Aspen Aerogels Inc Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Aspen Aerogels Inc. Q4 2020 Earnings 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 be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Mr. John Fairbanks. Please go ahead sir.

Thank you. 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 a reconciliation of management's use of non-GAAP financial measures compared to the most applicable GAAP measures, is available on the Investors section of Aspen's website, www.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 fourth quarter and year ended December 31, 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 In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year.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 Aerogel's actual results may differ materially from those expressed in these forward-looking statements. A list of factors that could affect the company's actual results can be found in Aspen's press release issued today 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. These forward-looking statements made today represent the company's views as of today February 18, 2021. Aspen disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA. These financial measures are not prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures are included in today's press release. I would also like to note that over the next two weeks in connection with the vesting of restricted stock units issued under our long-term equity Incentive Program, or Section 16 officers will file form for us to report the withholding of shares by the company to satisfy statutory tax obligation related to the vesting of these SUs. I want to emphasize that the shares that are withheld by Aspen will not be sold into the market and will remain issued. I'll now turn the call over to Don.

Thank you, John. Good afternoon. Thank you for joining us for our Q4 2020 earnings call. Today John and I are switching up the usual order of our comments. John will start with a recap of our 2020 full year performance and finish with our outlook for 2021. I will follow John by providing a strategic overview of the company and by outlining the significant opportunities we have before us. This evening, we also uploaded a new company presentation to the investor section of our website that expands upon my comments. We will conclude today's call with a Q&A session. John, over to you.

Thanks, Don. I'll start by running through our reported financial results for 2020 at a summary level. Total revenue declined by $39 million, or 28% during the year to $100.3 million. Net loss increased to $21.8 million, or $0.83 per share in 2020 versus a net loss of $14.6 million or $0.60 per share last year, and adjusted EBITDA decreased to negative $6.4 million compared to negative $200,000 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. First, I want to emphasize that in response to the impact of COVID-19 on our revenue levels, we decreased our costs and expenses by a total of $30.5 million from 2019 levels. In addition to a reduction in material costs associated with the revenue decline, they drove this decrease in our cost structure by means of our initiatives to reduce compensation and discretionary expense in response to COVID-19 related uncertainty, and our multi-year initiatives to reduce bill of material costs. Importantly, we reduced our costs and expenses despite an increase in research and development spending in support of our electric vehicle programs. As a result, we estimate that we reduced the annual revenue required for us to achieve EBITDA breakeven to between $110 million and $115 million in 2020 from $140 million in 2019. This progress indicates that we made the right decisions in response to the COVID-19 related market challenges, and that the fundamental economics of our business remains strong. Moving into 2021, we estimate that our annual revenue required to achieve EBITDA breakeven will rise to approximately $125 million principally through our decision to increase our expenses by $6 million in support of our electric vehicle initiatives and our new business development efforts. We will use this investment to accelerate PyroThin business development to establish industry leading thermal barrier fabrication capability, to progress from the development phase towards the commercialization phase of our Silicon rich Carbon Aerogel battery materials and to identify additional high value markets for our Aerogel technology, among other items. I’ll now provide additional detail on the components of our 2020 results. First, I'll discuss revenue. Total revenue decreased by $39.1 million, or 28% to $100.3 million from $139.4 million last year. This decrease in 2020 revenue was driven by a broad base decrease in both project and maintenance work in the global energy infrastructure market, and the impact of our decision to wind down our research services business offset in small part by growth in the sustainable building materials market. The decline in our energy infrastructure business was principally due to our energy customers seeking to limit the number of third party insulation installers in their facilities to reduce worker density, temporarily shuttering operations from time to time in response to COVID-19 outbreaks, and delay in the start of projects due to the threat of COVID-related interruptions. Total shipments for the year decreased by 30% to 28.6 million square feet of aerogel blanket while our average selling price increased by 4% to $3.49 per square foot. Next, I'll discuss gross profit. Gross profit was $14.6 million, or 15% during 2020 versus $26.3 million, or 19% during 2019. This decrease in gross profit was driven principally by the 30% decrease in sales volume and a reduction in research services contribution, offset in part by the 4% increase in average selling price, a reduction in manufacturing expense, and to the reduction in material costs. Next we'll discuss operating expenses. Our 2020 operating expense decreased by $4.3 million or 11% versus last year to $36.2 million despite an increase in research and development in support of our electric vehicle initiatives. The decrease in operating expense was principally the result of the cost controls we instituted in response to the COVID-19 pandemic. Next, we'll discuss our balance sheet and cash flow for the year. Cash used in operations of $9.9 million reflected our adjusted EBITDA of negative $6.4 million and a $3.5 million increase in working capital investments during the year. This increase in working capital is principally the result of an increase in finished goods inventory of $4.6 million during the year. Capital expenditures during 2020 totaled approximately $3.4 million. We're focused on improving the efficiency and reliability of our East Providence manufacturing facility. We raised a total of $26.2 million during the year through our financing activities, including $14.8 million through our public offering in February, $3.7 million in a PPP loan in May, $9.5 million under our ATM in November and December, and a net of $1.4 million from employee equity transactions during the year. We used $3.1 million of the proceeds to repay our outstanding borrowings under our revolving credit facility in Silicon Valley Bank. As a result, we ended 2020 with $16.5 million of cash, net current assets of $33.2 million, no borrowings under our revolving credit facility, and shareholders’ equity of $67.9 million. We also had access to an additional $5.4 million available under our revolving credit facility at quarter end. Looking forward to 2021, we project that the COVID-19 related contractor access restrictions will continue to impact demand for our products in the energy infrastructure market. As a result, we are currently assuming that our 2021 revenue levels will remain in line with our 2020 full year results. We're also projecting that our initiatives to reduce raw material costs and to enhance product manufacturing productivity will help to improve our gross margin to approximately 20% for the full year from 15% in 2020. However, we intend to increase our investment in the electric vehicle market and our aerogel technology platform by $6 million in 2021, again, to accelerate PyroThin business development, establish an industry leading thermal barrier fabrication capability, progress from the development phase toward the commercialization phase of our silicon rich carbon aerogel battery materials and identify additional high-value markets for aerogel technology. In addition, we intend to continue our efforts to improve the underlying fundamentals of our business and ensure optimal operational effectiveness remains strong. We believe these actions and initiatives will position Aspen to resume the strong operating performance that characterized 2019 and to take advantage of the significant growth opportunities available to us today in the electric vehicle market and leverage our aerogel technology platform to develop new high-growth businesses. Our current 2021 full-year outlook is as follows: We expect total revenue of between $100 million and $108 million, net loss of between $21 million and $25 million, adjusted EBITDA of between negative $8 million and negative $12 million, EPS of between a loss of $0.77 and a loss of $0.92 per share. This EPS outlook assumes a weighted average of 27.3 million shares outstanding for the year. In addition, this outlook assumes depreciation of $8.8 million, stock-based compensation expense of $4 million, and interest expense of $200,000. This full-year outlook also projects a gross margin of approximately 20% and average selling price of between $3.45 and $3.50 per square foot. Turning to cash, we expect our capital expenditures will total approximately $7 million for the full year. We’ll focus these capital expenditures to support the initial build-out of our thermal barrier fabrication operations and to maintain our East Providence plant, and we're targeting to have a minimum of $10 million of cash on hand throughout 2021. Looking beyond 2021, we expect that strong growth in our EV thermal barrier business and a post-COVID rebound in our energy infrastructure markets will necessitate the expansion of our silica aerogel blanket capacity by the end of 2023. We're engaged in the early stages of an effort to size the required expansion, to select an optimal manufacturing site, and to identify the appropriate financing structure to fund the project. In addition, we're planning to establish an automated thermal barrier fabrication operation and to enhance our battery materials capability among other items. As a result, we may incur additional capital expenditure and financing needs during 2021 to support these electric vehicle-related investments. We'll announce additional details as we finalize these investment plans during the year. I'll now turn the call back to Don.

Great. Thank you, John. Aspen Aerogel is at a significant juncture in its development as we continue to realize the full potential and value of the company. Our vision is to make an important contribution to a better and more sustainable way of life. Our Aerogel technology, whether deployed in electric vehicles, sustainable buildings, or energy infrastructure, is centered on safety, energy efficiency, and asset resiliency. We envision that these priorities will hold us true as our Aerogel technology enables future solutions to pressing global challenges. We are motivated by the conviction that our work is important and meaningful, by our focus on big societal challenges and transformations that matter, and by creating value broadly defined. We embrace the idea that the imperative for change often leads to creativity and innovation. The Aspen team believes that our time to contribute is now. Our Aerogel technology platform is at the core of our strategy to be a global technology leader in sustainability, with a focus on multibillion-dollar opportunities in high growth, high value markets and on creating a proprietary, diverse, and very valuable business enterprise. Today, our Aerogel technology is being leveraged with products in four substantial areas; PyroThin thermal barriers address thermal runaway in electric vehicles and have resulted to date in battery platform design wins from a single customer with the potential to generate over $1 billion of revenue this decade. Aspen battery materials seeks to deploy our carbon aerogel technology in the design of low-cost high-performance anode and cathode materials for the lithium-ion batteries that will power the EV megatrend. Sustainable building products target the construction market in applications for fire safety and energy efficiency, which are critical. And Pyrogel and Cryogel products address resource efficiency, asset resiliency, and fire safety in global energy infrastructure facilities, where we have an installed base of over $1 billion. It is important to remember that the Aerogel technology platform remains rich with untapped potential beyond these four business areas. Our new business creation team continues to explore the intersection of sustainability themes, emerging mega trends, and our own Aerogel technology platform. The opportunities for the PyroThin thermal barrier, the Aspen battery materials, and the energy infrastructure businesses are significant. Our PyroThin thermal barriers are designed to allow EV manufacturers to manage thermal runaway, and based on our recent substantial contract, will be used in the coming generation of electric vehicles. Thermal runaway is the phenomenon where a cell in a lithium-ion battery pack has the sudden release of energy that can result in a fire. PyroThin thermal barriers are designed to impede the propagation of thermal runaway both at the cell and pack levels across multiple lithium-ion battery platforms. Aspen’s technology offers a unique combination of performance attributes that enable EV manufacturers to achieve critical safety goals without sacrificing driving range. In our last earnings call, we announced that a major U.S. automotive OEM awarded Aspen a contract to supply PyroThin thermal barriers for use in its EV battery platform. We started to supply PyroThin thermal barriers to this customer in 2020, and based upon the OEM’s projection for 2021 and 2022, we expect to generate single-digit millions of dollars each year in commercial revenue consistent with the initial launches of its EV modules. During 2023, we expect to see from this customer alone a substantial ramp in revenue with potential revenue in 2024 and throughout the decade of more than $150 million per year. Over the coming decade, our potential revenue again from this customer alone represents an opportunity of $1 billion for Aspen. The ultimate value of this contract is dependent on our customer’s success in participating in a global transformation to electric vehicles. We believe this customer is well positioned to succeed. It is important to acknowledge that thermal runaway is a universal challenge for all EV manufacturers. Battery electric vehicle companies are likely to engineer to maximum safety levels at this pivotal point for the market acceptance of the mobility. We have already seen recalls and regulatory pressure resulting from EV fire safety issues in Asia, Europe, and North America. We estimate our PyroThin thermal barriers are focused on a $30 billion commercial opportunity over the course of this decade. We are participating in a number of RFQs with other EV manufacturers, and the list has expanded to include companies producing energy storage systems for distributed generation, both grid and home scales. Thermal runaway is a very challenging issue to manage. We believe that the attributes of our thermal barriers combined in a single solution will make PyroThin a significant contributor to a safe and successful global transformation to e-Mobility and to electrification more broadly and be a big winner for Aspen Aerogels. Our second initiative in EV is our battery materials that utilize our carbon aerogel technology. Our efforts center on leveraging both the unique attributes of our carbon aerogels, and our two decades of experience manufacturing aerogel nanomaterials at scale. Our goal is to improve the energy density of lithium-ion batteries used in the EVs. Our focus is on cost, performance, and safety. Our work on our silicon-rich anode materials has intensified as we have gained confidence in our ability to meet the cost and performance targets set by both current and potential partners. As a result, we have expanded both our battery materials team and our related lab and test facilities. We are expanding our capabilities to provide larger sample quantities to our current and potential partners for their testing and production scale equipment. We believe our focus on low-cost high-performance silicon-rich anode material is on target, and that our work supported by an active IP strategy will be attractive and valuable to our current partners and to other leaders in battery technology. Switching gears to our energy infrastructure business, the pandemic continues to inhibit our short-term revenue generation. In response to COVID-19, facility owners have limited the number of contractors on site in order to lower worker density, which has reduced near-term demand for our products. Our underlying assumption for our 2021 outlook is that lower density work sites will continue to be the reality. Therefore, we assume revenue levels will remain in the vicinity of $25 million per quarter. Looking forward, we expect both maintenance and project revenue to rebound when contractor access to facilities improves. If the distribution channel restocks, we believe that there is significant pent-up demand. PyroGel and Cryogel have been specified for several petrochemical and LNG projects, and we believe that Aspen will see increased revenue opportunities as soon as these projects move forward. We believe that we have positioned the company to emerge from the COVID-19 period with a strong operating platform in energy infrastructure and significant strategic momentum for the company as a whole. In our new company presentation, we described the breadth of the opportunity we have over the next decade and lay out targets and milestones for 2023. We are focused on multibillion-dollar opportunities where our Aerogel technology platform can be deployed in ESG and sustainability-based markets. In the two EV businesses alone, PyroThin thermal barriers represent a $30 billion opportunity this decade, and the EV materials opportunity, while at an earlier stage of development, is potentially even larger. We believe we have the opportunity to double revenue every 24 months through 2025, driven by our unique and protected technology and by multi-year platform wins, the first of which we have in hand. We are confident that over the course of this decade, Aspen will grow significantly and establish its reputation as a technology leader in sustainability. With respect to targets and milestones for 2023, we aim for revenue of $225 million, more than two times our 2021 outlook. We believe this 2023 revenue target will drive a gross margin of 30% and help to fuel our continued growth. Our 2023 revenue target is comprised principally of two parts: first, PyroThin thermal barrier revenue derived predominantly from our contracts with a major North American automotive OEM; and second, we believe that when the pandemic ends, we will not only regain our 2019 peak revenue level in energy infrastructure, but will also have the opportunity to continue to grow that part of our business. This belief is grounded in the fact that we had a revenue CAGR of over 20% from 2008 to 2019, and grew revenue 34% in 2019 alone. We have defined a 2023 milestone for Aspen battery materials as the first adoption of our silicon-rich anode material in a lithium-ion EV battery. We believe such an adoption would be a significant value driver for Aspen. Between now and 2023, we expect to expand our relationships with our existing evaluation partners, and to advance relationships with other market leaders. The replacement of graphite and anodes with silicon is widely viewed as the best near-term approach to boost revenue in lithium-ion batteries. We know that other companies have a similar focus, but different approaches. And we also know that these companies have attracted investment capital at very significant valuations. We believe that our proven ability to produce aerogel anode materials at significant scale with a dual focus on high performance and low costs for over two decades puts us in a competitive position. We believe that our technology, our experience, and our expertise, set us apart and position us for success. We are considering business models for Aspen battery materials that span from direct manufacturing to technology licensing. The goal will be to maximize long-term value of the company. Overall, we believe that we are well on our way to becoming a global technology leader in sustainability, as we focus on multibillion-dollar opportunities in high growth, high value markets, and on creating a proprietary, diverse, and very valuable business enterprise. With that, I would like now to turn the call back to Elaine for the Q&A session.

Q - Eric Stine: Hi, Don and John.

Hi, Eric, how are you?

I'm glad to hear things are going well. I understand that your recent success in the thermal barrier segment was achieved in a competitive landscape. Could you share your perspective on the current competitive environment within this application? Ultimately, I'm curious if you believe this recent success could set a new industry standard for this application.

I would answer that in two ways. Firstly, we went through a rigorous process with a very technology-focused company that selected our product to address this issue. I’ve mentioned before that this issue has caught the industry's attention, and I was surprised by its intensity. They are trying to catch up. Our process took about a year, involving the development of the product and then a thorough RFQ process. It was evident that there were several potential products for this application at the start of the RFQ process. As we navigated through the technology, engineering, quality, and procurement elements of the RFQ, we were committed to finding the best solution. We believe we will be the technology leader and the industry standard in thermal barriers. This issue affects not just the one customer with whom we have a contract but also others, as shown by our business development funnel, which includes over 30 companies representing both established and new players in the automotive sector. We are also seeing opportunities in stationary systems related to distributed generation, which face similar thermal runaway challenges. In that funnel, we have provided materials and engaged in intensive discussions, responding to a small number of RFQs that have emerged. We are currently in that RFQ process with a few companies and are engaged with nearly everyone in the industry in one way or another. We believe we have a unique product that addresses a challenging issue, and we are actively involved in this area.

Do you believe that since you have already done much of the initial development work with your current OEM, the RFQs you're currently processing will be completed more quickly than before? I mean, when we went through this process previously, it took us about eight months. I'm just interested in your thoughts on how this may play out with new customers.

Yes. We do think that the battery platform that will be serving both the incumbent and the new players will need to resolve this in the next two, four and six quarters. That’s the way we're thinking about it. So, the time for us to win is now. And we've moved a lot of our resources into making sure that we are front and center when it comes to competing for that business. Again, we think we have a very unique technology, a very unique solution and we're engaged. So, I do believe this is something that's going to play out over the course of that timeframe, Eric: two, four and six quarters.

Got it. And then just last one for me. I know you're looking at options, and it's early for the capacity side. You did mention the automated line for the PyroThin product. Just wondering what that does for capacity? Does it expand the capacity of the current East Providence facility? Or how should we think about that?

So, John referenced the advanced thermal battery center, which is focused on being not only the showcase for the technology for customers and others in the industry. But it also has our prototyping and manufacturing capability as well. This relates to not just the aerogel production from East Providence, but the Tier 1 production of the part as well, or the various parts that will go into these battery platforms. So, it does enhance our revenue for sure. We’ve talked for a long time about having a revenue capacity of approximately $200 million with this capability of additional parts manufacturing, if you will, it does enhance our revenue capability. I want to say out to this, $250 million level. Having said that, that's important to us. But we also know, I made a statement that we have the opportunity to double revenue every 24 months through 2025. And if you play that out, it's clear that we need additional manufacturing capacity. And we are heavily focused on that today. We've talked about this in the past as to whether we would build the facility ourselves or whether we have manufacturing partners. We're exploring those items now.

Okay. Thank you.

Thanks, Eric.

And your next question comes from Jed Dorsheimer from Canaccord.

Hi, Jed.

Hi, Jed.

Check to see if your line may be on mute. Sorry. Days of zoom, I guess I pulled the wrong mute. Sorry about that, guys. So anyways. So thanks for the visibility and the layout of the strategy. I just want to clarify. So the first win that you have for the thermal runaway. That's not the Asian customer that you had originally talked about. But this is a domestic player in the EV space or that would not be said?

We have not named the company contractually for now. We're hoping to be able to do that. But we have identified the company simply as a major North American automotive OEM.

Got it. That's helpful. Thanks. And I guess just pivoting away from the thermal runaway, if we look at – I didn't hear. Maybe I just missed it. Did you give an update on the development of the silicon particles for the anode side?

Yes, we have made significant progress in product development, which is detailed in our company presentation available in the Investor Section of our website. We are currently meeting the cost and performance targets set by both our current and potential partners. Our team has been expanded with more technical talent, and we've increased the size of our laboratories and test facilities. This growth is enabling us to provide larger sample quantities to partners for testing with production-level equipment. Our goal, based on our collaboration with a partner, is to achieve our first adoption for a 2023 EV lithium-ion battery, which establishes a clear timeline. Additionally, we are working on building a larger pilot facility to enhance our capabilities for sampling materials and to accelerate our efforts with partners.

That's great. Thank you. I'd like to pivot back to the core oil and gas business or the insulation for the oil and gas. I'm curious about the current situation. We're seeing commodity prices rise and a healthy increase in pricing. I'm just wondering where your customers stand in terms of reinvestment in midstream production to start triggering that demand scenario.

Yes, that's a great question. Throughout 2020, we maintained that after a strong 2019 with over 30% revenue growth, the momentum slowed due to COVID. At the same time, we saw energy prices decline, and we were trying to assess the impact of both factors. Our belief was that the primary cause was COVID. We would definitely prefer current oil prices around $40, $50, and $60 over the lower prices of $20, $30, and $40 that we experienced. This is a much better environment for us. We're also seeing increased interest in the LNG sector, which we have focused on for over five years, resulting in a 50% revenue CAGR since 2015. This strategic investment has paid off. I see significant pent-up demand on both the maintenance and project fronts. Once we move past COVID, we are confident we will return to the activity levels we saw in 2019 and resume growth in that area of our business. The question remains, when will that happen? For our outlook, we believe a recovery won’t happen until 2022. So here we are in 2021, and it's all about how things develop. Nonetheless, we expect to be around the $25 million per quarter mark, with some variation each quarter, aligning with the guidance John provided for 2021.

Got it. One last question, if I could. In terms of that business, is it going to be more production related in the mid to downstream? Should we think of it in the same way? Has that business shifted to offshore versus domestic production in building out the pipes and refiners?

Yes. Our primary focus remains on the refinery petrochemical sector and the LNG sector, including both liquefaction and receiving terminals. The only significant upstream portion we have is our pipe-in-pipe subsea programs, which have consistently performed well for us over the years. While it is not a major growth area, we maintain a high market share in this segment. Typically, this part of our business generates around $10 million annually, with fluctuations of about $5 million. It has been stable for a long time. We excel in this area and appreciate this line of work. Most of our projects are concentrated in refineries, petrochemical operations, and the LNG sector.

Got it. Thanks. I'll jump back in the queue. Thank you.

Thank you, Jeff.

And your next question comes from the line of Tom Curran from B. Riley Securities.

Good evening.

Hi, Tom.

Don, regarding the PyroThin RFQs we currently have, what is the earliest potential date for any of them to lead to a second production volume contract? Considering the current status of conversations and the stage of each RFQ, does it seem more likely that this award will come from your partner in China that supports BYD for a new third OEM customer?

I believe that these RFQs will materialize during the first half of this year. While I can't specify whether it will be in a week or a month, I am confident that it will happen within that timeframe. Additionally, I anticipate that more RFQs, along with further design and development, will occur in the latter part of the year and extending into 2022. I think much of this will be clarified throughout this calendar year and into early 2022. We are dedicated to being the technical leader and expert resource for addressing these challenges with automotive OEMs, battery manufacturers, Tier-1 suppliers, and companies focused on stationary battery supplies, both for the grid and home use. This process will unfold in phases over two, four, and six quarters.

And then shifting over to the carbon aerogel side. I've surmised the two of your goals for your relationship with SK Group this year were to convert your existing evaluation agreement into some type of joint development deal. And then for that new partnership structure to set a target of having carbon aerogel material designed into 2023 battery at SK Innovation. Could you provide an update on those objectives and speak to how they had been or might be impacted by last week's ITC ruling against SK Innovation?

Our main focus is collaborating with the development team in Korea. We are closely working with them through our development agreement with a sister company called SKC, and SK Innovation plays a vital role due to their testing capabilities. They are a significant player in the battery technology space in Korea, targeting both the Asian and European markets. The recent ruling was primarily concerning the United States, which is undoubtedly a crucial market. When I consider not just Aspen but larger corporations like Ford and VW, it's clear there are many stakeholders interested in this outcome. So far, we haven't observed any changes. We regularly engage with the SKC and SKI teams several times a week. Although it's been a brief period since the announcement, we haven't seen any differences compared to before. We remain hopeful for a resolution, and many are supporting that potential outcome.

Yes, I would expect the same in that. That's good to hear. It sounds reassuring. And then just turning to 2021 guidance, John, for this adjusted EBITDA range, negative $8 million to $12 million. Should we think of that as partner reflective of incremental $6 million of EV-related spending? Is that what you're trying to tell us? And will that $6 million be entirely captured within R&D?

Actually yes. So the $6 million is included in the $8 million to $12 million guidance, negative guidance. It is not all in R&D. Some of it is actually captured in cost of sales associated with the build-out of the advanced thermal battery fabrication facility. We need to hire people, fabricators; we have equipment that we need to run and operating expenses associated with that fabrication operation associated with that principal contract we have with the North American EV manufacturer.

Got it. That makes sense. Thanks for fielding my questions.

Thank you, Tom.

And your next question comes from Amit Dayal from H.C. Wainwright.

Thank you. Hi, guys. Appreciate you taking the question.

How are you?

Good. Thank you. On the EV side of the story, can you talk about margins for the EV segment potentially that you are anticipating versus what you might be generating for infrastructure implications?

Yes. John, do you want to take that?

Yes. Well, we talked at the time we announced that contract back in our third quarter earnings call, about 55% of the revenue associated with that contract will be for our PyroThin aerogel materials. Our margins on that component of the revenue are strong. They are in line with what we're seeing on the energy infrastructure side and, if anything, a bit at the high end of that range. The other component, the other 45%, is fabrication, and for the fabrication, its much lower margin. So in the aggregate, we would expect a lower margin on that business. But I think as Don alluded to earlier, the capacity that we could generate out of the East Providence plant increases from $200 million to up around $250 million. The best way to think about it is we will still generate gross margins close to 30% at full capacity in the East Providence plant. We would still expect to generate adjusted EBITDA at capacity in the East Providence plant of about $35 million. All the changes, as it will see slightly higher revenue out of that facility, but the profitability and the cash generation haven't really been changed by that business.

Understood. Thank you for that. Really appreciate it. And you're getting to roughly single-digit million revenues from the EV opportunity in 2021 and 2022. Is there growth in that single-digit millions between 2021 and 22? Or are you sort of just getting used to flying with the first two years? Give us some color on how that plays out, please?

It does. It basically doubles from one year to another, but still single-digit million. So I want to keep that in perspective. It’s entirely consistent with the rollout of electric vehicle models for this particular player. When you look across the industry, we're starting to see some new 2022 models, but really, most of the OEMs I've talked about 2023, 2024, and 2025 models coming onto the market. So, from having one or two in sort of their launch year to three, four, five and six, and then ultimately, you know, 15, 20 and 25 vehicles, electric vehicles coming off of their lines. The exact ramp of that is consistent with our projections from the design win that we had with the North American entity. So as we say, single digits in 2021, doubling that, but still being in single digits in 2022. And as I said, in 2024, and through the rest of the decade, up in the $150 million range. And 2023 is that substantial ramp year as we move to those much higher numbers. Just think of it as kind of maybe getting halfway there kind of thing for the ultimate ramp.

Understood. Yes. That's all I have. My other questions were asked. That's all my question. Thank you so much.

Thanks, Amit. We'll talk to you later.

And your next question comes from Doug Becker from Northland Capital.

Hi, Doug.

Thanks. I was just hoping to get a little more context on the $225 million in revenue target and the 30% gross margin. Is there clear visibility to that number? Or is it based more on a top-down assessment of the opportunity? And what type of fabrication revenues are included in that, as you were just alluding to that are at a lower margin?

Let me talk about it one level, and then John maybe can go to a little bit more detail. It’s comprised principally of two major components is the way we're thinking about it. One is from the single North American automotive OEM. Again, these are their projections and what we’re using in this case. The other assumption is that we recapture our 2019 revenue level in our energy infrastructure business. When you put those two things together, you get up very close to that $225 million level. We also have the sustainable building materials activity, and a variety of other small sources of revenue. But those are the two principal components of the $225 million. John, when I was talking, did you figure out that portion of that that would be a fabrication?

Yes, we'll do the calculations. This is just an estimate, and I don’t want to be held to it. If we consider the peak energy infrastructure revenue of $225 and $140 from 2019, subtracting that from $225 leaves us with $85 million related to the EV thermal barrier business. Earlier, we mentioned that 55% of that would come from the sale of aerogel blankets and the rest from fabrication. This suggests we could be looking at around $190 million in silica aerogel blankets revenue for 2023, which aligns with the capacity of our East Providence plant. The economics, as we've consistently stated, have remained stable, and we anticipate a gross margin above 30% from that plant, generating significant cash flow during that period.

And Doug, let me just add one thing to that. It's an interesting question. Let me explain what's not included in that number. It assumes a 2019 level of revenue from our energy infrastructure business. We believe that 2022 and 2023 are post-COVID years and we anticipate recapturing that revenue level during that time. We also expect to continue growing that business. As I mentioned earlier, we achieved a revenue CAGR of over 20% from 2008 to 2019, with a remarkable 34% growth in 2019 alone. Additionally, there's not much consideration for potential RFQ wins from companies comparable to the one we've already secured. We are confident that we will be the technical leader and the industry standard in thermal barriers. We would be disappointed if we were not involved in more battery platforms than the one we currently have.

Understood. A 30% gross margin suggests incremental gross margins of around 45%. I want to confirm that this is feasible even with certain fabrication components operating at very low margins due to capacity utilization.

Yes, absolutely. We anticipate two things. We'll get the incremental 45% that we talked about for a long time as the incremental gross profit per dollar of aerogel blanket revenue. We also anticipate that we have continued effort ongoing to improve our bill of material cost as a percentage of sales. So we'd expect a bit of a margin enhancement there from that. It would offset the degradation in margin associated with the fabrication component of revenue.

Got it. Thank you.

Thank you, Doug.

And you have follow-up question from Jed Dorsheimer from Canaccord.

Hey. Thanks guys. Just a real quick one here. So just on the Biz Dev side of things, can you convince me why your insulation that's being used for oil and gas wouldn't be used in a hydrogen reaffirmation application?

We are exploring that issue. We wanted to get our thoughts aligned before we put it into any presentation. We are looking at that as a potential use for our materials. There are obviously very great similarities between that hydrogen work and other work that we do in the industrial area. So standby on that, I know it’s a very topical question and we want to really make sure we're focusing on it in the right way and express carefully what we think our role could be in that space. We'll definitely do that.

Got it. Let me just rephrase the question slightly. From a thermodynamic perspective, your insulation is going to give properties that would either be beneficial in terms of high-temperature heat, but also low temperature too. So I'm operating it at 260 degrees below Fahrenheit and having the thermodynamic benefits of your foam and the lack of air penetration, hermeticity if you will, which still have the same beneficial properties, correct?

You're exactly right. And we're perhaps more focused right now in the cold side of that equation. I think for the reasons that we are doing very well in the LNG space today might be the reasons why we do well in the hydrogen space coming down the road. Yes. Thank you, Jed.

Thank you, Jed.

And there are no further questions in the queue at this time. And I would like to turn the call back over to Don Young.

Thank you. Hey, we appreciate everyone's interest in Aspen Aerogels. We look forward to reporting to you our Q1 2021 results in late April. Thanks for joining us tonight. We look forward to seeing you then. Be well. Take care.

This does conclude today's conference call. Thank you for participating. You may now disconnect.