Aspen Aerogels, Inc. (ASPN) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Loral, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels Fourth Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to John Fairbanks, Aspen Aerogels' CFO. Please go ahead.

Good afternoon. Thank you for joining us for the Aspen Aerogels conference call. 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 First, we'll take questions at the end of our prepared remarks, and as the operator indicated, an archived version of this webcast will be available in the Investor's section of Aspen's Web site, www.aerogel.com. The press release announcing Aspen's fourth quarter 2015 results, and 2016 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 summary statement of operations, a summary balance sheet, and a summary of key financial and operating statistics for the quarter, and the year. 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 risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in the forward-looking statements. A list of factors that could affect the company's actual results can be found in Aspen's press release issued today and are discussed in more detail in the reports Aspen files with the SEC, particularly in the company's most recent annual report on Form 10-K. The company's press release issued today and filings with the SEC can also be found in the Investor's section of Aspen's Web site, www.aerogel.com. The forward-looking statements made today represent the company's views as of today, February 25, 2016. 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 U.S. Generally Accepted Accounting Principles or GAAP. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The definitions of, and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and a discussion of why we present these non-GAAP financial measures is available on today's press release, which is also available on the Aspen Web site. I'll now turn the call over to Don Young, President and CEO of Aspen Aerogels.

Thank you, John. Good afternoon. Thank you for joining us for our Q4 2015 earnings Call. I will provide comments about the business and our performance; and John Fairbanks, our CFO, will present the financial details for the fourth quarter, the year 2015, and our guidance for 2016. We will conclude the call with a Q&A session. I'd like to start with a recap of 2015, our first full year as a public company. We had three broad goals going into the year. The first goal was to expand capacity to meet the growing demand for our products in 2015 and beyond. We completed Line 3 in East Providence on time and on budget, and we did so safely. We produced high-quality products from the outset, and today Line 3 is exceeding our expectations in terms of output and yields. During the year we also made significant progress on our Plant 2 project. We negotiated incentives, and selected an excellent site in Statesboro, Georgia, and have completed initial site layout and engineering designs for the facility. Our solid Line 3 execution provides a perfect blueprint for Plant 2. And I have high confidence in our team's ability to complete the project successfully. The second 2015 goal was to grow our revenue by deepening the penetration of our broad base of end-users in the energy infrastructure market. The successful startup and operation of Line 3 enabled us to grow product revenue by 21% for the year, and 34% for Q4 alone, and to continue to gain market share despite a deteriorating energy environment. We not only gained share with our existing end-users, but we also diversified into additional segments of the energy infrastructure market, with our first substantial LNG project win, an initial success in the district heating market. We will continue our efforts to gain share in our existing market and to diversify into other markets where our aerogel products have unique value. The third 2015 goal was to remain financially strong no matter what the macro environment dealt us. We finished the year in an excellent position, which will enable us to continue to execute our strategy, to grow revenue and profitability over the short and long-term. Despite cash outflows to complete Line 3, we ended the year with over $32 million of cash, and a clean balance sheet. The stage is set for us to perform well in this challenging energy environment, and to drive outsized gains when the market stabilizes. We are determined to earn the reputation as a company that can perform well even in a tough environment. And we believe the accomplishment of our 2015 goals is an important step in that direction. I will now review our fourth quarter performance. We finished the year 2015 with an exceptionally strong quarter, despite the fact that the macro headwinds intensified through the year, we were able to deliver record revenue, record gross profit, and record adjusted EBITDA, records not only for the fourth quarter, but also for the year overall. During the fourth quarter, revenue grew by 34%, gross margin reached 26%, and our adjusted EBITDA margin of 14%, represented our first double-digit result. It is also worth noting that we produced our first quarterly net income and positive earnings per share, important milestones for the company. We believe that this performance is a testament to the ROI that we are bringing to our end-users, and is indicative of the long-term value and pricing power underlying our products. Our strategy to penetrate existing markets, to expand into new markets and to drive profitability is working. And we are just getting started. This strong performance in Q4 was enabled by several factors. First, we experienced strong demand in the subsea refinery and petrochemical markets. Second, we operated all three lines in the East Providence facility at full capacity throughout the quarter without any internal or external disruptions. In fact, the third line has been performing approximately 15% above our expectations in terms of overall output. Third, we had an excellent mix of product sales that contributed to our high revenue levels, and strong gross margins. And finally, we managed our expenses across the company in a smart and prudent manner. Our fourth quarter performance demonstrates the optimal output revenue and profit potential of our current set of assets, even against the backdrop of a challenging energy market. The fourth quarter also provided the momentum we need to be successful in 2016, and beyond. With respect to 2016, there is no question that the depressed energy market will have a negative impact on our upstream project work. Our record 2014 and 2015 performance in the subsea market, in particular, will be hard to replicate in 2016. During 2014 and 2015, revenue in the subsea market averaged $19 million. We currently expect subsea revenue in 2016 to be at the low end of our historical range, of between $5 million and $10 million per year. The other upstream area that is challenged is the Canadian oil sands, the majority contributor to our overall Canadian business. For perspective, our revenue in Canada represented 6% of our total revenue in 2014, and 4% in 2015. We anticipate Canada will contribute approximately 5% of our total revenue in 2016. We have been able to mitigate much of the Canadian upstream challenge by focusing our team on opportunities in the refineries and petrochemical facilities in the eastern part of the country, which contributed 15% of our overall Canadian revenue in 2014, and will contribute closer to 40% in 2016. Our team has managed this challenge very well. On a global basis, the fact that over 70% of our revenue is derived from the downstream market is key to our resilience during these times with challenging market conditions. At the macro level, lower oil and gas prices should deport [ph] and possibly stimulate activity in the downstream processing and power generation markets. Many of our downstream customers have been operating their facilities at high capacity utilization rate, and we anticipate that these facilities will need to address their most critical areas of deferred maintenance during 2016 and 2017. Also, given the extent of the deferred maintenance anticipate high levels of unplanned maintenance in refineries and petrochemical facilities. We are well-positioned to serve the maintenance needs of these customers and know building base load maintenance business and continuing to gain market share will benefit Aspen in both the short and long term. The main point is that we believe that there is more than ample opportunity within our downstream account to compensate for today's weak upstream market. There are additional end markets that are also important to consider as we continue to build a strong and resilient business. In the LNG market, we received in Q4 a $5 million order for an LNG receiving terminal in Thailand with shipment spread over late 2015 and early 2016. This order represents our first large scale LNG project win and bodes well for future LNG projects and related maintenance work. In addition, we have had initial success in the district heating end market. Municipalities, universities, and hospitals among other settings use central steam generation to heat facilities. This steam is distributed to various buildings through tunneled pipelines which are prone to flooding and are a challenge to maintain. Deteriorated insulation on these transmission pipelines results in poor quality steam and inefficient and expensive operation. Our Pyrogel products are valuable because of their thin profile, hydrophobicity, vapor permeability, and overall durability. Successful installations in the city of Beijing, Duke University, and University of Minnesota have provided valuable case studies to this effort. The 2016 market opportunity for Aspen in district heating is on power with the subsea market with revenue potential doubling from the initial beta launch in 2015 to the 5 to $10 million range. Longer term, the market opportunity for Aspen is substantially larger as we build out this high margin segment with a dedicated team and enhanced marketing support. There are two other end markets that are important to highlight. The power generation market is approximately one-third of the $2.8 billion energy infrastructure insulation market. We are in the final stages in the development of the Pyrogel product designed specifically to meet the requirements of the power market, and believe the optimized product will begin to have a positive impact on revenue growth and profitability in 2017. And second, we are targeting specific niches within the building materials market that we believe provide a substantial opportunity for our high-performing insulation materials. Our value proposition in this segment is related to the thin profile and excellent fire properties of our products. These attributes are particularly valuable in Europe, where solid masonry wall design and high standards for energy efficiency are the norm. We achieved more than $7 million of revenue in the building materials market in 2013 before we throttled back the business due to capacity constraints and are focused on the energy infrastructure market. As a result, we constrained revenue in the building materials market during both 2014 and 2015 to the 4 to $5 million ranged. However, we expect that 2016 revenue will more than double this recent range as we reengage with our European partners. With further commercial and technical development, we expect revenue and profitability to grow significantly in the building materials market in 2017 and beyond. We provided initial guidance at our last earnings call in early November just over a hundred days ago. Since that time, oil prices have dropped another 30%, reports of reduced capital spending in the energy sector have multiplied, and as expected, project activity in the subsea market has declined significantly. Despite the continued down cycle, we are reaffirming our 2016 guidance as presented in early November. Several factors support our confidence. First, the South Asia petrochemical project that we expected to diminish in size in 2016 compared to 2014 and 2015 has in fact expanded in scope. We now expect revenue from the project in 2016 to grow relative to the earlier years. Second, our 2016 price increase has held across the marketplace despite the continued pressure in the energy market. Again, we believe this pricing power is indicative of the strong value proposition of our products in these markets. Third, and as I said earlier, we believe we can fill the approximately $20 million revenue gap left by the weak upstream market with solid downstream performance and an expansion of end market, and at the same time drive increased profitability when compared to 2015. These points are the reasons why we believe it is appropriate to reaffirm our 2016 guidance. I would like to complete my comments with an update on our Plant 2 project. During 2015, we selected Statesboro, Georgia as the site for our facility after completing negotiations of inducement incentives. Engineering work is well underway and initial site preparation is scheduled to begin next month. The key driver for this project is based on the fact that demand for our aerogel products has grown significantly. From 2008 through 2015, our product revenue grew at a compound annual growth rate of 29% to over $120 million. We are monitoring carefully the macroeconomic environment, the energy sector, and our growth ramp in the power, district heating, and building materials market in order to best predict the ideal timing for Plant 2 capacity. As our total addressable market becomes larger and more diverse, it is important we have the manufacturing capacity available to meet demand. It is critical that we find the right balance when considering supply, demand, and prudent financeability. The East Providence facility and projected inventory balances will provide revenue capacity in 2017 of more than $150 million. The difference between our 2016 revenue guidance and this revenue capacity will support more than 25% growth in 2017. As a result, we currently anticipate that we will commence commercial shipment from the first production line Statesboro, Georgia -- in the Statesboro, Georgia facility during 2018. Overall, we continue to be cautiously optimistic. It is impossible to ignore the current energy market, but we will build on the moment from our outstanding Q4 2015. We are confident that we will perform steadily throughout 2016. We will maintain our commitment to grow profitability, to prudently scale up operation, and to remain financially strong. We are in position to execute well during the energy market down cycle and to take advantage of the subsequent recovery. We are confident in our ability to execute our penetration strategy, to gain market share, and to expand into valuable new markets. It is a challenging environment, but we have the products, the technology, and the people to get the job done. Now, I will turn the call over to John for a review of our financial results. John?

Thanks, Don. As Don highlighted during his comments, our financial performance during the fourth quarter was strong. We set new records for revenue, gross profit, gross margin, adjusted EBITDA, and earnings per share during the quarter. These results reflected a favorable mix of products sold, strong manufacturing performance, and the full impact of our third manufacturing line. Let us start by running through our reported financial results for the fourth quarter and fiscal 2015 at a summary level. Fourth quarter total revenue grew 34% year-over-year to $37.4 million. Fourth quarter GAAP net income was $1.6 million or $0.07 per share versus a net loss of $2.7 million or $0.12 per share last year. Fourth quarter adjusted EBITDA was $5.4 million compared to $1.3 million a year ago. We define 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. We also generated free cash flow of $2.9 million during the fourth quarter, and ended the period with $32.8 million of cash and cash equivalent. For the year, total revenue 20% to $122.5 million. GAAP net loss was $6.4 million or $0.28 per share in 2015, which represented a significant improvement over the last year. Adjusted EBITDA for the full year was $9.1 million, up from $3 million a year ago. Overall, we are very pleased with our performance. Our revenue, net loss, earnings per share, adjusted EBITDA, and cash balance reach the upper end of or slightly over our most recent guidance. I will now provide additional detail on the components of our results. First, I will discuss revenue. Fourth quarter total revenue was comprised of product revenue of $36.6 million and research services revenue of $743,000. For the year, product revenue was $120.5 million, and research services revenue was $2 million. During the fourth quarter product revenue increased 34% versus last year. This growth was due to record revenue in the subsea market and continued strong growth in the petrochemical and refinery sectors, particularly in Asia and Europe. During the quarter, we shipped 11.9 million square feet of aerogel blankets, which represented a growth of 19% versus the fourth quarter of 2014 and was supported by output from our third manufacturing line. Our fourth quarter average selling price increased 13% versus the fourth quarter of 2014 to $3.09 per square foot, and reflected both the impact of price increases in the range of 4% over the past year, the temporary shift in product mix, the higher priced subsea products. For the year, product revenue increased 21%. This growth was again due primarily to record revenue in the subsea market and continued strong growth in the petrochemical and refinery sectors principally in Asia and Europe, upset in part particular weakness in the Latin American market, which we had anticipated. For the year, shipments increased by 11% to 42.2 million square feet, and our 2015 average selling price increased 10% versus a year ago $2.80 per square foot and again reflected a high mix of subsea products and the impact of price increases over the past year. In 2016, we are facing significant market headwinds, most notably the impact of low oil prices on our upstream markets and the strong dollar. As a result, we expect product revenue during 2016 to be in the range of 115 to $120 million, essentially flat with the level of product revenue generated during 2015. Despite our 2016 price increase, we expect average selling price to moderate during 2016 into the range of $2.70, plus or minus $0.05 per square foot due the expected reduction in the mix of subsea revenue during the year. This average selling price expectation is included in our 2016 revenue guidance. 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% versus 2015 to $2 million due to limitations on our eligibility to receive SBIR contract awards. Moving forward, we expect research services revenue to stabilize, to remain at approximately $2 million during 2016. This estimate is also included in our 2016 revenue guidance. Next, I'll discuss gross profit. Gross profit was a record $9.9 million during the fourth quarter and our gross margin of 26% represented an increase of 7 points from the fourth quarter of 2014. Gross profit was $24.7 million for the full year and our gross margin of 20% represented an increase of 3 points over the last year. A significant improvement in gross margin during 2015 is due to strong revenue growth supported by output from the third production line and improved manufacturing productivity, our 2015 price increases, and favorable mix of products sold most notably within the subsea market also contributed to the gross profit increase. Due to anticipated changes in the mix of products sold, we expect gross margin to be in the low 20s during the first of 2016, and to improve to the mid-20s during the second-half of 2016. This gross margin expectation is also included in our 2016 guidance. Next, I'll discuss operating expenses. Fourth quarter operating expenses grew a modest 3%, to $8.2 million, despite a 34% increase in revenue. For the year, operating expenses decreased by $2.2 million or 7%, to $30.9 million. This decrease in annual operating expenses was largely a result of a decrease in stock compensation expense, offset in part by additional costs associated with operating as a public company for a full-year 2015. Our 2016 guidance includes our expectations that operating expenses will increase by approximately 5% year-over-year, principally in support of a planned expansion of sales personnel in marketing efforts, and continued strong investment in research and development. Next, I'll discuss our balance sheet and cash flow. We ended the fourth quarter with $32.8 million of cash and minimal debt, net current assets of $44.2 million, and shareholders' equity of $122.5 million. We generated positive cash flow from operations of $5.2 million during both the fourth quarter, and the full year. In addition, our $20 million revolving credit facility remains untapped. So we are reaffirming our financial guidance for 2016, as Don mentioned. Total revenue is expected to range between $117 million and $122 million. GAAP EPS is expected to range between a loss of $0.06, and a loss of $0.15 per share. Now this GAAP EPS guidance assumes weighted average shares outstanding, 23.2 million shares for the year. Adjusted EBITDA is expected to range between $11.5 million and $13 million. This projected year-over-year increase in adjusted EBITDA is due to improved productivity associated with the operation of the third manufacturing line for the full year, the impact of price increases this year across our mix of products, and continued improvements in manufacturing throughput and yields. 2016 outlook also assumes depreciation and amortization between $9.6 million and $9.9 million, stock-based compensation of between $5 million and $5.2 million, and interest expense of $200,000. While we don't plan to provide specific quarterly guidance, we think it's important to provide our investors with a general view to our expectations during the year. We expect revenue in the range of $60 million to $65 million in the first half of 2016, and in the range of $55 million to $60 million during the second-half of the year. Due to anticipated changes in the mix of products sold, we expect gross margin to be in the low 20s during the first-half of 2016, with an increase to the mid-20s during the second-half of 2016. We also expect operating expense levels to be slightly higher in the first half than in the second half of the year. In line with this anticipated product mix and the timing of operating expense, we expect adjusted EBITDA to be lower in the first half of the year, and to trend higher during the second half of the year. And as always, project work and product mix can create quarterly variability, and we'll update our annual guidance at the time of each earnings release during 2016, or as otherwise necessary. I'll now turn the call back to Loral for Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of James West with Evercore ISI. Your line is open.

Good evening, guys.

Hi James, how are you?

Good. A question for me on the new power gel that you're talking about for the power market, how long has this been in the R&D or in process? So what do you usually see as time to market? I know you said it wouldn't really contribute in 2017, but presumably you'll have something commercialized this year. Is that fair?

It is fair. James, we've been working on this project for the better part of a couple of years, frankly, and it has intensified over the course of the past year. You'll remember, we've always thought about energy infrastructure, and you know, sort of six buckets, and that power market has some characteristics that are a little different than the refinery and petrochemical markets, in particular. And as we learn more about that market, and created a market focus on it, we thought it prudent to optimize a product for those specific conditions of the power gen market force. And that's what we've done. And we think that we will be able to -- it may be beta form in 2016, but more impactful -- in a more impactful way in 2017, launch a product, and that be again an important segment.

Okay, thank you, Don. Then the shift, you're back into the building materials market. If I remember correctly, you had exited that area both because of capacity constraints, as you mentioned in your prepared comments. But it was also, correct me if I'm wrong, but I thought it was a lower margin business too. And that the energy side was higher margin. Is that the case? And then, I guess if you're talking about just niche parts of the building [ph] products markets, are those the higher margin parts?

Yes, James, it's John. So if you look at the profitability expectations for our new markets, in the power market and the district heating markets, we'd expect gross margins that are consistent with existing revenue in the broader energy infrastructure market. Our existing Pyrogel products or slightly optimized version for the power market will meet the needs of district heating applications, and applications within the power segment. And so we expect no degradation in gross margin with those markets. Our building materials product line does deliver a lower gross margin. However, based on what we see in terms of volumes this year, the impact of increasing the mix of building materials' revenue in 2016 would be less than a one percentage point for Aspen's gross margin. And in addition, we expect that we'll be able to drive down the costs of those products, and expand our margins as production volumes increase, as we gain experience producing those products. I think we've always cited that we've sold roughly, now, about $500 million worth of product, but the bulk of that has been our Pyrogel and Cryogel products. I think our aggregate building material sales are probably around $20 million. So we really haven't had the opportunity yet to go down the experience curve, and driving costs out of those products. And then we'll have additional ability to drive out costs as we optimize those products through technological advances as well. So with volume and technological advances, ultimately we think that we can drive margins in the building materials business that are consistent with what we get in energy infrastructure, it just might take us a couple of years to get there.

Okay, that's very helpful. Thanks guys.

Thanks, James.

Your next question comes from the line of Chip Moore with Canaccord. Please go ahead.

Hi, Chip.

Hi, thanks. Guess first, was curious to see on Canada, you called out a rather quick pivot there to the downstream side. I guess, maybe talk about -- is that just a couple of projects or does that speak to your ability to pivot, if need be, you know how to upstream.

Yes, I mean -- I think the way I would say it is that the work that is done in the eastern part of the country is more similar, if you will, to our core refinery and petrochemical work that we do abundantly, here in the U.S. And so it was a very natural extension of that work. We had been working on it for a period of time. And I think it was a natural progression, frankly. And so it -- and a timely progression, especially as the Volkswagens came under such tremendous pressure. So again, we've been working on this for a couple of years, quite honestly. As we continue to try to broaden the scope of our end-user base in that refinery and petrochemical work, and then begin to deepen those accounts, and I think we've done that. And that's exactly what happened in Canada.

And we didn't -- we did not decrease the number of sales reps we have in Canada. And they shifted their focus away from the oil sands into the other segments of the market in that region.

Got it. Okay, that's helpful. And I guess just more broadly on sort of pivoting to some of these new markets. Can you talk about lead times now, and sort of go-to-market on some of those newer opportunities, the district heating, building materials, anything you need to do there?

Yes, so first on lead times. You remember, we, for most of 2014 and 2015, we talked about 20 weeks kind of lead times. That had come down by the end of 2015, as we brought on the new capacity. That has actually maybe come down into that 10 to 12-week kind of period. That's actually increased here recently. Back up maybe into the 15-16-week kind of timeframe. With respect to district heating, we've had a concerted effort going in this area, we dedicated resources. We have an ideal product, a great value proposition. We now have built out some excellent case studies in that area. And again, as I said in my comments, we will at least double our revenue activity in that area in 2016, from the beta launch that we did in 2015 to get out to these kinds of numbers in that $5 million to $10 million range, here in 2016. That is a market that is quite large though, and over a longer period of time, we think that will be a valuable market for us. The power market, we're a little further back because we are still finalizing the product, beginning to introduce it, and getting feedback, just as we did with Pyrogel and Cryogel with ExxonMobil, back in 2007-2008. And so we want to perfect that product before we roll it out with gusto. So, again, we're learning a lot in 2016, and I think you should expect some impact on revenue growth and profitability in 2017.

Yes, okay, that's helpful. And then I guess just lastly on Plant 2. Maybe you can talk about where we stand in terms of timing on potential debt financing? And then also, given Line 3 has been up and running for a bit here, and running above plan, have you learned anything new that should help you there? Thanks guys.

So in terms -- really nothing has changed with our financing. I think as Don had alluded to, we're now expecting that line to be up operational and contributing in 2018. At this point, we've completed the site acquisition and set-up negotiations. And we've completed our plus-minus 30% engineering layouts. We're involved in the second phase of engineering, with the completion of plus-minus 10% engineering layouts expected in May. Our current plans for the facility, the projected cost to compete a full first line and the plan is between $110 million and $120 million. However, the scope and scale of that line has changed somewhat, and we're actually planning to build it now in two phases. So the first phase will cost us roughly $85 million to $90 million, which is kind of in line with our expectations for that line initially. And then the second phase will cost us about $25 million to $30 million. One significant change though is that we expect to get additional capacity out of each of those phases, and ultimately additional capacity out of the full first line. So each phase of that first line will give us between 20 million and 24 million square feet of aerogel. So the aggregate for that first line now is between 40 million and 48 million square feet of aerogel products. So we're pretty excited. So the capital intensity has reduced. And, ultimately, we think the output that we can drive out of the plant has increased. And I think it's important to note that the plant site, the layout, and the design will support the development of two additional, similar production lines in the future. And that Plant 2 engineering effort is -- continues to be in process, but it really has gone smoothly, where we haven't lost any time in that engineering effort. And so we feel very good about the progress that we've made. And to the second part of the question, on the performance of Line 3, the way I would say that is Line 3 is better than Line 2 in certain ways. And Line 2 is better than Line 1, just as you would expect. And I think you should also expect that, in essence, Line 4, Line 1, Plant 2, we will take all the learnings that we've had from lines 1, 2, and 3, and incorporate them into the first line of the second plant. And as we continue to invest in our process development capabilities, again, I would anticipate that line running better than Line 3.

Your next question comes from the line of Sean Meakim with JPMorgan. Your line is open.

Hi, good evening. So I wanted just to follow-up a little bit on the LNG project in Thailand. Obviously, the LNG market globally is looking pretty challenged, but there are a number of facilities under construction. So I was just hoping you could just give us a little more context around the timing it took to win that award. Where Aspen sits in the award cadence for LNG project? And then just the potential for other prospects that are out there at the present time?

Yes. LNG, like most projects, insulation comes quite late in the cadences, to use your word, of project development. It's one of the reasons why we get very, very few cancellations. These projects are well along by the time the insulation is installed on these facilities. So there's a lot of momentum, a lot of capital spend, et cetera. And that was the case in the Thailand project as well, in that receiving terminal. We also -- we don't deny your comment that the LNG market is challenged. Like so much of the big infrastructure project in world right now. But there are other projects that we are well-along in the bid process for. And we anticipate that we will be able to add to our first win here during 2016 with other projects.

That's very helpful. And then just to bring back to another -- a topic from last quarter's call. How are you guys thinking about the inventory levels that you think are necessary as you trying to shorten your lead time? So this is something we talked about quite a bit. Just, I'm thinking on the context of any update you have on MRO opportunities, as spring turnaround is coming, just maybe curious to get an update there.

Yes, so our finished goods inventory at the end of the year is about $2 million, is up a couple of $100,000 from the end of the third quarter. And that kind of finished goods inventory for us is virtually nothing. It's the product that we just produced in the last couple of days. And product that hasn't yet been delivered to the customer, but might be on a truck or on a ship, where we can't recognize revenue until it's delivered. And so we have not yet built a significant finished goods inventory. We do expect though, that during 2016, we will be able to create that finished goods inventory, principally, not necessarily so much in the first quarter, but moving into second quarter, and definitely in the second-half of the year. Which would give us the ability to serve on a quick-turn basis to be able to take advantage of those turnarounds and that deferred maintenance in case there's any sort of emergency maintenance within the refinery and petrochemical companies that we serve. And so it is definitely an anticipated benefit of that build. In addition, we're also excited about the fact that that additional finished goods inventory will allow us to start to run our plant to produce product two inventory rather than to produce product two orders, which will allow us to take longer runs, and allow us to run that plant more efficiently. So that, we still do anticipate that that will happen. It hasn't yet happened till the beginning of the first -- half-way through the first quarter.

And also, Sean, we're trying our hardest not to starve our distributors. We want more product in the pipeline near the refineries, near the facilities, so they can respond. Obviously, we track very carefully MRO spending. And we subscribe to the fault that there may very well be a relatively high percentage of unplanned maintenance in the facilities again because they have been running them so hard for so long now as you know.

That's right, yes. That's very helpful. Thank you, guys.

Thank you, Shawn.

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

Hi, good afternoon guys, initially the question; nice quarter.

Thank you.

I want to get updates on the price increases, I think you had commented earlier that that you said the price increases have been successful in 2016 or was that 2015? I guess you guys increased price this year or should we expect future price increases in 2016?

Yes. So, just a history of our price increase; we were successful putting price increases in place in 2013, '14, and '15. Again, roughly 4% across -- on average across the mix, there are some higher and lower ones within that mix, but just think of it across the model is about 4%. We did the same thing effective January 1, 2016. And we might remember, we did announce that, inform our customers in the July-August timeframe of that 2016 price increase. Again, at that point in time, we had four or five plus months lead time. So that was an appropriate communication. And in fact -- I mean price increases in 2016 are fairly unusual but -- in this business at the moment, but we were able to put it in place and sustain it for the year. And we have every confidence that it will hold even though the market is under pressure and vulnerable in some ways.

Great, thanks. And then, can you provide a little more color on the subsea market? I think that on the last call you guys said that you are expecting a slowdown in the second half of this year. Has that slowdown actually occurred a little faster than you guys have been planning, or are you just continued to be prepared for the second half of '16?

Yes, so the subsea market -- as I said earlier question, we come pretty late in these projects. And Shawn was referring to the LNG market, but it's also true in the subsea projects as well. So, there is a certain flywheel effect I guess in this segment. And so, we can track projects very carefully. They are well documented. We're participating in the bid processes early on in these projects. So, I think it's fair to say -- and I said in my comments that last earnings call we thought it would revert back to sort of historical levels of $5 million to $10 million, and in this earnings call, I was even a little more clear about that that we thought it would be in the lower end of that range. And we're -- we hope we are wrong, but I think we are probably right that it will be in that kind of -- at that kind of level. And we are very confident about that level because we've got that largely in hand today. But again, these projects with oil and -- where it is today, we feel these projects on pause in many cases. So, we will be ready to go when some of the best projects kick back on. And hopefully, we will be surprised over the course of the year, but we are not counting on in our guidance.

Great. Thank you.

Your next question comes from the line of Ryan Cassil with Seaport Global. Please go ahead.

Hi, guys. Good evening.

Hey, Ryan.

Hi, Ryan.

I just wanted to go back to the refining MRO opportunities. You are guys are apparently talking with these customers about planned shutdowns. And are you getting sense that that's going to happen at the end of '16 or early '17? Or is that more optimism that it needs to happen based on the duration in between turnarounds? And then, my second question is for the unplanned maintenance, given where you guys are with your lead times, is that really an opportunity for you guys based on where you will be with inventory in the second half?

Yes, thank you. So, inventory is important for us. And again, for us, getting more products down into the distribution channel near those refineries and petrochemical classes is very important. That doesn't show up as often as skids [ph] inventory, but it is plant side and that's where want it. So, we have done a reasonable job so far this year getting product in position. It is important we ourselves build more inventory here as we go later in the year. Our sales and marketing team are on the ground, calling on these accounts every day trying to gauge maintenance practice and maintenance expectations. And again, as I said, we are hearing and expecting a high level of unplanned maintenance. But we are also hearing that there are an array of turnarounds even here in the spring time let alone in the fall season that we were anticipating -- we are there telling us that they are going to be doing some significant maintenance work. So, we're going on that. We try not to be either optimistic or pessimistic, but just clear eyed about the opportunities and being as close to ground as we can. We think the team has done a pretty effective that will be ready for that opportunity.

Okay. Great. And then, could you tell us what your assumption is for capacity utilization in the East Providence plant for '16? And maybe how that -- if it's different in the first half and second half, but has that changed it at all with the third line running more efficiently perhaps to give you a little bit more buffer in case something goes wrong?

So, our existing guidance hasn't changed too much in that, Ryan. So I think at the last earnings call, we discussed that at the upper end of our revenue guidance for product revenue is $1.20 million. That gave us roughly $15 million of additional revenue capacity out of the plant. And so, that third line is definitely running above our expectation, is contributing, and just on that sort of stable basis would lead us to think that we would have additional revenue capacity. Working against that a bit is the mix, that I alluded to, in the first half of the year with a slightly lower ASP, we would anticipate higher volumes, slightly lower ASPs. And therefore, we are probably still in that range of about $135 million for the year. So, nothing has really changed since November, but sort of the component of that 135 million mix has changed a bit.

Okay. All right. Thanks guys.

Thank you, Ryan.

Your next question comes from the line of Craig Irwin with ROTH Capital Partners. Please go ahead.

Hi, good evening, gentlemen. In this current environment, a lot of investors are looking at things from a sort of worst case scenario. And, the dire scenario is what unfortunately the new buyers very often look at before they scoop in new positions. Can you maybe -- now you are 32 million cash, you are getting pricing on your product now, but can you maybe discuss with us that if you did see a surprise as far as your renew trajectory in '16, what your ability would be to take out additional cost to maybe reduce some of your operating costs? How much room do you have there? And what you see as a potential downside scenario?

Yes. So, -- I mean that's a very good question. A lot of our expense is people. And, it's both in the plant, operating expense, sales. Sales and marketing is predominantly sales reps and travel expenses. G&A is people and professional services and a lot of things that are required to be a public company. And research and development is actually and our engineering groups are people as well. And so, in terms of a really quick response, I think when you talk about cutting expenses, we can obviously cut discretionary expense although as a company we keep strong controls on cost to start with. So we do have some opportunity there. We could delay and defer potential hiring, and so instead of adding to our cost base in 2016 we could maintain it. And also I'd say probably we do have the ability to control and constrain cost by $2 million-$3 million to get something more than that though would mean we'd have to actually take out resources. And the implementation time and ultimately the time it takes to actually get a net benefit to those types of actions but push the impact of that out to 2017. So we do have some ability to cut and control expenses to offset any sort of downside scenarios and that would probably cover $5 million, $6 million, $7 million of a revenue mix. Beyond that we would probably see some kind of degradation in the profitability, but at present I think now based upon what we're seeing -- what we are seeing in the market we are fairly confident in the guidance range that we provided and we don't think we have to take those actions.

Great. That was fantastic.

Yes, I would just add if I may, Craig, to that, I mean you cited some things that are very important to us strong cash and position, not that that's a good place to be in this kind of environment. you pointed out the price increase -- putting a price increase in the tough environment is -- it says something about our product and I think the other thing to keep in mind for us that if you -- the markets that we have targeted -- the energy infrastructure market at our core, we have done a great job creating adoption across all virtually all the petrochemical and refinery companies, but our penetration rates are relatively low still, early stage. And we're doing a great job I think building, building, building into that market as our capacity has allowed, but we're -- for us just to gain another market share point or two is a very absorbing kind of thing from a revenue and cost point of view of running this business. And so I think I would just make the distinction that relative to a company that's more mature and might have a higher market share where it's very hard to evade being buffeted by this big macro environment that we find ourselves in today. I just think our ability to maneuver is a little greater within the marketplace and it does provide us some additional protection.

Great, thank you for that. So my second question again is sort of on the lines of a skeptical investor, and I believe I know what your answer is going to be like many people on the line, but a skeptical investor in this environment would probably be thinking that your customers could look to substitute back to the legacy products that they used a few years ago, given that your product is a pretty novel product. And probably an incremental cost for them an incremental first fit cost, can you maybe discuss how the economics work for your customers, whether or not this is something that would make sense? Whether or not the design and engineering changes that they've made to incorporate your product would be consistent with that?

Yes, so I think I've -- we always talk about and think about ourselves material cost, total installed cost, and total lifecycle cost. And so, you're right on the material cost point of view, but we tend to be very competitive with many of the products that we are displacing today at that total installed cost level. And it is typically at that point that the engineer that you might be referring to, he might be evaluated at that point. And we're very competitive in many cases at that level. And of course our value proposition and one of our selling points is, well, also if you can look towards the total lifecycle cost, and that's where the durability of our material that -- the prevention of corrosion and the insulation, the whole host of important factors that's where we really come in and save money over a period of time. But I don't want you to think that people necessarily rely on that third bucket. It's usually the second bucket where people are being measured, and we're competitive in that level in many, many, many cases.

Fantastic. Thank you for taking my questions.

Thank you, Craig.

Ladies and gentlemen, that's all the time we have for today. I'd now like to turn the call back to Don Young, CEO, for closing remarks.

Thank you, Loral, and thank you for participating in today's call. We really appreciate your interest in Aspen Aerogels, and we look forward to reporting our first quarter results to you in early May. Have a good evening.

Thanks everybody.

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