Aspen Aerogels Inc Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Aspen Aerogels, Inc. 2Q 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please note that we will now hand the conference over to your speaker today, John Fairbanks. Thank you. Please go ahead.

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. The press release announcing Aspen's financial results and business developments as well as the 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.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 quarter and six months ended June 30, 2020. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year.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 Aerogels' 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 and are 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 Investors section of Aspen's website. The forward-looking statements made today represent the company's views as of today, July 30, 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 measures and a discussion of why we present these non-GAAP financial measures are included in today's press release. 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 Q2 2020 earnings call. I will start by sharing our recent business results and our perspective on the current operating environment. I will also discuss our ongoing strategy related not only to our core energy infrastructure business but also to our two electric vehicle initiatives. Next, John will review our Q2 and year-to-date financial performance, describe the progress we've made to ensure the long-term financial strength of the company, and introduce new financial guidance for 2020. We will conclude the call with a Q&A session. Let's start with the obvious. The pandemic is having a negative impact on our business, particularly on our near-term revenue generation. Our products are installed by contractors working in refineries, petrochemical plants, and LNG terminals around the world. It is critical to us for contractors to have access to the energy infrastructure facilities that we serve. In response to COVID-19, facility owners have limited the number of contractors onsite in order to reduce worker density. For this reason, our revenue has been negatively impacted during Q2, most notably in the U.S. maintenance market. Adding to the challenge in Q2, our distributors actively managed their own working capital, which resulted in a destocking of the distribution channel. Fortunately, a distributor can only destock once in a given period of time. So for this pandemic, we believe the negative impact of destocking has largely played out. Looking forward, we expect revenue to rebound strongly when contractor access to facilities improves and the distribution channel restocks. It is clear that there is significant pent-up demand, especially on the maintenance side of the business. When we examine EIA data for U.S. refineries, we see that the capacity utilization for this period last year was over 90%. In April 2020, as the pandemic intensified, capacity utilization for U.S. refiners dropped below 70%. Capacity utilization in U.S. refineries has now partially rebounded to approximately 80%. An active facility needs regular maintenance, so we view this trend as a positive sign. However, given that we have seen starts and stops in all regions, it is hard to predict with certainty when a consistent demand boost for our products will begin. To be cautious, our underlying assumption for our new financial guidance is that lower density work sites will be the reality for the remainder of the year. Therefore, we expect quarterly revenue levels to be relatively consistent with the first two quarters of 2020. In the face of the dual impact of COVID-19 and an uncertain energy environment, our critical commercial tasks for both maintenance and project work is to sell our value proposition centered on simplified logistics and reduced workforce requirements to continue to gain market share in the energy infrastructure space, even in a down market. Also, we will continue to strengthen our sales organization, including a focus on converting our pipeline into additional project wins. We are confident that these investments will pay dividends. Our second-quarter performance was largely consistent with our COVID-19 expectations, with revenue down 17% for the quarter and down 8% year-to-date during which we had two positive pre-COVID months, January and February. Our revenue required for adjusted EBITDA breakeven has decreased from $140 million last year to a revenue level of approximately $110 million for 2020. This decrease in adjusted EBITDA breakeven is the result of the actions we took to lower compensation and discretionary expenses, reduce our bill of material costs, and improve our yields and productivity in our East Providence manufacturing plants. The impetus for this important work was both the pandemic and our ongoing drive to profitability. Interestingly, the lower breakeven level was achieved at a time when we increased our R&D spending to support our strategy to leverage our aerogel technology platform into new diverse and valuable markets, including our two emerging opportunities in the EV space. Importantly, also during this time, we strengthened our company with an equity raise and credit line extension in February and a PPP loan in May. We believe we have positioned the company to emerge from the COVID-19 period with a strong operating platform and significant strategic momentum. On the subject of strategy, we continued to make substantial progress with our two initiatives addressing electric vehicles. We have accelerated optimization of our silica-based aerogel blankets to provide better solutions to EV manufacturers to manage thermal runaway. The development of our thermal runaway mitigation product, PyroThin, benefited from our experience delivering critical fire protection solutions to our energy infrastructure customers and from active technical exchanges with key EV manufacturers. The thermal runaway product leverages our existing silica aerogel technology, can be produced using our current manufacturing assets, and is protected by our existing intellectual property. One of our performance indicators for 2020 is to gain adoption for or to generate initial revenue from the thermal runaway opportunity in the EV market in 2020. In fact, we have shipped an initial thermal barrier order to an Asian partner to be used by BYD in its new Blade Battery platform. BYD, of course, is the largest Chinese producer of electric automobiles and buses. Blade is BYD’s innovative battery system focused on safety, energy density, and cost. The Blade Battery system will be used in BYD vehicles and will also be available for sale to other EV manufacturers. In addition, we're in the midst of responding to a request for quote with a potential U.S.-based customer with whom we have completed significant product development work. The RFQ contemplates orders spanning multiple years and potentially totaling multiple hundreds of millions of dollars of revenue. If successful, in the near-term we will receive during Q3 2020 an order for a small prototype fleet of EVs. The RFQ does not guarantee success, but it does mean that we are in the hunt for a significant business with our PyroThin product. With respect to our carbon aerogel efforts, we continue our work to validate and accelerate the potential adoption of our technology within the battery materials market. Our effort centers on taking full advantage of the unique attributes of our carbon aerogels and leveraging our decades of experience manufacturing aerogels at scale. The ultimate goal is to improve the energy density of lithium-ion batteries, a key enabler in expanding the drive range and reducing the cost of electric vehicles. We continue to work closely with our evaluation partners SKC and Evonik, and are actively engaged with other industry-leading companies, both battery and EV manufacturers. In the first six months of 2020, we accomplished several important items. We improved significantly both the performance and cost of our materials. We expanded our battery team and we built an in-house battery fabrication and testing capability that will allow us to accelerate development even faster. During the remainder of 2020, we will provide larger sample quantities of our newest carbon aerogel materials to our partners to test in full cells and on more production-level equipment. The goal is to test full battery systems with multiple cells stacked back to back to measure against a total energy output target. This feedback from our evaluation partners is critical as we continue to optimize our carbon aerogel materials. The advanced data also make our attractiveness to potential new partners yet more appealing. We continue to believe that we will expand our relationship with one or both of our existing partners and enter into additional agreements with other industry leaders during 2020. Our goal with these two opportunities that leverage the mega trend towards electric vehicles is to build proprietary and diverse aerogel-based businesses and to further demonstrate the value and breadth of our technology platform. We will continue to report out on our progress related to these important strategic initiatives. Finally and to recap, we believe we are taking the correct actions in this unusual time that fortify the company to regain our commercial momentum and advance our strategy. Our goal is to keep everyone on the Aspen team safe and healthy, and at the same time, to keep the company strong. We are focused on our drive to profitability and on executing our strategy. These times demand a balancing act and we will continue to aggressively manage the company to ensure we maintain the correct balance. Now I'll turn the call over to John for a review of our financial results.

Thanks, Don. Let’s start by running through our reported financial results for the second quarter of 2020 at a summary level. Total revenue declined by 17% to $24.6 million from $29.5 million in the second quarter of 2019. The second-quarter net loss was $5.7 million or $0.21 per share versus $5.3 million or $0.22 per share last year. Second quarter adjusted EBITDA was negative $2.1 million compared to negative $1.7 million a year ago. 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. For the first half of 2020, total revenue declined by $4.4 million or 8% to $53.1 million. Net loss improved to $8.9 million or $0.34 per share in 2020 versus a net loss of $11.3 million or $0.47 per share last year. Adjusted EBITDA for the first half improved to a loss of $1.6 million compared to a loss of $4.3 million a year ago. Throughout the remainder of my comments, I'll focus on second-quarter performance and our outlook for the remainder of the year. However, I first want to emphasize that in the first half of 2020 we improved adjusted EBITDA by $2.6 million, despite a revenue decline of $4.4 million during the period. This improvement was driven by our initiatives to reduce compensation and discretionary expenses in response to COVID-19 related uncertainty, our multi-year initiatives to reduce the bill of material costs, continued improvement in yields and productivity in our East Providence plant, and our annual price increases. Importantly, we improved profitability despite an increase in research and development spending in support of our electric vehicle and next-generation process technology programs. This performance indicates that we are operating well despite the COVID-19 related market challenges as the fundamental economics of our business are improving. We believe that the actions we're taking to improve profitability in the energy market and the strategic investments we're making in the EV market will enable Aspen to drive when business conditions improve. I'll now provide additional detail on the components of our second-quarter results. First, I'll discuss revenue; second-quarter total revenue decreased by $4.9 million or 17% to $24.6 million versus $29.5 million last year. This decrease in second-quarter total revenue was driven by a decrease in project-based revenue in the subsea market, a COVID-19-related decline in maintenance-related business, most notably in the U.S. petrochemical and refinery market and our planned reduction in research services revenue. These declines were offset in part by growth in onshore project work globally, led by strong demand in the LNG market. The COVID-19-related decline in our maintenance-related business is largely a consequence of our energy customers limiting the number of internal and third-party insulation installers in their facilities to reduce worker density and temporarily shutting down operations from time-to-time in response to COVID-19 outbreaks. The access-related issues affected our business globally during the quarter, but were particularly prevalent in the U.S. Gulf Coast region. Total shipments during the quarter decreased by 13%, totaling 7.3 million square feet of aerogel blankets. Our average selling price decreased by a slight mix-related 2% to $3.35 per square foot. Next, I'll discuss gross profit; gross profit was $2.9 million during the second quarter of 2020 versus $3.5 million during the second quarter last year. However, gross margin was 12% during both quarters. The decrease in gross profit was largely driven by the 13% decrease in volume, the 2% decrease in average selling price, and the decline in research services revenue offset in part by a decrease in manufacturing expense and a decrease in material costs. I want to highlight that our second-quarter gross profit reflected $1.2 million of expense associated with our $4 million reduction in inventory during the quarter. If we had maintained inventories at first-quarter levels, our gross margin would have improved to 16% in the second quarter of 2020 compared to 12% last year. However, we chose to decrease inventory balances in the second quarter to improve cash flow as we gained confidence that we could sustain manufacturing operations despite the COVID-19 pandemic. Next, I'll discuss our operating expenses; second-quarter operating expenses decreased by $200,000 or 3% versus last year to $8.5 million, despite a $300,000 increase in research and development in support of our electric vehicle initiatives. The decrease in operating expenses was principally the result of a decrease in travel-related expenses and the tight discretionary cost controls we instituted in response to the COVID-19 pandemic. Next, I'll discuss our balance sheet and cash flow for the second quarter. Cash used in operations of $1.9 million reflected our adjusted EBITDA of negative $2.1 million, offset in part by a $200,000 decrease in working capital investments during the quarter. The decrease in working capital was principally the result of a $4 million decrease in inventory net of an associated $3.8 million reduction in accounts payable. Capital expenditures during the second quarter totaled $1 million and supported the expansion of our carbon aerogel battery lab in our Northborough, Massachusetts headquarters and capital investments to improve the efficiency and reliability of our East Providence facility. During the quarter, we also received PPP loan proceeds of $3.7 million and nearly $900,000 in proceeds from the exercise of stock options. We ended the second quarter with $13.4 million of cash, net current assets of $30.1 million, no borrowings under our revolving credit facility, and shareholder's equity of $66.5 million. We also had access to an additional $8.9 million available under our revolving credit facility at quarter end. Importantly, we believe we have the balance sheet, liquidity, and available credit required to support operations and to continue to fund our planned strategic investments. At the time of our first-quarter and last investor call in April of this year, we indicated that the COVID-19 pandemic and volatile energy markets were adversely impacting demand for our products and making accurate projections of our 2020 revenue challenging. Accordingly, we withdrew our prior 2020 financial outlook due to the considerable uncertainty for our business associated with the COVID-19 pandemic. At present, we expect that ongoing worker density constraints and access issues at customer facilities will continue to pressure demand for our products during the pandemic. However, oil prices have settled above $40 per barrel and we believe that demand patterns for aerogel blankets have begun to stabilize. While risks and uncertainties remain, we currently expect that our second half 2020 revenue will be roughly in line with first-half actuals. There's some potential for project-related upside but will fall below 2019 levels. As a result, we're introducing a new 2020 full-year outlook as follows: total revenue is expected to range between $104 million and $110 million; net loss is expected to range between $17.7 million and $14.7 million; adjusted EBITDA is expected to range between negative $3 million and breakeven; EPS is expected to range between a loss of $0.67 and a loss of $0.55 per share. The EPS outlook assumes the weighted average of 26.3 million shares outstanding for the year. In addition, the 2020 outlook assumes depreciation and amortization of $10.5 million, stock-based compensation expense of $4 million, and interest expense of $200,000. The full-year outlook also assumes a gross margin of between 16% and 18% at an average selling price of $3.45 per square foot, plus or minus $0.05. Turning to cash, we expect capital expenditures will total approximately $4 million for the full year. Overall, we believe we have the balance sheet, liquidity, and available credit required to support operations and to continue to fund our planned strategic investments. We believe we have taken prudent actions to reduce expense levels and improve our cash flow. We believe our business fundamentals are improving and we remain committed to monitoring all aspects of our business and are prepared to take necessary actions to keep the company financially sound and execute our strategy. I will turn the call back to Sheryl for Q&A.

Your first question is from Eric Stine of Craig-Hallum. Please go ahead. Your line is open.

Hey, Don. How are you doing?

Eric, how are you?

Hi, Eric.

Hey, I'm fine. So I was hoping before moving on to the electric vehicle topic, if we could just talk about the core business to you. I mean, it seems like the weakness that you've seen in Q2 is not a surprise, but also that you expect for the remainder of the year is that day-to-day business that up until this point grown every quarter, every year, I believe is how you described it. And with the view that that comes back, I would love to hear a little bit about the project business you did in the release and a little bit in the commentary there. Talk about how you were seeing some positive signs, but just talk about that business and then maybe some of the end markets within that business.

Yes. So there's a lot of discussion going on in the industry today about the timing of projects and how the pandemic has impacted that timing. Whether we talk to contractors or our distributors, the basic consensus for now is that we've seen primarily delays in project work as opposed to cancellations of project work, at least for our part of the world. Therefore, we're doing everything we can to be in position and competitive for those projects. There are several projects that have passed through the financial decision stage and, in many cases, have begun construction, and we feel we're in a prime position to participate in those over the course of 2021 and 2022. We are very focused on replacing, if you will, the PTT tie LNG project that we have, which will come to an end towards the end of Q1 2021. We think that we will do that, not only in the LNG business; there are two or three prime projects that we're focused on and believe that we're in a strong, competitive position to win, but also in the petrochemical and refinery areas as well, particularly in our Asian region. So again, I don't want to pretend that the pandemic hasn't had an impact. It clearly has slowed things down. Frankly, our focus right now is to execute the projects that we have and monitor carefully worker access and contractor access into those job sites. As I noted in my comments, there have been kind of rolling starts and stops to access, again depending on where you are in the world. We are seeing pretty good access in Asia, and that's an important region for us, particularly in Thailand. Right now, I would say we're seeing a little pause or a little extra cautiousness on the Gulf Coast here in the United States for all the reasons that we read about regarding COVID-19 activity levels down in Texas and around the Gulf. I think our outlook is largely the same; just these pauses and delays are clearly influencing our business.

Yes. And then when I think about the guidance for the second half, it looks a lot like the first. Is it fair to say that you really are factoring in only modest improvement in that access problem? And maybe that's a little bit offset by the fact that just the destocking at the distributor level is done? It just seems – you mentioned some potential upside from project business. Is it in terms of the day-to-day business? Is that upside there? Or is that something where you have enough visibility into some of the refinery schedule that you think that is truly more of an early 2021 part of the business?

Yes. So on the core side, I think your characterization is right. We just think it's prudent for us to assume that quarters three and four are going to look and feel a lot like Q2 from an access point of view. We based our new financial guidance on that assumption. To the extent that I talked about some of the refinery capacity numbers returning back to kind of pre-COVID norms, those activity levels without question translate to more activity back in the refinery and petrochemical side of the world. That forms a bit of upside for us, also in terms of projects. So, look, we have some projects that have themselves had some starts and stops. I think our upside in project work is an assumption that we get maybe better than expected access to finish off some of those projects here in the U.S.

Okay, that's helpful. Well, maybe just turning to the electric vehicle opportunity. The RFQ details with the large North American OEM; is it fair to say that that is the one that you've been furthest along with? And I'm curious, you mentioned that if you get that RFQ, it would mean that you would start with a small order for a pilot deployment. Maybe just talk about whether you are competing versus another technology once you get to that point? Or is it really a decision by the OEM? Did they move forward or not?

No question, it's a competitive environment. We feel that we have an excellent solution. If you think about some of the parameters of this—passive fire protection, that's really the nature of our product; it's a thin product, a compressible product. There are many factors where this type of application suits us quite well. No question, it's a competitive environment. We've made it over some of the early hurdles, and we're moving fast as they are. We think we're in a strong position, but still, it’s competitive. The prototype fleet that would require initial parts, initial shipments would be a Q3 2020 order. Again, I emphasize it's not an important amount of revenue per se, but it is crumbs on the trail for sure that we're moving in the right direction. We would expect that that type of order would expand in 2021 and begin to generate some noticeable revenue, but it's really in the 2022-2023 timeframe where you should start seeing substantial revenue. The work we've done in this space, and I’ve said this before, leads us to believe that the opportunity can be as large, if not larger than our energy infrastructure business, where we had $140 million of revenue last year. The opportunity is clearly of that scale.

I think it's important to mention that it's for the 2022 model year. So it's prototyping late 2020; the initial commercial production is expected in late 2021 with an introduction at that time, and then ramping after 2022, 2023 and beyond.

Okay, thanks. I'll take the rest offline.

Thank you, Eric.

Your next question is from Amit Dayal of H.C. Wainwright. Please go ahead. Your line is open.

Thank you. Hi, John. Hi, Don.

Thank you.

So with respect to the unit side of your progression, did you say you've already shipped some amounts to BYD or is that also sort of a 3Q event?

We’ve shipped to our Asian partner, who is responsible for fabrication and delivery to BYD. So you are correct; we have shipped that product.

That was a couple of hundred thousand dollars. That's kind of a prototype level.

So how does this—what needs to happen for that relationship of that sort of order to move to the next level, if you will? If there’s a testing period, how long would that take, etc.? If there's any color you can provide.

They've been working with the material for a period of time already. This is, again, for what we refer to and the industry refers to as a prototype fleet, again using BYD’s new battery systems, so-called Blade. They announced this a few months ago, and I believe in June of this year. Our material is looking for a role in that new battery system. Again, we've gone through substantial testing through our partner and with BYD for that material.

Understood. Yes, I’ll take my other questions offline. Just getting back to sort of the adjusted EBITDA sort of expectations, some of these cost cuts that you've made, how much of this should we think will be permanent? As you sort of scaled back? Would some of these costs going back into the business? Are you going to try and ship them away?

John, do you want to take that?

Yes, I will. I think it'll probably be a mix. We pulled back discretionary spending and I think we're learning to operate in a new mode. I do think that some of the cost savings will be permanent and that we will see improvements to our bottom line flowing from the actions we've taken during our COVID-19 operations. Other expenses will return. At present, quite a bit of the savings are our sales force not traveling. We would love to get back to a position where we could be making our sales pitches face-to-face. It’s very effective in this industry, and we have definitely lost something in doing those virtually. A portion of it is a reduction in incentive compensation that was set pre-COVID and that we're not achieving currently. So we've pulled that back; we'd expect that to return as well. I think it's a mix, but as a management team, one of our goals is to find ways to take some of these learnings and cost savings measures and make sure that they are permanent and help us achieve our drive to profitability objectives.

I can tell you, those initiatives that we had in place around raw material cost reductions and yield and productivity improvements, those are fundamental. Those are going to stay with us past the pandemic. I think John has it exactly right. I can tell you, I'm really eager to get back traveling. There are many good reasons for me to be in Asia, and I'm ready to go. Those are expenses that will return to our income statement, but we believe they will help solidify and advance some of the strategic work we've been doing. I give my team a lot of credit for being able to advance our strategy. It’s sometimes the potential partners we know less well that are experiencing delays in forming new relationships from a distance. Our team has done a terrific job advancing our strategy during this period.

Understood. And just maybe going back to the North American EV opportunity; you're saying this is mostly a hundred million dollar opportunity for you. What would it take from an investment perspective to deliver these levels of orders?

That's a good question. We have plenty of capacity to deal with the early years. Let me just say this opportunity is spread out over a 5- to 10-year period. We're re-tooling one of our three operating lines to optimize our performance around this new product, so-called PyroThin. Thus far, it will remain within our capital expenditure budget of approximately $4 million in total. We feel that we're in good shape to meet those orders in the years to come. It will be interesting to see how the energy infrastructure business comes back strong, and when this business becomes more established. We do anticipate that eventually we will build additional capacity. Time will tell, but we're fine for now. If you remember we have roughly $200 million of revenue capacity in our existing manufacturing plant. Our guidance, which is between $104 million and $110 million, is a little artificially low; we were at $140 million last year. Therefore, we still have some room to continue to grow within the confines of our existing asset base.

I just want to stress that this product is a silica aerogel-based product that can be manufactured in the East Providence plants. When Don mentioned retooling, this is really optimizing the existing production assets that form this product. It's very similar to what we've been supplying in the energy markets for years.

Understood. Yes, I was just going to say it's a great problem to have.

Yes.

No, exactly; that's the way we think about it. Regarding the capital decision, John and I have discussed taking partnered approaches to new capacity or additional capacity to minimize our own capital. We're focused on advancing our aerogel technology platform as a technology company. We believe that this EV opportunity both on the silica aerogel and carbon aerogel side positions us well. There’s no doubt that we have additional ideas valuable to pursue by leveraging that platform into new markets.

Thank you, guys.

Thank you.

Thanks, Amit.

Your next question is from Jed Dorsheimer of Canaccord Genuity. Please go ahead. Your line is open.

Hi, thanks, Don. I guess you've addressed a lot of them, but I was wondering, I'm just digging into the core energy business. I know that COVID came in and hit all of us by surprise, but if I look at rig count with the peak of 620 in 2019, that's going to come down to less than 150, so I'm just wondering, is that kind of the bigger driver in terms of the energy market versus COVID? And then also, along the same lines, we're going from 12.3 million barrels per day to less than 8 million. So I'm just wondering how I reconcile some of those figures as I'm trying to figure out when the ramp is going to happen. Is it more COVID-related or just looking at the capacity related there?

We've kept an eye on EIA numbers. Those numbers represent the activity levels within these refineries. Refineries can’t consistently run optimally or safely without ongoing maintenance. Thus, the capacity utilization number is indicative for us. We were at about 93% capacity utilization last July, dipped down into the mid- to high sixties in April, and now have returned to about 80%. It’s interesting; we were doing well until the pandemic hit in April. We’re starting to see improvement now. We are quite international, as you know, and are exporting. I want to say we export over 60% of our product, and we benefit from geographical diversity. We're seeing that the Asian economies are more active than ours. We started to come back, but we seem to be back on our heels right now in the Gulf Coast. In the U.S. maintenance market, I can’t emphasize enough how important that market is for us. We have a terrific team in that market. When it’s quiet, we certainly feel that. We felt it a bit in Q2, and the destocking didn't help; distributors managed their working capital, pulled back their inventories, causing a double whammy for us in Q2. Thus, we took a prudent approach to think about the remaining part of the year. We just assumed it would look similar to Q2.

Got it. And one last question: the utilization number you put out there—many refiners have gone under due to pricing. Is that a true apples-to-apples number, or is that rising as a function of companies that aren't able to stay in business, leading to a lower denominator?

I haven’t dug into the EIA numbers to that extent. I think those numbers are generally reliable, and they have their finger on the pulse pretty well. The refiners for the most part have performed better than some of the highly leveraged frackers. Those are big, broad-shouldered companies for the most part we serve.

Got it. Thank you. Just turning into the EV side—I have a few questions, if you don't mind. So just to be clear, the product with BYD is for the passive fire protection, correct? It's not for the carbon battery materials?

Correct. It is to address thermal runaway within their lithium-ion battery program.

So, you just shipped that within the last year to them?

Within the last month.

And I just want to make sure from an expectation perspective: you are booking it into the battery pack for fire protection to be adopted with the 2022 model year for them. Is that the expectation?

We have two activities going on here. The prototype fleet is what John referenced and is particularly related to the North American-based opportunity we're involved with—a 2022 launch, which will take place in September or October of 2021 with initial volumes. For BYD, we anticipate a similar timeframe, with a 2022 model launch occurring late in 2021.

Got it. I mean, for BYD that seems incredibly aggressive in terms of timeframe in that sector. Is there something that you've been able to do to accelerate that program? That's a critical element in the car, particularly in terms of reducing the risk of catching on fire. I'm curious how the timeframe works.

We've been very impressed with the companies we work with regarding the speed with which they’re addressing this issue. They were not anticipating having to grapple with this problem at the early design stage of those battery systems in EVs. It’s not a retrofit idea, but I think they’re a little behind in their development to tackle this particular problem. Therefore, they're going all out to address it in their systems. The blade battery system has safety as one of its attributes; we appreciate that safety emphasis and believe it aligns well with our product. Historically, the companies in this industry aren't the fastest moving unless they have a problem to solve. We've been beneficiaries of their speed, innovation, and customer intimacy, which is what Aspen is all about.

I think it's a fantastic win for you guys. I want to understand the timing of everything. So congrats. I will take the rest offline. Thank you.

We haven’t declared a win yet, but we still think we're in the middle of the game. This will play out over the next months, quarters, and a couple of years. The indications are pretty good, but we’re continuing to work hard to serve those customers well. Thank you, Jed.

There are no further questions at this time. I will turn the call over to Don Young for closing remarks.

Thank you, Sheryl. We appreciate your interest in Aspen Aerogels; we look forward to continuing to report our progress during our third quarter 2020 results towards the end of October. Be well, and have a good evening. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.