Aspen Aerogels, Inc. (ASPN) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon. Thank you for attending the Aspen Aerogels Inc. Q2 2021 Earnings 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 pass the conference over to your host, John Fairbanks with Aspen Aerogels. Thank you. You may proceed, Mr. Fairbanks.
John Fairbanks: Thanks, Bethany. 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 would like to address before turning the call over to Don Young, Aspen's President and CEO.
Donald Young: Thanks, John. Good afternoon, everyone. Thank you for joining us for our Q2 2021 earnings call. Today, I will describe the key highlights of our progress towards achieving our near-term and longer-term business goals. John will then recap our Q2 performance and finish with our updated outlook for 2021. We will conclude today's call with a Q&A session.
John Fairbanks: Thanks, Don. I'll start by running through our reported financial results for the second quarter of 2021 at a summary level. Total revenue grew 29% to $31.7 million from $24.5 million in the second quarter of 2020. Net loss increased to $6.7 million or $0.23 per share this year versus a net loss of $5.7 million or $0.21 per share in the second quarter last year. And adjusted EBITDA was negative $3.4 million compared to negative $2.1 million in the second quarter of 2020. We define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expense and other items that we do not believe are indicative of our core operating performance. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. Total revenue increased by $7 million or 29% to $31.7 million. This increase in second quarter revenue was principally driven by the beginning phase of a post-COVID recovery and demand in the refinery and petrochemical market, particularly in the United States, solid growth in the European building market and continued shipments to the Arctic LNG project, offset in part by a decrease in project work, both in the subsea market and due to the conclusion of the PTT LNG project. Total shipments for the quarter increased by 35% to 90.9 million square feet of aerogel blankets, while our average selling price decreased by 5% to $3.19 per square foot. The decrease in average selling price reflected an increase in the mix of lower-priced building materials products and 5-millimeter LNG infrastructure products this year versus the second quarter of 2020. Next, I'll discuss gross profit. Gross profit was $4.6 million or 14% during the second quarter this year versus $2.9 million or 12% during the second quarter of 2020. This increase in gross profit was driven by the 35% increase in volume and a decrease in material cost, offset in part by an increase in manufacturing expense and the decrease in average selling price.
Operator: . The first question is from the line of Eric Stine with Craig-Hallum.
Eric Stine: So maybe we can start on the thermal barrier side and the contract increase with the OEM in hand. Any color there? I mean, I would assume that's more vehicles or potentially its more content per vehicle or maybe how that breaks down as you look at these two new contracts?
Donald Young: Yes, Eric. This is more content per vehicle. These are additional parts per vehicle. So same number of vehicles forecast, if you will, but just more content per vehicle.
Eric Stine: And the OEMS, I mean, I guess, thought process on that, is it realizing that this is more from than they thought? Or is it simply just part of optimizing their battery platforms?
Donald Young: Yes. No, I think it's more the latter, actually. I think it's a function of becoming more familiar with our materials, to be honest, and finding additional thermal management uses for our PyroThin products within their battery platform. So I wouldn't necessarily say this is -- these are sort of emergency parts, if you will, I would say that this is sort of the fine-tuning of the design.
Eric Stine: And is that something that as you think about, as you mentioned, you've got a lot of activity in the 3 levels that you laid out. As you think about that content for vehicle, do you think this is the direction that other OEMs go as you start to knock out some awards?
Donald Young: Yes. I think it's a good question. Just to review what we've said in the past and including it in our presentation on our -- in our investor website there. We've we presented the idea of around $275 of content per vehicle in our model. And we've also said often in the past that we believe our content will be between $100 and $300 per vehicle, really depending on the size of the vehicle, sedan versus SUVs versus trucks. And maybe also how OEMs finalize their designs and what have you. And so I think those numbers are valid. If anything, I would not choose up a little bit. But until we get more in hand, I think John and I are very comfortable with those kind of numbers from a modeling point of view.
Eric Stine: Maybe just on the advanced battery materials side, a little bit of a new strategy. Maybe the thought process there rather than going solo, obviously, I guess, expanding your market opportunity. But have you had inbounds on that? And just maybe what drove you in that direction?
Donald Young: Yes. I think it's a couple of things. One is we've been very active, as you know, Eric, in the development phase of the material, working with our 2 announced partners, SK in Korea and Evonik in Germany. But as we've said before, we have a small handful of other companies with whom we're engaged. And I think it's that -- I think it's just moving down the learning curve has opened new ideas to us, some generated internally and probably some suggested to us externally. And it's -- and so it's driven that expanded or enhanced strategy to include our own silicon-rich anode, providing our carbon aerogel to others. And then exploring the role that our carbon aerogel silicon anode could play in a solid-state battery as well.
Eric Stine: And maybe just sneaking in one last one. Just on building materials. I mean on OEM I heard you talk about that in. It's been a long, long time, so that kind of caught my attention. I mean do you think that that is something where it's a bit of a catch-up with BASF or kind of the fruits of the refocusing that they did, I think, earlier this year?
Donald Young: As we've said before, we've been disappointed at the rate of growth or the market penetration that we've had so far in that area. I think it is fair to say that we were pleasantly surprised by the nice uptick in revenue in building materials. We firmly believe that our high performance, noncombustible, highly efficient materials have a role to play in the building materials market. And we're just starting to get a little traction in there, but we're very pleased by the progress we've made in the second quarter and really the first half overall.
Operator: The next question comes from the line of Chris Souther with B. Riley.
Christopher Souther: Maybe just a little more details on the extension here with that first customer. How does this change the gains you had previously talked about? Should we think about this, essentially the 30% increase in each of the years on the platform? So looking out to 2023, where you talked about, I think, $75 million or so. Is that closer to $100 million? Or is it kind of more backend, some of the later models having kind of the more content? Maybe just kind of walk through the timing of the cadence increase here.
Donald Young: For now, Chris, what we want to -- the expectations that we want to set are consistent with what we've said before. And as you know, low single-digit millions this year, higher single-digit millions next year as new models are rolling off, we were targeting that $75 million mark in 2023. And then that doubling in 2024 and in the outer years of the decade. It is fair to say that this -- I don't want to say it within the backend necessarily because this is really a content per vehicle issue for us. So it's an uptick across that board, it's not necessarily all backend loaded. It's a content per vehicle calculation for you. So look, we're extra comfortable with those numbers that we outlined previously. And this really fortifies that and gives us a bit more content per vehicle, no question.
Christopher Souther: So maybe just on to the Asian automotive OEM that you talked about being on the cusp of a win here with, which is great to hear. Maybe just a little bit more on the scope of the program there. Is this a global OEM that you're working on for a battery platform, one of those kind of top 10 traditional OEMs that you've talked about, where you've got 5 in that late stages at this point with them? Or is this you've got EV kind of only player? And then what are kind of the model years where that platform is expected to launch, if you could provide that, I think, would be helpful for people as well?
Donald Young: Yes, Greg. It is one of the top 10 major automotive OEM with a significant EV program going forward. And Asia based as we mentioned. What's interesting about this for us is that we are being designed in, in a pretty rapid way into a very specific model on the significant launch that they have planned in several regions around the world, beginning in Q1 of 2022. And there was a significant focus on having that model launched on time and there was a concerted effort to bring the pieces together, if you will, and we were very responsive to that. And that's the nature of the design win that we're anticipating here in the very near term. What is interesting in our work with this company is that they have had a keen focus on, let's just call it for them sort of gen 2, which is the advancement of their own battery platform, and that battery platform is destined to power, SUVs, all their models over the course of this decade. And so winning this first piece is really, I think, puts us in the catbird seat to be designed into the platform here in this coming period of time. And so -- and just, again, kind of rough numbers on this, the focus on the content per vehicle is not dissimilar from the North American company that we've announced previously. So this is a great start for us with this particular customer, and we think it's just the start, and we've got a long future with that outstanding company.
Operator: The next question is from the line of Amit Dayal with H.C. Wainwright.
Amit Dayal: With respect to these models hitting the market early 2022, maybe first quarter 2022. Do you anticipate potentially shipping product against these in Q3 or Q4? I mean, some of this probably is already underway for you. I'm just trying to see in terms of revenue recognition by the end of the year, for the EV side, do you see something to start coming in for you guys?
Donald Young: Actually, Amit, that's a good question. We -- the launch is actually at the end of Q1, but we would anticipate some initial shipments in Q4. And -- but we've got that baked into our 2021 aggregate outlook for this year. So it's not going to change the overall estimate for our EV thermal barrier business significantly in 2021, but there is some potential for revenue from that second customer this year.
Amit Dayal: And then on the building material side, was this sort of just a near-term sort of contribution for you from maybe some projects that came up versus it being more of a -- more concrete trend going forward that you will see potentially more contribution on the building materials side going forward?
Donald Young: The observation that we have here is that building materials more broadly were very active markets in several regions of the world, interestingly around the pandemic, and we certainly felt here in the United States and in Europe. I think with our materials, in particular, this was not driven by any one given project or even 1 or 2 or 3 given projects. This was pretty broad-based activity levels where our materials, again, high performance, highly efficient, noncombustible, again, finding roles and a whole host of opportunities in this segment. So we believe this is the beginning of our ability to grow that business in the years to come. We really do believe that the market is moving towards the idea of highly energy-efficient and noncombustible. And we've got a very, very important offering, we think, in that space.
Amit Dayal: Just one last one for me. In terms of the KSP investment, should we think about KSP just being a little more passive versus more active? Like how should we think about their involvement post the investment in the company?
Donald Young: Well, KSP, they're investors first, and they focus on making good investments, and they're very focused on certain segments that they want to get a kind of a bird's eye view on and they've made, obviously, the investment in us and some other fine companies. It is also part of their strategy, though, to bring more than money to the balance sheets of their portfolio company and to bring other resources. And so for us, sort of the most, if you will, most logical, most near term, given that we're, as I said in my notes, moving into high gear here around Plant 2, they are -- they do significant projects all around the world and for us to be able to supplement our very good capital projects team with resources from the Koch team is a big advantage for us. So again, first and foremost, investors, but part of their strategy is to help their portfolio of companies in any way they can.
Operator: The next question is from the line of Doug Becker with Northland Capital Markets.
Douglas Becker: You started to address this a little bit, but I was hoping to get a little more color on framing the potential size of the imminent deal with the Asian automotive OEM in the shorter-term and really the longer-term opportunity. And it sounded like you were saying the content per vehicle would be similar, but if you could frame it a little bit more on the longer-term side?
Donald Young: Yes. So I think, Doug, and John was trying to explain this. But with the U.S. automotive OEM, we're in a battery platform, and that battery platform will be used across 25 or 30 models ultimately. With the Asian automotive OEM, we're initially in a single model, although that model is a global model. It will be sold in Asia, in Europe and in the U.S. But it is -- I think in terms of content per vehicle, it's about the same, but by its very nature, that initial contract, the expected contract will not be as significant as focusing with the U.S. automotive OEM. However, it puts us in line to ultimately secure a battery platform win, which could be as significant as what we've seen. But that's not what's on the table today. What's on a table today is a single model win. And so contextually, it would be 125th of what, just using 25 models, 125th of what we'd expect from the U.S. business at present, but could ultimately be, to the extent we're able to win the platform, could ultimately be as big as what we're seeing in the U.S.
Douglas Becker: And what are the remaining steps to being able to officially announce this deal? It really does seem like it's imminent to try and get something into the first quarter model.
Donald Young: We have been finalizing the design and the contract, and I think you know us well enough, Doug, that we would not have talked about being on the cusp unless we were on the cusp. So we're working on the final elements of the contract and the agreement.
Douglas Becker: And then in light of some potential customers looking at the use of the carbon nanomaterials and solid-state batteries. I just want to get your latest thoughts on the opportunities and the threats from solid-state batteries because at least arguably, it really could eliminate the thermal runaway issue, but that might be a much longer-term threat.
Donald Young: So our work -- again, we're engaged on the solid-state -- with the solid-state focus with 2 entities. And yes, in the early days of testing and evaluating our materials in the context of a solid-state battery structure. To the -- and we'll keep you up-to-date as we make progress. I think an interesting milestone would be to be able to announce the kind of evaluation partnerships that we have with SK and Evonik, with these companies and some of these other focal areas for us. So with respect to the -- I suppose the threat of solid-state, we believe that lithium-ion batteries will be around for quite a long time. And that the solid-state will develop over a fairly long period of time. And that that solid-state technology to reach at scale is something that is out in 10 and 15 years. And we believe that as we go towards versions of solid-state, that the thermal runaway risks only escalate over the course of that period of time. We also believe that with the amount of work and scale that is going into lithium-ion batteries that they will continue to improve performance, but also cost and will be a very challenging competitor if and when solid-state reaches scale. And so look, we're -- as I indicated in my comments, part of the contract of the North American entity reaches out beyond 2030. For us, actually that's an indication that people are planning for thermal runaway to be an issue out into that kind of time frame, 10 and 15-year kind of time frame. So of course, there are no guarantees for anything forever. We think 10, 15 years is a very, very long runway, especially for a technology platform company that is constantly innovating and entering into a variety of new markets. So again, we're very respectful of it. And in fact we're putting some chips on the table ourselves on the solid-state type because it's -- I think for us to do.
Douglas Becker: Any change to the ABM TAM? Or is that, well, too soon to be broadening that opportunity?
Donald Young: I think we'd like to leave those numbers alone for now.
Douglas Becker: They're pretty sizable as is.
Operator: The next question is from the line of Shawn Severson with WCR.
Shawn Severson: Don, I was wondering if -- just going back to energy infrastructure business for a moment. I assume most of the uptick has been maintenance stuff and turnarounds right now things that have been delayed. But how does the project work look going out over the next couple of years? I know that can be lumpy and the timing difficult. But obviously they can be bigger ramps and bigger projects to come out. And then eying into that, what about anything on the hydrogen front or any updates?
Donald Young: Yes. So you are correct that the highest activity levels that we have seen here as we, I always want to say, coming out of the pandemic. These days are a little murky on that. But certainly, as we -- certain regions are working their way through it. Most everything has been maintenance. We love maintenance work. And so we've been restocking the supply chain and the distribution channels. There's been a tremendous amount of activity, especially in the U.S., as John said in his comments. We did, as we announced in the last quarterly call, we ended another LNG business in Arctic LNG, which is a terrific project for us here this year. With respect to additional projects, I really believe that we're in a very strong position in the specifications of a wide range of projects that were put on pause, leading into as the pandemic started. We have seen some of them begin to come to life again, in the planning stage, if you will. And we believe that as those projects initiate, we will win our fair share of work there. And we have every expectations that our revenue mix of 60% maintenance and 40% project will be the norm here again as we get to the backside of the pandemic.
Shawn Severson: I was just wondering, maybe surprised, the pipeline a little bit differently and looking at for the PyroThin product. Are all of those OEMs and customers in there? Are they all chasing a model year for a launch? I mean, if we're looking at -- even though they're in different stages of development with you, is this all kind of coming into a 2024 year or 2023? And just trying to understand the timing, even though they may be in different stages of development, is there a year that this is really converging on?
Donald Young: Well, what we have seen and what they've announced, if you look at these companies, they -- typically, they have announced 1 or 2 or 3 vehicles here out over the course of the next 2 or 3 quarters. And then it's really 2023, where you start to see some of the company saying that they'll have 5 and 10 vehicles out. And then as you get '24, '25, you see some of them saying 2025, even 30 vehicles, electric vehicles in those model years. So it's not inconsistent really with the ramp that we've talked about from the North American company that we've discussed, just low single-digit millions this year, mid to upper single digits next year, boom, that $75 million target number in 2023. That's a function of the battery platform being utilized over a greater number of models and picking up market share. And then, of course, by the time you get out to 2025, you're more than double that number. So I think that ramp is very emblematic of sort of the timing of these companies rolling out their various models.
Operator: The next question is from the line of Tom Curran with Seaport Global.
Thomas Curran: So starting on the PyroThin side, just hovering a bit more detail out on this pending design win with the Asian automaker. What would be the remaining steps in time line in progressing from this single model award to some form of a multi-model battery platform based contract?
Donald Young: Well, Tom, I think it really relates as much to their development, the finalization of development of their battery platform. So it's just a little brief history. I mean what we -- if you look at a variety of companies and the approaches people took. Some people had a dedicated battery platform concept really in the 2015, 2017 sort of time frame, and they've been driving down that road ever since. And I would say our North American entity design customer is a good example of that. Others came to this approach a little later. And they did that because I think they viewed their approach, they were going to rely -- and they were going to be more sort of integrators, if you will, and really rely more on their battery cell partners, the LG, the Samsung, the SKs, the Panasonic, the CATLs of the world to really drive their program. And I think as certain companies began to change their tune and Tesla is probably a good example of that, right, where they really made a very specific change in bringing more and more of their technology in-house around energy storage. They think of themselves to a great extent as an energy storage company at this point. So -- and several companies have really focused on this battery platform idea. So they're at different stages of development in their own personal or in their own corporate time lines. And we -- I think the Asia-based customer, I think, is a good example of this. They don't want slim down on the launch promises they gave. So their first approach was to be sure that they had the model ready to roll when . But we know that they're focused on the battery platform themselves and we work closely with them on that.
Thomas Curran: And then when it comes to the remaining prospective customers you've had at stage 3 in the development pipeline, assuming this Asian automaker was one of them as of the last update you gave us, you've gone from 5 to 4. Does the current leading candidate for becoming your next customers seem most likely to start with a prototype order similar to the very first sale you made in China? A design win maybe for a single model or 2 or jump straight into a big battery platform based production volume contract such as your first North American customer?
Donald Young: I think it will be a combination of the latter 2 really, the specific model. And while we're working very closely on a broader battery platform for the entity. But there are some who are quite advanced in their battery platform work. And so we could be right into that final stage with others as well, Tom. So I think -- I would like for your expectations to be that it will be a combination of those 2. With respect to the idea of prototypes, we are active selling prototype parts to at least 5, maybe more at this point. But at least 5 companies, we're selling parts to these companies. And the distinction is, as you know, is prototype parts are going into vehicles that they're not planning on selling and production parts are going to vehicles, whereby they're rolling them out and selling them to the public.
John Fairbanks: Yes. Tom, yes. So in the second quarter, we had revenue from all the companies in stage 3, but it was prototype revenue. So to get to stage 3, you're kind of in that prototype bucket already. And what we're then doing is converting them to commercial contracts that are either for a battery platform or for a model.
Thomas Curran: So ever since you realized that first dollar of prototype revenue back in 2Q of 2020, you've had just a steady stream prototype part sales and stage 3 is all about converting that now into some form of production award?
John Fairbanks: Yes. It really becomes production award, and it's really when that material is going to end up in vehicles that go to their dealers, right? So that's the difference. When it's in prototype stage, they're putting it in prototype vehicles and ensuring those vehicles, they're driving them around and make sure they meet their design specifications or if they're going into thermal barriers, going into lithium-ion batteries, they might put them in a lab and instigate the thermal runaway and make sure those barriers perform as advertised. And so -- but at that point, they are buying material from us.
Thomas Curran: That's a helpful clarification. And then on the ABM side, this will be my last one, try to help you guys finish on the hour. When it comes to the first prong of your strategy, is it your understanding that your partners are using those evaluation samples to explore anode structures or investigate uses in some other way that differs from your scaffolding host design?
Donald Young: No. In the first leg of the three legs in this -- our traditional approach, if you will, we have been supplying our silicon-rich anode material to them and iterating with them as they have set metrics or milestones for us to achieve. And oftentimes together with specific recommendations back and forth as we iterate. So I hope that answered your question, Tom. So that was our traditional approach. That was our initial approach, and we're still very engaged at that level. By far of the 3 approaches, that's our biggest focus today. These other areas really emerged from conversations that we had, again, with that small handful of automotive and battery OEMs who wanted to explore some additional ideas with us. And that's how we came. Our expertise, of course, is around the carbon aerogel. It's the manipulation of that -- of those carbon materials. So we know that it's a particularly interesting material, host material. And we're pretty unique, we think, in the way that we can construct that material. And it gives us, as I said in my notes, an opportunity to have a broader adoption. We've talked about being OEM agnostic and with PyroThin. We've talked about being an industry standard with PyroThin. I'm not quite there yet with this other approach on ABM. But the concept is the same that it will allow a broader adoption if we provide this particular aspect, it really suits, it goes right to our technological strength. And so that's the nature of the discussions and collaborative work that we're doing with these other companies.
Operator: The next question is from the line of Jed Dorsheimer with Canaccord Genuity.
Jonathan Dorsheimer: Most have been asked, but I guess first product out of the gate, is that going to be a value engineering implement or new platform launch? In other words, if there's a battery on the market that has some existing problem for fire mitigation. Would you be slotted into an existing model? Or is this for a new model?
Donald Young: The PyroThin work that we're doing for the thermal barriers is going into a new model. And so it's a very good distinction, actually, Jed. We -- because we know that there are existing electric vehicles there that are running into thermal management, thermal runaway challenges, for sure, right? And so the vast majority of the work we are doing is on new models, typically focused on new battery platforms and not doing remediation work looking backwards, if that's the right term.
Jonathan Dorsheimer: Then on just silicon anode efforts there. I thought -- maybe I misunderstood, but I thought I heard you talking earlier about solid-state, yet all the solid-state companies seem to be abandoning development or at least pushing out time frames and coming back to a traditional, moving into silicon-based anode, which would seem to increase your value proposition. I just want to make sure that you're not endeavoring into solid-state at this point that you're still squarely focused on developing your silicon anode solution?
Donald Young: That's our principal focus. And you are right. We're seeing a lot of interim steps between where we are today, where the industry is today and what people sort of think of as -- sometimes people use the expression, true solid-state. And the work that we're doing, again, is predominantly focused on today's chemistries and today's approaches, today's gigafactories, et cetera. We have done some work on what role our silicon carbon aerogels may play in a solid-state construction. We believe that this is very much on the our stage and down the road many, many years, but we're learning a lot. And we do believe that our materials have unique properties even with a solid electrolyte. So again, we believe that is in the distant out many, many years from now. So again, our principal focus, as I said earlier, is on that silicon rich anode material, bringing that carbon aerogel structure to current technology assets.
Jonathan Dorsheimer: One last question for me, and I'll let everybody get on with their night. The LNG work that you're doing up north, is there a hydrogen component in terms of steam reformation? Or is that strictly LNG?
Donald Young: It is. Our role is on the LNG side. And -- but Jed, we've continued to internally articulate the role that we may have in providing thermal management and fire safety for the both the storage and the transportation of liquid hydrogen. And again, it's such a natural offshoot of our value proposition in LNG. And the scale that they're talking about to have a sort of an interstate system of hydrogen is the numbers are just, as you very well know, are just gigantic kinds of numbers. So we're exploring our role. We're trying to partner up with some of the leaders in the space to get smart on it and make sure people are -- have a keen understanding of the value proposition that our materials can bring into that market.
Operator: There are no additional questions waiting at this time. I would like to pass the conference back over to Don Young for any closing remarks.
Donald Young: Thank you, Bethany. Thanks very much. We appreciate everyone's interest in Aspen, and we look forward to reporting our third quarter 2021 results to you in late October. Be well. Have a good evening. Thank you.
John Fairbanks: Thanks, everybody.
Operator: That concludes the Aspen Aerogels Inc. Q2 2021 Earnings Call. I hope you all enjoy the rest of your day.
