We don't know of any company quite like Aspen Aerogels. We often talk about transferable skill sets in energy services, products and services in traditional energy that have new emerging markets and new energy. No one has done it quite as well or as quickly as Aspen Aerogels, who with an established product line in traditional energy, is seeing step change in revenue and profitability as a supplier to electric vehicle batteries. I'd like to introduce Mr. Ricardo Rodriguez. He joined Aspen in November of 2021 , serves as the company's CFO and Treasurer. Prior to CFO, he was Chief Strategy Officer. You have a wealth of experience in the auto industry, having worked for Aptiv, ClearMotion, GM, Amazon, and a number of other players. Ricardo, thank you very much for joining us today.
Thanks. Thanks for having us. Thank you.
So let's just start with the basics here, and just sort of familiarize everybody with your business here. Can you just talk about the basics here? What are aerogel products, and kind of what makes them superior to traditional products?
Yeah. Aerogel at the core is a material with a very open nanostructure. And in the case of our insulation products, which are based on silica, they are, in essence, a very good thermal isolator. And by very good, I mean 5- 10 times better than anything else that would be second. You can go on YouTube, and you'll see literally you could have you know 800+ degrees Celsius or 1,500 degrees+ Fahrenheit on one side of a centimeter of our material, and you could hold your hand up at room temperature on the other end of it. And the first market that we cracked, as you mentioned in your opening remarks, was the energy industrial insulation market.
Think of oil refineries, basically very hot applications with piping there, where you want to preserve the energy that you spent warming up something within a very tight envelope. Then we moved on to cold applications with a set of cryogenic products, you know, in LNG liquefaction and LNG storage, very cold tanks, et cetera. And then more recently in EVs, as a cell-to-cell barrier, right? And again, it all really stems from this notion of the material being an amazing thermal isolator, very extremely fire resistant. And then in the case of EVs, a new requirement was added to the list, which was, you know, basically very compressible and recoverable mechanical properties.
Anything that you put next to the cells of an EV needs to be able to get compressed and decompressed without placing any undue pressure on the cells. Otherwise, you cause what you're trying to solve, which is thermal runaway, and that's what our product has been doing here for a couple of years now.
So maybe let's just start off with the industrial energy business, and kind of where you started here. So maybe just kind of start initially, I think this was about twenty years ago. So initially, kind of how did this develop, and what was the initial applications for the aerogels?
Yeah. So the initial applications for aerogels were actually spacesuits with NASA. Again, on this quest to find a material that would provide a lot of thermal isolation with a very thin profile, and then as the team really honed in and developed the process, which is highly patented and proprietary to us, and it's in essence taking a glass fiber substrate and impregnating it with a solution of silica in ethanol, and then creating the aerogel. 'Cause anybody can make aerogel in a lab, but it would be a very brittle material. Think of it as an ice cube, if you could take out the water. That's what it would be, and it'd be kind of useless because you wouldn't be able to mold it around any shapes.
It'd be so brittle and fragile that if you dropped it, it would just shatter. And so the, what the company pioneered is making it in a form that you can actually apply and wrap around pipes and cut into shapes and mold, et cetera, right? And that was the breakthrough. And so the first market that the company worked over a long time to build demand in was the energy industrial insulation market. And if you get, you know, certified by the likes of an ExxonMobil or one of these large asset owners, then you only have to deal with eight people to capture what can be a pretty large market. And that's, that was the strategy that the team took. Right now we have about $150 million of supply to meet the demand in that end.
But we over the past couple of years, we've seen demand really increase coming out of COVID, as these asset owners think longer term around the value that everything that's in these sites provides. And we believe that we have more demand in the energy business than what we can supply with our little $150 million external manufacturing facility.
So you're putting basically, this is upgraded, much more efficient insulation-
Correct.
- on mining and petrochemicals. What are some of the other end markets that-
LNG facilities. We recently announced in our earnings call that we're in a carbon capture project as well. And then there's also a market of subsea pipe and pipe insulation. So if you think in the Nordics, you know, the heavier this insulation is, the more the pipes can sag, and it's critical to keep the oil at lukewarm temperature so it can flow through the subsea pipelines. And that's a market that we've pretty much had to ourselves here for the past 10 years. And as we've optimized our way to supply it, and more recently, set up our operations so that we can supply that profitably, we're now leaning more into those projects, and they're helping us get to the margins that we've had here recently.
So you recently shifted all your manufacturing, I think, just about all your manufacturing for this business from East Providence to China?
Correct.
Can you talk about kind of why you did that and the benefits you've seen so far?
Yeah. So, I mean, we have an amazing sales team that has been with the company, in many cases, from the beginning. And so when General Motors came and gave us the award to supply the Ultium battery platform with, you know, our earlier iterations of our cell-to-cell thermal barrier design, we knew that we were going to run out of aerogel supply at some point from Rhode Island. And it's kind of insane, right? I mean, this company has spent twenty years building up demand in this energy industrial market. We've always believed that it could be a very profitable segment if the revenues were above $140 million a year. And to have that get sundown simply because we can't supply it, because we're ramping up the EV thermal barrier business was, you know, extremely painful.
And so our head of sales on the energy industrial side, along with the rest of the team, started looking for alternate sources of supply at around, you know, the middle of 2023. And we went to China, had a bunch of conversations with folks that had assets that, you know, could potentially make the product. And it wasn't until February of last year that the team could actually go to China to physically validate how they were making all of the samples that were being shipped back and forth. And that's when we saw that there was a you know, there were about nine months of remaining work to do in order to validate them to the point that we could put, you know, our brands on their products and sell them as if they were ours.
And then some initial tests of the product, the feedback was very positive. The product's actually less dusty than some of the stuff that we were producing in Rhode Island, given some changes in the formulation that our team made in order for that to work with the assets that the external manufacturing facility had. And it's worked out very well. And this year, we've just continued to certify more and more of our 11 SKUs within that product line. And as I said, we'll do over $150 million of revenue this year, most of that being supplied by the external manufacturing facility.
When do you anticipate reaching full capacity in China, and do you have opportunities to expand from there?
I think here in Q4, we will very likely reach the maximum of the capacity that's there. It's no secret, it's implied within our guidance that the energy segment needs to do at least $42 million of revenue for a quarter here in the second half. And so, yeah, we're expecting that supply to be fully on for all SKUs, definitely in the fourth quarter. And then there's potential to increase that capacity further with some of the investments and the development that we've made there in Q3. We've had a brief shutdown that the team is managing here in Q3 to enable further supply. And our team also continues chasing additional demand, so we believe that that business can grow in, like, the, you know, low double digits every year.
So this has been your established business, which has kind of been there for kind of provides this base revenue, base margins, but the real story is about thermal barriers in this new market that's kind of up. So maybe can you explain, first of all, what is thermal barrier? I mean, what are the thermal barriers used, you know, for thermal runaway, but can you explain kind of what thermal runaway is and how your product solves for this?
Yeah, absolutely. You may recall those Samsung tablets in 2018 that were catching on fire in planes, or, you know, when people put them in their bags and they got squeezed between stuff, or when they sat on them, you know, these tablets would literally just ignite. That, in essence, is thermal runaway, as, you know, as you read about it on USA Today, I guess. What it really is, is for various different reasons, you have the positive and the negative side of the cell short, and the lithium-ion electrolytes that are in between are highly flammable. And various different things can cause, you know, the anode and the cathode to come in contact. The main one is a buildup of old, basically, like, dried-out lithium on the anode side of the battery.
That buildup happens as you charge, discharge, and just use the battery in, you know, outside of how people expect you to use it. You charge it very quickly at very low temperatures, you build up these dendrites. The buildup becomes enough that it breaks through the separator, and then boom, the cell goes. If a vehicle's involved in a crash, you're in essence rupturing the cell. Somehow you can make the positive and negative side come together, and there you go, right? So, at the same time, it's this whole notion of thermal runaway is also the expression for if you. Let's remember, these battery packs in these vehicles are made of 100 of these cells lined up in a bank, right? In a Tesla with cylindrical cells, you have thousands of these cells.
So if one starts heating up, it'll heat up the one next to it, and the one next to it, the one next to it. And the temperatures are pretty high. I mean, these are 800 degrees Celsius thermal events. And so the number one job was to prevent the spread of this heat inside. Like, before you have the explosion, which is, again, super low probability, you'd want to be able to manage the current, the power, and the temperature of each cell individually, right? And the controls in the vehicle enable you to do that. But if physically you cannot constrain the hot cell to it just heating on its own, then you've got a problem, right? And so that's where GM came to our team, looking first to address thermal runaway or thermal propagation, which is, you know, this...
And then over time, you know, the requirements have tightened up and have been developed further, and this whole notion of having that material behave like a very pliable foam has become more and more important, and so that is what we're solving. In a lot of the EVs that you see today, before we were around with this type of solution, OEMs would put a barrier to shield the overall battery pack, something like a mica sheet or a sheet of metal, and that buys you a little bit of time. But you've seen how some of these fires on EVs that only have a pack barrier, they require a ton of water and a ton of time to put out.
And so OEMs are now thinking about addressing this closer to the source, and if you address it at the cell level and you isolate the cell that's heating up, then you're able to get a lot more performance out of the battery. So, I mean, we are seeing OEMs that truly leverage our design for a cell-to-cell barrier and go from a cell-to-pack design. They're able to, you know, regen energy faster, charge batteries faster, have to worry less about, you know, dealing with high temperatures. And they're able to adopt a very different control strategy than an OEM that doesn't really know what's happening inside of the battery pack thermally between one cell and the other.
So you said your, your anchor customer is GM.
Mm-hmm.
And so are you providing Thermal Runaway to all of their batteries?
Now we are, yes. So since the Bolt was taken out of production, we've been supplying every single vehicle, every single EV that GM makes on the Ultium battery platform. So this year, GM expects to make anywhere between 200- 300, 200- 250,000 EVs on that platform.
An entirely new market that wasn't there a year ago.
Correct. Yeah. I mean, when I joined the company at the end of 2021, we did $7 million of EV thermal barriers. And I'm not joking, we had about 250 people in a room about the size of this room, with tables, hand-assembling all of the parts, in order to ramp up production for General Motors in 2021. And then now we have, you know, 250,000 sq ft facilities with about 600 people and a bunch of automated equipment cranking out, I believe it's about 130,000 parts a day.
It's essentially the same manufacturing process as with your industrial energy business, correct?
For the aerogel rolls themselves, yes. This is actually where the company has gotten a lot of operating leverage, right? So if you look at our process in Rhode Island, the main constraint is volumetric. So we take the rolls and put them into a cylindrical mandrel, which is where we pump supercritical CO2 and make the aerogel. Our energy industrial products are anywhere between 10 and 20 millimeters of thickness. On the automotive side, the product is a close cousin of Pyrogel, but the thickness is anywhere between 2- 3 millimeters, in some cases even thinner. And so what used to be maybe a 120-foot-long roll of insulation is now, you know, 6 to 1,000-foot-long roll of insulation.
Assuming that you're selling each sq ft of area at about the same price, that's where all of a sudden we've gotten all of this operating leverage out of the Rhode Island assets to support the EV business, to increase our capacity to about $500 million per year, out of the same equipment and same process that was making the energy industrial insulation.
That was about $120 million, right? You went from basically $120 million back-
Correct
... to $500 million.
To 500.
Right.
What we did have to add was all of the assets in Mexico, and the team actually developed an automated process for taking the roll, feeding it through a die cutter, out come a bunch of rectangles that need to be encapsulated with heat-resistant film, dimensionally checked at every step of the process, and then in some cases, we actually assemble, you know, some foams, some seals, and other materials to the encapsulated rectangles of aerogel to ultimately end up at the cell-to-cell barrier part. And so the average vehicle would have, you know, about 100 of these parts inside of the pack, one between every single cell. And I think we've said before that on a vehicle that has pouch cells, it's about $900, $900-$1,500 per car, depending on the size of the battery pack.
On a vehicle that uses prismatic cells, it's about $350 per vehicle. It's not a total net add for the customer because in the place that we take it between each of the cells, they would usually have to buy some sort of polyurethane foam that is pretty expensive. So in the case of the pouch cell vehicles, they'd be buying about $350-$400 of foam. In the case of the prismatic cell vehicle, they'd be buying about $150-$200 of foam. But that foam, at 300 degrees Celsius, basically adds fire to the fire, adds fuel to the fire. And so we think we provide quite a bit of value and protection for, you know, a small increment.
When you put that within the context of the overall battery pack, the battery pack costs, you know, at 150 kilowatt hours, talking about 13-14 thousand-dollar batteries. So $900-$1,000 to keep it safe makes a lot of sense, especially when you have recalls like one of the Chevy Bolt, where, you know, GM learned the hard way, you know, that recall cost them about $1.8 billion. Even to this date, they're paying some customers $6,000 to have them sign away their liability claim if the vehicle burns anything around it, if it goes into thermal runaway. And so I think we're seeing OEMs become more and more safety-oriented around thermal runaway, especially as they try to push the energy density of these packs to the max.
Right.
If you look at all sorts of EV consumer surveys, they will all tell you that in the West, people want an EV to have 400 miles of range. Right now, realistically, there's only three models out of a plethora of models that have been launched that meet that requirement. And so as all of the OEMs go and try to provide 400 miles of range, for better or worse, they can only work with the chemistries that are currently developed. They are ready on the shelf, that are tested and validated to be sold to consumers, and those chemistries are NMC. NMC, and then pick your form factor, right?
And so, starting to make NMC work and to provide consumers with 400 miles of range, do it safely, and to really push the edges of controls, you kind of need to address thermal runaway at the source, which is in between the cells, and that's what we're trying to help them do.
So is foam the only other competing product that prevents thermal runaway? Is there any? Who else do you compete against? What are the other options that the OEMs have?
Yeah. So initially we were tested alongside some ceramic-based materials, like ceramic papers or mica sheets, but you would need about two to three times the thickness and the weight to deliver the same level of thermal isolation. And then those materials are very brittle, so they actually don't meet the mechanical requirements, and they could actually cause thermal runaway. And then if you are stacking something that is two to three times thicker, you know, fifty times over on, you know, on each side of the pack, then you cut, you know, by up to 20% your ability to add material that actually stores energy. And so that's what we've been competing with initially.
But now that we've you know, built our own data set and customers are becoming more understanding of what we do and their requirements, and particularly the mechanical one, they're really seeing us as having a nice lead on the market. There's some other solutions that are aerogel-like. You know, some of the work around our IP is you could make aerogel particles and put them together inside of some form of vacuum-sealed bag. But those products, after you know, even ten mechanical cycles, you end up with just a bag of dust, and they don't deliver the thermal isolation that's required.
And so that's another material that the OEMs, you know, loosely tested about a year ago, and we're seeing, we saw a lot of press releases from companies announcing those products, but they really only scratched the surface at meeting the requirements of the OEMs.
So how are you thinking about growth and thermal barrier, thermal barriers over the next few years? You have GM, which is ramping up this year.
Yeah.
Would you expect them to kind of stay at that kind of 200,000 vehicle range there, and then are you adding on other players on top of that? So-
Yeah.
Ultimately, what are you thinking about in terms of growth for this segment?
Yeah, so for us, I mean, the way we look at General Motors, it took them a while to ramp up. Right now, they're working their way up to a healthy base of about 200,000 vehicles. For our guide, we actually have them at a hundred and eighty thousand vehicles.
Okay.
The Honda Prologue is actually made by General Motors. We were really encouraged in July and throughout the second part of Q2 to see the sales of that vehicle. So we actually expect about 45,000 Honda Prologues made by GM to have our product. So we think GM will probably end up at around 225,000 vehicles this year. Now, we know that the regulatory environment in the U.S. is calling for a much higher EV mix than where the EV market is today. If you look at the EV market this year, just year to date, it didn't grow at all compared to last year. Tesla is losing a lot of share, and the gainers have basically been the OEMs that we supply, Toyota, GM.
We'll start production next year with Audi, with Stellantis, with Porsche, and then we have another German OEM that nominated us for the business that we haven't announced yet. And so we'll ramp up other customers in the second half of next year.
Mm-hmm.
But for General Motors, which is, you know, a big driver of our revenues in that segment, we know in 2026 that the U.S. EV market needs to be at least 15% of new vehicle retail sales. Right now, even if you include Tesla, Rivian, Lucid, the 100% EV makers, the U.S. market is at—it's scratching 8%. So the EV market, if the regulation sticks, and there's three sets of regulation, right? The CAFE standards, the EPA emission requirements, and the CARB emission requirements in 18 states that make up, you know, over 40% of the U.S. car market. The EV mix needs to double in order for all these OEMs to comply in 2026.
And so even for General Motors and these other OEMs, we kinda know what the two dots are, so where we are in 2024 and where we need to be in 2026 for these guys to not have to pay a ton of fines, and so 2025, I think, is, you know, likely gonna be a bit of a midpoint. I think IHS has GM at 312,000 EVs next year. If GM gets there, we'd be ecstatic, but, you know, we're pretty focused on continuing to add other OEMs in addition to the ones that we have.
And just through process of elimination, similar to on the energy side, how there are only so many energy companies, you know, the next ones for us to chase are, you know, Ford, Volvo, the Koreans, the rest of the Europeans, and I think we can build a pretty valuable business now that we've demonstrated that we meet the requirements and that the business model works, and that we've got, you know, healthy margins that will enable us to pay back all of the capital that we're deploying.
But right now, you're just focused on the U.S. market for this?
Europe as well. So, I mean, Europe is. I think a lot of these awards, actually, the vehicles are being made in Europe. So for Audi, the next generation Audi A6, that's made in Germany. The Stellantis vehicles that we'll be supplying, the cells are actually made in France, and the vehicles will be made in Europe. The Porsche, it's the all-electric Boxster Cayman platform, that'll be made in Europe as well, by Volkswagen. So yeah, I think, we're getting ourselves pretty well positioned to cover the West.
I'm sure people are probably wondering, Tesla. Tesla is not a customer because of their cylindrical batteries, right?
Right.
So how do they handle thermal runaway?
They sort of don't. If a cell in a Tesla goes into thermal runaway, the car will burn to the ground. The way they handle it is, I think they're relatively conservative in terms of how they use the cells and how they charge them. And if you take a Tesla Model Y, theoretically, it should deliver you 400 miles of range, but you see about 310 advertised, and in the real world, you probably get about 270 miles. And so that's how they do it, right? The way people try to manage for thermal runaway in these cells is there's theoretical models of how the cells are supposed to behave, and they just kinda charge, discharge them, and use them on the fringes of it.
You know, I tell my wife, you know, when she charges her EV, she thinks it's at 100%. It's not really at 100%. It's probably at about 80%. When she's discharging it down to 0, it's not really 0. It's probably closer to 30%.
Right.
Um-
Sort of staying within the governed center.
Exactly.
Just kinda one last question for you in terms of kind of the broader EV market. We're seeing kind of a decline in sales near term or kind of overall in the U.S., you're seeing at least flattening.
Yeah.
Is that a concern for you at all, or is it just the OEMs are kind of all building up so that you don't really have to worry about kind of, I guess, end market demand right now?
Yeah, I mean, I think this is where, you know, not supplying Tesla kind of helps. When I read the earnings reports of some of the OEMs of some of the tier one suppliers, you know, that were riding the EV wave, supplying some of the earlier entrants, yeah, I mean, today you're seeing your volumes just consistently decline. But we were starting from zero. Like, I still think we're in the first innings of the game. And so I even said this during our last earnings call. I truly believe, and we're seeing it in the numbers and the incentives, that for 2024 , and I think a good portion of 2025 , EV demand is not being driven by overall consumer wanting more EVs versus a nice vehicle, et cetera.
Like, EV demand is being driven by the OEM's willingness to incentivize it. And so with a bunch of cheap leases, with the $7,500 tax credit and some cash on the hood of these cars, they're gonna sell as many as they need in order to position themselves to continue selling ICE vehicles in 2026. And so for some of them, it's a lot of EVs. For some of them, it's not that many, depending on their mix and what other vehicles they're selling as part of their fleet, right? And so...
And actually, Barclays has a really good study that we leverage where we look at what makes those, you know, Ford, GM, and Stellantis need in the U.S. to comply with the regulation in twenty twenty-six, and it's all at around, you know, 15% plus of their mix, right? There is GM doing 2.6 million vehicles at retail here in the U.S. on a given year. 15% of that is a lot more than the 200 to 300 to 250 they're talking about for this year.
Thank you very much, Ricardo. So for those who don't know the story, I have an initiation report just came out two weeks ago. I actually used to cover this company about 10 years ago. I've reinitiated it. It's a fascinating story. Just look at what the numbers have done in the last three quarters. It's truly remarkable change here. Ricardo, thank you very much.
Thank you. Thanks for having us. We appreciate it.
Thank you.
Thank you.