Aspen Aerogels Inc Q3 FY2025 Earnings Call

Good morning. Thank you for joining the Aspen Aerogels Inc. Q3 2025 Financial Results Call. I will now hand the conference over to your host, Neal Baranosky, Aspen's Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may begin, Mr. Baranosky.

Thank you, Micai. Good morning, and thank you for joining us for the Aspen Aerogels Third Quarter 2025 Financial Results Conference Call. With us today are Don Young, President and CEO; and Grant Thoele, 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 our Section 16 officer will file Form 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. Our CEO, Don Young, has established a prearranged Rule 10b5-1 plan to sell a limited number of shares for tax purposes in connection with a one-time personal real estate transaction. I'll now turn the call over to Don. Don?

Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q3 2025 earnings call. My comments will cover the introduction of two new members of the leadership team, the unsettled commercial environment for electric vehicles, an update on our energy industrial segment, a discussion of the versatility of our flexible Aerogel blanket, as we target adjacent markets, the announcement of the design award from a major European automotive OEM and the beginning of the ramp for ACC, a lot to cover. Grant Thoele, our new CFO, will amplify these points with his comments. We look forward to your questions. At the time of our last earnings call, we announced that Grant would assume the role of CFO effective October 1. Grant joined Aspen in 2021 and has been a key architect of our corporate finance and strategy functions. He brings to the CFO position an important blend of operational depth and transactional experience. After three years at KPMG, Grant gained experience in operations and business integration at Learfield Sports and in optimizing financial performance and capital structures during his time at Providence Equity Partners. His experience and disciplined approach will serve Aspen well as we execute the next phase of growth and value creation. I'm also pleased to welcome Glenn Deegan, our new Chief Administrative Officer. This new position for Aspen combines into a single role the Chief Legal Officer and Chief Human Resource Officer responsibilities. Glenn brings more than 25 years of legal, HR, and transactional leadership with deep experience guiding organizations through complex M&A, governance, and integration initiatives. He joins Aspen from Altra Industrial Motion Corporation, a $2 billion global leader in motion control and automation products, where he served as Chief Legal and Human Resources Officer. Glenn played a pivotal role in major strategic transactions, including Altra's $4.95 billion acquisition by Regal Rexnord Corporation in 2023. His experience in successfully integrating companies and aligning people, culture, and governance through transformational change will be invaluable. We welcome Grant and Glenn to their new positions. Our core objective is to build a strong, profitable, capital-efficient business. The focus during the first three quarters of 2025 was to streamline and simplify the organization to optimize our cost structure, build resilience and drive profitability, and of course, to prepare for the rapidly changing North American EV environment. North American EV sales in Q3 were at record levels, powered by the pull forward of demand in response to pending changes to rebate incentives and regulatory standards. GM grew U.S. market share during the quarter to 16.5%, second only to Tesla. During October, however, GM shifted gears and significantly ramped down its EV production rates. We expect GM and other EV OEMs to align production rates according to consumer demand based on the new market conditions. GM has suggested that it will determine the natural demand for EVs early in 2026. We believe EV growth for GM and other OEMs will start again from that reset number. Despite these market headwinds, we do see brighter spots for our PyroThin thermal barrier segment. In October, we won a battery design award from a major European OEM, an account with great promise and the potential to ramp in 2027. We anticipate naming the company at the time of our next business update. In addition, we are seeing signs that another European customer, ACC, is preparing to ramp its battery cell production in 2026. As a reminder, ACC was created to serve the European EV market with high-volume, high-quality lithium-ion battery cells and is strategic to Aspen because it is owned in part by Stellantis and Mercedes-Benz, both companies important to Aspen as we seek to ramp our business in Europe in 2026 and 2027. And one other brighter spot, on-shoring and near-shoring in response to shifting trade policy and geopolitics is creating advantages for companies such as Aspen who can provide high-performance, domestically produced solutions. Proximity enhances our ability to support new opportunities with our existing BEV and EI customers and is opening the door to adjacent market opportunities. An example of the latter is battery energy storage systems or BES, where two powerful shifts, one technical and one policy-driven, are converging to open a new opportunity for Aspen. To improve economics and pack more energy into the same footprint, best developers are moving to higher-density LFP designs, essentially applying EV-style engineering to grid-scale storage. And by doing so, creating the same thermal propagation challenges that we have already helped the EV industry solve. Our PyroThin thermal barrier technology, with its extremely low thermal connectivity, excellent fire resistance, and minimal thickness, is exactly what developers need as they compress thousands of cells into a single rack or modular. On the policy-driven side, domestic content rules are making local sourcing both a supply chain preference and a financial incentive. We are working with two large advanced energy storage battery and system technology companies on near-term opportunities to supply PyroThin thermal barriers where the battery modules support the rising demand from data centers, grid infrastructure, and other high-reliability applications. We are also pursuing a range of high-impact electrification projects from carbon capture to pressure geothermal where asset owners are seeking low carbon solutions for site-specific power generation. Again, we are well-positioned to serve their thermal management needs with high-performance domestically produced solutions. Our Energy Industrial segment cannot make up for the volatile EV revenue in the near term, but we do see this segment stabilizing and beginning to grow again. Our Energy Industrial revenue this year has largely consisted of baseload maintenance work. Project-oriented revenue has been lacking in 2025 after record performance in 2023 and 2024. We see activity levels strengthening across the board and anticipate a healthy growth year for Energy Industrial in 2026. We see subsea opportunities in the backlogs of key customers that we expect will generate subsea project revenue for us in 2026. We are quoting subsea project work with potential revenue exceeding $80 million over the next three years, including $15 million to $20 million in 2026. And on the LNG side, we will supply Cryogel to the Venture Global CP2 LNG project in Cameron Parish, Louisiana during the first half of 2026. Again, we anticipate a strong growth year in 2026 for the Energy Industrial segment and a return to a trajectory towards a robust $200 million Energy Industrial business in the years to come. As part of our long-term growth strategy, we are executing a disciplined initiative to diversify into markets adjacent to our core battery and Energy Industrial businesses. In addition to the battery energy storage systems and electrification opportunities described above, our team is focused on other potential adjacencies based on commercial potential, speed to market, product differentiation, and the ability to leverage our existing manufacturing platform. We believe the diversify and broaden Aspen's addressable market and contribute revenue levels beginning in 2026. The initiative reinforces our commitment to innovation-driven growth and enduring shareholder value. Grant, over to you.

Thanks, Don, and good morning to everyone joining us today. I plan to cover Q3 financial highlights, our Q4 and fiscal year 2025 outlook, along with the financial framework and long-term strategic positioning. Looking at Slide 3. Q3 revenue landed at $73 million, a decline of $5 million or 6% quarter-over-quarter, driven by Thermal Barrier revenues softening 12% from Q2 to $48.7 million. This was partially offset by a 7% increase in Energy Industrial revenues to $24.3 million, representing a stabilization of our EI segment from the recent low in Q2. Gross profit of $20.8 million decreased by 18% quarter-over-quarter, predominantly driven by less volume to absorb fixed costs at our manufacturing facilities. Gross margin of 28.5% declined from 32.4% last quarter. We adjusted our production schedules in Q3. However, we won't see the benefit of more efficient manufacturing operation until Q4. Ultimately, lower EV volumes drove the majority of the decline in combination with increased scrap rates in preparation for ACC's volume ramp over the next few quarters. We saw this dynamic with our successful ramp of GM at the beginning of serial production. Thermal Barrier segment gross margin was burdened by fixed costs and one-time scrap charges, resulting in a 24% gross margin for the quarter, down from 31% in Q2. Segment gross margin for Energy Industrial landed at 36%, in line with Q2 and above our company target of 35%. We lowered our OpEx rate, excluding one-time items from impairments and restructuring charges, from $24.6 million in Q2 to $22.6 million in Q3. We will continue to look for opportunities to streamline and simplify our operations to further reduce this run rate in the coming quarters. Adjusted EBITDA declined by $3.5 million quarter-over-quarter to $6.3 million in Q3. In terms of Q3 cash flow, we had favorable working capital of $12 million due to supply chain and inventory optimization efforts, lowered CapEx spend below $10 million, opportunistically paid down $14.8 million on our revolver to lower interest expense, and paid down quarterly amortization on our term loan for $6.5 million. We ended Q3 with $152.4 million in cash and equivalents. Next, let's turn to Slide 4 to review our Q4 outlook. Over the past few months, the administration has removed CARB waivers and penalties for CAFE standards, and we expect similar actions regarding EPA rules. These regulatory shifts have occurred faster than originally anticipated. As a result, supply side incentives are no longer driving portions of EV production, leading consumer adoption and demand as the primary forces influencing how many vehicles reach dealer lots. GM and other OEMs are clearly taking decisive actions to align production with current consumer demand. Workforce reductions, capacity adjustments, and temporary plant closures underscore that the near-term environment remains uncertain and difficult to forecast. GM has indicated that it expects to determine the natural level of EV demand early in 2026 and is recalibrating production accordingly. While this represents a meaningful step down from prior growth expectations, we believe EV volumes will begin to grow again from this lower base. For the fourth quarter, we currently expect total revenue between $40 million to $50 million. We anticipate the mix between our segments to be grounded in approximately $25 million for the Energy Industrial business with more variability in the Thermal Barrier segment. It's worth noting over the past few weeks, we've seen GM demand erode, leading to a higher degree of uncertainty. Additionally, the mix between segments is important to overall profitability given different unit economics of each business. With $40 million to $50 million of revenues for Q4, we'd expect between negative $14 million to negative $6 million of adjusted EBITDA, respectively. Given our new Q4 outlook and the resulting impacts on liquidity, we are engaging with our lenders at MidCap for near-term covenant relief. It's worth noting we have over $150 million of cash as of September 30, representing a strong net cash position. When taking our year-to-date actuals and Q4 guide, revenue could range from $270 million to $280 million, with adjusted EBITDA of $7 million to $15 million for the year. In October, Q4 volumes declined below our previous guidance assumptions in August. It's clear that OEM reactions to a deregulated environment have accelerated beyond prior expectations. When bridging to our prior outlook, by far and above the driving factor in lower expected full year results is driven by EV market headwinds, combined with a less favorable product mix, which results in higher material costs on average for 2025. We now believe that the fourth quarter adjusted EBITDA levels are representative of our go-forward cost structure. Several one-time items in this quarter have temporarily impacted profitability and actions have already been taken to improve our breakeven threshold. Material cost as a percentage of revenue in the second half of 2025 were slightly higher than our go-forward run rate due to shifting production between East Providence and our external manufacturing facility. Projects tied to cost reductions at our manufacturing sites, primarily production optimization and yield improvements, will begin to materialize in 2026 and 2027. We also expect our operating expense run rate to level out between $20 million and $22 million, with additional savings opportunities tied to the implementation of our company-wide ERP system and synergies from integrating our Mexico facility. As a result, we believe we can achieve adjusted EBITDA breakeven approximately at $200 million of annual revenue with line of sight to further improvements as we move throughout 2026. We expect to end the year with $25 million of CapEx, excluding Plant 2 or approximately $5 million of spend in Q4. In regards to Plant 2, we continue to pursue buyers for the property and equipment. We expect equipment sales to begin trickling in within Q4 and over the next few quarters, while the building sale has a longer tail over the course of 2026. Turning to Slide 5. As we look ahead to 2026, I'd like to outline how our financials could perform at various volume levels within our core business. It won't come as a surprise that there remains a wide range of potential outcomes on the EV thermal barrier segment. While we have stronger confidence that the Energy Industrial segment will return to growth next year. We continue to pull every operational and financial lever available to ensure the business remains stable and efficient. The EV landscape continues to evolve. And while we use IHS forecast and customer-provided volumes as key inputs, we apply our own insights, scenario analysis and appropriate discounts to those forecasts to model and plan for various production scenarios. When we think about GM, their recent public statements suggest that the volumes we're seeing in Q4 likely represent a floor for production levels based on their current EV portfolio. GM has been clear that the EV demand will be soft through early 2026 as the market resets to a more natural level of consumer demand following the end of incentives. Importantly, GM is better positioned than many OEMs. They've gained U.S. market share, maintained pricing discipline with fewer incentives and remained highly committed to EVs as a strategic priority. From this lower base, we expect GM's production to rebuild as demand normalizes and the company continues to expand its EV portfolio. The IHS current forecast for 2026 has GM delivering approximately 175,000 Ultium vehicles. Assuming $10 million to $15 million of other OEM revenues, we could potentially generate approximately $135 million of revenue at full IHS volumes for the Thermal Barrier segment. However, given the degree of uncertainty that we see in the market today, it would be prudent to take a significant discount to IHS volumes. As a reminder, with our expected cost structure in 2026 and after crossing the breakeven adjusted EBITDA threshold at $200 million revenue, we expect to drop approximately $0.50 to $0.60 to the bottom line on every dollar of additional revenue. With operating cash flow tied to revenue and growth levels, we project a total of $45 million in cash outflows from investing and financing activities or approximately $10 million of CapEx and $35 million of debt payments in 2026. From where we sit today, we believe we can maintain over $100 million of cash on our balance sheet at the end of 2026 when assuming breakeven adjusted EBITDA. Looking even further out at our core markets, 2027 introduces European EV customers ramping up, along with continued healthy growth for the Energy Industrial business. We believe we can return to growth in 2027, supported by awarded European EV customer forecasts that have the potential to generate over $150 million of revenue in 2027 at full volumes. Along with GM growing off its 2026 EV reset, continued growth in Energy Industrial and untapped adjacency revenue. Lastly, I'll build on Don's comments around our strategy going forward. As we look to Aspen today, our focus is on unlocking the full potential of our aerogel technology, the foundation of our differentiation. It's a platform that has high barriers to entry, a deep IP moat, and strong sustainability tailwinds. Over the past few years, we've aggressively pursued capturing the EV opportunity, and in doing so, have greatly improved our technology, manufacturing capabilities, and footprint. In addition to strengthening our core markets and optimizing our capital structure, we are laser-focused on expanding Aspen's strategic optionality to accelerate growth, unlocking new verticals and long-term value creation. Our Aerogel products currently serve two core markets with a highly specialized value proposition, but we see a much larger opportunity ahead that helps drive our strategy, including expanding our aerogel technology platform into adjacent markets and enhancing Aerogel performance with complementary specialty materials. In order to execute this strategy, we'll explore strategic partnerships, pursue organic and inorganic opportunities by canvassing the landscape of specialty materials companies and take an all-of-the-above approach to broaden our portfolio offering with high-value products at accretive margins. We believe our Aerogel technology platform provides a springboard into new addressable markets within Specialty Materials that share our focus on lightweight, thermal management, and sustainability. By broadening our capabilities with a specialty materials platform anchored on Aerogel, we open the door to solving mission-critical problems for our customers. Think energy storage materials, advanced composites, and thermal interface and fire protection systems, all solutions that expand our relevance across diversified markets. As I step into the CFO role and look ahead, my focus is on ensuring that our strategy is matched by disciplined execution and thoughtful capital allocation. I'm challenging the organization to think boldly, act strategically, and relentlessly pursue new opportunities that expand our impact and deliver long-term value for Aspen and its shareholders. Don, over to you.

Thank you, Grant. Before we move to Q&A, I would like to reinforce a couple of key points. These are clearly trying times for EV OEMs and companies such as Aspen. We have been forced to change our expectations after three years of significant revenue growth and margin expansion. We continue to believe that electric vehicles have a significant role to play and that EV demand will reset at a lower market share and then resume a growth trajectory. Our Energy Industrial business is well positioned for a policy approach in the United States that promotes an intensified focus on energy and power generation. We anticipate that the segment will have a strong revenue growth trajectory in 2026 and beyond. The work on adjacent markets leverages our valuable technology and products as we diversify and expand our end markets. Overall, we have designed Aspen with a lean operating cost structure in order to generate substantial profits from incremental growth. Operator, let's turn to Q&A, please.

Our first question is from Eric Stine with Craig Hull.

I would like to discuss the EBITDA breakeven target of $200 million that you are aiming for. Based on my calculations, it appears that you would need a gross margin in the mid-20s, considering your expected operating expenses. If you're anticipating some weakness in electric vehicles, even with potential improvements, I believe that could significantly impact your margins in the first half. I'm trying to understand what factors will be involved in reaching that breakeven point at $50 million. Are there additional measures or considerations that you could share?

Yes, I can address that, Eric. Over the course of 2025, we have taken decisive steps and have significantly lowered our overall fixed cost run rate. Some of these changes will start to materialize in the coming quarters. We have planned upgrades for production capacity and yield improvements that are expected to yield returns in the first half of next year. The product mix is crucial for reaching the breakeven point, and I want to emphasize that having more thermal barrier can help achieve the breakeven EBITDA threshold sooner. We're aligned with your perspective that EV demand may be soft in the first half of the year.

It seems that you are not indicating that this is the run rate or level you expect to be at as you begin the year. Instead, it appears that this is likely more of a level you anticipate reaching in the second half, particularly due to some of the initiatives you had planned which we hope will begin to have an impact towards the end of 2025 or more into 2026.

Yes. I believe that these will become evident at the beginning of 2026. There are several production-related yield improvements and projects associated with the plant that are expected around mid-2026.

Sorry, Eric, I was just going to add. You know that we've taken actions through the year, including in the third quarter. And I think those will be more clearly reflected as we get into Q1 of next year as they filter their way through the income statement.

Okay. Got it. But it's not necessarily signaling additional steps. You could take those if needed, but what's really in motion will get you to that level.

Correct, correct.

I'm feeling more optimistic about the Energy Industrial sector. The first three quarters have been relatively weak, but as we talk about a return to growth and aiming for $200 million, I'm curious about the potential impact of the LNG project for CP2 and other initiatives. What are your thoughts on the scale of growth we might see in 2026 to reach those higher levels?

We have been operating in the mid-20s primarily due to our baseload maintenance work, with only a small amount of project work during this time. We believe there is potential in the subsea business to reach around $15 million by 2026, which would be a significant increase from this year. Over the next five years, that aligns with our normal performance. We have experienced record years of $25 million and $35 million in 2023 and 2024, respectively. Additionally, the LNG project and other activities are providing a nice boost. We anticipate seeing contributions from projects and also believe there is room to expand our baseload maintenance work. This year, there haven't been many turnarounds in refineries, as they are operating with significant margins and have been hesitant to perform normal maintenance. However, we expect that to change as we approach 2026. Therefore, we foresee a combination of growth in baseload maintenance and increased project activity, which we believe will lead to a healthy growth year in 2026.

Okay. Maybe just last one for me. I mean so many questions to ask about the EV space. But maybe just clarity on, you mentioned as much as you can provide on the battery manufacturing coming out of Europe. Stellantis, Mercedes, what kind of contribution could that potentially make in '26?

Overall, we're seeing the European OEMs would be between that kind of $10 million to $15 million range in 2026. We're obviously taking a discount to the volumes that they have provided. And so that could fluctuate. We're bullish on the European EV market kind of compared to the North American market as of right now.

The next question is from Colin Rusch with Oppenheimer. Overall, we're seeing the European OEMs would be between that kind of $10 million to $15 million range in 2026. We're obviously taking a discount to the volumes that they have provided. And so that could fluctuate. We're bullish on the European EV market compared to the North American market as of right now.

Do you have a sense of where channel inventories are at this point with the pull-through in the September quarter and kind of initial sales in October with GM. Does it still feel like you need to do some channel correction here? Or do you feel like the channel is fully cleaned out?

We've made progress, Colin, for sure, and moving products through distribution. Again, it's not perfectly transparent for us. But we know that it has improved markedly from earlier this year.

Okay. That's helpful. And then on the stationery storage side, obviously, there's a very, very large pool of demand that's happening there and the duty cycles that those systems are going to engage in are intensifying and diversifying. I want to just get a sense of what you guys are seeing from a demand perspective and the design perspective on that because that looks like an opportunity that may emerge sooner than later to be honest.

Colin, it's been an interesting push for us as we think about what we refer to as these adjacent kinds of markets a little off to the side of our core market, which we consider this to be exactly that. And what has been beneficial to us is not only the domestic supply incentive aspect of it. But at a technical level, we have seen the battery cells move to a higher-density LFP format. Again, as I said in my prepared comments, really using sort of EV engineering at grid level scale. And that feeds very neatly into our thermal barrier work. And we have made substantial progress in working with two large companies to date. And we believe that we will have this part of our business contribute to our 2026 revenue in a notable way.

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

I'm bouncing around Colin's, so apologies if this was already covered. But is the new European OEM award, is that a platform award? And could you give some sense of the potential volumes that we could see there in '27 or maybe '28 when it's more fully ramped?

Yes. I'll take that one, Ryan. I think that it's not necessarily a platform. I believe it's kind of a model approach. And it will be in 2027. And the magnitude is reflected in kind of that $150 million European OEM revenue that I cited kind of in my script here, that is at full volumes, and it's inclusive of this award. And so the discount to that, even taking $50 million to $75 million of that would be really, really beneficial to our P&L, considering we already have the fixed costs and the manufacturing in place to achieve that revenue level.

Appreciate that. And then shifting gears. Battery storage sounds like an exciting adjacent market opportunity. Curious what some of the other applications are that you're looking at? Is there anything in the data center world that could be interesting for your technology just given the insulation aspect?

Well, Ryan, these battery modules are supporting data centers, and they are designed as site-specific energy storage systems. We are currently focusing on this aspect. You inquired about other potential adjacent markets, and we have a team dedicated to exploring those opportunities. You are already familiar with the building and construction market we previously targeted. We are looking for the right partner in that space, as we believe it can contribute to our revenue and help diversify our markets. We successfully built that into a multimillion-dollar business in the late teens, and we plan to resume those efforts as another example.

The next question is from the line of David Anderson with Barclays.

I was trying to get a little bit better handle on kind of where you see kind of overall GM to include Bolt in there, kind of where the numbers look like they could bottom out in the first quarter just in terms of the overall volumes of vehicles. I'm looking at the IHS numbers, which just seem just completely wrong. I mean, it doesn't make any sense to me of what they're showing. In fact, they actually raised their numbers on '26 this past quarter. So I'm trying to understand, I almost have to kind of push that aside. Where do you think we kind of bottom? I know they're kind of guiding like 40,000 cars in kind of 4Q. But realistically, where do you think we've bottomed in the first quarter? And how much could you see that growth throughout the year?

Look, it's definitely an uncertain moment in time. I mean I'm a little reluctant to try to give an exact number. We do discount the IHS numbers in our own planning. We take other inputs as well, including from our customers themselves. And we try to triangulate really around those kind of numbers. So Dave, I'm just reluctant to project at this point what we think GM is going to do in Q1.

And I think just to add to that, David, please go ahead.

No, no, no. I was going to say if you still think that first quarter would be the bottom, is that the right way directionally to think about it, at least?

We believe that sometime in Q4, GM will provide clarity on their demand outlook in this new environment by early 2026. This makes me think that Q4 and Q1 are likely the lowest points, especially after the demand surge experienced in August and September, leading up to October 1.

That makes a lot of sense. I'm just curious, as you start building on the European side, the design of the batteries in terms of your thermal barrier how that fits in there in terms of, say, revenue per unit. How does that look in Europe versus the U.S.? Is it the same? Is it a little less, a little more? How should we think about that as you build out that side of the business?

Yes. Most of the European OEMs use prismatic batteries, and historically, the cost per vehicle has been between $250 to $350 million. This is obviously different from other situations.

Okay. Don, I want to revisit the battery storage topic. A few years back, you mentioned incorporating your technology into battery architecture, particularly regarding the cathode. Are the discussions happening today related to that, or are they focused solely on the thermal barrier aspect? Can you elaborate on the battery surge? I've never encountered thermal runaway as a significant issue before, and I've not heard it mentioned in relation to larger battery storage systems. I always regarded it as part of the normal cycling process, which might be relevant here. Could you clarify how you fit into this discussion? I was surprised to learn about this new perspective.

Yes. These are akin to our PyroThin thermal barriers, Dave. And what is changing, I think, from a technology point of view, is that they are moving to higher density cells, and that is creating concern around thermal propagation or thermal runaway, which we address in slowing the propagation and controlling that. There's also some policy aspect to this as well, which these projects have incentives to have domestic supply. And again, we contribute to that as well. So it's really a combination of our technology and that those policy changes or incentives, I guess, I would say, that are benefiting us in this space. So we're good at making these materials; we're really expert in helping them design around our materials, and they are trying to get as much density and as many cells into a limited amount of space as they can. And again, that suits us very well.

I would add that we already have the infrastructure in place to deliver on this opportunity. It aligns closely with our existing thermal barriers. We have the production capabilities and the necessary tooling to achieve this. A key point is that there isn’t a significant capital investment required to pursue this opportunity.

The next question is from the line of Leanne Hayden with Canaccord Genuity.

Just to start, I'm curious about the impact of lower electric vehicle demand levels. How do you view the option of utilizing capacity at your Rhode Island facility compared to outsourcing to your external manufacturing partner?

That's a good question. I think that, really, this comes down to a regional basis, right? We want to do what's best for allocating profits accordingly between the production facilities. As of right now, we have capacity we can use in both our East Providence plant and our external manufacturing partner. And it just comes down to whether it's domestic or international, we have the capabilities at both facilities to kind of deliver on the demand.

Okay. And I noticed you're targeting decreasing CapEx into the fourth quarter and into next year. Curious how long you think you can maintain these lower levels?

I want to point out that there are certain programs we are currently quoting that may require additional capital investment, similar to the automated equipment we need to implement in Mexico. However, we are not in the process of building a new plant at this time. When we consider capital expenditures, our focus is on maintaining our existing assets and ensuring they operate as efficiently as possible. We will be very selective in our investments, recognizing that cash is crucial. Any capital expenditure will be closely tied to a return, which will be reviewed by my team and me through a business case to ensure we allocate capital appropriately.

At this time, I would like to pass the call back over to Mr. Baranosky for any further remarks.

Actually, I will take it. Thank you, operator. This is Don. We appreciate your interest in Aspen Aerogels and look forward to reporting our fourth quarter results to you on February 12. Be well. Have a good day. Thank you.

Thank you all. This now concludes today's conference call. We appreciate your participation, and you may now disconnect your lines.