Aspen Aerogels, Inc. (ASPN) Earnings Call Transcript & Summary

Good morning, everyone. My name is Colin Rusch. I lead the sustainable growth and resource optimization research practice here at Oppenheimer. We're thrilled to have the C-suite from Aspen Aerogels, Don Young, President and CEO; and CFO, Ricardo Rodriguez along with Neal Baranosky from [indiscernible] IR.

Guys, let's just hop into it. There's a lot going on. There's a lot of moving pieces here. And you guys reported last week with some better-than-expected numbers. So there's a lot of news out this morning around Ford making an investment in incremental EV capacity. We're seeing EV sales hold up a little bit better partially with the cliff on the federal tax credit. But I think underlying demand looks better than feared, honestly. So can you guys talk about what you're seeing with your customers and their plans as we move through some U.S. policy changes but continue to see a lot of growth in both Europe and Asia?

Do you want to take it, Ricardo? And I'll provide color -- commentary.

Sure. Happy to jump in. So I mean it's no secret that the lion's share of our revenue right now on the EV thermal barrier side comes from General Motors. And we were all obviously disappointed by how long it took for a lot of these vehicles to launch. And we truly believe that if those cars would have launched in 2022, the EV market would be a completely different story from what it is today. But it is what it is. And now that they have all launched, they're having pretty good months of sales, at least in the U.S. When you look at a vehicle like the Equinox, it's the #1 non-Tesla selling EV in the U.S. And I think GM is just really hoping that momentum to continue, definitely between now and the end of September before the $7,500 tax credit goes away. But we're still pretty mindful of the tax credit that is there on the supply side for these automakers. That one is not going away at the end of September. And if GM has gained so much share of the U.S. EV market, we just don't see them letting go of that easily going into the fourth quarter and next year. And so -- we're actually pretty on the pessimistic side in 2023 and called that a little earlier. But this time, we're actually more optimistic than one would think when it comes to the $7,500 credit going away. It's actually enabled the OEMs to keep prices up. If you look at who's getting the $7,500 credit today, it's basically the leasing companies and the financing arms of these OEMs. And if they want to retain share and -- what we don't see going away is this notion that these companies are betting their future on EVs, that is still pretty consistent. And so we've said that this is going to be a bit of a transition, but the North Star is towards more electrification even if we continue to look further behind China and Europe.

Colin, I would just add, and Ricardo spot on, on his comments. I would say that we are prepared to serve these OEMs and their projections going forward in both here in the United States and in Europe. Having said that, we also took careful action in the first half of this year to modify our cost structure, our fixed cost structure pretty dramatically. And you can see that on Slide 2 of our earnings deck, where we removed roughly $65 million of fixed costs out of our structure. And it shows, frankly, in our outlook for the rest of the year, where we basically anticipate approximately flat revenue first half to second half, but with approximately twice as much EBITDA associated with it. So we're starting to see the impact of that -- of those actions. We also believe as we grow in the future that we'll be able to hold that cost structure tight and really leverage the revenue growth. And as you know, well, we're dropping $0.50 plus of every incremental dollar of revenue. So we think we're in a good position to weather the storm. And maybe the other leg of the stool adding to what Ricardo said is that and the cost mindfulness of the way we've got the company set up now is that we require minimal capital expenditures as well at this point. We have our supplemental supply in EMF, and we've got a robust plant in East Providence, Rhode Island serving our auto customers and the U.S. energy customers. So we're, again, in an environment with some moving parts to it, we feel like we're in a solid position, again, also with a strong balance sheet as well.

Excellent. Well, guys, good to get kind of overlay here that you've got a restructuring company that's optimized from a capital perspective. You've got the primary end market right now where your customers are not backing away from investment despite some of the overlay around policy adjustments. So can we talk about within that EV market, what you guys are doing for your customers, right? And why is this an essential part of a design process that not only allows for better performance of these people, but also lower cost over time as they commercialize? And I'd love to just get from a technical perspective, what you guys are doing for these customers and how you help drive efficiencies in their platforms?

Yes. So happy to jump on that one, Colin. I mean, in essence, what we do is we allow these customers to take risks that they otherwise wouldn't take. And we provide passive protection that historically has not been there or that is critically needed when there's nothing else to stop thermal runaway and thermal propagation, right? And so maybe just to ground ourselves, so thermal runaway is if you remember those Samsung tablets that were blowing up in people's bags on planes, all that was, was under cabin pressure or somebody sitting or squeezing these tablets, the pouch cells that are inside of those devices were being compressed and you'd have a short inside of the battery that would, in essence, connect positive plus negative and you'd have a chemical fire and pretty much an explosion happening with these cells. If you think of an EVs' battery, it's nothing more than hundreds or thousands of those cells depending on the form factor put together. And so whenever an OEM is assembling and developing an EV, they're playing a game of probabilities, right? If you control your manufacturing processes to the nth degree, there's only so much certainty that you -- that none of these cells will go into thermal runaway or thermal propagation. Those risks that are higher if you are overcharging or overly discharging one of these cells, especially at very low temperatures or very high temperatures. And so you -- initially, the ask for us was just to be there as a passive layer, taking up as little space and as little weight as possible so that in the rare case that the thermal runaway happens, we can isolate the 1 cell and turn a pretty catastrophic event into a serviceable event. But that has actually evolved. And if you look at, for example, the GM EVs versus your typical Tesla or any other vehicle that is not using our product, and you look at the way they use regen, you look at the way they charge at cold temperatures, they're actually able to push these cells closer to their limits and use more of the available storage capacity because they know that we are there as a passive layer to isolate a cell getting too hot, right? And this is why, for example, if you go out there and drive a Tesla today, even though the vehicle should theoretically be able to give you 400 miles of range, it really has something like 330 in the EPA test cycle. In the real world with differing temperatures, you probably get around 280 miles of range. But the GM Ultium EVs are actually demonstrating to have to -- be able to deliver reliably more than the 310 to 450-plus miles of range that the EPA cycle delivers. And that's because they're able to use regen more aggressively, charge faster and harder at cold and very hot temperatures. And that's something that I've experienced on my drives, driving both of these vehicles. And so those benefits are proven and there only -- and more OEMs are starting to see the light around the benefits of having a product like ours in between these cells in place of those old polyurethane foams that didn't provide any protection that would actually become fuel to these fires.

And Don, can you help the investors understand exactly what the aerogel is and how it works, right? I mean, I think, it's always instructive to just kind of hold a bit to aerogel understand kind of how -- just honestly and just crazy it is, right? It's kind of a wild material that it's hard to imagine. And can you talk about the platform that you guys have built over the course of a couple of decades at Aspen and what an aerogel really is and why you guys are such clear leaders in the field and how then this gets applied supply in the EV battery that Ricardo really just articulated well.

Sure. Going back many decades, aerogels had been discovered, but really as a laboratory curiosity to a great extent, best thermal insulator, lightest solid material known to man. It's this open porous, nanoporous structure. And while it was fascinating technically and had amazing properties, it didn't have a lot of capabilities, and that's because it was not industrially robust. So Aspen Aerogels dating back, as you said, slightly more than 2 decades ago, worked with NASA and others and developing what we refer to as a flexible aerogel blanket. And this is where we, in essence, infused that silica aerogel into -- in liquid form into a fibrous batting material, and we created what is really our platform, which is the flexible aerogel blanket. And so we were able to maintain all of the properties of this amazing material, but we added capabilities to it, industrially robust. And so we started -- and we've had IP all along from the very first years to these recent weeks and months. We've continued to add to that. And our scale has been at being able to mass produce these materials at this point. So there's a chemistry to it. There's a process technology, and then there is a sort of product optimization. And we've optimized around our subsea pipeline business, our refinery business and on to LNG terminals, et cetera, and then all based around thermal management and fire safety. And of course, when we went into the EV business, per Ricardo's description of our value there, it was really about this thin profile, high thermal performance and outstanding fire safety with this flexible aerogel blanket that can absorb and act like a sponge to a great extent. So that's sort of the core of what we have done with the material. I think it's possible to think about adjacent markets that continue to use flexible aerogel blanket as a concept. And again, where you see applications where high thermal performance, perhaps fire safety, are key ingredients and thin profile are key ingredients. You'll remember dating back into the late 20-teens, we had a building materials activity going, ran out of capacity as we were getting that rolling and stepped away from it. But there have been aerospace applications. There are a variety of applications where we think we can use the same flexible aerogel technology and be additive and create a third leg to the stool, if you will, energy industrial one, EV two, what is three and four. Because it's so critical as we've moved from the red line to the blue line to the green line in our cost structure to be able not only to do that as Phase 1, but then to travel up that green line and drive significant profitability and cash flow from our existing assets.

So let's pick up on that because we've known you now for 15 years, Don, right, and have watched the evolution of the platform of this blanket material being used first in some building applications and then into the oil and gas space and now into the EV space as a unit play. And as you guys have evolved, the chemistry and the manufacturing process, you've been able to enter into new markets. So can you talk a little bit about the optimized manufacturing process that you have, the evolved platform that gives you some flexible capacity as needed and how you're thinking about some of that incremental productization that you can go through to open up some new revenue streams?

Yes, we -- as we were contemplating our second plant in the United States in Statesboro, Georgia, as we're going through that process, we, at the same time in really late 2023 began considering an external manufacturing capability to provide more variable supply to us and in smaller increments than the design of Plant 2, which was to bring on $1.2 billion, $1.4 billion, $1.6 billion of revenue capacity in one fell swoop. And so what we were able to accomplish over the course of 2024 was to transition from the Plant II concept over to this more variable supply where we're able to bring up smaller amounts of -- or increments -- smaller increments of supply and fit the demand curve better, if you will. So we've got our substantial capacity in East Providence, Rhode Island Plant I, and we've created this variability of supply in our supplemental relationship out of China.

And how do you protect the IP in that relationship and what's essential? I think it's been interesting to see what's essential in terms of you manufacturing and then productization. There's obviously, some complexities and some layers to this in terms of what you guys share and what you don't share with some of these folks and how you bring something to market.

Well, the materials that they're producing are our original materials serving the energy industrial business. And one of the keys in protecting our intellectual property, not only the surrounding agreements and what have you, we understand the complexities of that with -- working with this kind of partner. But what I would say is that we have -- if you look at our end users, historically are always basically the largest companies in the world, whether it was ExxonMobil or British Petroleum or BASF or more recently, the General Motors and the Toyotas of the world, these are companies that would not knowingly use an infringing product in their applications. And we have been active in being sure that any product that may have -- maybe a takeoff of our product, we've been aggressive. And I think you remember back into the -- again, back in the 20-teens, we defended our intellectual property very successfully against Chinese impersonators here in the United States, across Europe, in Asia including having our patents validated in China. And so there's never a perfect answer to that -- to your question, but we think we've got the framework, both operationally and contractually to do the best possible. There's also, with respect to our partner, a mutual benefit to this relationship. I mean we are their gateway, if you will, outside of China. And we have created what I think is a very significantly mutually beneficial relationship with that partner. And I think they would -- they agree that it would be a mistake for them to violate that.