Aspen Aerogels, Inc. (ASPN) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Aspen Aerogels First Quarter 2015 Earnings Results Conference Call. During the call all participants will be on a listen-only mode. After the presentation we will conduct a question and answer session. [Operator Instructions] Please note that this call is being recorded today Thursday, May 7, 2015 at 5:00 PM Eastern Time. I would now like to turn the meeting over to your host for today's call, Shawn Severson of the Blueshirt Group. Please go ahead.

Thank you for joining us for the Aspen Aerogels conference call. I'm Shawn Severson from Blueshirt Group. Before turning the call over to Don Young, Aspen's President and CEO, there are a couple of housekeeping items that I would like to take care of. First, Aspen’s management will take questions at the end of our prepared remarks. And as the operator indicated, an archived version of this webcast will be available in the investor section of Apsen’s Web site. The press release announcing Apsen’s first quarter 2015 results and 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 Aspen’s Web site. There you will also find a statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the first quarter of 2015. Please note, that management’s 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 Aspen’s press release issued today and are discussed in more detail in the reports Aspen’s filed with the SEC, particularly in the company’s most recent annual report on Form 10-K, Company’s press release issued today and our filings with the [technical difficulties]

I apologize for the technical difficulties, it appears the line of Mr. Severson has disconnected.

I’ll take over Dan, it’s John Fairbanks. I’ll just finish up Shawn’s prepared remarks. So the Company's press release issued today and filings for the SEC can also be found in the Investor section of Aspen’s Web site www.aerogel.com. Forward-looking statements made today represent the company’s views as of today May 7, 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 were not prepared in accordance with the U.S. Generally 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 a discussions why we present these non-GAAP financial measures is available on today's press release, which is also available on Apsen’s Web site. I will now turn the call over to Don Young, President and CEO of Aspen Aerogels.

Thank you, John. Good afternoon everyone. Thank you for joining us for our Q1 2015 earnings call. I will provide comments about the business and our performance and John Fairbanks our CFO will present financial details of our first quarter and update guidance for 2015. We will conclude the call with a Q&A session. As we have stated in the past, our IPO proceeds will enable us to expand capacity. Our initial focus has been the build out of the third manufacturing line in East Providence to increase capacity by approximately 25%. This additional manufacturing capacity is critical in order to alleviate our immediate capacity constraint and to meet to growing customer demand for our product. Our commitment was to have the new capacity contribute to operations during the second quarter of 2015. We are pleased to report that we have commenced operation of the new manufacturing line during the second half of March. We produced high quality product from outset of operations. We are now confident that we will achieve our output and revenue projection for the third line and for the East Providence plant overall for the year. We also met the goals with the project by completing the third line safely on schedule and within budget at $26.5 million, down from recent estimate of $27 million and from our original estimate of $30 million. The successful execution of the line three expansion projects has validated our confidence in our team. We are now preparing to site and build plant II to attempt to meet substantial demand for our products; more on this topic later in my comments. Our Q1 financial performance was solid especially considering the disruptions to our manufacturing facility due to unusual winter storms and its high end of our third manufacturing line to the plant's existing infrastructure. We estimate that we lost the equivalent of three production days on our existing two lines due to these disruptions. Demand during the quarter continued to exceed supply and was particularly strong across the United States, Europe and Asia. We stayed focused on maximizing manufacturing productivity and controlling discretionary expenses. As a result, our first quarter revenue and adjusted EBITDA each met our guidance despite our production hurdles. At the time of our last earnings call, I reviewed our commercial business against the backdrop of lower oil prices. The core point I emphasized was that our business is well diversified across all major refinery and petrochemical companies in many facets of the energy infrastructure market including upstream and downstream, hot and cold, maintenance and projects and 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 event such as oil price fluctuation. We cited three markets where we anticipated vulnerability; Canada, Brazil and Subsea. We have in fact seen a slowdown in the oil sands in Canada as a result of the oil prices and we expect sales there to be flat in 2015 compared to 2014. Activities in Brazil are largely on pause as the country work through both the ramifications of low oil prices and its own specific local issues. Canada and Brazil accounted for 6% and 5% respectively of our 2014 revenue. Our value proposition in the subsea market is strong. In 2014, a completed a record year in which revenue was more than doubled the historical levels. We’ve started 2015 with the multi-million dollar purchase order for delivery beginning in Q2 2015 and have secured additional projects for the remainder of the year and into 2016. Our subsea business remains robust despite the lower price of oil and we anticipate another record year. Approximately 80% of our revenue is derived from the downstream market where critical reliability and maintenance work is essential to safety and high utilization rates for our end users. This revenue is drive from refinery, petrochemical and the LNG work and these markets remain strong. It is important to remember that many of our end users favor lower oil and gas prices especially if it provides a stimulus to the economy. Our Pyrogel and Cryogel products are valued, because we saved end users money. Our product reduces corrosion under installation, increase reliability, saves space, install rapidly, and are industrially robust. These factors are important to our end users whether oil prices are $50 or $100 per barrel. We continued to be challenged to meet customer demand. Our lead times remain significant at fix to six months which when combined with our commercial pipeline provides confidence for our performance in 2015 and into 2016. With the third manufacturing line running successfully, our objective is to restock our distribution channel and to bring our lead times down to an industry standard and more customer friendly level of one to two months. Continued strong demand for our products may exceed our ability to reach supply and demand equilibrium even with strong contributions from our new manufacturing line. Next I would like to provide an update on our plant II capacity expansion project. The objective of the project 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 late 2017. As we announced during the last earnings call, we’ve decided to build our second plant in the United States for the following reasons: Strong raw material supply, lower relative energy costs, a reduced risk profile of building and operating a major manufacturing facility and a broad array of financing alternatives. We’ve narrowed our site selection to a few sites in two states in the Southeastern part of the United States. We will announce the specific site location upon completion of ongoing strategic negotiation and we remain on track to commence operation of plant II in late 2017. Delivering line three in our East Providence facility in a safe and timely manner and on budget gives us great confidence that we will be equally successful with plant II. Overall, we continue to be cautiously optimistic. Demand remained at record levels and we’ve implemented our third successive annual price increase. We recognize fully that aspects of our market in particular the oil sands, Brazil and perhaps eventually subsea are vulnerable to low oil prices. But as I’ve said many times, we believe that the diversity of our revenue is an important Aspen asset and provides to us an important buffer to market variability. 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 and to continue to operate at high capacity utilization rates even when considering the contribution of our new manufacturing line. Now I’ll turn the call over to John for a review of our financial results. John?

Thanks Don and good afternoon. As Don highlighted during his comments, our first quarter performance has positioned us for a strong 2015. We achieved an eighth consecutive quarter of positive adjusted EBITDA. Our gross profit and adjusted EBITDA increased significantly versus the first quarter of 2014. We completed the third line in East Providence ahead of schedule and on budget and we commenced our operation of the third line in the second half of March in Aerogel blanket output, yields and quality from our third line have met or exceeded our expectations to-date. I’d like to start by running through our financial results for the first quarter at a summary level. First quarter revenue grew 5% year-over-year to $23.5 million, despite downtime related to record snowfall in the Northeast and construction of the third manufacturing line. First quarter GAAP net loss was $2.8 million or $0.12 per share, which represented a significant improvement over last year. And first quarter adjusted-EBITDA was $734,000 compared to less than $100,000 a year ago. Redefined adjusted EBITDA is 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 this performance. First quarter revenue and adjusted EBITDA each met our guidance and the completion and start-up of the third line in East Providence represented the achievement of a significant milestone for our company I’ll now provide additional detail on the components of our results. First, I’ll discuss revenue. Total first quarter revenue was comprised of product revenue of $23.2 million and research services revenue of $289,000. As Don mentioned, our product revenue remains well diversified across geographies, sub-segments of the energy market and all phases of maintenance and project work. During the first quarter, our product revenue increased 8% versus the first quarter of 2014. This growth is due primarily to strengthen the petrochemical and refinery sectors in Asia, Europe and U.S. During the quarter we shipped 8.8 million square of Aerogels blankets, which was essentially flat compared to shipments during the first quarter of 2014, due principally to capacity constraints. Moving forward however, we expect a significant increase in number of square feet produced and sold due to the contribution of output from our third manufacturing line. Our first quarter weighted average selling price increased 8% versus the first quarter of 2014 to $2.64 per square foot, reflected both the impact of prices, increases over the past year and favorable mix of product sold. 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 67% versus Q1 2014 to $289,000 primarily due to limitations on our eligibility to receive SBIR Contract Awards. We expect research services revenue to increase each quarter during the remainder of 2015 and to total approximately $2 million for the year. This expectation is included in our 2015 revenue guidance. Next, I'll discuss gross profit. Gross profit grew 35% to $4.5 million and our gross margin of 19% represented an increase of 4 percentage points from the first quarter of 2014. This gross margin improvement was due principally to price increases over the past year, a favorable mix of products sold, and continued strong manufacturing yields and efficiencies. We expect gross profit and gross margin to increase during the remainder of 2015 to anticipated increases in production volumes, manufacturing productivity, and manufacturing yields. Next I’ll discuss operating expense. Operating expenses are $7.3 million in the first quarter of 2015, represented an increase of $1 million compared to the first quarter of 2015. This increase is principally due to higher stock based compensation expense and a cost associated with operating as a public company. Moving forward, we expect operating expenses to increase slightly during the remainder of the year to increased investments in sales and marketing personnel and R&D initiatives. This expectation is included in our EPS and adjusted EBITDA guidance of the year. Next I’ll discuss our balance sheet and cash flow. We ended the first quarter with $35.5 million of cash and market securities, minimal debt, net current assets of $43.7 million and shareholder’s equity of $122.2 million. In addition we had nearly $11 million of borrowing capacity under our revolving credit facility at quarter end. Net cash used in operating activities at $3.7 million in the first quarter, reflected an investment in working capital which we expect to have reversed over the remainder of the year. Moving forward, we expect to generate positive cash flow from operations but we expect our cash and marketable securities balance to decline to $30 million at the end of 2015 due to the payment of final amounts due related to the construction of the third manufacturing line. I’ll now update our financial guidance for 2015. Strong initial output from the third production line makes us increasingly confident in our ability to manufacture sufficient product to support 2015 revenue projections. Total revenue is expected to range between $113 million and $117 million which is unchanged from our prior guidance. GAAP EPS is expected to range between a loss of $0.16 and loss of $0.28, an improvement from our prior guidance. This GAAP EPS guidance assumes weighted average shares outstanding of approximately 23 million shares for the year. Adjusted EBITDA is expected to range between $9 million and $11 million, an improvement from our prior guidance. This updated 2015 outlook also assumes depreciation and amortization expense between $9.3 million and $9.8 million. Stock based compensation expenses are between $5.7 million and $5.8 million, and interest expense of approximately $200,000. While we don't plan to routinely provide quarterly guidance. We again think it's important for our investors to understand how we expect our financial performance will improved throughout 2015 due to the ramp of the third manufacturing line. We anticipate that our financial profile in the fourth quarter of 2015 will be significantly better than in the first quarter. We expect revenue to increase from the $23.5 million generated in the first quarter to a range of between $30 million and $32 million in the fourth quarter. We expect adjusted EBITDA to increase from the $734,000 generated in the first quarter to a range of between $4 million and $5 million in the fourth quarter. As always, project work and product mix can create quarterly variability, but we want to reiterate that we expect to exit 2015 at significantly improved levels of adjusted EBITDA due to the contribution of the third manufacturing line. Our annual run rate of adjusted EBITDA at the end of 2015 is expected to be between $16 million and $20 million as compared to an annual run rate of $3 million based on our first quarter 2015 results. I’ll now turn the call back to Dan for Q&A.

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

I guess just first on the guidance. Maybe you could talk a little bit about what’s giving you the increased confidence particularly on raising the profitability side? Is that better yields on the third line or what do you see in there?

So Chip is really three pronged. We have greater confidence in our revenue projection. It's based upon the initial output that we’ve gotten out of the third line. So we just have an increasing confidence in our ability to ultimately achieve those revenue projections. Secondly we’ve had really solid operating expense control in the first quarter and then into the beginning of the second quarter, which once again makes us really feel that our expense budgets are very reasonable and give us some upside. And then finally the yield out of that third line has exceeded our expectations as well. So all total, just strong operating performance on the manufacturing side, good operating expense control -- that's allowed us to be able to take up those estimates. And we're just having more confidence in our ability to deliver this year.

Okay, that’s helpful. And in terms of capacity, I think you talked about last quarter again I think it was 45% next quarter and 80% is that similar type of ramp, is that what you’re looking for?

Overall -- now that the third line is in place. We’re really looking an output from the whole plants across the three lines. And so far the third line is really going well. It’s early, but we’re operating ahead of the plan. It’s actually allowed us the flexibility to do a little maintenance on our line 1 and line 2 here in the second quarter. But overall, we’re absolutely confident that we’ll meet to exceed our 2015 output targets across the whole plant. And that then allows us to reaffirm that 2015 revenue guidance.

I think it's really going well.

That’s great. And just in terms of product mix and pricing, 264, would you just talk about -- how you see that plan on the year in terms of mix?

So that the 264 -- we didn’t have any offshore business during the first quarter, which tends to come at a higher price point. We do expect to have significant contribution on offshore projects in the second quarter and in the second half of the year as well; that ought to takes our ASPs up ultimately for the year. Q2 probably fairly leveled with Q1, but Q3 and Q4 we'd expect an uptick in the ASP.

Okay. So a little upper bias on mix with the offshore. And then I guess one more, and will opt out of the queue. Outlook for the Cryogel, I think you’ve been tracking some larger projects, trying to get that penetration up more towards industry average -- just bring us up to date on what you’re seeing there?

Chip, the LNG business in particular has been focus of our, as I said in the last call, we were following an adaption path very similar to the Pyrogel product, which was introduced about a year earlier, that is going in and solving problems, making our way into maintenance opportunities, gaining confidence, working our way into specifications and qualifications. And we’ve been tracking products both -- projects I should say, both export facilities and receiving terminals and we remain very confident that we will break into a couple of projects this year of good size which as you suggest will bring our Cryogel revenue towards the industry average. It’s about an 80-20 mix in the industry. We were closer to 10% last year and we’ll continue to move that number towards the industry average with these anticipated, but highly expected wins.

[Operator Instructions] And there are no further questions at this time. I’ll now turn the call back over to Aspen CEO Don Young.

Thank you, Dan. Overall, I’m very pleased with our results for the first quarter of 2015, with the contribution from our new manufacturing line and then strong demand for our products. We believe we’re well positioned to continue to build on the momentum from 2014 and to perform in 2015 at record levels. Thank you for your interest in Aspen Aerogels. We look forward to reporting our second quarter results to you in August. Have a good evening.

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