, as well as the Department of Energy and the Department of Transportation, including the National Highway Traffic Safety Administration around strengthening United States regulations surrounding safety in battery electric vehicles. International harmonization around safety regulation has taken place in China, India, Korea, and Japan, but not formally yet in the United States. We believe stronger safety regulations and, most importantly, safer electric vehicles enhance consumer confidence in electric vehicles, protect lives, protect property, and help our first responders. We expect that as battery electric vehicles become more prevalent, communities, insurers, and the federal government will advocate for enhanced safety measures and requirements. We intend to be an important part of that conversation. The U.S. Department of Energy's Loan Program Office was created to grant loans for large-scale energy infrastructure projects with the goal of supporting the development of more fuel-efficient products, including the expansion of domestic manufacturing of electric vehicles. Our team, including our external advisors, have been in consultation with the Loan Program Office related to a proposed application for a significant loan as part of its Advanced Technology Vehicle Manufacturing Program, which offers loans to support U.S. manufacturing of fuel-efficient advanced technology vehicles and qualifying components. The LPO process is uncertain and can be drawn out in time, and there's no guarantee that our proposed application would be looked upon favorably. In fact, our first application for a U.S. Department of Energy grant for advanced battery materials as part of the Bipartisan Infrastructure Act was not funded in 2022. Since that time, we have put considerable effort into the LPO process And we believe we are a very good candidate for a direct loan as part of the advanced technology vehicle manufacturing based on the importance of battery performance and safety. Again, timing can be drawn out, but in our case, it may match well with the right timing strategy for our Plant 2.