Good morning, everyone. I'm George Gianarikas, one of Canaccord Genuity's sustainability analysts. Welcome to our 44th Annual Growth Conference. And it's a wonderful way to start our conference is with Aspen Aerogels, a stock that's thankfully made me look good in a, in a market that's pretty tough. Thank you to Don Young, President and CEO, Ricardo Rodriguez, CFO, and Neal Baranowski, Senior Director of Corporate Strategy and Head of Investor Relations, for attending. Guys, good morning!
Thank you.
Thanks for having us.
So maybe just a broad question, maybe start off and give us a quick overview, some of the key takeaways from your recent earnings results?
Sure. Thank you. Thanks for coming, everyone. Yeah, so when I think about the coming really out of 2023 and through Q1, we had. We built a lot of momentum over that period of time as we continued to build our second business, our first business being the energy industrial business, which has continued to perform well. We're working our way out of some supply constraints with our external manufacturing facility there, targeting $150 million of revenue in that part of our business. And then, of course, notably, our thermal barrier business and addressing thermal runaway in electric vehicles has progressed significantly from a growth point of view.
We raised our guidance originally at the beginning of the year from $350. In Q1, we raised it to $380, and we raised it to $390 revenue. EBITDA followed from, I think it was $35 to $55 to $60. And so we've beaten and raised twice. I think, really importantly, though, if you look at our gross margin progression over that period of time, we've moved from 11% to 17%, to 23%, to 35%, to 37%, and in Q2, a 44% gross margin. And again, our EBITDA margin improved dramatically over that period of time to be 24%-25% last quarter. And so a lot of momentum operating well.
I still believe that we've got a lot of improvement to be had in our performance, which helps us, I believe, sustain and perhaps even grow that gross margin from where we are today.
Speaking of gross margins, it was really, in our opinion, the standout of your recent earnings result. Can you just talk about what happened there, how it happened, and how sustainable that momentum is?
Yeah, I mean, I think, you know, historically, we used to break out the, the material component from the manufacturing costs or conversion component. This time we didn't do it, 'cause I think at some point it starts becoming, intelligence for, you know, other folks that are trying to build a, a business in the material space. Maybe even it could be completely unrelated to what we do, but, material costs basically were flat as a percentage of sales quarter-over-quarter from Q1 to Q2. All the benefit really came from fixed cost absorption as we, you know, as we captured additional, you know, another $30 million, roughly, of revenues, right?
And so, one can only expect that if you look at our EV thermal barrier business, that one currently, we believe it's sized for roughly, over, over $125 million a quarter, right? And so we were running at almost like $90 million here, and so we still have that's where the additional room will come from. And to Don's point, I mean, I think on the material side, we can still make a dent by improving our yields, but that'll require a little bit more work here over the next couple of quarters, and there's some additional opportunity there. But just from just from capturing enough demand to better utilize our current capacity on the EV thermal barrier side, that's where all of the margin improvement came-
Yes
here. And then, at the same time, on the energy side, the switch to our external manufacturing facility has been accretive from a margin perspective. We continue pushing pricing there as well, given that we're sold out. And so that, that's what enable, enabled the margins here at Q2 as well.
You know, if I could just add one thing to that, to sort of the math behind all this. We've talked about having $650 million of revenue capacity from our current assets and supply arrangements, $500 million on the EV side and $150 million on the energy side. And what we introduced at our earnings call was the prospect, a lot of work needs to be done, but of expanding those numbers, on the EV side, our Plant One in East Providence, Rhode Island, and our assembly facility, fabrication facility in Mexico. Can we get another $100 million of revenue out of those assets? It's a little bit of a question mark, but that's what we're striving to do.
We know on incremental revenue, we're dropping well more than $0.50 for every incremental dollar of revenue, so you know, that's extremely valuable. And at the same time, we've challenged our energy industrial side of the business, which has had great demand, to expand that from roughly $150 million to. Can we get $100 million more out of that business? So all of a sudden, we go from, you know, $650 million to perhaps a number like $800 million or even $850 million, again, we've got largely the sort of the organizational infrastructure to operate at those kinds of levels, and that, I believe, continues to push and sustain and support-
Hmm.
- our gross margin and our EBITDA margin, of course, as well.
To maybe unpack that for a second, if you were to reach 800-850 with the current capacity, I would assume that the gross margin profile of the firm kind of shoots up a little bit, given the dynamics you talked about.
Yeah, I think a little bit is the key point because it depends on the mix, right? Right now, the beauty of what we're doing is that, and Don and I talk about this all the time, like the business is as simple as it'll ever be. You know, people ask us constantly about, well, do we think concentration with GM is a risk? We think it's a blessing. Right, it makes our business very simple in terms of managing engineering changes, chasing AR. It's one big relationship that's delivering a lot of this profit. As you add a lot of programs, not all of them are sized as big as GM is, right?
These programs, just as we learned with General Motors, initially cost you quite a bit to launch, and then it's really up to your operations to make sure that you put it on the margin-
Hmm
path that you were assuming as you were quoting it. We think we're pretty conservative when we're quoting these in terms of the, you know, the operational demands of the team and the volume expectations of these programs. But you do have to pay a little bit to launch, right?
Right.
And so as the revenue mix has more programs within it, there's a lot of potential for the margins to improve once you get to that steady state and they're on their second year. But when you've got several of them on their first year, I think that can, you know, make a dent on gross profit.
I'd like to ask about GM. It's something that we all collectively pay a lot of attention to, and you guys have done a really good job of cushioning your guidance, you know, throughout the last, call it, 12-18 months. And on your recent call, you brought that down below what GM had guided, but you raised some of the guidance for the Honda, which appears to be a very well-selling EV. Can you just sort of talk about, as investors, what we should be paying attention to? Because there's a lot of confusion still in the marketplace around that number. And second, how we should think about those volumes in 2025.
Mm-hmm. Yeah, I'd argue that the real point is 2026, and we actually covered this last week on the call, right? And so, you know, the OEMs won't tell you this explicitly, but they face a significant regulatory wall from an emissions and a fuel economy standards perspective, where things will get real in 2026, and then even more so in 2030, right? And so OEMs like General Motors, Ford, Stellantis, et cetera, OEMs that are that have a lot of presence in the U.S. market, they all need to, on average, get to a 15% EV mix in 2026 in order to comply with the regulations. Even if they're able to manage launching some plug-in hybrids between here and there, to pick up some of the lost ICE volume, they all need at least a 15% EV mix.
15% EV mix for General Motors is roughly 400,000 vehicles. We're sitting here right now at... You know, we can debate whether it's 180 or 250, right? But we know that the 2026 point is at least 400,000 vehicles. Then 2025 is really just a point on that line from where we're at now to over 400,000 vehicles for General Motors.
Hmm.
Whether that line is very steep or, you know, a little more gradual, just given the broader state of the economy and the new vehicle market, I think that we'll see here in the second half of this year. But we still truly believe that 400,000+ vehicle mark is there in 2026, given the regulatory environment.
Right.
I think IHS right now has General Motors at 312,000 EVs, if you include the Honda Prologue and the Acura ZDX. That seems like a decent midpoint between where we're trending here for 2024, and where that North Star is for 2026.
Hmm. I mean, the story, your story gets very exciting, I think, in 2026, because you have all these new customers that you already announced that-
Correct
I think start to kick in. Can you help us just sort of layer when those customers start to really impact your P&L?
Yeah, so I mean, the other programs that we're launching with Audi, with Stellantis, with Porsche, with Scania. In the case of Stellantis and Audi, they were all claiming to launch in 2024. But we conservatively, from looking at those programs and understanding where the cells were coming from, we're like: This is more like a 2025-second half of 2025 thing. And that, now we feel pretty confident about that 2025 timeline-
Hmm
as these guys have, you know, communicated those delays, both in. And they really depend on Northvolt's ability to make cells for Audi and ACC's ability to make cells for Stellantis, right? The Scania program, that one is ramping up as well, but that one also requires cells from Northvolt, and so as those ramp up, we'll see that benefit next year. The Porsche vehicles have not been announced yet. but we expect that to be a fourth quarter of next year launch on the Cayman and the Boxster platform to start. And then, you know, we have another German OEM that we mentioned in our remarks last week. They, they've got an odd sourcing process.
They have a very formal nomination process that we've just gotten through, and so we've been nominated, and as soon as they come back from summer vacation, we should be working on the actual supply agreement. And that may also kick in towards the latter part of next year.
We should expect one new customer announcement between now and the end of the year, or?
Yeah, I mean, we'll be sprinting to get it done.
Okay.
Yeah.
Is it a large European OEM or a midsize?
We only focus on the large ones.
Yeah.
Yeah, I mean, through process of elimination, it's pretty simple, right? The ones that are left to go are BMW, Daimler, the Koreans, Ford, Volvo. With one hand, our team knows who to choose.
Two of those are European, right?
Yeah.
There you go. Okay.
Also, Neal put a German flag on our slide deck-
Nice
in investor summary, so to even narrow it a little bit more than that, so.
Yeah.
Maybe to focus on energy industrial, which has had really good momentum. You switched your manufacturing process, and you have a deal in China there. You know, we focus on EVs, so some of the dynamics, you know, in oil and gas, your end markets, at least I'm not intimately familiar with. Can you just sort of talk about the drivers, the sustainability of that particular line of business? And you talked about increased revenue capacity as well.
Yeah, yeah. So we've been capacity constrained, but this business really goes back more than 15 years. But we started in doing subsea pipelines, where our high thermal performance and thin profile enabled the end users and the engineering companies, companies like Technip, to shrink these systems down, and we drove a lot of value and enabled longer, deeper, more complex systems, subsea. We then started working with ExxonMobil refinery, petrochemical work, and they gave us the good housekeeping seal of approval in their global specifications. And once you get an ExxonMobil, you know, it makes all the other ones much easier. And so we began growing in that part of the business.
Again, traditional energy, but bringing better operating performance, more efficient, safer operations, including fire safety, which, as we all know, translated very well into the EV thermal barrier business. But then we got our foot in the door on the LNG business. Again, kind of working sort of energy transition of sorts. And we've been o ur Cryogel products for that segment used to be maybe 10% of our revenue mix. Today, it's closer to 25% of our revenue mix, and that's a growing part of our business. And as I mentioned in the last earnings call, we've won two carbon capture programs now as well. And so again, you know, furthering that energy transition, I think
I don't really love transition, because we're not leaving the old stuff behind, we're doing extremely well there. So we're not transitioning away, we're just expanding the TAM from our point of view, in this part of our business. So, look, it’s not a 30% per annum grower, but we believe that we can double the size of that business-
Mm
over the course of the next four years, and you know, with 40% gross margin. And so you get this stable baseload of both revenue and profits that support our other endeavors.
Over the next four years, you can double capacity with your Chinese relationship?
We believe we can. We believe we will, yeah.
Are there any IP issues that are coming up, or do you feel comfortable with them?
Look, I mean, that has been the, you know, eyes wide open, a part of this thing. We knew that, we explored a few different partners. We feel like we have an excellent partner. We have a mutually beneficial relationship. They have 100% of their capacity today dedicated to us. And so we have helped them produce our legacy products, those products that we developed originally in 2005 to 2009, and they're doing a fine job of doing it. You know, in the end, it was a relatively easy decision for us, because what was our alternative? Our alternative was to let that business just go towards zero, from a revenue point of view and a capacity point of view.
We probably would've had well less than $100 million of revenue capacity to serve them out of East Providence this year.
Mm.
I mean, well less, maybe a number more like 40. And by the time we get to the end of the year, for Q4 would've been something like $10 million.
Mm.
And so that business would've largely gone away at, you know, at that point, as the EV business just absorbs all that capacity.
Mm.
So it was a very intentional, very thoughtful process, but it was a relatively easy decision. The hard work was really finding the right partner and building our partnership and our relationship with that entity.
to switch gears for a second, you talked a lot about, you have talked about a DOE loan. And it sounds, at least to us, that that's getting closer.
Mm-hmm.
Can you just sort of update us on your thinking there, and how much that DOE loan. How much you would need in excess of that potentially to build your plant in Georgia?
Yeah, I mean, for us, the DOE loan is amazing, right? We truly think of our cost of capital as the front sprocket on a bicycle.
Mm-hmm.
You could be pedaling as hard as you want, going up a hill, but if you're on the wrong sprocket, and your cost of capital is out of whack, you're not getting far, right? And so for us, the DOE loan is a really good way to reduce our cost of capital by, you know, multiples, relative to the WACC in most people's models. And so we thought it was worth the chase more than a year and a half ago, or almost two years ago, when we decided to really play to win with our application and get the best advisors to help us get there. Now that we've been in this due diligence and term sheet negotiation phase for a while, I mean, the terms have been aligned to.
The loan is in the interagency review process, and, and it's only a matter of time for the loan to get through that process for us to have a conditional approval. Our expectation, given that we've invested $300 million towards the project through the end of the first half of the year, is that, that, is our equity contribution to the project. And with the exception of a few, construction reserves that need to be funded, we expect the loan to fund the plant the rest of the way through.
Okay.
We don't quite have an updated cost estimate for the plant, but we do. That we can disclose, but we do expect the DOE loan to fund the project the rest of the way through. When we look at our current balance sheet, we could already access the loan with the funds that we have on hand.
We will open it up to the audience for any questions in our remaining four minutes. Any questions from the audience? There's a mic that'll go around. If not, I can continue.
Yep.
I have a special place in my heart for a guy named Tom that works for your firm who's specializing in...
He just came back from paternity leave.
Exactly.
Yeah.
In silicon battery materials. I'm curious as to whether you can sort of update us on, on your thinking there, on the prospects of that, of that moonshot of a potential business at your firm?
Yeah. Well, it really goes back to our. George is referring to a colleague of ours by the name of Tom Carney, who has lots of degrees, and he is a. He has led a battery materials initiative. So this is the introduction of silicon into the chemistry of a battery, with the goal of increasing energy density, and ultimately drive range. I would just step back a second. Our strategy, broadly as a company, is to leverage our aerogel technology platform into large, interesting, dynamic markets, particularly those with sustainability themes.
So this is very consistent with the strategy overall, and we have that program and a handful of others in what, you know, in our funnel, if you will, of around new business creation. And Tom's project has a, t hey're trying to solve a very challenging problem, as you know, and there are other companies trying to solve it. And we've made tremendous progress in that, and other battery material initiatives that we have in around our carbon aerogel program. So for us, it remains an important R&D project, very central to our strategy. And we believe that as we get closer to data that we can rep- or a process that we can replicate, that will attract validation.
That will come, I think, from either grants or partnerships that allow us to sort of take this from our, let's just say, lab scale to pilot scale. That's our goal here. I think we'll continue to report on it. We've had the luxury, in a lot of ways, of having two other substantial businesses to talk about-
Yep
and that's allowed those smaller businesses to or those smaller prospects to mature sort of behind the curtain a bit.
You know, last question. One that I get quite a bit still is about competition. So when you look at, you know, the design-ins that you have, who else was in that bake-off, if anyone? And to the extent companies, EV companies, aren't using your material, what are they doing exactly, and, and-
Yeah. So the vehicles that you see out there today that, you know, were being developed and launched before we had a cell-to-cell barrier solution are in essence using a polyurethane foam that's there for mechanical reasons in between the cells. Right, and so that foam does a great job in terms of buffering any sort of vibration and harshness that the cells are subjected to while the vehicle is moving, but it does nothing in terms of thermal isolation if a cell starts heating up and preventing that, you know, propagation throughout the battery pack, which is pretty quick, right? I mean, a cell will go from room temperature to 800 degrees Celsius in, you know, a couple seconds. And so
Some of them are just playing the game of probabilities, and if you look at an EV today that could theoretically give you 400 miles of range, they really are very careful with what temperatures they run it at and what's- how much charge they make available to you as a driver. So, you know, take a Tesla Model Y could theoretically give you 400 miles of range. It's got an EPA range of about 310 mi.
Hmm.
In the real world, when you're driving it in cold and hot weather, and it's consuming a lot of energy to keep that battery primed at a certain temperature, you may get 270 mi of real-life range, right? And so that's not great. And, you know, folks like General Motors realize that, and they realize that they had a, an even worse risk when you have larger form factor cells, which is the case of these pouch cells and prismatic cells. And all of a sudden, the requirement went from the mechanical one to, you need to thermally isolate. And there just isn't another material that can deliver the same level of thermal isolation that we deliver, without being three to maybe even 5 x thicker.
Hmm.
And space matters, right? The more space you're taking up with insulation material, the less cells you can have, the less range you can offer to consumers. And then the third requirement is this whole element of flame and fireproofing, right? So in the rare case that a cell actually does light up, can you suffocate that fire at the cell level? And you know, a lot of materials were used initially as module barriers or pack barriers, and these include ceramic papers, mica sheets. They're also very expensive and hard to source. And more recently, this whole notion of a bake-off hasn't really been the case in our selling. It's been more of we go through a bit of a development cycle, we provide a quote.
The OEM obviously doesn't like the quote 'cause they want the part to be free, and they claim to have some competitors. We don't see them. And, you know, there have been a few cases where we've lost the business to some ceramic-based material, only to then be asked a couple of weeks later to dust off the old quote and-
Hmm
and get accelerated to sourcing. That was the case with ACC and Stellantis.
Hmm.
And so, you know, we truly believe that, you know, if we discounted the product, then we, we'd get sourced immediately and right away, but there's no benefit in that. And so we're gonna just be very careful with pricing, more than make sure that we pay back all of this capital that we're deploying towards the opportunity. But so far, competitive-wise, I do think we've got a really good, healthy lead, because the barriers of entry are really high, right? If we were sitting, working at one of the big materials companies chasing this EV opportunity, first, if you open up USA Today, it's looking less and less attractive every year, right? So good luck getting that approved. Then, you would need to get over our IP, which a nd you'd pretty much be infringing from day one.
As soon as you try to make a, any sort of blanket-based aerogel product, you're infringing on our IP. And then second, you would need to get all the capital and the scale to get there. And then, most importantly, you'd need to build a relationship with the OEMs. So it's this pretty serious chicken or the egg problem for anybody that's trying to pursue this, right?
Hmm.
You can't get the relationship if you don't have the scale. You can't get the scale if you don't have the capital. You can't get the capital if you don't have the relationship. So, I truly believe that if it weren't for the scale that we had with our energy business, GM would have never sourced us.
Hmm.
The fact that PyroThin started as a very close cousin of Pyrogel, the energy product, is what got us over that chicken or the egg problem. It's just really difficult for others to overcome that.
That was awesome. Thank you, gentlemen.
Thank you, George.
Appreciate it.
Anytime.