Aspen Aerogels Inc Q2 FY2024 Earnings Call

Good morning. Thank you for joining the Aspen Aerogels, Inc. Q2 2024 Financial Results Call. I will now turn the conference over to your host, Neal Baranosky, Aspen's Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may proceed, Mr. Baranosky.

Thank you, Elissa. Good morning, and thank you for joining us for Aspen Aerogel's Second Quarter 2024 Financial Results Conference Call. With us today are Don Young, President and CEO; and Ricardo Rodriguez, Chief Financial Officer and Treasurer. The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA. The reconciliations between GAAP and non-GAAP measures are included in the back of the presentation and earnings release. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review disclaimer statements on Pages 1 and 2 of the slide deck as the content of our call will be governed by this language. I'd also like to note that from time to time, in connection with the vesting or pending expiration of restricted stock units and our stock options issued under our long-term equity incentive program. We expect that our Section 16 officers will file forms to report the sale and/or withholding shares in order to cover the payment of taxes and/or the exercise price of options. Lastly, I want to call out that next Tuesday and Wednesday, August 13 and 14, Don, Ricardo, and I will be hosting one-on-one investor discussions at Canaccord's 44th Annual Growth Conference. This event will also include a fireside chat with Don and Ricardo on Tuesday, August 13, from 8 to 8:25 a.m. EST. On Wednesday, September 4, the company will host one-on-one investor discussions at the Barclays 30th Annual CEO Energy Power Conference in New York. And finally, on Tuesday, September 24, the company will host one-on-one discussions at Oppenheimer's Innovating Sustainability Summit to be held virtually. I'll now turn the call over to Don.

Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q2 2024 earnings call. My comments will focus on Q2 and first-half performance, 2024 full-year outlook, and the status and expected impact of several key elements of our strategy. Ricardo will dig deeper into our financial performance and outlook and our business strategy. As Neal indicated, we will conclude with a Q&A session. We operated very well in Q2. The strong execution leveraged and extended the momentum that we built throughout 2023, and during Q1 of this year. The performance is reflected in the Q2 financial results and in the higher 2024 revenue and adjusted EBITDA outlook, our second beat-and-raise quarter of the year. Quarterly revenue grew to $118 million, which was accompanied by a 44% gross profit margin. Adjusted EBITDA grew to $29 million, resulting in an adjusted EBITDA margin of 25%. Quarterly revenue and gross profit were at record levels in both our Energy Industrial and EV PyroThin thermal barrier businesses. We are well-positioned to be net income positive for 2024, an important milestone for the company. Our profitability metrics are driven by leveraging our fixed assets and controlling expenses. Our operating facilities are emphasizing important safety, operational, and financial objectives and are producing outsized value for Aspen and our customers. The gross profit margin over the past six quarters has expanded from 11% to 17% to 23% to 35% to 37% and now to 44%. Our adjusted EBITDA margin over the same six-quarter period has grown from negative 31% to positive 25%. Comparing the second quarter of 2024 to the second quarter of 2023, revenue increased by approximately $70 million and gross profit grew by approximately $43, dropping 62% of incremental revenue to the gross profit line. These results demonstrate the power of leveraging growth through our focus on unit economics and cost controls, both key elements of our business model. We believe we can continue to improve our performance. As demonstrated above, driving incremental revenue through existing capacity is extra valuable in terms of our profitability metrics, especially as we continue to improve yield throughout the manufacturing and parts assembly processes. The transition to supplemental supply in support of our Energy and Industrial business is also strengthening our gross margin expansion. Our External Manufacturing Facility or EMF supplied 10% of our Energy Industrial revenue in Q4 2023, 50% in Q1 2024, and over 75% in Q2. Over these three quarters, our Energy Industrial gross margin grew from 32% to 42%. We anticipate that the EMF supply percentage will continue to grow as we more fully dedicate our East Providence plant to the thermal barrier business. Energy Industrial activity remained strong across all regions and segments, including significant growth of Cryogel products serving the LNG industry. Since the launch of Cryogel products in 2007, 29 facilities globally have been built or converted for LNG export. Aspen's Cryogel is being used on 23 of these facilities. We have also won our first two carbon capture projects, where our Cryogel products deliver high-performance thermal management. These important wins reinforce our role in sustainability and introduce an additional high-potential segment to our Energy Industrial business. We are confident that our Energy Industrial team will ensure consistent, long-term, and highly profitable growth for the company, projecting a record year in 2024 with at least $150 million in revenue and gross margins surpassing our initial 35% target. Our medium-term goal is to double the business and create a reliable source of revenue and profits. At the beginning of the year, we anticipated revenue of $350 million and adjusted EBITDA of $35 million, which we later increased to $380 million and $55 million during our Q1 earnings call. Mid-year results and the momentum of both businesses have allowed us to again raise our revenue forecast for 2024 by $10 million to a minimum of $390 million and our adjusted EBITDA outlook by $5 million to at least $60 million. As always, these expectations are based on baseline figures, and our aim is to surpass them. In fact, we see an opportunity for over $50 million of additional revenue potential, particularly within our EV PyroThin Thermal Barrier business. In Q2, we received our sixth design award from a major EU battery manufacturer to provide the next-generation battery platform for Porsche, the luxury sports car brand in the VW group. This manufacturer has delivered more than two million battery systems since 2019, and the battery platform is set to support multiple Porsche models with production expected to start in 2025. Our electric vehicle commercial activities are currently at their highest levels. In Q3, we plan to deliver over 100,000 prototype or preproduction parts across more than a dozen programs in our development pipeline. We are also in the final stages of contract negotiations with a major European OEM, which we expect to be formally awarded in the third quarter, making it our seventh design win. Additional OEM EV Zero programs are also anticipated this year, enhancing our position in the Electric Vehicle market. Regarding our engagement with General Motors, GM confirmed in its Q2 earnings call its goal to manufacture between 200,000 and 250,000 EVs in 2024. IHS reported the production of 108,000 Ultium-based EVs in the first half of the year, with expectations for a ramp-up in the second half due to new vehicle launches. For our planning purposes embedded in our 2024 forecast, we expect GM to produce 180,000 LTM-based EVs for GM models, along with an additional 45,000 Ultium-based EVs for Honda and Acura. As Ricardo will elaborate on, the sell-through rates in July were impressive and support our expectations for the year. The potential increase in our revenue outlook mentioned earlier is mostly contingent on GM successfully ramping up production to its target. We are fully prepared to meet GM's demand for PyroThin Thermal Barriers if they achieve or exceed their production goals. We believe our strategic achievements, both in commercial and operational aspects, guide us toward effectively leveraging our capacity and supply systems to achieve our interim baseline targets of at least $650 million in revenue, $230 million in gross profit, and $160 million in adjusted EBITDA. Our financial results for the first half of 2024 strongly support these profitability objectives. We are implementing three key elements of our strategy to meet our revenue and profitability targets: first, fully converting Plant 1 in East Providence, Rhode Island, to enhance the PyroThin Thermal Barrier business; second, transitioning to our external manufacturing facility to support the energy industrial business growth; and third, maintaining financial stewardship to strengthen the company's capacity to reach our interim and long-term goals. Regarding financial strength, we ended Q2 with over $90 million in cash, just $10 million lower than at the end of Q1. With the positive momentum from our recent performance, we now expect to achieve at least $60 million in adjusted EBITDA and positive net income for the full year 2024. As we plan for revenue beyond $650 million, we are focused on our second Aerogel manufacturing facility in Georgia, which will add approximately $1.2 billion of revenue capacity by 2027. Several months ago, we announced that the U.S. Department of Energy Loan Programs Office invited Aspen into the formal due diligence and term sheet negotiation stage of the process. This loan application is one of the key drivers for restarting the construction of Plant 2. We have made steady progress with the Loan Programs Office. While we do not have assurance that the DOE will issue a conditional commitment, we remain deeply engaged with the LPO and its advisers and continue to believe that we are a strong candidate to partner with the DOE LPO in this program. We believe that we are in the final stages of the due diligence process. If we are successful, the next step would be a letter of conditional commitment. We expect to be able to provide additional details at the time of our next quarterly earnings call. Ricardo, over to you.

Thank you, Don, and good morning, everyone. This quarter, we reported another record-breaking quarter on behalf of our team, starting on Slide 4. We delivered $117.8 million of revenue in Q2, which translates into 145% growth year-over-year and 25% growth quarter-over-quarter. This reflects an annual revenue run rate of over $470 million. Most importantly, we believe that operating at this run rate demonstrates the scalability of our asset base and validates that it was only a matter of time before demand caught up with our team's ability to deliver what we've been laying out for over a year. Our energy industrial revenue was $36.9 million, an increase of 4% year-over-year and a 27% increase quarter-over-quarter. $20.3 million was delivered through our external manufacturing facility, which has nearly doubled its ability to supply product quarter-over-quarter and is well on its way to enable us to deliver over $150 million of revenues in this segment as we close out the second half of 2024. As Don mentioned in his remarks, the applications, recurring maintenance, and new projects continue driving excess demand, and we are incentivized to continue increasing supply in this segment. EV thermal barrier revenue of $80.8 million was up more than six-fold year-over-year and 24% quarter-over-quarter, reflecting a higher-than-expected ramp in GM's production of Ultium platform-based electric vehicles and higher volumes from Toyota, Scania, and more preproduction parts for Audi. Our prototype and preproduction part volumes continue to exceed those from the prior quarters. Next, I'll provide a summary of our main expenses. The cost of goods sold of $66.2 million, or 56 percentage points of sales, reflect relatively flat material costs quarter-over-quarter, but a significant improvement in conversion costs as a percentage of sales. Let's remember that we define conversion costs as all production costs required to convert raw materials into finished products. These include all elements of direct labor, manufacturing overhead, factory supplies, rent, insurance, utilities, process logistics, quality, and inspection. The higher revenue levels and our team's ability to scale and deliver lowered our cost of goods sold by 7% quarter-over-quarter. This is an 18% improvement in our ability to deliver gross profit from lower conversion costs, which tended to make up around 30% of our sales. So the effect of the team's focus on optimizing our capacity, introducing automation, and improving production yields among many other things is materializing faster than expected. We also believe this improvement could continue if revenues ramp further, with each incremental dollar of revenues above Q2's revenue level bringing over 50 percentage points of sales as gross profit regardless of mix. In Q2, company-level gross profit margins were 44%, and our gross profit of $51.6 million is a $43.2 million improvement over our gross profit of $8.4 million during the same quarter last year. Our Energy Industrial segment delivered $15.5 million of gross profit or a 62% year-over-year increase on comparable revenues. In EV thermal barriers, we delivered $36.1 million of gross profit in Q2. The resulting gross profit margins during the quarter were 42% and 45% for our energy industrial and EV thermal barrier segments, respectively. Most of the one-time charges of obsolete inventory and equipment related to customer-driven engineering changes that we implemented in Q1 were reversed in Q2 as we receive the benefit of those changes and the reimbursement from customers. With this in mind, the best way to look at the profitability of our EV thermal barrier business is by looking at the results of the first half rather than each quarter separately. Operating expenses, which are sized for our near-term projected annual revenue capacity of over $650 million, were at $31.6 million in Q2 were down by $1.1 million quarter-over-quarter. This would have been even lower without several one-time expenses linked to performance pay, recruiting, and talent development. Higher than expected insurance costs also drove OpEx to these levels. We will continue managing OpEx in the second half of the year, and we'll focus increases on driving incremental demand and profitability only. Our team continues to visit every key company process and implement new systems with the intent of bolstering our capabilities, reducing fixed costs, and driving our OpEx towards the recurring $110 million per year level. Putting these elements together, our adjusted EBITDA was $28.9 million in Q2 compared to negative $10.8 million during the same period last year. Delivering 25% EBITDA margins in Q2 this year at the current revenue run rate, more than validates the planning and execution of the gearing that we defined over a year ago. As a reminder, we define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation, and any other nonrecurring items that we do not believe are indicative of our core operating performance. In Q2, these adjustments were limited to $3 million of stock-based compensation, $1.1 million of interest income, and $2.3 million of interest and financing-related expenses. Our net income in Q2 increased to $16.8 million or $0.21 per diluted share versus a net loss of $15.8 million or $0.22 per diluted share in the same quarter of 2023. We could not be more excited about reversing this loss in 12 months' time. Next, I'll turn to cash flow and our balance sheet. Cash generated by our operations of $6.8 million reflected our adjusted EBITDA of $20.9 million, interest income of $1.1 million, and $23 million used for working capital. The key items that resulted in the usage of working capital were an increase in accounts receivable and inventory, offset by an increase in accounts payable, prepaid and accrued expenses. If we counted revenue collected from customers of $28 million in the week after closing the quarter, we would have generated free positive cash flow. Our capital expenditures during the quarter were $24.8 million. These put our operating cash needs for the quarter at $18 million, down by 59% quarter-over-quarter from $43.6 million in Q2. Again, if we included the revenue collected during the week after we closed the quarter, we would have generated over $10 million of positive free cash flow. In Q2, we spent $12.3 million toward slowly advancing progress to fully enclose the main structures at Plant 2 and temperature control in all areas. To date, we have incurred $300.2 million in cumulative expenses through the end of the second quarter towards Plant 2 in Georgia, to position the project for a potential restart of construction after we've obtained conditional approval from the US Department of Energy's loan programs office as part of our application to fund the remaining construction cost of Plant 2 through a loan pursuant to the DOE's advanced technology vehicle manufacturing or ATVM loan program. The remaining CapEx spent in the quarter of $12.5 million went towards additional improvements at our aerogel plant in Rhode Island and EV thermal barrier equipment in Mexico that will enable the potential continued ramp of our business in 2025. Our financing activities in the quarter included an $8.1 million release through the exercising of employee stock options that were close to expiring within our equity compensation plan. Looking ahead, we continue pursuing capital leases to fund a meaningful portion of this year's remaining CapEx outside of Plant 2, which I'll go into when we discuss our updated outlook. We ended the quarter with $91.4 million of cash and shareholders' equity of $517.8 million. We continue to meaningfully work our way through the due diligence and term sheet negotiation phase with the US Department of Energy's loans programs office as part of our application to fund the remaining construction costs of Plant 2 through a loan pursuant to the DOE's advanced technology vehicle manufacturing or ATVM program. In the appendix, we have a graphic of the different phases of the DOE's application steps and details on the work streams that make up the due diligence and term sheet negotiation phase and our progress within these. As our operating performance improves, we continue assessing relatively inexpensive debt options that have become available. These include asset-backed loans, term debt, and a potential revolving line of credit to support our business. We expect to end the year with a capital structure aimed at continuing to lower our cost of capital and making sure that we have the flexibility to fund a potentially faster-than-expected but very profitable ramp in our business. Now I'll turn over to Slide 5 and walk through our updated thoughts on the outlook for the rest of the year. I'll focus on the EV thermal barrier segment, as Don covered our Energy Industrial segment in his opening remarks, and we have a very clear line of delivering at least $150 million of revenue there this year. We remain sold out and revenues there depend on our ability to increase broad supply of all our product variants. With two quarters of EV production behind us, we could not be more impressed by the launch of the Honda Prologue, a vehicle that we weren't expecting to launch until later in the year. We believe that Honda is a very attractive product here being produced by General Motors. Everything about the way this vehicle was launched, from the product plan, the timing of the advertising blitz, pricing, and availability seems to be working in the US marketplace. In July of this year, almost 3,500 of them were sold, and we expect that the annual sales run rate of 42,000 units will increase as the year progresses. With this in mind, we think it's worth splitting the Honda Prologue along with the Acura ZDX from the rest of the GM production volumes in our outlook as we show here on the left side of Slide 5. We expect at least 45,000 of these to be produced in 2024. GM continues ramping up production of a broad range of other Altium-based nameplates. In mid-June, it revised its external 2024 Altium production forecast from 200,000 to 300,000 units down to a range of 200,000 to 250,000 units. This trimming of the upper end of their production goals does not impact our outlook, and we are actually revising our baseline production outlook of GM's Altium vehicles down by 10% from 200,000 vehicles to 180,000 vehicles to be safe. GM can still very well exceed 180,000 units as it ramps up production in the second half of the year of nameplates like the Equinox and Silverado. At the same time, we expect to launch the GMC Sierra EV, the Escalade IQ, and the Cadillac OPTIQ. We continue to believe that GM's established brands with long-running customer loyalty, along with the size and scope of its distribution scale, can enable it to drive sales beyond these expectations. Putting GM and Honda's accurate volumes together, we now expect to supply over 225,000 vehicles and enable our EV thermal barrier business to deliver over $240 million of revenue in combination with Toyota, some initial Scania and Stellantis volumes, along with a high level of prototype sales. A question that we get often from investors is centered around the sell-through of EV production and whether we see risk in it affecting GM's production long term. In the center of Slide 5, one can see that in the U.S., the sales rate of Altium-based vehicles grew by about 50% in July over June to 156,000 vehicles per year. Through the end of July, we believe that around 45,000 vehicles have been sold, and if July sales rates were to stop growing, over 110,000 vehicles can be expected to be sold in 2024. To support sales of 225,000 vehicles, dealers would still need around 60 days of inventory on hand or 40,000 vehicles at least. This inventory may need to be even higher to support many different vehicle nameplates. So to confidently produce over 225,000 vehicles in 2024, only around 75,000 incremental vehicles beyond the July sales rate need to be sold within the year. We believe that this is achievable, especially as attractive lease incentives are offered to consumers, and therefore, we continue to see very profitable upside to our business baseline outlook. A vehicle like the Chevy Equinox, which is now the most attractively priced EV in the U.S. market, could drive most of the incremental unit sales required in the second half of the year. We also continue seeing some investors attempt to connect our customers' volume plans to our revenues, and we strongly advise against this as there is a significant delay of weeks or even months for a finished EV thermal barrier part that we invoice customers for to end up in a produced vehicle. This delay is even longer for our sold vehicles. We continue to include in Slide 12 in the appendix of this presentation to illustrate this, and we recommend studying it and reaching out to Neal if you have any questions. For reference, on Slide 5, we are also showing IHS' expectations for what the LTM production ramp looks like in the second half of 2024 versus the first half of the year to get to a total of 244,000 units. While time will tell whether 244,000 units in 2024 is the right expectation, we believe that an increase going into the first half of 2025 is still likely. Turning over to Slide 6. Combining both segments results in a total revenue outlook of at least $390 million, which would be a 63% year-over-year increase from our revenues in 2023 and a $10 million increase over our prior revenue baseline for 2024. With this updated baseline, we believe that we can deliver over $16 million of operating income in 2024, a 45% improvement over our prior EBIT baseline of $11 million, which, assuming D&A of around $30 million and stock-based compensation of $14 million, would translate into over $60 million of adjusted EBITDA. This is a 9% improvement over our prior baseline EBITDA outlook, and it implies 50% EBITDA margins on the incremental $10 million of revenue, demonstrating our ability to continue scaling profitability without relying on outsized revenue growth. Our updated 2024 EBITDA outlook continues to consider some potential headwinds to our near-term profitability, such as the cost of new launches, higher power prototype sales, engineering changes that could lead to inventory obsolescence, and expedited freight costs driven by the start-stop nature of some of the nameplates in our thermal barrier demand. We could also opportunistically decide to add OpEx to continue advancing our R&D in key areas and accelerate the development of our technical sales capabilities and fund new program launches. As we reintroduced the rest of our energy industrial products, a mix that includes these products can also impact gross profit in this segment. On the flip side, if additional demand is truly there, we expect a disproportionate amount of it to flow to our bottom line as it did in Q2, and our team will continue reducing our fixed costs, increasing our production yields, uptime, and driving the right energy industrial pricing and mix. Continuing with the rest of our 2024 outlook, $60 million of positive EBITDA would translate into net income of over $7 million or $0.09 per diluted share, assuming a share count of 79.3 million shares. We are increasing our net income outlook by $5 million or over 3.5 times. On our diluted EPS outlook by $0.06 per share from $0.03 per share, or threefold. Our CapEx without including Plant 2 is expected to be reduced by $5 million to $45 million from $50 million for the year, thanks to our team's ability to deliver a higher level of uptime from our EV thermal barrier equipment in Mexico. We continue to believe that this investment is enough for us to ramp up our production capacity in 2025. As I mentioned earlier, we only spent $20.5 million in the first half of the year towards advancing the construction of Plant 2 in Georgia versus our original expectation of $30 million. Looking ahead, we are not planning to spend more than $15 million advancing the construction of Plant 2 until we receive potential conditional approval on the loan pursuant to the DOE's advanced technology vehicle manufacturing or ATVM program. This investment will still ensure that the site is advanced enough to preserve all our investments made to date, and it enables the potential reacceleration of construction in the fourth quarter of this year. On the right side of Slide 6, before moving on, I think that it's worth pausing again and taking stock of the operational and financial journey that our team has been on over the past 2.5 years. The basic metrics of revenue growth, gross margins, EBITDA, and operating income that had to be up and to the right are surpassing our initial expectations, thanks to the work of everyone on the Aspen team that continues doing more with less and sharpening our acts by developing new capabilities. I couldn't be happier with our performance progression, and I'm excited to see it lower our cost of capital in real time as we continue creating opportunity for the same team that got us here and our company. Next, I'd like to please turn over to Slide 7. Before handing the call back to Don, we thought it's important to take a look at what's happening in the US electric vehicle market, which our in-production OEMs mostly participate in, so that we aren't rattled by the day-to-day headlines. There just doesn't seem to be an even keel out there. So we spent some time looking at the year-to-date market ourselves. Let's just face it. The US EV market didn't grow year-to-date through the end of July relative to last year in the US. It's only up around 1%, which is comparable to the growth rate of overall new vehicle sales. We foresaw this in early 2023 as we were planning for 2024, considering the effect of rising interest rates. This fact is a key ingredient in developing our 2024 revenue baseline. Still, though, EVs made up around 7% of the market, and over 1.3 million EVs are expected to be sold in the US this year. So this has become a meaningful part of the market. Within it, there are some obvious share winners and losers. And as we started our EV thermal barrier business from zero in 2021, supplying newly developed platforms and nameplates, we are benefiting from the demand gains of the OEMs that we supply. PyroThin is equipped on six out of ten new EV nameplates that have been introduced in the US in 2024, and those vehicles that were developed before we had a sell-to-sell solution are aging and losing share versus a range of fresh nameplates from OEMs that are gaining share. At this point, PyroThin is equipped on 100% of EVs sold by GM, Toyota, and Honda in the US. These OEMs are only scratching the surface of what their share can be relative to their overall position in the new car market and the scale of their distribution. We believe that they will continue making gains as they launch new nameplates and offer attractive incentives on these vehicles to drive volume. The need to produce EVs at a rate that properly enables the absorption of fixed manufacturing costs is, in our mind, expected to drive production rates in the second half of 2024 more than demand. I'll let you spend more time with this slide on your own time. But when we look at the EV market in 2024, we continue seeing opportunities for additional sell-through within the OEMs that we supply, thanks to an interesting circular reference of higher production volumes needed to deliver profitability and higher incentives needed to drive those volumes. Thinking longer term and moving to slide 8, it's worth remembering why OEMs built up all of this capacity to make EVs in the first place. Understanding the regulatory environment in the U.S. around emissions and fuel economy standards is important. As a guided investment that was made over the last four to five years within OEMs in preparation of tighter standards that will ramp up this next year. I won't bore you with all the details, but U.S. new vehicle emissions and fuel economy regulation is driven by 2 major federal regulatory agencies: the Environmental Protection Agency or EPA and the National Highway Traffic Safety Administration or NHTSA. At the state level, for 18 states that make up over 40% of new vehicle sales, including California, this is driven within the California Air Resources Board or CARB standards. Neal would be happy to point you in the direction of good reading material to understand these standards in detail. These agencies can enforce fines, sue, or enforce penalties on OEMs who do not comply with their standards, and, therefore, impact the profit potential of currently lucrative sales. Focusing on the EPA, when looking at 2026 to be minimally compliant with these regulations, the industry would need to reach roughly 15% EV sales mix, up about 7 percentage points from the current penetration or more than doubling. This includes the exhaustion and rollover of emissions credits purchased or generated from the sale of EVs in prior years. General Motors, for example, would need to quadruple the EV penetration from 4% in July of 2024 to around 16% by 2026 to be barely compliant. It's estimated that Ford would need to triple its current EV mix to barely comply with the EPA's submissions regulations. If we go to what will be our next most important market after the US, Europe, the CO2 emissions there get even more stringent for OEMs, and that is why we see a lot of new programs from those OEMs in our core pipeline. As we built up our thermal barrier business, we've met not only with teams inside the OEMs that are working to address thermal runaway in batteries for all form factors and chemistries but we've also met with planning teams that are making sure that OEMs are positioned to comply with these regulations in 2025, 2026 and beyond. OEMs take these regulations more seriously than one would think from reading the press or investor relations materials. This continues giving us the conviction to keep investing in this market, particularly now that our operating model is being validated quarter after quarter. And with that, I'm happy to hand the call back to Don. Thank you for your attention and support.

Thank you, Ricardo. While we operated well in Q2 and for the first half of 2024, we believe we have room to improve upon our record financial performance as we continue to focus on leveraging fixed assets, controlling expenses, and executing key elements of our strategy. The Aspen team has done an outstanding job and the team is positioned to continue to win. Elissa, let's turn to Q&A. Thank you.

The first question comes from George Gianarikas with Canaccord Genuity. Your line is now open.

Hey everyone. Good morning and thank you for taking my questions. I'd like to focus on the gross margin upside. I mean, you talked a little bit about how you got there, but maybe just a little more detail as to what's driving that improvement and also your view on the sustainability of that. Thank you.

Yes. So as I mentioned in my remarks, in terms of material costs, we just don't think that there's a lot more room left to squeeze. Those have settled out at levels that that we were surprised by two quarters ago. And it's very encouraging to see that trend continue. And as we renew some of the contracts for raw materials, they're all shaping out to end up at around the levels that we've seen here over the past two quarters. Now, when it comes to fixed cost absorption, we believe that there's still quite a bit of juice left to squeeze up to a point. It really depends on the revenue mix that we have as we ramp up some of the other EV launches; I think the launch phase tends to be relatively expensive, as we saw here with General Motors throughout 2022 and the beginning of 2023, and so those will impact the gross margin to a point. And then at the same time, on the energy industrial side, as we start ramping up production of Cryogel, that doesn't have the same gross margins as some of our higher running products. I do think that remark that I made of basically incremental revenue beyond the run rate of this quarter, coming in at about 50 percentage points of gross margin broadly is the right way to think about this. Obviously, until we find some other breakthrough in efficiency, which still would require quite a bit more development, and we don't have line of sight to that just yet.

I think I would just add to what Ricardo said. We still have room to improve our performance, particularly as we drive yields in our Aerogel manufacturing facility and parts assembly activities. There is definitely an opportunity for improvement there. As that gross profit translates to EBITDA and EBITDA margin, we currently have the OpEx structure in place to support further growth. Ricardo has mentioned multiple times our focus on maintaining our current level of costs and OpEx. This allows the gains in gross profit to contribute to EBITDA gains as well. We believe there is an opportunity to sustain these margins, as Ricardo described.

Yes. I mean, frankly, George, our minds are starting to shift from being excited about gross margins to being excited about what ultimately matters, which is operating income, net income, and targeting generating positive free cash flow. And there, given, as Don said, given the OpEx, it doesn't take a ton of incremental gross profit to increase those metrics by multiples, right? Which is sort of implicit in the updated guide, which was pretty modest. But to increase our net income per share threefold, that to us is the ultimate measure of profitability.

Thanks. And maybe just as a follow-up, I'd like to focus on Energy Industrial, where relationships in China appear to be going well. Any update there? Any potential for that revenue capacity to flex higher over the near to medium term? Thanks.

The relationship is strong, and the cooperation is also strong, making it a mutually beneficial relationship. Yes, they have the ability to expand their capacity. We believe there is potential for growth, although it may not significantly impact 2024 beyond the numbers we've shared so far. However, as we move into 2025, our team is focused on doubling the size of that business in the medium term. It serves as a valuable source of both revenue and profit for us. We are currently in discussions with our manufacturing partner to execute this strategy.

Yes. I mean, our run rate within the baseline guide, our run rate needs to increase to over $42 million a quarter here in the second half in order for us to get to $150 million. And so we're obviously very incentivized to increase that supply, and that's implied within the baseline.

We're still trying to keep up with demand, especially in certain areas of that business. We've recently secured two carbon capture programs in North America, which I believe present a promising opportunity for us moving forward in the medium term.

Thanks.

Thanks, George.

Thank you. The next question is from line of Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much, guys. Given the cadence of what's going on in the industry and certainly some other suppliers looking at the opportunity and your success, can you talk a little bit about the competitive landscape and what you're hearing and seeing from customers and of those folks that may try to wedge into this market?

We are not observing competitors attempting to enter the market, particularly in light of the current headlines. Those supplying components to EV manufacturers, or those who began sourcing as we were just initiating other areas of the EV value chain, are re-evaluating their investments in the EV sector. While this market appeared very appealing a year ago, it no longer seems so for them. This situation actually provides us with the opportunity to steadily convert more customers. In the U.S. market, we've noted that we are featured in six out of the ten new models introduced and we wonder why we aren't part of the other four. The reason is that we were not involved during the development of those vehicles. As Don mentioned and I reiterated, the facility we are currently in, which focuses on our EV thermal barrier prototypes, is busier than ever as we ramp up new initiatives. We intend to continue pursuing this, even if some of these projects get delayed by the OEMs. We believe that our discussions about the regulatory environment help clarify our position as we look towards 2026. These models need to be launched, and incurring fines is costly for the OEMs. We are aware of teams working on optimizing their plans as they develop their product strategies. There is a reason they are still investing in some EV capacity, albeit at a slower pace. Currently, we do not see other competitors addressing these three requirements.

That's super helpful. And then thinking about where some of the growth is coming from as you see that you start to ramp more capacity and guys continue to perform well there with customers. How do you think about serving that market, especially given the success that you've had with the contract manufacturing and the energy market? Is that something we should be thinking about as part of the long-term model?

I mean I think we're incentivized to leverage the facilities that we have in Mexico as much as possible, right? The scalability that the overhead there delivers is incredible. If I just think to a previous life and the notion of ramping up facilities in Europe, that's a really hard place to make stuff in. You almost need to go to Eastern Europe or places like Morocco, Tunisia, and even there, the costs are rising. So we're inclined to really stick to our strategy here. If we are able to solve for the cost of capital for the plant in Georgia, we would ramp up Plant 2 right away to meet all of this demand that we expect in 2027 and 2028 and beyond. Then continue leaning into our assets in Mexico; we're actually setting up a warehouse in the Netherlands for some of these customers so that we could have some inventory near their production facilities. Given the profitability trajectory that we're on and the margin progress that we've made, we want to be very careful in expanding our footprint.

Super helpful. Thanks, guys.

You bet.

The next question is from the line of Ryan Pfingst with B. Riley. Your line is now open.

Hey, guys, thanks for taking my question.

Hey, Ryan.

Ricardo, just to follow-up on that last one. With the sixth OEM award for PyroThin and another expected in the third quarter, what's the strategy if and when that awarded volume in 2026 or 2027 or 2028 exceeds your expected $1.7 billion in revenue capacity after Plant 2 comes online?

Boy, that's an amazing problem to have. I'd love to be the CFO of the company. I mean, yeah, for us, the plant in Mexico still has an ability to ramp. Our current assets, last time we sized up our capacity, we mentioned that it was $650 million, but our team in Rhode Island continues finding additional efficiency. We're incentivized to find as much productivity and capacity as we can until Plant 2 comes online sometime towards the end of 2027. If we solve our cost of capital issue here for Plant 2, the strategy is the same. Let's just ramp up Plant 2. We do think that there may be room in 2025 and 2026 to get all of these programs together. It will be tight, but get all of these programs fulfilled out of Rhode Island and potentially supplemented with some material from our external manufacturing facility for selected programs. But that would be a great problem to have. We just want to take it one step at a time. I think the most immediate one is solving for the cost of capital to get Plant 2 in Georgia restarted as soon as possible. Our team in Mexico and our teams in Rhode Island continue finding additional capacity. As those improvements are demonstrated, it's fair to expect us to revise our capacity update from $650 million of capacity to something that can bridge the gap to when Plant 2 comes online potentially.

Got it. Makes sense. And then maybe just a second question on something a little more near term. Ricardo, could you potentially go a little deeper on the working capital dynamics and your expectations for collections and inventory here in the second half?

It really depends on the volume trajectory. So if we have to continue capturing additional demand beyond our baseline expectations, we would continue consuming working capital similar to what we did here in Q2. But at the same time, if the demand flattens out a bit on us, which is what's implied in the baseline very conservatively, then all of that working capital would reverse itself. We get paid pretty reliably within 45 days of when we invoice something. I think that overall, it's a net positive for cash flow generation. If demand increases and we have to flex up, we'll consume a little bit of cash like what happened here in Q2. But then if it doesn't, then our cash flow position would be potentially even better as the working capital reverses itself. We think we're sitting here looking at the second half favorably from a cash position. It's a net neutral in terms of working capital and collections. Our accounts receivable on the energy side is extremely tight. We've rarely written things off there. We sell to very legitimate and large customers, and we have no concerns on our ability to collect.

Great. Also, Ricardo, you mentioned in your script Ricardo, the possibility of a working capital line. Just to manage these things, I mean, we really managed through the first half of the year, our working capital without that kind of working capital line. So it's very possible we could do that, and I think it would be very normal for a business like ours to benefit from that.

That second point, Don. I mean I think we keep increasing our level of sophistication here. There’s the things that we are considering, such as the working capital line, our revolver. There's also factoring that we could do with our A/R to help free up cash flow earlier. We now have the margins and the reliability to be able to do that. With a little bit of insurance, we could do fairly cheap factoring as well. We’ve got plenty of options to fund what could be a very profitable expansion going into 2025.

Thanks, guys.

Anytime.

Thank you. The next question is from the line of Dave Anderson with Barclays. Your line is now open.

Hey. Good morning, Don. Only 13 years between earnings calls for me. A little bit changed here. I want to ask you about…

Yeah. Yeah.

I want to ask you about the bigger picture for your business over the next few years. There are concerns about EV demand in the U.S. and globally, as Ricardo mentioned, while domestic OEM manufacturers are just beginning to ramp up. I'm curious about how you view this and considering that GM is a key customer, what is guiding the pace of this ramp-up? Is it driven by EV sales and market demand, or is it more related to their manufacturing improvements? It seems to me that there are many worries about EV demand, but I’m not sure how significant that will be for your business in the next two to three years. Am I thinking about this correctly?

Yes, that's exactly right. That’s what we were trying to convey in our remarks. There is a combination of incentives and regulations influencing EV production. I would argue that these factors are more significant for the OEMs than the demand itself. Additionally, there's the challenge of OEMs' ability to produce cells, modules, battery packs, and vehicles, which is new territory for them. We see this occurring in Europe, where some companies that had high hopes of rapidly increasing capacity are struggling to produce their first batch of cells for vehicles, which is delaying the manufacturing of these programs. For instance, looking at an OEM like Ford, which has been producing EVs in the U.S., it’s reasonable to expect that for their next-generation products, they could scale up quickly given the current regulatory landscape and the EV portfolio they need to offer to sell vehicles from 2026 to 2030 and beyond. So that’s the key issue. OEMs generally don’t talk about this for obvious reasons, as it involves costs and capital investment, but they must produce EVs. Once they have the manufacturing capacity in place, they face the decision of whether to operate at a very low capacity with minimal output, which guarantees losses, or to provide certain incentives through leases. Leases can effectively drive volume for the OEMs without incurring significant expenses. They hope to utilize most of the capacity they have established and achieve gross profit. We believe that all OEMs will experience some sort of ramp-up phase, which will intensify in 2026 due to the fixed and variable costs that the regulations create.

I also think they're gaining experience and the market and the consumer is becoming increasingly comfortable and interested in these types of vehicles. As Ricardo mentioned, the Prologue during his remarks, it's a really attractive vehicle. GM, the Equinox is a well-priced vehicle, very stylish, great drive range. We have high confidence that they're going to get a good pull-through on that as well. Those things will reinforce themselves or the production as you cited. I also think there will be good demand for growing demand for these vehicles, especially some of the newer nameplates.

In your guidance, you mentioned a potential upside of $50 million for 2024. What factors influence that? Are you being conservative in your estimates, considering possible production issues for GM, which is reflected in your guidance? The upside seems to rely on everything going as planned. I'm curious about the difference between your current guidance and the potential upside. Is it primarily GM improving its internal processes that could impact this? Can you relate this to this year's guidance?

I believe there are two phases of potential growth within our baseline outlook. We are being cautious given GM's history with producing and selling these vehicles, which differs from Honda's approach of focusing on higher-end models. That's why we adjusted our baseline outlook to 180,000 vehicles for GM. If GM meets its goal of 200,000 vehicles, it could generate an additional $20 million in revenue for us during the year, potentially realized in Q3 or Q4. There's also the possibility of GM reaching 250,000 vehicles, which could bring in another $50 to $65 million in revenue. We want to manage our operations and expenses without concern about fluctuations in GM's production numbers. We take our baseline guidance seriously and would prefer to focus on running our business without worrying about GM's statements at investor conferences regarding their electric vehicle outlook. It's important to note that our analysis of OEM communications shows that the market is currently encouraging these companies to imply they are reducing EV production due to perceived impacts on profitability. However, EVs are critical for their long-term sustainability, especially for selling vehicles in the US and Europe starting in 2026 and beyond. While we remain optimistic about our long-term outlook, we need to be cautious about our short-term expectations regarding GM's production.

David, another source of potential upside is the energy industrial business, which I know you are familiar with, likely in the range of $10 million to $20 million. It’s not about demand in this case, but rather our production capabilities and our ability to supply mainly from external manufacturing facilities. This is another factor to consider when we think about our upside compared to the $390 million baseline we mentioned today.

Great. Thank you very much, Don. I appreciate it.

Thanks. Welcome. Thanks for initiating coverage on us.

Thank you. The next question is from the line of Eric Stine with Craig-Hallum. Your line is now open.

Good morning, everyone. Thanks for sneaking me in here at the end.

Hey, Eric.

So I'm just curious, you mentioned in your remarks and also in the presentation, this potential seventh OEM in the third quarter, major German OEM. Just curious, I mean, can you give any details there? Is that potentially a parent company of nameplates or brands you already have? Is that a new OEM altogether? Anything you can share would be great.

I believe Neal included a German flag on the slide, indicating at least one new OEM we have been collaborating with for a significant period. This OEM already has a strong presence in the electric vehicle market globally. We have a high level of confidence based on the work completed thus far, and we anticipate that the contract will be signed in the near future.

Got it, that sounds great. Just one last question for me. You mentioned carbon capture and two initial projects. Can you provide an idea of the scale for these? I assume we should consider this similarly to early LNG projects, where you start small, then gradually increase in size, potentially reaching a much larger project or contract. Is this the right way to think about it? Also, could you share what the current state is and what your goals are for the future?

It's a little bit of a work in progress. But I would cite some differences, actually, with our LNG work. When we broke into the LNG business, and again, it's a very conservative group of engineers that surround that business, and the failures are extremely costly and difficult. So, we really sort of cut our teeth in that on the maintenance side, doing relatively small projects within LNG facilities, building the confidence, and getting our data in place. On the carbon capture side, the initial activities are sort of more project-oriented just given the newness of these facilities. I believe we have some work to do before we can really size the market. I believe the opportunities on a per-project basis will be notable. Give us a couple of quarters to kind of work our way into this market, but there's a nice pipeline of projects. We think these carbon capture programs are important from a sustainability point of view. They're being driven largely by the companies we've served in our traditional energy industrial business. We have excellent channels into them, relationships with the engineering groups, and we have an excellent solution as well from a thermal management point of view.

Okay, that’s great. Thanks.

Thank you, Eric.

Thank you. The next question is from the line of Tom Curran with Seaport Research Partners. Your line is now open.

Good morning, guys. Thanks for going into extra innings here and taking my questions.

Happy to.

Happy to.

Yes. No, you guys always do. For your internal modeling that underpins guidance, would you tell us what average CPV you're assuming for the Honda Prologue and Acura ZDX, respectively?

Yes, they're about $900 per vehicle.

For both, Ricardo?

Yes.

Great. And then turning to the Scania contract. As a commercial vehicle brand, that marquees activity is just a bit more opaque. It's tougher to track and get insights into. Could you speak to what indications you've gotten about how that production volume is expected to ramp? And will you be starting with the Scania 45p electric truck and just that auto initially, are there additional models in the queue? Could you just share some color on the current visibility and expectations you have specifically for the Scania ramp?

Yes. Initially, it's focused on the Scania 45p electric truck. It's important to note that Scania is using Northvolt cells. While we have high expectations for its performance in Europe, the actual ramp-up depends on how well cell manufacturing can scale up. Until that process begins, it's challenging for us to assess the ramp-up for this model.

Okay. And then I'll squeeze in one more quick one here. On the energy industrial side, Don, could you just remind us when it comes to an LNG project, when do your orders tend to hit relative to the projects FID announcement? What are the differences for you between a liquefaction project and a regasification opportunity?

From a regasification standpoint, I would say the largest project we've undertaken in LNG has been the regasification facility with PTT in Thailand. However, most of our projects have focused on export facilities, which are generally smaller but still significant. As I mentioned earlier, we've been involved in the vast majority of these projects over the past five years. I apologize for forgetting the initial part of your question.

Just the timing of when you tend to see your orders hit and you get spectate relative to, let's say, a high-profile FID announcement?

Yes. We get spectate relatively early in that process, but we deliver product relatively in the stage of construction project, right? Insulation is one of the parts of the latter phase of these construction programs that the LNG terminals have. We get visibility on it relatively soon, but then we deliver towards the end of the projects.

Got it. Thank you. Let me check through my final questions.

Thanks, Tom.

Thank you. The next question is from the line of Alex Potter with Piper Sandler. Your line is now open.

Hi, guys.

Hi, Alex.

I know I'm on time here, so I'll just ask one question about the STLA medium platform from Stellantis. First, would you agree that in terms of additional volume in 2025 compared to 2024, this is potentially the most significant new target for Pyrothin next year? Also, could you provide an update regarding any rumors about Stellantis possibly delaying a few launches? I'm not sure if that's accurate or aligns with your observations, but any information you can share about that relationship would be appreciated. Thank you.

Sure. I'll start with the first question. We believe that Audi could increase production faster than Stellantis. The reason is that the medium platform from Stellantis, which includes a subset that uses cells produced by ACC in France, is the factor we are waiting on. Once that ramps up, we can start thinking about the timing of those vehicle launches. Regarding your second question, this is why we anticipate those production volumes will appear in the second half of 2025 instead of 2024. It's clear that the vehicles are not launching as expected in 2024, which we anticipated. We expect production to ramp up significantly in the second half of 2025. However, Audi should be very close to that timeline.

Okay. Perfect. Thanks. I'll take the rest offline. Thanks, guys.

Thanks, Alex.

For your time. Thank you.

Thank you. The next question is from the line of Sameer Joshi with H.C. Wainwright. Your line is now open.

Don and Ricardo, congratulations on all your progress. I have a comment and a question. The increase in top-line guidance of about $10 million seems quite conservative given that your baseline volumes have risen from 200 to roughly 225. I'll leave that for now. My question is about the DOE loan application process. Is there a concern, which is a good problem to have, that the process could be delayed and prevent you from achieving the capacity needed for delivery in the 2026, 2027 timeframe? How are you preparing for potential delays that may arise with the DOE?

Sure. In response to your comment, I want to emphasize that it's baseline or greater than. We understand that, but we don't want to get ahead of ourselves. Regarding any potential delays on the DOE loan, my answer is no. We are moving as quickly as possible on it. The DOE has been very engaged with us. I wouldn't be surprised if our team is spending at least 10 hours with them each week since we reached this stage in the process. While we cannot disclose anything prematurely, we are very optimistic about our position in the process. Everyone is motivated to complete this before the election, so we do not expect any delays. This actually aligns perfectly with our timeline.

Got it. Thanks for that, Ricardo and good luck.

Thank you.

Thank you.

Thank you. There are no further questions at this time. So I'd like to hand the call back over to Don for any additional remarks.

Thank you, Alison. We appreciate your interest in Aspen Aerogels and look forward to reporting to you our third quarter 2024 results. Be well, and have a good day. Thank you.

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