We don't know of too many companies quite like Aspen Aerogels. We often talk about transferable skill sets and energy services, products and services in traditional energy. They're in. They now have new emerging markets in new energy. Well, no one has quite had done it quite as well or as quickly as Aspen Aerogels. With an established product line in traditional energy that is seeing a step change in revenue as it's supplied through EV batteries. I'd like to introduce Mr. Ricardo Rodriguez, who joined Aspen in November 2021 and serves as the company's CFO and Treasurer. Thank you very much for joining us today.
Thanks, Dave. Thanks for having us. Telling Neal that, it feels a little bit like we're on a paddleboard here presenting after Baker Hughes, and Carnival's cruise ship just went by. So thanks for having us. We really appreciate it.
Absolutely. So maybe we just start with, to the uninitiated, what is Aspen Aerogels? Can you talk about your business and sort of the core product behind.
Mm-hmm.
The story?
Absolutely. So the core technology of the company is a materials platform. And aerogels were invented in the 1950s. They're the lightest material that humans have created. And in our case, what the company really pioneered is a practical use for silica-based aerogels. And what an aerogel is an open-pore structure material that when you use silica as the base for it, it traps air in a very unique way unlike any other thermal isolator. And so that makes it, you know, three to 10 times better than any other competitive form of thermal insulation that you could use, along with a bunch of other benefits like it being fireproof, hydrophobic, et cetera. And in the first 20 years of the company's history, that proved critical for energy industrial infrastructure.
If you think about oil refineries when you only have so much space around the piping to isolate that thermally and none of the other materials can do it, that's where we started to come in. We added another product to do the same thing for very cold processes, so cryogenic processes within LNG facilities. In subsea piping, so pipe-in-pipe insulation, that's a market that we pretty much have to ourselves, where you need the insulation to be as light as possible while still isolating the pipeline from very cold water temperatures. To your earlier point on why we're really playing the energy transition so well, it's the same material or a variation of the same material.
Around the time I joined the company almost four years ago, General Motors came to us looking for a solution to protect vehicles and batteries from thermal runaway inside of the cells of electric vehicle batteries. And if you don't know what thermal runaway is, you may remember those Samsung tablets that were exploding on people's bags and particularly on planes. And in essence, what was happening there is when you put a tablet in a plane, the cabin pressure is such that you actually press the positive and negative side of these battery cells together, creating a short inside the cell, and it blows up. And, you know, the lithium-ion materials and some of the other stuff inside of these cells is pretty flammable.
And so, you know, General Motors looked at what the other automakers were doing when it came to really pushing every last bit of performance and energy density out of these cells. And given the size of the cells and how much they were trying to get out of them, they knew that they had to put some form of passive insulation that took up as little space and weight as possible. And that's where our team actually showed up first with some of our energy industrial product. And they would go back to their hotel rooms at night, shaving it down to the minimum thickness that GM could get away with. And those became the first EV thermal barrier prototypes.
And to put it in perspective, you know, we did roughly $145 million of revenues last year on the serving of traditional energy infrastructure markets with these rolls of insulation. And then our EV thermal barrier business basically grew from about $7 million of revenues in 2021, which is when GM started production, to over $300 million of sales last year. You know, we being a material, an advanced materials platform, it's protected with over 400 patents, a pretty intricate process that has a lot of know-how that is very tough to replicate. We actually set the company out to operate with a target gross margin of 35%+ gross margins and to deliver, you know, at least 25% EBITDA margins. And as we've grown, we've geared the company to deliver that and more.
We delivered a little bit more than that last year at the gross margin level. And then I think this year, we're taking a bit of a reset as you've indicated in your research around the volumes for GM, right? The election has been pretty impactful in terms of the policy that's driving EV volumes here in the U.S. temporarily, even though consumer preferences we believe are still gonna prevail in the long term. But that's in essence of today. We expect to do just over $300 million of revenues this year across both segments and to still be generating meaningful EBITDA. And we've got a cost structure that's now even better than what we delivered at $450+ million of revenue last year.
Can we talk about a little bit more about the aerogel product itself? You're not the only one that has aerogel. So how is your aerogel product different than some of the other? I think there's a couple other companies that make an aerogel-type product. And also, what's the IP? How do you protect the IP around this?
Yeah. So, you know, we were actually looking for additional capacity to supplement our ramp in 2023 and actually looked at other "aerogel" companies. And I would be surprised if you add them all together to get, you know, more than $50 million of revenues, even in China. The main differentiation is quite a bit of evolution around the chemistry and the process that makes ours mechanically way more pliable than any other "aerogel" material that's being touted. And then also, when it comes to delivering the thermal isolation and the right composition to deliver this open-pore structure that I mentioned, you know, there are quite a few controls in the process that we've developed over time that give us the ability to deliver a product that just performs at a, you know, 3X better than some of the comparable materials that we've tested.
The proof is that some, you know, the Western OEMs have tested this "aerogel" material and have not awarded it any business after having tested ours and given us the business. We actually audited a lot of these potential "aerogel" suppliers, as I said, in 2022 and 2023 as we were looking for additional supply, and then spent over a year getting our partner in China to provide us with some external manufacturing facility because they needed quite a bit of hand-holding on the process side and the trade secret side in order to, you know, deliver a product that could have our brand name on it.
If we talk about the energy industrial business a little bit, I'll first wanna talk about the end markets a little bit. You touched on them. Can you kinda go through the major drivers for this thermal for the aerogel products in the energy industrial business?
Yeah. So on the energy industrial side, we basically have three applications. And then I'll go through the markets. As I mentioned, the main applications are hot processes. So we have a product called Pyrogel and a couple of families within them that go into refining. Then our Cryogel product goes for a cryogenic process, and that mostly ends up in LNG facilities, sometimes even covering entire tanks within LNG facilities. Other chemical processes. Last year, we did a carbon capture project. So wherever you're operating at very cold temperatures and you need to protect the, you know, the energy loss, we can come in. And then the third branch within the energy industrial side is the pipe-in-pipe insulation for subsea pipelines, that I mentioned as well. We sell the product through distributors. These are relationships that we've built over the past 20+ years.
Now, you know, more than 20 years into this journey, we have an install base of about $1.5 billion of product. And if you think of the maintenance cycle at these facilities, part of the maintenance cycle includes cutting up insulation to inspect for corrosion. And so that drives a healthy baseload of business for us, especially on the Pyrogel side, as this insulation is cut up and then being replaced. That gives us an opportunity to replace materials like mineral wool and perlite as the piping gets rearranged, and there's an opportunity for us to take share from them. And then, of course, whenever a new project is announced or started, we work pretty hard to come in and capture additional market share in that. And that ends up driving about, you know, a good third of our revenues in a given year.
When you kinda pull it all together, how do you see sort of the longer-term growth target of energy industrial?
Yeah. For energy industrial, we've said that growth between 10% and the low teens would make sense. That's, I think, the onus is really on the team to develop that, not just on the three applications that I mentioned. But it's very interesting 'cause when you go around the world, you'll find these niche applications that people end up using our product on. Like, not that long ago, I actually found out that the Formula 1 teams were using our Pyrogel product to cover the exhaust of the race cars.
Oh.
I mean, very little product, but it really makes you think, "Okay, wherever there's energy loss, we have a role to play," right? Or wherever there's performance that could be gained from preventing energy loss, we can be there. I joined the company in 2021, right as the opportunity on the EV thermal barrier side came along, actually built a building materials insulation segment. It got a meaningful amount of revenues very quickly, only for us to shut it down in order to supply the EV thermal barrier opportunity. But I think really the onus is on the team over the next, you know, 12 months- 18 months to assess all of these additional applications, invest a little bit of OpEx, get some revenue in return, and then really get that snowball effect outside of the three segments that I laid out.
I think that in combination with the install base that we have and new projects can definitely drive 10% + growth in the segment.
I did see Brad Pitt talking about the Aspen Aerogels products. He was talking about it, so that's pretty interesting. Shifting over to the thermal barrier side, it's been a really interesting business, that kinda came out of nowhere. Can you talk about the origins of this? This is, it kinda took everybody by surprise. And I never even heard of thermal runaway before.
Yeah.
Before this came out. Can you just talk about the genesis of this, what, how GM started using your product?
Yeah. I mean, so GM was actually familiar with aerogel 'cause a long time ago, they looked at aerogel as a potential heat shield barrier on the Corvette. If you think about internal combustion engines catch on fire all the time, and you know, if you could have a better heat shield made of a material like Pyrogel, it'd be amazing. But they determined that for various reasons, it didn't make a ton of sense. But then GM actually cold-called our team in 2020, saying, "Hey, we're jumping into this EV investment with the Ultium platform." At the time, they had a target of having the capacity to produce a million EVs by 2025. And they in essence came to the team looking for a solution.
And if you look at what used to be put into electric vehicle batteries before, it was, in essence, this polyurethane foam that is there for mechanical reasons, right? So when you're putting the battery pack together, you want the cells to sit there firmly without moving and shaking around because that can then cause these cells to fail. But, they wanted us to replace those foams with a foam-like material that delivered all the properties that we were known to deliver on the energy side, right? So great thermal isolation, fireproofing, and then they added the third leg of the stool, which was the mechanical properties. And that's where a lot of the work went in to develop those mechanical properties to make the material thinner. That, in turn, gave us an ability to produce a lot more, get more capacity out of our assets.
That's how we ended up with the thermal barriers as we know them today. The product, you know, releases some silica dust, and GM said, "We don't wanna deal with the dust inside the battery pack plants." So we came up with a method to encapsulate the rectangles of aerogel. That cutting encapsulation and dimensional testing is what we set up a couple of facilities in Mexico to do in 2022. I mean, right now, we're at the rate we'll, I mean, we'll produce over 90 million parts in a year.
So what's the comp? So what are other EV manufacturers or battery OEM makers use to prevent thermal barrier thermal runaway?
Yeah. I mean, it's a multidimensional problem. The main thing that they do is they actually throttle back the battery, right? So Tesla, the current battery architecture, for better or worse, was guided by decisions that had to be made in 2006 and 2007. And the cells available at the time were cylindrical laptop battery cells, right? So that put Tesla on a path where, you know, they're set on using cylindrical cells. But if you actually look at the EV market today, with China, you know, 91% of vehicles out there have pouch or prismatic cells. So only Tesla, Lucid, Rivian, and some lingering BMWs are using cylindrical cells. And on those cylindrical cells, you don't necessarily have a lot of space to put a thermal barrier like ours.
And so you have to sort of play around with probabilities as you're charging, discharging, and using the vehicle. And so that means that it, you know, if you or I were to buy a Tesla, theoretically, that car could have maybe 400 miles of range. But you'll see that the EPA cycle rating is probably for like 350 miles of range. And then in the ebbs and flows of daily driving with different temperatures, we would probably be getting about 280 miles-290 miles of real range as that battery's throttled back through the controls of the battery. What we're seeing with GM is that when GM advertises a vehicle with 310 miles of range, you're getting 310+ miles of range. So they're able to use regen more aggressively, knowing that we're there, as a passive layer.
They're able to heat up one cell, knowing that that heat won't spread to the next one. They're able to use charging a lot more aggressively. You're seeing now vehicles with, you know, 800-volt architectures that enable faster charging. And generally, there's a thermal barrier in those vehicles enabling that faster charging without as much risk. And so, yeah, I think OEMs are starting to see that. There's quite a bit of opportunity that unlocks itself when it comes to maximizing the performance of the battery cells when you have a passive layer of insulation like ours.
So when you're getting the fast charging, does that increase the risk of thermal runaway?
It does significantly, especially at either very cold or very hot temperatures.
What do the Chinese use?
The Chinese, some of them play this game of probabilities that I mentioned as well. And some of them on very high-performance applications use, you know, this "aerogel" that we discussed that tends to be stiffer and provides, you know, less thermal isolation. And sometimes, you know, we've seen several videos of those Chinese EVs or buses catching fire, and the material's there, and it buys you time, but not as much as we think it could.
So aside from GM, can you talk about some of the other kinda European EV manufacturers?
Yeah.
The opportunity set there?
Yeah. We've been supplying Toyota as well since 2021 on the bZ4X and the Subaru Solterra and the Lexus variant of that vehicle as well. We also have an award from Audi, for their next-generation A6 platform. We also have an award from Scania, Volvo Trucks, with Stellantis for the vehicles that will be equipped with the cells made by ACC in France. That's actually the program that we're looking forward to launching here in Q4 of this year, and that'll ramp up next year. And then Porsche also awarded us business for the replacement Boxster and Cayman platform. Again, another high-performance.
Mm-hmm.
EV that will really look for fast charging and fast discharging. And then we also announced an award with Mercedes-Benz. So Daimler and that'll kick in in 2027 for those vehicles that'll also be supplied with those cells from ACC.
So when you talk about awards with these various auto manufacturers, what does that mean? What does an award mean? Is that just like a callout, like you now have an agreement with them, but do you actually know what the numbers are gonna be, or is it more of a callout?
No. So we actually have been given the business, and we're designed into a specific vehicle that is about to start production.
Okay.
We have agreed to pricing. They've given us indicative volumes. You know, several of us have worked in the auto industry before at the company, and we know that you can't totally take the OEM's volumes at face value. If you add up the volumes they give you, you end up with a car market that's five times the size of the car market. And so we've been pretty eyes wide open about, you know, sizing this correctly. If we would've believed the million units by 2025 from GM, we probably wouldn't be here today, right? But we actually did get that number right. Like, we said that in 2021 that number was gonna hover between 200 and 350 thousand vehicles in 2025.
And so, yeah, I mean, it, it basically means that you have to start committing a little bit of capital to get ready to supply those programs for when those vehicles start production, and that we've agreed to pricing and that we're designed in. And that, we, I believe, gives us quite a bit of staying power because to design us out, you need a lot of development work and capital to, in essence, make a change, right? And you also wouldn't wanna be the engineer that took out the, the critical safety component that's addressing thermal runaway.
So, for me, on GM, obviously, outside my lane, I rely on my colleague Dan Levy, who covers GM, who talks about kind of the production forecasts of EVs. What are they telling you now? Actually, maybe just step back a little bit. Kind of been a lot of volatility over the last couple of months with the big bill and everything's happening.
Yeah.
So kinda what's been the messaging from GM? How are you kinda seeing this trend? What are they saying to you right now?
Yeah. So, I mean, GM back in, even before 2021, really put itself in a path to get as strong of a foothold as it could on EVs, right? And they invested pretty much their entire market cap on EV capacity and EV launches. I actually think they're betting even a brand like Cadillac on EVs. If you look at all of the new product offerings from Cadillac, they're mostly EVs.
Mm-hmm.
You know, some of the vehicles that we supply, which at this point, there are now about 17 nameplates with GM, they've actually gotten a strong foothold in the market. The number two EV sold in the U.S. after the Tesla Model Y is actually the Chevy Equinox. We're actually pretty encouraged to see GM gaining share, sometimes even over-indexing the share that they have on the coasts of the U.S. on their internal combustion vehicles getting new customers. There's also quite a few customers that are leaving their Teslas to look for an alternative, and GM is there ready to take them.
Having said that, yeah, I think the election was kind of transformational in many ways relative to some of the energy policy and the fuel economy standards and the emission standards that the OEMs were being held to, especially for 2025 and beyond, and so now the OEMs don't have as much of an incentive for having a certain percentage of their new cars sold in the U.S. being EVs. In fact, quite a bit of that regulation is being tested right now and removed.
But at the same time, we do see GM, and what they tell us is that they've invested so much in launching these vehicles, they're getting customers that they otherwise wouldn't get, and that will, you know, have them really focused on maintaining that share even after the $7,500 credit for consumers has gone here at the end of the month. The incentives on the production side for making EV cells and assembling EVs in the U.S., I think, will actually only increase with the Trump administration, and so it's kind of a balance. The consumer credit, if you look at the data for EVs, it actually just enabled the OEMs to increase the prices by about $5,000 on average, so consumers didn't necessarily get that benefit unless they were really leasing the vehicle, getting a cheap lease.
And with the Trump administration, we actually see quite a few incentives for making the cars in the U.S. with U.S.-made content, and then that favors us with our USMCA content that we are selling into these EVs on. So, I mean, I think we'll have to make a bet on where the volumes will land and kinda visit it next year. But we don't think that it'll be a bigger reset than what we saw from last year to this year in terms of volumes for GM. And then we obviously have all of these other awards with other OEMs that I mentioned in 2027, contributing to the P&L pretty favorably. And again, with this 35%+ gross margin target, which in the auto industry is relatively rare.
Like, we really gear the company to pay back all of the capital that we've deployed to chase this opportunity with attractive margins.
You had to do a lot of supply chain jujitsu over the last couple of years. Yeah, you still maintain the 35% you've got to the 35% operating margin target. Can you talk a little bit? So all of your thermal all of your industrial energy industrial is now manufactured overseas.
Most of it.
Most of it.
So, except for the part that is, now that we have some extra capacity in Rhode Island, we are making some of the U.S. product here in the U.S.
Mm-hmm.
With a lot of raw materials also from either the U.S. or Europe as well, but yeah, for the rest of the world, our energy product is made by the external manufacturing facility in China.
So are you confident to get back to those 35% margins? What, when do you think you can get back to there?
Yeah. I mean, we showed good progress towards that between Q1 and Q2.
Mm-hmm.
Right? So I think that right now, the company's geared, in essence, at that $85 million per quarter revenue run rate. We can deliver the 35% gross margins. It's a lot easier to do it on the energy side. We deliver 36% gross margins here in the past quarter.
Mm-hmm.
Even though the demand rate wasn't nowhere near what it would need to be, you know, for us to be at 85 in total. And then on the EV thermal barrier side, if we were doing $60 million for revenues per quarter, we would have 35% gross margins, and we did 55%.
Got it.
Millions, yeah.
So just a question of volumes.
Correct. Yeah. I think it's just the fixed cost absorption, which the team keeps working on reducing further and further.
Mm-hmm.
I think that'll yield benefits in definitely 2027 when we expect the demand to truly be there, you know, potentially even higher than what we did last year.
Great. Well, why don't we leave it there? Ricardo, thank you very much for your time.
Thank you so much for having us. We appreciate it.
Thank you very much.
Thank you.