Aspen Aerogels, Inc. (ASPN) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Aspen Aerogels Fourth Quarter and Full Year Earnings Results Conference Call. [Operator Instructions]. Please note that this call is being recorded today Thursday, February 26, 2015 at 5:00 PM Eastern Time. I would now like to turn the meeting over to your host for today's call. Susan White, VP Finance and Corporate Strategy. Please go ahead, Ms. White.

Thanks, Courtney and thank you everyone for joining us for the Aspen Aerogels conference call. I'm Susan White, Vice President, Finance and Corporate Strategy. Before turning the call over to Don Young, our President and CEO and John Fairbanks, our CFO. There are couple of housekeeping items would like to take care of. First, we will take questions at the end of our prepared remarks. As the operator said, an archive version of this webcast will be available in the Investor section of our website www.aerogel.com. The press release announcing our fourth quarter and fiscal 2014 results and our business outlook as well as a reconciliation of management's use of non-GAAP financial measures as compared to most applicable GAAP measures is available on the Investor section of our website. There you will also find a summary statement of operations, a summary balance sheet and a summary key financial and operating statistics for the fourth quarter of fiscal 2014. Please note, that our discussion today will include forward-looking statements including any statements regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact and such statements are subject to risk and uncertainties. Aspen Aerogels actual results may differ materially from those expressed in the forward-looking statements. A list of factors that could affect our actual results can be found in the press release we issued today and are discussed in more detail and the reports we filed with the SEC. Particularly in our most recent quarterly report on Form 10-Q. The press release we issued today and our filings with the SEC can be found in the Investor Relation section of our website www.aerogel.com. The forward-looking statements made today represent our views as of today February 26, 2015. Aspen Aerogels disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. During this call, we will refer to non-GAAP financial measures including adjusted EBITDA. These financial measures are not prepared in accordance with the US General Accepted Accounting Principles or GAAP. These non-GAAP financials measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The definitions of reconciliations of these non-GAAP financials measures to the most directly comparable GAAP financial measures and the discussions why we present these non-GAAP financial measures is available on today's press release, which is also available on our website. I will now turn the call over to Don Young, President and CEO of Aspen Aerogels.

Thank you, Susan. Good afternoon, everyone. Thank you for joining us for our Q4, 2014 earnings call. I will provide comments about the business and our performance and John Fairbanks our CFO will present the financial details of our fourth quarter and fiscal year and update guidance for 2015. We will conclude the call with a Q&A session. 2014 was an important year for Aspen Aerogels in part because we completed our IPO in June. The proceeds from the IPO provided the funds to build the third manufacturing line in our East Providence Plant, which is on schedule to operate during the second quarter. The additional manufacturing capacity is critical in order to meet growing customer demand for our products. The IPO proceeds also enabled us to eliminate virtually all of our outstanding debt and will provide the foundation for financing our second manufacturing plant. During 2014, we also achieved many financial milestones. On an annual basis, total product revenue grew by 21% despite our being capacity constrained for much of the year. We also significantly improved our profitability as measured by gross margin, gross profit and adjusted EBITDA. During the fourth quarter, we delivered record revenue, record gross profit and record adjusted EBITDA. I'd like to begin with a review of our commercial business against the backdrop of lower oil prices. From the time of our June IPO to-date, oil prices have dropped by roughly 50%. However, during this time we have been challenged to meet customer demand. Our lead time to remain at record levels about 26 weeks, which when combined with our commercial pipeline provides confidence for our performance in 2015 and into 2016. We have not seen in any cancellations of purchase orders or any pricing pressure that we believe is related to the price of oil. Our business remains well diversified across all major refinery and petrochemical companies and many sectors of the energy infrastructure market including upstream and downstream, hot and cold, maintenance and projects and in all geographic regions. This diversity is core to our strategy and we believe it provides a buffer against both specific local or regional events and larger macro events such as the current drop in oil prices. At a more detail level, we believe subsea and oil sands projects are most sensitive to lower oil prices. While it makes sense that lower oil prices will cause these upstream projects to be less attractive. We have not yet seen an impact on our business. It is important to note, that for deep sea and oil sands activities, insulation systems are installed late in the execution of these infrastructure projects and the work we are targeting for 2015 is well along towards completion. This flywheel effect gives us confidence that we will continue to operate at high levels of capacity utilization through 2015 and into 2016 even with the third manufacturing line becoming operational in the second quarter. In 2014, we hit a record year in the offshore market which was more than double our historical revenue levels and we have started 2015 with a multi-million dollar purchase order for delivery in Q2, 2015. We have our eye on several 2015 and 2016 projects that are far along in their development. While we expect offshore to be quieter with $50 oil, so far we have not seen it, but we're monitoring the situation carefully. Oil sands represented approximately 6% of our revenue in 2014 and is probably our most vulnerable area because of low oil prices and the weak Canadian Dollar. The announcements related to layoffs and project delays certainly demonstrate the changing landscape. We are not counting on any Greenfield projects in Canada until the environment improves. Our work in Canada is comprised primarily of SAGD projects that are focused on incremental improvements and expansions to existing systems and it should be noted that the oil sands, is our only direct exposure to unconventional drilling. We do not for example have specific play in the hydraulic fracing area. Brazil is another area that we are watching carefully. The country provided approximately 5% of our revenue in 2014. Lower oil prices, internal issues at Petrobras and the weak Brazilian Real make for difficult environment in 2015. The remaining approximately 75% of our revenue comprised of refinery, petrochemical and LNG work remain strong. It is important to remember, that many of our end-users favour the environment of lower oil and gas prices especially if it provides a positive kick to the economy. In the Asia market, as discussed on prior earnings call. We continue to work on a large project with a major Asian petrochemical company. During 2014, we received $28 million of purchase orders for this project, by the end of 2014 we had delivered approximately half of the $28 million with the remaining half to be delivered through 2015. The market in United States hit record revenue levels for both the fourth quarter and the year. Our US market is predominantly a maintenance business for refinery and petrochemical facilities. The feedback from these end-users is consistent. Maintenance work that is critical to safety and reliability will continue. Investments that contribute to high utilization rates will continue and projects where final investment decisions had been made and construction is underway, will be completed. We think that 2015 maybe a breakout year for us in the LNG market, despite lower prices for LNG due to weaker demand in Asia and new supplies hitting the market. As we described during the last earnings call, we see our Cryogel Z product gaining market acceptance in a manner very similar to the path followed by Pyrogel on the hot side, that is solving specific problem being used for maintenance, gaining customer confidence, working into specifications and ultimately winning project work. We believe that we are deep into that product adoption cycle and we anticipate winning our first large scale LNG projects in 2015. Overall, the tone that we want to set is one of cautious optimism. We recognized fully that aspects of our market in particular the oil sands, Brazil and perhaps offshore are vulnerable to the current energy environment. As I've said many times, we believe that the diversity of our revenue is an important Aspen asset and provide us an important buffer. We believe, we remain well positioned to grow in 2015 even considering markets uncertainties caused by lower energy prices. Our confidence is based on several factors. First, the value of our products is not predicated on $100 oil. When we develop Pyrogel and Cryogel with Exxon Mobil in the 2007 and 2008 timeframe. Oil prices swung from the 40s to 140s and back again. Our products are valued because we saw the end-user money. They reduce corrosion under installation, increase reliability, save space, install rapidly and are industrially robust. Approximately 80% of our revenue is derived from the downstream market, where critical reliability and maintenance work is essential to end-user safety and high utilization rates. We believe that the core value proposition of Pyrogel and Cryogel are independent of oil price. It is about reliability and saving money for our end-users. Second, we have experienced excellent adoption of our products and say, we're introduced to the market. The products have been qualified, specified and adopted by almost every refinery in petrochemical company. While our five year product revenue CAGR is 32%. Our penetration rates with these end-users are low as evidenced by our 3% market share. We are just getting started and our opportunity to continue to grow is significant even in this current energy environment. We are confident in our ability to execute our penetration strategy into continue to operate at high capacity utilization rates even considering the new manufacturing line scheduled to become operational in the second quarter of this year. And finally, it is important to put our new manufacturing assets in perspective. The capacity of the third line equals approximately one additional percentage point of market share enabling us to move from 3% to 4% market share. We understand that it would be much harder to evade the ramifications of immediate market conditions, if we had a 30% market share, but we think it is a less daunting challenge given our market share, our growth rate and our competitive position. Again, we are confident that after the hard work of gaining adoption, by large and technically sophisticated companies. We will be able to continue to penetrate these existing accounts more fully which will enable us to grow through this current period. Next I would like to provide an update on our capacity expansion projects. As you know, we currently have two production lines in our East Providence facility which have been operating at full capacity. To meet growing customer demand, we are expanding manufacturing capacity in two phases. In the first phase, we are building a third operating line in East Providence which will increase capacity by approximately 25%. We commenced construction just after our June IPO and it remains on track and under budget. We now expect this project to cost $27 million down from our prior estimate of $30 million. We have made significant progress on line three since our last earnings call. All line three employees have been fully trained and we remain on schedule to operate the new line at 45% of its capacity during Q2, 80% during Q3 and 100% during Q4. The second phase of our capacity expansion is to build a new production facility to diversify our manufacturing sites and to increase our profitability. The first line of this second plant is projected to increase our total capacity by approximately 50% and to begin operations in 2017. We have decided to build our second plant in the United States for the following reasons; stronger raw material supply, low relative energy cost, a reduce risk profile of building and operating a major manufacturing facility and a broader array of financing alternatives. We will announce the specific site location upon completion of ongoing strategic negotiations and we remain on track to commence operations of plant two in 2017. Now I'll turn the call over to John for a review of the financial results. John?

Thanks, Don. Good afternoon. As Don highlighted during his comments, our financial performance was strong. We achieved seventh consecutive quarter of positive adjusted EBITDA in our quarterly revenue gross profit and adjusted EBITDA, for reaching new record. I'd like to start by running through our financial results for the fourth quarter and fiscal 2014 at a summary level. Fourth quarter revenue grew 15% year-over-year to $28 million. For the year, revenue increase 19% to $102.4 million. Fourth quarter GAAP net loss was $2.7 million or $0.12 per share which represented a significant improvement over the last year. For the year GAAP net loss was $66.3 million or $5.37 per share. Fourth quarter adjusted EBITDA was $1.3 million compared to $200,000 a year ago. 2014 adjusted EBITDA was $3 million up from negative $1.8 million a year ago. We defined adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expense and other items that we do not believe are indicative of our core operating performance. Overall, we're pleased with our performance. Our 2014 revenue, net loss, earnings per share and adjusted EBITDA each exceeded our guidance. I'll now provide additional detail on the components of our results. First I'll discuss revenue. Total fourth quarter revenue was comprised of product revenue of $27.3 million and research services revenue of $700,000. For the year, product revenue was $99.3 million and research services revenue was $3.1 million. As Don mentioned, our product revenue remains well diversified across geographies, sub-segment to the energy market in all phases of maintenances and project work. In the fourth quarter, our product revenue increased 17% versus a year ago. For the year, product revenue increased 21%. This growth is due to continued strength in the petrochemical and refinery sectors in Asia and the US and in the offshore market. During the quarter, we shipped 10 million square feet of Aerogels blankets and for the year, we shipped 38.2 million square feet. Our 2014 weighted average selling price increased 13% versus a year ago $2.60 per square foot and reflected both the high proportion of offshore revenue which has a significantly higher than average selling price and the impact of price increases over the past year. I'll now turn to our research services revenue. Our research services revenue is related to contract research performed principally for government agencies. Research revenue declined 28% during the quarter and 22% during the year, principally due to limitations on our eligibility to receive SBIR Contract Awards. We expect research services revenue to decline to approximately $500,000 per quarter in 2015. This estimate is included in our revenue guidance. Next, I'll discuss gross profit. Gross profit was a record $5.2 million this quarter and our gross margin of 19% represented increase of four points from the fourth quarter of 2013. Gross profit was $17.1 million for 2014 and our gross margin of 17% for the year represented an increase of five points over the last year. This gross margin improvement was due to strong contribution from an offshore project, our 2014 price increases and continued strong manufacturing yields, throughput and efficiencies. Looking forward, we expect gross margin to decline by a few points in the first and second quarters of 2015 due to start-up cost associated with our third line in East Providence. Next I'll discuss operating expenses. Operating expenses decreased by $2.3 million in the fourth quarter of 2014 compared to the fourth quarter of 2013. Excluding last year's construction and progress write off of $3.4 million. Q4, 2014 operating expenses increased by $1.1 million. This increase is due to high stock compensation expense and the cost associated with operating as a public company. Next I'll discuss our balance sheet and cash flow. We ended the quarter with $49.7 million of cash and minimal debt. Net current assets of $53.2 million and shareholders' equity of $123.7 million. We generated positive cash flow from operations of $4.7 million during the fourth quarter and $6.6 million for the full year. In addition, our $20 million revolving credit facility remains untapped. During 2015, we expect our cash balances to decline by approximately $20 million to principally to outflows to complete our third manufacturing line in East Providence, Rhode Island. I'll now update our financial guidance for 2015. Total revenue is expected to range between $113 million and $117 million unchanged from our prior guidance. GAAP EPS is expected to range between a loss of $0.24 and a loss of $0.36, an improvement for our prior guidance. This GAAP EPS guidance assumes weighted average shares outstanding of 23 million shares for the year. Adjusted EBITDA is expected to range between $8.5 million and $10.5 million again unchanged from prior guidance. Overall, this 2015 guidance assumes line three's operational during the second quarter of 2015. The plant output equivalent of 45% of capacity in the second quarter, 80% in the third quarter and 100% in the fourth quarter. This ramp rate ensures that we sustained a safe work place, manufacture high quality products and maintain cost effective and efficient operations. Our 2015 outlook also assumes depreciation and amortization are between $10 million and $10.5 million. Stock based compensation are between $5.7 million and $6 million and interest expense of $200,000. While we don't plan to routinely provide quarterly guidance. I think it's important for our investors to understand how our financial performance will improve throughout 2015 due to the ramp of the third line. Our financial profile in the fourth quarter 2015 will be significantly better than in the first quarter. We expect revenue to ramp from a range of $23 million to $25 million in the first quarter to a range of $30 million to $32 million in the fourth quarter. We expect adjusted EBITDA to ramp from between breakeven to a $1 million in the first quarter to a range of $4 million to $5 million in the fourth quarter. And as always project work and product mix can create some quarterly variability, but I want to make it clear, that we expect to exit 2015 with significantly improved levels of adjusted EBITDA due to the contribution of the third manufacturing line. Our annual run rate at the end of 2015 is expected to be between $16 million and $20 million as compared to an annual run rate of $5 million based on our fourth quarter 2014 results. I'll now turn the call back to Courtney for Q&A.

[Operator Instructions] your first question comes from the line of Chip Moore with Canaccord. Your line is open.

Yes, thanks for taking the question and congrats on the nice results. I guess. First, I appreciate the granularity what you've seen in this macro environment 26-week lead time maybe you can talk about confidence there, you can shift things around if you do see pricing pressure is select areas or cancellations?

Hi, Chip. This is Don. We're not anticipating cancellations and there is a lot demand for this product today. These are some of that work is Reliance or excuse me is the large petrochemical plant. It is very diverse set of purchase order including as I talked about before all phases of energy infrastructure work, all sub-segment, lots of geographies, hot and cold work etc. so we're anticipating that 26-week lead time is solid as a rock.

Okay, that's helpful and on Cryogel, you know it sounds like you're tracking some larger size projects still maybe little more detail there and then, I think that's about 10% of the business, what do you think that can get to here?

Well, the market overall is about 20% cold and 80% hot and so we're as you know we're tracking closer to 10% right now, as we begin to take on, as we continue to do that adoption cycle process that I described. We think, we will get to that 20% level and these projects would certainly enable us to reach those kind of percentages again which reflects the market overall.

Yes, okay that's helpful. And on the third line great to see that's on track with the weather here in the North East particularly. Plant two it sounds like you got a site in mind maybe you can talk about lead times on some of that equipment in terms of when you need to get financing in place etc.

So we actually have, we have narrowed it to a small group of states and sites within those states. We are going to be doing that work here over the coming months. We will need to begin ordering long lead time items by the end of this year and that again would enable us to commence operation of that second plant during 2017. In terms of the financing and John do you want to say a word?

Yes, so we've been in contact with several banks and some private debt firms as well. And we have a high degree of confidence that we'll be able to raise the capital that we need to complete the first line in the second plant. Doing this project in the US actually makes that job a bit easier. Our cash flow, the bulk of our assets today and our cash is here in the US and ultimately that EBITDA and that access to cash will make easier for us to leverage and raise the funds that we require with a high degree of confidence that we'll be able to accomplish that well in advance of the time necessary for that cash to be in hand to complete the project on time.

Okay, that's perfect and then just lastly, maybe you can talk about impact of mix on price potentially lower offshore business in 2015, how that plays out versus price increases, maybe if you can just tease that that out a little? Thanks.

Yes, so that's a really good question. The offshore product pricing is higher. We fabricate that product and as part of that, we'll take a square foot of Aerogel and actually cut it down by say half, but ultimately we charge twice as much for it. And so realistically, we get the same sort of revenue per level of output out of our plant. It just comes at a higher price slightly lower square feet, but higher price giving us equivalent amounts of revenue and so what we would expect this year, would be to actually generate higher square foot. So our production will be higher, the square feet we deliver will be higher at a slightly lower price, but we would expect no real significant impact on our bottom line. So we're relatively neutral from a profit standpoint as to the mix of product that we saw.

Okay, thanks folks.

Thanks, Chip.

Your next question comes from the line of Tyler Frank with Robert Baird. Your line is open.

Hi, guys. Congratulations. Thanks for taking the question. I was hoping, could you elaborate just on that a little bit more. I mean it looks like pricing per square foot during the fourth quarter was around $2.73. How should we think about pricing going forward and can you talk a little bit about your ability to pass on price increases potentially throughout the year?

Yes, so we really peaked in the fourth quarter the $2.73 per square foot. We'd expect our pricing in the first quarter to be more in the range of the $2.40 plus or minus $0.05 but we do expect offshore projects during the remainder of the year. So overall, we would expect our pricing during 2015 to be higher than 2014 due principally to the increased pricing that we implemented in the fourth quarter of 2014. So we will get quarterly variability in pricing, but that doesn't necessarily mean that we'll see quarterly variability and profitability. When we see lower pricing per square foot due to mix, we'll also see lower material cost per square foot from that mix and we'll get essentially the same contribution per square foot from that revenue.

Tyler, you also mentioned price increases as you know, we put in our first price increase in 2013. Also roughly 4% or 5% across the mix. Did the same thing the following year for 2014 and we had successfully done is also here for 2015. The next logical time for us to increase price would be for the 2016 here.

We have not seen any discounting or price decreases associated with the drop in oil prices. So we've been able to sustain our list prices this year and especially with the large long lead times that we haven't had any reason or haven't actually gotten any pressure from our customers to drop that price.

Great, thank you. That very helpful and then just on the margin front. The drop in margin expected in Q1 is that just related to the third line coming up and how should we think about margin ramping throughout the year?

Yes, so in the first half of - so our gross margin in the fourth quarter of 2014 was 19%. So we'd expect in the first half of 2015 for our gross margins to run in the range of 17% plus or minus a 0.01% or 0.02% depending on the nature of product mix and project work. When we begin to operate Line three near capacity, we expect the step function increase in gross margins in the low to mid-20s, due to the increase contribution against our fixed cost. As I mentioned in my comments. We expect line three to operate at about 80% of capacity in the third quarter of 2015. So at that time, we'd expect to realize that step function into the low to mid-20s and we'd see that in terms of the impact on gross margins and those gross margin expectations are reflected in our 2015 guidance. In terms of EBITDA, we ran at about 3% for the whole of 2014, 3% of revenue EBITDA margin and approximately 5% in the fourth quarter, 2014. Again, for the first half of 2015 we'd expect to say in the low single digits with the added cost of operating line three, but when we begin to run line three at 80% of capacity so in the third quarter, 100% of capacity in the fourth quarter. We'd expect to step function increase in EBITDA margins into that low-to-mid teen range.

Perfect, that's very helpful. Thank you very much guys.

Thanks, Tyler.

Your next question comes from the line of James West with Evercore. Your line is open.

Yes, hi. This is actually Samantha Hoh filling in for James. First of all congratulations on the 4% to 5% pricing you were able to poach through earlier this year. And I was just wondering, have you had conversations with your material supplier about potentially lowering your cost there and then, if you could also elaborate on the variance between US and international suppliers for on just material cost side?

So Samantha, thank you for that question. We have worked successfully now for the past few years to broaden the number of raw material suppliers that we have and we've continued, I think we'll continue to do that and overall, our raw material cost have dropped over the course of that period of time. Going forward, we're modelling that we'll hold these prices for the most part and so we have not modelled continued price decreases in our raw material supply. We have an aggressive team and they will continue to work with those suppliers to get the very best pricing that we can. In terms of US and European suppliers. What has been interesting and what to some degree certainly reinforced our decisions to build plant two in the United States was to simple fact that, our suppliers both American companies and European companies were eager to expand in the United States driven by a stronger market, lower energy prices and that had a real influence on us. They were less inclined to expand in Europe at this point and we want them to continue to expand and for us to have as many choices in as ample of supplies as possible. So even our European investors have assets here in the United States and as I said there, in the position to expand those, as we continue to expand our own operations.

That's it from me. Thanks and congrats on the quarter.

Thanks a lot.

There are no further questions in queue at this time. I will now turn the call over to Mr. Young for any closing comments.

Thank you, Courtney. Overall, I'm very pleased with our results this quarter and for the year. We made important strides improving our financial performance in 2014 and we are well positioned to succeed in 2015. Customer demand remains strong and has diversified across geographies end-users and sub sectors. Operations are running well and we are effectively managing our cost. We are also successfully executing our major capital project of building line three and it remains on track to contribute during the second quarter. We want to thank you for your interest in Aspen Aerogels. We look forward to reporting our first quarter results to you in May. Have a good evening.

This concludes today's conference call. You may now disconnect.