Hey, good morning, everybody. It's Jeff Osborne, the sustainability and mobility technology analyst at TD Cowen. Thanks for joining us on our second annual Sustainability Week virtual conference. Very pleased to have Don Young, president and CEO of Aspen Aerogels, as well as Ricardo Rodriguez, the CFO and treasurer joining us. Thanks, gentlemen, for taking time out of your busy day to hop on with us. I appreciate it.
Thank you, Jeff.
Thanks, Jeff.
Well, maybe to, to jump right in, for those that are tuning in, and maybe not familiar with the Aspen Aerogels story, do you mind just taking a minute or two to introduce what you folks are up to? And then we can, dive into, some particular questions I had as part of our fireside chat.
Great, thanks. I will, I'll kick it off. We are a material science technology company. We have developed what we refer to as our aerogel technology platform. Our strategy is to leverage that technology platform into large dynamic markets, typically with sustainability themes, to them. We have two markets that we're active in today, our traditional energy infrastructure business, and that today has about $1.5 billion of installed base at this point. We've set a goal to have at least $150 million of revenue from that segment in 2024, with gross margins at least 35% in Q1. You know, Jeff, we had 40% gross margins in that particular segment.
The second part of our business is our EV thermal barrier business, which is newer but is growing rapidly from $7 million of revenue in 2021, $56 million in 2022, $110 million in 2023, and we're poised to more than double that part of our business here in 2024. Overall, coming out of Q1, we upped our outlook to $380 million of revenue, up from $350 million, where we started the year, and $55 million of Adjusted EBITDA, up from $30 million, as we started the year. We're really trying to build on our momentum coming out of 2023, and through Q1.
We've had a terrific gross margin run here with gross margins progression 11%, 17%, 23%, 35%, 37% in our most recent quarter. So that's over the course of five quarters. We're active in the EV thermal barrier pipeline, development pipeline. Today, invoiced specific prototype parts in Q1 alone to nearly 20 different OEM programs. You know, an indicator maybe of the activity level within that development pipeline. So that's hopefully that gets you going.
Yeah, no, that's great.
Mm
... the one thing I, a lot of my questions will be on the mobility side, but certainly we can touch on the energy side as well. But, you know, big picture, I wanted to dig into thermal runaway and why we're at the point we're at, as it relates to the mobility segment as a whole. Can you just touch on, you know, what causes thermal runaway in a battery at a high level for those that are tuning in that maybe aren't chemists?
And then, you know, how people like Mary Barra and others can try to aim with your product to make this a serviceable event for the OEM, as opposed to a complete write-off of the vehicle, which we've seen, you know, billions of dollars of vehicles have written off as it relates to warranty reserves and fires and other things. So maybe just at a high level, walk us through that journey that OEMs are going through.
Definitely. So yeah, I mean, I think the easiest way to think of thermal runaway, and probably the last time we saw thermal runaway in the news, some of you may recall those Samsung tablets that were, you know, catching on fire in planes, or when people sat on them, or, you know, whenever they were compressed inside of a bag. And that, in essence, is thermal runaway. So it's basically where through a range of reasons, you have the anode and the cathode start coming closer in contact, to the point that, you know, they cause a short. It initially starts as a... Depending on what's causing it, it could start off as just a thermal event, or it could actually be an initial explosion or a release of energy.
The things that cause thermal runaway are not obvious. You know, the most obvious ones are obviously when a vehicle's in a crash, if a cell has some manufacturing defects. But the not obvious one is one where, depending on how you use the cell, how you charge, discharge it, et cetera, you know, dendrites or build-up of lithium can start to accumulate on the anode of the cell. And then that build-up can be enough that it actually breaks through the separator, which is what separates the anode from the cathode. And once that happens, you have a pretty quick energy release. And we're talking about 6-800 degrees Celsius thermal event. And so, you know, very few materials can operate at those temperatures, let alone provide thermal isolation...
And so, you know, GM and several other OEMs have learned the hard way through seeing what is happening with other OEMs, but also as they try to pack more energy density, you know, per unit of volume in the vehicle, they've all gone to large form factor cells, right? And so, I mean, if those Samsung tablets with very small pouch cells were having pretty serious thermal runaway issues, just imagine what happens when the cell is, you know, 5-10 times bigger, and then when you have hundreds, or in the case of cylindrical cells, thousands of these cells in a vehicle, right?
And so it's a very low probability event, but at the same time, I don't think the industry in general is that good at managing those probabilities yet, given that you never know what is exactly happening inside of a battery cell. All you have is a theoretical model of how it should behave, and then you, you know, basically try to manage it in a way that it stays within the boundaries of that model. And so, you know, General Motors with several former Tesla engineers who came in and saw the path that the company was taking with these large pouch cells, quickly realized that, wow, you know, thermal runaway could be a problem here. GM also learned the hard way with the Chevrolet Bolt and the $1.5 billion recall that is still being settled today.
So, you know, they came to us looking for a material that would provide, you know, really three things. The first one is thermal isolation in between each of the cells, in the case that one, a cell just heats up, and to prevent that from spreading to the others. That's, in essence, the thermal propagation. Then the second requirement is some sort of fireproofing elements. So in the case that the cell actually does catch on fire, can you suffocate the fire and prevent the spread as well? And then the most important one, and the one that, you know, really is not obvious and it took us some time to develop with GM and now with other OEMs for prismatic cells, is the mechanical requirements, right? So if your material is very stiff or hard, you're actually compressing the cells.
And again, going back to my example with the Samsung tablets, that's exactly what you're trying to prevent, especially on pouch and prismatic cells, which don't have a ton of structural rigidity. And so that's in essence what we're solving for. You know, initially we were tested against some other theoretical materials that could do the trick, and that was when OEMs were solely focused on the thermal isolation. But as the requirements have become crystal clear over the past year and a half or two, you know, really those mechanical properties have been brought up front and center. And it's really gotten to the point where OEMs either adopt an aerogel product like ours, or they just put a polyurethane foam that, you know, at 300 degrees Celsius, basically adds fuel to the fire.
You know, we think we've got a strong lead in terms of getting our product introduced through all of the different OEMs, and we're gonna continue optimizing those mechanical properties, our scale, and our quality, and our throughput capabilities to make sure that we stay ahead.
Perfect. And you wandered right into my follow-up question. On my list here is walk through competing solutions to the PyroThin product line that you have. You know, why are you winning versus other approaches? You alluded to mechanical capabilities, I think two years ago or so at different conferences that you folks presented at. Beyond mechanical, it was more the thin profile, just essentially the amount of space you were taking up within the battery pack itself seemed to be why you're winning. Maybe the answer to the question is why you win has evolved in the past 18 months, but can you just walk us through, you know, competing solutions, what are they, and then why you're winning versus those?
Yeah, again, as I said, I think that the potential competing solutions are all theoretical because nobody has put them in place. You're right, Jeff, at the conferences, initially, people were talking about, okay, what materials could provide comparable thermal isolation, right? So, you know, things like ceramic papers, mica sheets, could potentially do the job up to a point. Some other aerogel-like solutions, you know, where there are particle-based aerogel products, try to enter the mix. But then it's really when you go back and think about the main requirement, which is trying to provide all of this in the thinnest envelope possible and adding the least weight to the vehicle as possible, and then at the same time making it pliable, that's where, you know, the other competitors really just kind of don't meet the requirements.
And, and OEMs ultimately have to make the decision of, okay, do they replace the polyurethane foam that they would otherwise have with something like PyroThin and tackle the problem at the source, or, or do they just, you know, leave the polyurethane foam and do nothing about it, and, and sort of hope for, a, a very low probability of thermal runaway in their vehicles? And so, you know, we're seeing more folks make the, the former decision slowly and steadily, right? It's, it's worth remembering that the introduction point for us into these vehicle platforms is really either when, like the case of Ultium, when the platform was being designed from scratch, or some of the opportunities that we're looking at now, like, you know, the Audi one that we've announced, where the battery pack is going through a meaningful redesign or an update.
And so it's really either at that mid-cycle refresh for a vehicle or in the new development of a battery platform or nameplate. You know, wherever it's being introduced, that's where we can come in. So we can't be just adopted by an OEM on a rolling basis on a vehicle, even though the need is very pressing for our product.
Got it. That's helpful. Maybe just policy-wise, is there anything, you know, mandating thermal barriers that we should be monitoring as investors? I know China's had some programs in place, for some time. I think the UN had been talking about, this issue, but I'm not sure, you know, where things stand, so maybe just a quick update there.
Yeah, so I think, like most regulatory stuff, it's been a little slow. And, you know, these don't necessarily they aren't necessarily aimed at having a cell-to-cell barrier, which is, you know, the market that we are building. But they do make the OEMs a lot more conscious and aware of it, because the requirement that the UN drafted and that's now been adopted in Japan, India, and Korea for every new EV sold, is that if the battery management system of the car detects that a cell could go into thermal runaway. And this is basically the theoretical model, right? So if a cell is starting to behave erratically and beyond the boundaries of the theoretical model, then it should actually issue a warning to the occupant when it believes that it's within five minutes of going into thermal runaway.
And so, if the OEMs now have to provide that warning, that's gotten them thinking, and I think it'll get us as consumers thinking, "Well, what does this even mean? You know, what exactly is thermal runaway? How much time do I have to get out? And is the five minutes enough, right?" So I think I don't think that requirement is really the strong push because OEMs are bound to do the right thing from the get-go in the West, right? I mean, they have brands that they need to protect, and a lot of goodwill that they've built up over, you know, in some cases 100 years plus. But it's definitely, you know, made them prioritize this.
I'll give you an example, like with, you know, a company like Ford, you know, thermal runaway, and addressing this used to be handled within the noise, vibration, and harshness team of the vehicle, and, you know, over 2.5 years ago. Now there's a team of over 70 people working to address this specifically on... And it's got, you know, noise, vibration, and harshness experts, it's got thermal isolation experts, it's got battery experts, it's got heat transfer people. So it's become a little bit more of a discipline within the OEMs, thanks to these requirements and I think just them wanting to do the right thing.
Makes sense. Maybe just a follow-up question to one of Don's points about the 20 different programs. I think on the earnings call, Don, you mentioned it was with 8-12 different OEMs and trying to get the analysts to stop playing bingo as it relates to the one or two wins that you had alluded to maybe 6-9 months ago. It's great to see the proliferation of OEMs testing the platform as Ricardo just walked through. But I'm just curious, the potential awards that, you know, may be coming down the pipe, are those more platform awards similar to, you know, what GM is doing, where it's a battery platform or that would be across multiple nameplates and/or cars?
Or are they sort of, you know, one-off, programs, that similar to what maybe Audi or Stellantis, are doing? I think Toyota, you know, at least for now, is starting that, that approach. So, you know, certainly GM is very pervasive, across everything they're doing. I'm just curious how other OEMs are, are approaching, maybe whether it's mid-cycle refreshes or other new, new launches, mid-decade.
And also-
Yeah, just... Sorry, if Ricardo could also work in, or yourself, Don, just how to think about content per vehicle as well on that same topic.
Yeah. Let me start with the prototype parts that we're supplying to these various programs. There is a spectrum of whether it is a sort of full-fledged battery platform meant to address all of the nameplates across a given OEM. Oftentimes it is for a range of vehicles within their offerings. Rarely is it for a single nameplate. So it's... You know, it takes quite a lot of design work, and I think people, the OEMs are in the midst of gravitating towards the battery platform idea.
I think it makes a lot of sense from a leveraging of that technology work, and I think the scalability of that approach also makes all the sense in the world. So that's what we're seeing. Content per vehicle, Ricardo, if you wanna-
Yeah.
Take a-
So, I mean-
Yeah ...
The main driver of content per vehicle is basically the form factor of the cells, right?
Yeah.
And so when you have a large pouch cell form factor vehicle, which is, you know, basically, General Motors and Ford are the ones that went on that path—you, depending on the size of the battery pack, it's anywhere between $700-$1,400 per vehicle. And it's worth remembering that there we would be replacing around, you know, $400 of polyurethane foam. And then, I mean, we're also enabling a simpler design than if you had the polyurethane foam, but then have to have some sort of module barrier and other things. So, it's not necessarily a pure add. And then on the prismatic cell vehicles, it's a little bit more straightforward and, you know, most of the European OEMs are using prismatic cells, some of the Koreans as well.
And, there we're about $350 of content per vehicle, but we're replacing around $150-$200 of polyurethane foam. This polyurethane foam's actually pretty expensive, and, you know, those guys make decent margins selling that stuff. We have to buy some of it for some of our pouch parts. But that's, in a sense, the content per vehicle opportunity.
That's helpful. And then, speaking of the content for OEMs, you mentioned on the earnings call you were negotiating, I think, a sixth potential OEM award. I'm just curious, are there any changes at play for existing customers that you've already announced? And then what are the main variables that people are focused on, beyond, you know, price and quantity to be delivered at X point in time? Obviously, people are concerned, you know, will you have capacity in the out years as you need to ramp up Georgia, which we'll come to in a second with future questions. But I'm just curious, high level, what are the key variables in a contract, and why would people need to potentially renegotiate existing ones?
Yeah, so I mean, I think the existing ones were all pretty well negotiated because the company, you know, went into those discussions with eyes wide open, being, you know, very well aware of all of the capital that we need to pay back, and then also just this need to continue building the platform and to, have all of that development be owned by Aspen, right? And so, you know, for better or worse, these tier one supplier agreements have evolved to be as vague and non-committal as possible, right? That is actually good up to an extent. The main terms that we... You know, for example, in the case with the sixth OEM that we had to work on, are basically the payment terms, right?
I mean, we don't wanna be financing our customers, and so that one we thought was worth pushing back on and just making sure that we, you know, can turn revenue to cash pretty quickly. And then another important one is basically who owns the jointly developed IP. And, you know, if you're willing to sign away your IP rights on the jointly developed IP, you have a contract right away. But we obviously wanted to continue given that we're the ones investing in a lot of this development, we wanted to own that IP. We think it'll continue building value for the company, and we think it can be leveraged across customers, and ultimately deliver lower costs for all, you know, customers if you look at them as a whole.
We thought that was worth, you know, kind of holding our ground on.
Makes sense.
I think the other thing, Jeff, on that, just an extension of that idea, is understanding the sort of sequencing of revenue when we win one. And we do believe that we'll be able to announce other design awards this, you know, during this year from that pipeline that I referenced and that Ricardo referenced, the sixth one. You know, when even if you look at the General Motors pattern, you know, from the time we won the award, we had, you know, relatively small amounts of prototype revenue leading to growing amounts over the course of one, two, and three years. I think that that'll be the pattern that you see.
You know, some of the wins that we had in 2023, you'll start to see some revenue here in 2024, and then noticeably revenue in 2025, and significant in 2026. You know, that's the sequence. So when we win one of these things, you know, that's sort of the launch. And then we, it starts to have an impact over the course of, you know, one, two, and three years. And I just think it's important to understand sort of the sequence of that and what it means to win one, and the impact that it has on our income statement.
Got it. Maybe let's just, since you mentioned GM, we can touch on them. I think you know, publicly stated, or GM's publicly stated, I should say, an aim of producing 200,000-300,000 vehicles in the year. Certainly there's been a lot of negative EV headlines in the last 6-9 months. So I think investors are trying to digest the intersection of what, you know, Mary's dream is, maybe at GM, versus consumer adoption of three new, what look to be potentially compelling vehicles, the Blazer, Equinox, and Silverado, ramping up for them some of their best-selling ICE vehicles. But maybe just walk us through sort of what the three different assumptions at play here. You have your own internal assumptions, which I think are 200,000 at the low end.
You have an IHS S&P Global number out there. I haven't seen their latest update, but I think it's at 277 or so.
Mm-hmm.
And then 2-300, you know, for GM. So you, you obviously chose the low end. But maybe just walk through-
... that decision-making process, and then sort of the perception among investors, given the upside in the quarter, was that there was a bunch of inventory at play. But maybe it's just they're ramping up, you know, these three new platforms to sort of seed the showrooms and the lots. But what are you seeing for the cadence for the next few months, at least?
Yeah, I mean, I think the, you know, the 40-week demand feed that we get from GM is one data point that has started becoming a lot more credible as it stopped changing. You know, during Q3 of last year, it started to stabilize, and so we started to be able to, you know, take those figures with more credibility. Then there's obviously the IHS number, which, you know, we think is... IHS is usually a little bit late, but it's - but in terms of the quarterly progression, I think IHS is a decent indicator. But frankly, Jeff, like, for us, as we invest in CapEx right now for 2025 and beyond, then, you know, we really look at a longer-term North Star.
You know, during the last earnings call, I referenced this notion of GM capturing its fair share of the EV market, and we truly mean that, right? I mean, last year we were all frustrated with GM not producing enough EVs, right? It's very easy to just get on the train of, you know, bashing their execution. But I stepped back and said, "Okay, like, what is truly the potential for sell-through here?" And I really mean it. I mean, I think if Tesla was selling Teslas at GM dealers, they would sell 30% more cars, just due to the, I mean, GM has 7,000 dealers in the U.S. alone. They sold, you know, over 6 million vehicles globally last year. They did, you know, around 2.2 million vehicles in North America.
Today we're looking at some OEMs with, you know, products that are very expensive and not quite meeting the range requirements of consumers do, you know, 10%-15% EV mix of their overall retail numbers, right? And so if we apply those same figures to GM globally, and, you know, to do 200,000-200,000 vehicles, you don't need to put more than 30 cars in each dealer, right? And I think the dealers would argue that in order to sell, you know, 60 cars, you need 60 on the lot, right? And so if we put 60 cars in each dealer, right, we're talking around that 400,000 unit number as the North Star, right? Now, whether it takes us 2 or, you know, 8 quarters to get there, I think that's really up to GM and their ability to ramp.
But, for us, we're not really worried about the sell-through because we are very well aware that, in particular, when you're dealing with multiple nameplates, you really need to stock the dealer channel initially to even start thinking about the sell-through, right? The other piece is, I mean, in order for, and speaking more broadly, not just GM, in order for them to continue supporting, you know, what's become a very healthy ICE business, they are going to have some EV mix. Whether it's 20% or 30% kind of depends on how on the emissions of the ICE vehicles that they're selling alongside them, right? And if we look at 2026 and 2027, they all have to have a, you know, 20%-30% mix in order to be able to support their current ICE businesses.
So, you know, in the near term, yeah, we have to look at the 40-week demand feed that we get from GM, which is now stabilized. We look at IHS, we apply a discount to those, especially, you know, if we're looking two or three quarters out. But we're pretty confident that the long-term trend is still up and to the right in terms of demand. I mean, these vehicles may need to be sold with some incentives and discounts to align with the market dynamics of higher interest rates and all of that. But I mean, you know, the OEMs are not tooling up these EV plans to run them at half capacity. So yeah.
And Jeff, I think we've been careful in our outlook. You know, with $95 million of revenue in Q1, growing significantly from Q3 and Q4, and setting that 380 number. You know, well that we've tried to be also cautious about, you know, maybe the latter part of this year and-
Right
... and what have you. So our eyes wide open, right? But we're in a—we've got a lot of momentum right now, and especially as we start to bring on some of the other OEMs and they begin to chip in. And then, of course, we've got the energy industrial business, which has a tremendous amount of demand, and we're—you know, we're finally really supplying that part of our business as well. So we've got some nice things going on to help us through this period. Absolutely.
We've only got a minute or two left here, but, maybe just rapid fire, if we can, touch on the balance sheet, the DOE process, and then, you know, what would be needed to move forward with Georgia. That we had some investors typing in questions on their screens, and that was the general theme, so I apologize for not getting those in earlier. But, where do we stand on those sort of three things?
Yeah, happy to go there. I mean, I think, you know, the DOE process is very interesting, because if you look at it from an investor's perspective, it's this binary event, right? Did you get conditional approval, yes or no, black or white? But frankly, from our perspective, especially in this phase that we're in, I mean, not everybody gets to this phase of due diligence and term negotiation. There are quite a few gates where, the DOE can basically filter you out, so. And so for us, it's really more of a darkening gray, to the point that, you know, when we look at Plant 2 and what we have left to spend, we feel perfectly comfortable with the notion of letting the DOE process hopefully come to a positive conclusion here before reinvesting again.
I mean, we realize, even at our current valuation, how expensive this capital would be if we restarted the project too early, and we want to be cautious as we do that. And also, I mean, we're on the tail end of this process with the DOE, and I think if we are patient and we play it out, we, you know, we'll get the most efficient and the lowest cost of capital available in the West to build out our capacity expansion, and it'll be worth it.
Jeff, think about it this way, you know, we've seen companies receive their conditional commitments from the DOE LPO, and, you know, we're now in this heavy due diligence term sheet negotiation. We, you know, if we're fortunate enough to get that conditional commitment, we want to be, we want those conditions to be as minuscule as possible. You know, I think those conditions have been so onerous on some of these other companies that it's been as much of a curse as a blessing in certain, you know, in certain ways. And for us, we want, we wanna be sure we work through those conditions prior to getting that commitment.
Maybe just add one quick point, Jeff, I mean-
Sure
... which I think is important for investors to understand. Plant 2 is pretty compartmentalized, right? With the DOE process, we think we can get it the rest of the way there. But if you actually look at the company without having to invest in Plant 2 , I mean, we can generate meaningful positive cash flow next year. As our operating performance improves this year, our cash needs on a given quarter are actually not that high. And so, you know, bolstering the balance sheet of the company that is not quite building Plan t 2 yet, it's a very simple exercise that we can take care of with a little bit of debt. You know, we don't have an ABL, we don't have a working capital line just yet.
We can work to put that in place as the structure of the potential DOE loan becomes a lot clearer, and those are all discussions that we're having right now.
Perfect. I'm afraid we're out of time, but thanks so much for joining us. Thoroughly enjoyed the conversation, and wish you the best of luck in the weeks and months ahead with the DOE process that we just touched on. Thanks so much.
Thanks.
Thanks.
Thank you, Jeff.
We'll see you.
Take care. Thanks, y'all.