Aspen Aerogels Inc Q1 FY2025 Earnings Call

Good morning. Thank you for attending the Aspen Aerogels First Quarter 2025 Financial Results Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to 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, Bruno. Good morning, and thank you for joining us for the Aspen Aerogels First Quarter 2025 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 and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide 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 the disclaimer statements on Page 1 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 of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that Section 16 officers will file Forms 4 to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the exercise price of options. I also wanted to highlight a near-term IR engagement on Wednesday, May 21. Management will be hosting one-on-one investor meetings at the B. Riley Securities 25th Annual Investor Conference. I'll now turn the call over to Don. Don?

Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q1 2025 earnings call. I will discuss our performance, the status and expected impact of key components of our strategy, and our outlook on the current environment. Ricardo will provide more detailed insights into our Q1 financial results, our strategy, and our expectations for Q2. We welcome your questions. Our aim is to establish a strong and profitable company. During Q1, we focused on enhancing our resilience by expanding our commercial activities in both the EV thermal barrier and Energy Industrial sectors, building a robust and flexible supply chain, and optimizing our cost structure. This essential work will carry on into Q2 and throughout the year. In our Thermal Barrier business, we achieved a significant PyroThin award with GM for a next-generation prismatic EV platform in Q1. This award, along with recent wins from Mercedes-Benz and Volvo Truck, highlights our value in various EV battery designs and chemistries, confirming our innovation and reliable performance. This success supports our position in the electrification ecosystem and paves the way for further platform growth across new and existing OEMs. We are also pleased with the record level of quoting activity in our PyroThin thermal barrier business, indicating that leading OEMs continue to invest in future battery electric platforms, which positions Aspen as a key technology partner and reinforces our strategic role in EV battery performance and safety. While our Energy Industrial business's first-quarter performance matched that of the first three quarters of 2024, it could not maintain the exceptional pace of Q4 2024, where we saw record revenue exceeding $53 million. It is not unusual for revenue in this segment to decline in the first quarter compared to the fourth quarter of the previous year. Typically, the Energy Industrial business experiences a revenue dip in Q1, followed by growth throughout the year. We may also be witnessing some destocking within our distribution channel. When our supply capacity has been limited, as it has since 2023, distributors and contractors tend to accumulate extra safety stock. During the period of supply constraints, our lead times extended to as much as six months, compared to more typical lead times of about one month. With our external manufacturing facility now fully transitioned and sufficient supply from two aerogel manufacturing sources, there is reduced necessity for distributors and contractors to hold as much safety stock as they prepare for maintenance work and projects at our customers' facilities. We believe we are now approaching a balance in the inventory levels held by our distributors and contractors, and that EI revenue will grow throughout the year to approximately match last year's revenue of $145.9 million. Despite some uncertainty in the energy markets, we note that most major oil and gas companies, including key end-users of our products such as Exxon, Chevron, Shell, and Total, are maintaining their 2025 capital expenditure guidance according to their recent earnings calls. We see substantial opportunities for long-term profitable growth in our core segments as well as new adjacent markets. Overall, we believe our Energy Industrial business is well-prepared for a policy environment in the United States that encourages greater focus on energy and power generation. Since 2023, we have been working to diversify our raw material supply chain and establish a second source for aerogel. We have successfully developed a resilient and flexible raw material and aerogel supply chain, which is crucial in an environment with fluctuating tariff regimes. We have broad sourcing options from Asia, Europe, and the United States to optimize raw materials for our aerogel manufacturing plant in East Providence. For aerogel supply, we can adjust sourcing for Energy Industrial, allowing production for U.S. customers to take place in East Providence while serving other global markets from EMF. In addition to sourcing optimization for Energy Industrial, we are actively addressing potential tariff risks through pricing strategies and collaborating with EMF to reduce product costs. Regarding finished Thermal Barrier parts manufactured in Mexico, these products comply with USMCA and are currently exempt from tariffs. In terms of financial management, we have taken and will continue to take decisive steps to simplify and streamline the company. As Ricardo will explain in more detail, our goal is to bring fixed cash costs down to 2022 levels, significantly reduce the revenue needed for positive adjusted EBITDA performance, and minimize capital expenditures. Our target for the new cost structure is to lower the revenue needed for adjusted EBITDA breakeven to approximately $245 million. We believe this optimized cost structure will allow us to achieve the same $90 million in adjusted EBITDA that we recorded in 2024 with about $360 million in revenue, considerably less than last year’s revenue of $453 million. Our EMF relationship and flexible sourcing strategy enable us to build capacity in a modular way that can better align with demand while minimizing capital investments. We believe we have the resources to grow both of our businesses and adapt to a changing environment. These actions demonstrate our commitment to creating a resilient, growth-oriented, and profitable business. Ricardo, over to you.

Thank you, Don, and good morning, everyone. I'm pleased to share our quarterly results, starting on Slide 3. In Q1, we achieved $78.7 million in revenue, marking a 17% decline compared to the same period last year, in line with our projections. Our Energy Industrial segment experienced a slight 2% increase in revenue, totaling $29.8 million, reflecting the inventory adjustments that Don mentioned, after 18 months of supply issues and several project completions in the latter half of 2024. EV thermal barrier revenue was $48.9 million, down 25% year-over-year as demand aligned with a reduced vehicle production schedule from key customers. We were encouraged by General Motors' performance, gaining market share in the U.S. and managing EV inventory effectively, which enhances our confidence in a stronger link between sales and demand for our parts. In Q1, our gross profit margins rose to 29%, though gross profit of $22.8 million represented a 35% decrease from last year. Our Energy Industrial business led with gross margins of 39% while our EV thermal barrier segment reported lower margins of 23%, below our 35% target, due to less production volume and pricing changes. We have strategically leveraged short-term pricing in negotiations to foster long-term commitments with customers as we grow. We expect these pricing impacts to diminish over time as we see results from our productivity initiatives. Although we aim for gross margins exceeding 35% at higher volumes, we anticipate margins this year to range in the mid to high 20% due to our current manufacturing costs and vehicle content mix. Our adjusted operating income was negative $2.9 million, supported by an adjusted OpEx of $25.8 million, and our adjusted EBITDA was $4.9 million in Q1. We define adjusted EBITDA as net income or loss, excluding certain expenses that don't represent our core operations. In Q4, we made notable adjustments, including a $286.6 million impairment for Plant 2 assets and other restructuring and financing costs. Our negative net income was $301.2 million, or $3.67 per diluted share; excluding specific costs, it would have been a smaller loss. Shifting to cash flow and our balance sheet, our operations used $7.4 million in cash this quarter, producing $5.6 million in operating cash flow while investing $13 million in CapEx. This cash flow benefited from a reduction in accounts receivable, reflecting our efforts to enhance cash generation. We paid down over $20 million in debt this quarter, impacting our total debt to $141.8 million. Of our $13 million in CapEx, $7.7 million was allocated for Plant 2, while the rest was for equipment related to future EV thermal barrier launches. As we conclude the demobilization of the Georgia site, we are poised to recover value from equipment and buildings over the coming quarters, expecting to spend up to an additional $20 million to finalize this process. Our cash and equivalents amounted to $192 million, with shareholders' equity at $314.8 million. We believe our balance sheet, combined with recent amendments to our debt covenants, ensures we can continue executing our strategy and optimizing our capital structure. Before discussing our Q2 outlook, I’d like to address our positioning in light of the international trade environment on Slide 4. We initially had a detailed analysis of our business segments concerning tariff impacts but will simplify this discussion. Importantly, our dual presence in trade blocks allows us to produce regionally for the region, and we have managed to secure most of our raw materials within these production blocks, limiting our 2025 tariff exposure to under $4.5 million. We're working to minimize this further by sourcing materials domestically. Our various business segments are impacted differently by trade regulations. In our Energy Industrial segment, our products fall under Annex 2, not subjected to recent additional tariffs, which significantly benefits us financially. We continue to leverage our Rhode Island facility to produce a majority of our products within the region while sourcing materials domestically. Our EV thermal barrier segment maintains compliance with USMCA rules, which means no tariffs apply when assembling parts in North America. Overall, the current tariff environment has minimal impact on our operations due to our strategic resource sourcing and flexible production capabilities. However, uncertainties surrounding trade policy could affect new vehicle demand, which we’re actively working to mitigate. Now, moving on to our Q2 outlook on Slide 5. Based on current insights, we anticipate revenue between $70 million and $80 million, which translates to adjusted EBITDA of breakeven to $7 million, resulting in a net loss between $4 million to $11 million. We expect to keep CapEx front-loaded and aim to manage it under $25 million for the year, excluding costs associated with Plant 2. While we acknowledge demand remains lower than last year's levels, we believe our baseline expectation is at least $280 million in revenues and $20 million of adjusted EBITDA for the year. As visibility improves, we will offer a more detailed forecast. On Slide 6, regarding profitability and cash flow, we want to emphasize that while our Q1 results did not fully reflect the advantages of our earlier cost reductions, we are working on further reductions to enhance our profit potential. Our annual goal is to safeguard our financial performance even against varied demand scenarios while ensuring at least $20 million of adjusted EBITDA on revenues as low as $250 million. With ongoing process enhancements and strategic resource management, we anticipate a significant increase in our potential adjusted EBITDA. We are focused on controlling our revenue breakeven point, targeting it to drop from $360 million to approximately $270 million, giving us greater control in uncertain demand conditions. On Slide 7 before passing back to Don, I’d like to highlight our excitement and commitment to executing our strategy in the Energy Industrial and EV thermal barrier segments. Looking towards 2027, we remain focused on the long-term trends and believe we can generate substantial additional revenues from new customer awards, especially as we ramp up in 2026 and 2027. We see potential for significant growth in both segments, reflecting the market demand and our strong customer relationships. As we continue to succeed in the marketplace and optimize our cost structure, we are well-positioned to achieve our financial goals while capturing value from our investments as sentiment improves. We’re committed to execution over the next quarters, maintaining focus on what we can control.

Thank you, Ricardo. Before we move to Q&A, I would like to reiterate that we believe that electrification through this decade will be a major driver for both our Thermal Barrier and Energy Industrial businesses. The goal for the Energy Industrial team is to create shareholder value by expanding the baseload of revenue and profit for the company. PyroThin thermal barrier design awards for Mercedes-Benz, Volvo Truck and the recent additional award from GM are clear demonstrations that leading automotive OEMs continue to invest in next-generation battery electric platforms, and they are choosing Aspen as a key technology partner. These contracts add to our portfolio of long-term growth programs and position us for continued platform expansion with both existing and new OEMs. With a strong foundation in place, we are confident in our ability to adapt, innovate and deliver both critical solutions to our customers and durable value to our shareholders. Bruno, let's turn to Q&A, please.

We do have our first question. It comes from Eric Stine from Craig-Hallum. Eric, your line is now open. Can you hear us? It seems we are not receiving any audio from your line, so I'll ask Eric to go back into the queue. Our next question comes from Colin Rusch from Oppenheimer.

Evaluating what to do with the Georgia facility, is there some residual value that you might consider monetizing, or are you thinking of holding onto it for a while? I just want to understand your plans for that facility.

Sure, Colin. I think we missed the start of your question, but let me summarize what I believe you were asking about our plans for the Georgia plant. You're inquiring whether we aim to hold onto it or focus on increasing its valuation. We have been clear on this for the past few months; our goal is to capture its value as soon as we can. As I mentioned earlier, we are already in discussions to sell some of the equipment to a few strategic buyers, and we will hold an auction for the rest. You can expect the plant to be listed for sale soon. There has been quite a bit of interest because it's a unique asset in a great location. Our objective is to recover cash from these assets in the near term. While selling in this environment is challenging, we are working hard to sell as much as we can as quickly as possible.

Okay. Great. And then with the oil and gas business, the inventory clearing, I guess, what signals are you seeing from your customers at this point that have changed in the last, call it, 4 to 6 weeks that give you comfort that the inventory clearing is fully wrapped up?

We have a fairly good understanding of the inventory that distributors and contractors currently hold, although it's not perfect. We have observed a decrease in those levels over the last couple of months. When I compare where we are now in 2025 to 2024 and the first three quarters of last year, we are essentially at the same level. While we had a strong Q4 last year, due to some additional project work that concluded during that quarter, we see ongoing project opportunities as we progress through this year. Now that we seem to have reached a balance in the destocking process and the inventory levels among our distributors and contractors, we expect to see revenue growth in the second half of this year and anticipate finishing the year with revenue levels comparable to those of 2024.

Our next question comes from David Anderson from Barclays.

So I have a specific question on thermal barriers and kind of a broader strategic question. So in your commentary, you said lower content mix per vehicle. I'm just curious, is that a trend you're expecting going forward? Is that sort of a one-quarter thing? And then sort of related to that, you talked about the next-gen LFP contract you have with GM. I would assume that's less revenue per vehicle as well just because of the nature of it. Can you just walk through that for a few minutes with me?

Yes, definitely. I mean this is exactly why content per vehicle is the wrong metric to apply to us as a supplier to the OEMs, right? We've seen this metric used by the Tier 1s broadly, and they get penalized when the content per vehicle goes down. In our case, it's a very different dynamic because as you know, the form factor of the cells inside of these battery packs are ultimately what drives the content per vehicle. And so this will definitely go down over the next several years and quarters as we launch more prismatic cell battery pack products versus the pouch-cell vehicles that we've been generally supplying up to this point. The content per vehicle has drifted from over $1,000 a vehicle. Right now, we believe we're sitting at about $800 per vehicle. If you recall, on the prismatic cells, it could be as low as $200 to $250 per vehicle. So what we're more focused on is really just making sure that we consistently deliver 35% gross margins at a reasonable run rate and that we pay back all of the capital that we're deploying. There's actually something pretty attractive in that within the prismatic parts that have the lower content per vehicle in the sense that we can share the equipment across various different OEMs, which will enable us to pay back the CapEx much better than how we've been paying back the CapEx on the current pouch programs. So yes, I do think, just in general, CPV is not really indicative of what to expect from us when it comes to our ability to generate margins and pay back the capital that we're deploying.

David, I want to emphasize a point that Ricardo made. I view some of these new form factors and chemistries as complementary rather than direct replacements for our existing business. This market is expanding, and we have anticipated this as we pursue these projects. Therefore, we are not particularly surprised by this development. I encourage you to consider it as a growing market rather than a zero-sum game among different product categories.

Right. Understood. An expanding market in a number of different ways, and you have other opportunities there. I totally understand that. My bigger strategic question is sort of around the U.S. market versus the European market for your business. Obviously, GM has lowered their expectations for the year. There are a lot of headwinds. I'm sure there's a lot of uncertainty in GM on the EV program. Just curious, just looking across the sea here into Europe and those areas there, I saw on your chart there, Mercedes, Volvo, a number of those other players over there. What's the opportunity for a European expansion? And are you thinking about maybe shifting that to Europe because that would seem to be at least a more opportunistic market at least over the next 3.5 years, I would think?

Yes. So far, our customers have been open to purchasing products made in Mexico. We prefer to supply from Mexico while maintaining some warehousing in Europe to fully utilize our investments there. Expanding into Europe could be quite risky without a solid baseline demand to begin with. We notice that labor costs in Europe are significantly higher than in Mexico, and since we aim to use the same equipment for all these programs, supplying from Mexico appears to be the most sensible option.

And David, I would just add to that that this is a set of customers who are dedicated to electrification. Over that time period that you mentioned, it will help us diversify and be a little less concentrated on our work here in the United States. These are good companies. We've worked extremely closely with them technically and commercially. We are very optimistic that we'll have a great business in Europe.

Our next question comes from Eric Stine from Craig-Hallum back on the queue.

David, I would just add that these customers are committed to electrification. Over the time period you mentioned, this will help us diversify and reduce our concentration in the United States. They are strong companies, and we have worked closely with them both technically and commercially. We are very optimistic about building a successful business in Europe. Our next question comes from Eric Stine from Craig-Hallum.

I don't think we're receiving any audio from Eric at the moment. Our next person in line is going to be Leanne Hayden from Canaccord.

Just to start, can you please talk about any conversations or traction you may have seen with any South Korean EV OEMs?

Yes. I mean they've been in the pipeline for a while, and they're obviously interested in the product for cell-to-cell work. They did have a meaningful number of launches here recently. So in order to get on those vehicles, one would have had to have a product in 2019 or 2020. But our team is actively engaged for the next generation and some of the potential refreshes of those launches, either directly with them or with the cell manufacturers.

Yes, I would just emphasize that we are very close to both LG and to Samsung on the cell manufacturing side of it. The Korean OEMs are good at what they do, and we're determined to partner with them and have them be a customer.

Yes. I mean that's what we were alluding to there on Slide 7. When we think about 2027 and in my prepared remarks, I mentioned that if we look at some of the additional OEMs that we are not currently in production with, those can add up to over $200 million of revenues in 2027. We think that that's pretty meaningful growth, especially as the OEMs that we're currently supplying could keep growing by then as well. A lot of the quotes that we are working on now and some of the additional awards that we have now have pretty early 2028 start production dates as well. It is fair to keep expecting the demand curve to get built up here from 2027 onwards from other OEMs.

We currently have no further questions. So I would like to hand the call back to Don Young for closing remarks. Over to you.

Thank you, Bruno. We appreciate your interest in Aspen Aerogels and look forward to reporting to you our second quarter results in early August. Be well. Have a good day. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. Have a good day.