Aspen Aerogels, Inc. (ASPN) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Mariama [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels’ Q4 2016 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 would now like to turn the call over to Gregg Landes, Vice President of Finance. You may begin your conference.

Good afternoon. Thank you for joining us for the Aspen Aerogels’ conference call. I'm Gregg Landes, Aspen’s Vice President of Finance. There are a couple of housekeeping items that I would like to address before turning the call over to Don Young, Aspen CEO; and John Fairbanks Aspen’s CFO. The press release announcing Aspen’s financial results and business developments, as well as a reconciliation of management's use of non-GAAP financial measures as compared to the most applicable GAAP measures is available on the investor section of Aspen’s website, www.aerogel.com. Included in the press release is a summary statement of operations, a summary balance sheet, a summary of key financial and operating statistics for the quarter and year ended December 31st, 2016. In addition, investor section of Aspen’s website will contain an archived version of this webcast for approximately one year. Please also 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 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 on the Investor section of Aspen’s website. The forward-looking statements made today represent the company's views as of today February 23rd, 2017. 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 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 most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures is also available in today's press release. I will now turn the call over to Don Young, President and CEO of Aspen Aerogels.

Thank you, Gregg. Good afternoon. Thank you for joining us for Q4 and fiscal year 2016 earnings call. I will provide comments about the business and our performance and John Fairbanks; our CFO will present financial details for the fourth quarter, the year 2016, and our guidance for 2017. We will conclude the call with a Q&A session. I plan to cover three topics in my prepared remarks. First, I'll provide a recap 2016. Second, I'll discuss the current commercial environment, our outlook, our market outlook for 2017, and our goals for the year. And third, I'll review our strategy of leveraging our Aerogel technology. There is no question that the year 2016 was challenging for us. After achieving a compound annual growth rate of 30% for the seven years from 2008 through 2015, we faced significant market headwinds in 2016. While solid upstream business led to record 2015 revenue, we expected that it would not be a strong contributor in 2016. We were right. Subsea, the primary component of our upstream revenue declined from a record $24 million in 2015 to $4 million in 2016. With oil prices declining by more than 50% during the second half of 2014, the upstream flywheel finally came to a stop for us by the beginning of 2016, reflective of the late cycle nature of insulation to our end users. The $20 million year-over-year Subsea revenue gap proved difficult to fill in our overall product revenue declined in 2016 by $5 million or 4%. While we expected the weakness in the upstream market, we did not fully anticipate the extent of the softness in the downstream market, particularly activity levels in refineries and petrochemical plants. While not nearly as dramatic as the declines in the upstream, the downstream market showed weakness, particularly during the second half of the year. We observed that whenever asset owners had a chance to delay projects or to defer maintenance, they often delayed or deferred. In the U.S. market, for example, our distributors indicated that insulation sales in our core refinery and petrochemical segments declined industry-wide by as much as 20% in 2016. This environment made growth difficult for us in the important U.S. market, although we were able to mitigate substantially the negative macro trends by continuing to take market share and by realizing our price increases. The positive surprise in 2016 was the significant surge in volume from the South Asia petrochemical project. As a reminder, we delivered product to the project in 2014 and 2015 at a rate of approximately $14 million per year. That annual rate more than doubled in 2016 to more than $29 million and comprised approximately 25% of our total 2016 revenue. On the one hand, the project shows the scope and scale of a large global project for Aspen. On the other hand, with the project coming to an end and the facility transitioning to maintenance mode, we expect our 2017 revenue related to this account to be approximately $5 million. This leaves us leaves us with another substantial revenue hole to fill in 2017. We will discuss is challenge further in our 2017 market outlook. The final point regarding 2016 relates to key catalyst that we define entering the year. There were three. Two market diversity and technology development. In September, we received approval from our Board of Directors for both our Plant 2 project and for the related debt financing proposal, which we received from a leading financial investor earlier that month. However, based on our stage gate decision-making process, we decided and announced in early November to temporarily pause our development of Plant 2 in order to better pace the project against our assessment of demand for the 2018 to 2020 timeframe. This timing adjustment better aligns the debt and spending related to Plant 2 construction with our demand forecast based on the current energy market. We believe it is prudent to maintain a strong debt-free financial position in this market environment while we execute our strategy. We also believe we made the right decision at that time and we remained ready and eager to restart the Plant 2 project as our core market strengthened and as our adjacent and new markets continue to grow and absorb increased capacity. In the interim, it is important to remember that we have annual revenue capacity from our East Providence facility and from inventory of more than $145 million, which allows for substantial growth above our current revenue run rate. Market diversity is core to our strategy of leveraging our Aerogel technology platform and we made solid progress during 2016. While we still have substantial room to grow in our core markets refinery, petrochemical, and Subsea, we also have important opportunities in adjacent markets. We define an adjacent market as a market where our value proposition is similar to that of our core markets and where we can use largely the same products, distribution channels, and contractors. Our first efforts have focused on LNG and district energy. During 2016, we three substantial LNG orders and we believe that these wins demonstrate the important long-term role we will play in the LNG market. It is important to understand how we believe we will grow the LNG business over time and how the LNG experience is likely indicative of adoption cycles for other parts of our business. From 2013 to 2015, we did small-scale maintenance work on approximately 20 LNG facilities around the world. Engineering firms and owners gained experience with and confidence in our Cryogel products. This work led eventually to inclusion into project specifications. From there we were able to win increasing scope in ongoing LNG projects, again, as engineering firms and owners gained confidence in our products. Our three LNG orders in 2016 are good examples of initial wins with order sizes ranging from $2 million to $4 million. The next step is to leverage these wins into greater scope in major expansion and Greenfield projects. The typical range of available scope of the LNG project is between $4 million and $8 million with a significant project reaching as high as $20 million. We have now earned the credibility to compete for these projects with a proven solution that provides a strong ROI for our end users. The key point here is appreciating the progression for maintenance work, the small scope project work, and onto larger scope project work. We believe this progression applies to many of our end markets with the most significant recent example being the South Asia petrochemical project to which we delivered approximately $60 million of Pyrogel over the past four years. District energy where steam is generated centrally and distributed through a tunneled system to a complex of buildings is an adjacent market where a thin profile and hydrophobic nature of Pyrogel are winning characteristics. After introducing our products to the district energy market in 2015, we more than doubled our revenue in 2016 as we continue to build a portfolio of successful projects. In addition we remain on track to launch in the second half of 2017 product specifically designed for the large and attractive power industry in end market that consumes more than $1 billion of insulation per year. The LNG district energy and power markets are examples of our progress thus far in targeting and developing high value adjacent markets to supplement our core refinery, petrochemical, and subsea work. Again, there is no question that the market environment in 2016 was challenging and our financial performance was impacted. However, we remain focused on executing our plan. We believe we are well-positioned to return to a solid growth trajectory as the energy market strengthened and as we have continued success developing our adjacent and new markets. Looking forward to 2017, we are assuming for our planning purposes that conditions in our upstream and downstream energy end markets will be about on par with 2016. That is to say no meaningful upstream activity and frugal downstream spending by our refining and petrochemical end users. In light of the approximately $24 million hole left by the successful completion of our South Asia petrochemical project, we are projecting a decline in our product revenue in 2017 of between $5 million and $15 million. While there is recent industry sentiment suggesting the potential for increased activity in the energy markets in 2017, we believe planning for a slower, more conservative recovery is prudent, especially given the aforementioned late-cycle nature of our products. Our goal for 2017 is to build momentum each quarter by gaining share in our core refinery and petrochemical end markets, by demonstrating value and growth in our LNG district energy and power adjacent markets, and by taking a partnered approach in the development of new markets, including building materials. The interesting element toward 2017 revenue projections is that it is comprised nearly entirely of singles and doubles and contains no significant project work. Excluding our Subsea and South Asia project work, our base revenue has grown from $72 million in 2014 to $81 million in 2015 to $82 million in the down market of 2016. We project continued growth in the space revenue between $90 million and $100 million, representing a significant component of our 2017 guidance range. Just to complete the picture with respect to our 2017 guidance. In addition to the $90 million to $100 million of base business, we expect that approximately $10 million of revenue will be derived from a combination of our ongoing Subsea in South Asia project work. The growth in base revenue in 2017 is driven by steady gains in market penetrations across all regions, growth in the district energy and power segments, and our price increases Accordingly, we believe that we're unlikely to have a significant project-driven revenue gap going into 2018. And given our record of gaining market share in our core business and developing our adjacent markets, we believe we're positioned to resume a revenue growth trajectory in 2018. Our long-term strategy is the third subject today. Our strategy is to leverage our Aerogel technology platform. Our initial success came in the subsea, refinery, and petrochemical areas where substantial growth opportunities still remain. We believe that we will resume significant growth in these core markets as activity levels in the energy sector increase. During the downturn in the energy market, we have continue to invest in our R&D and sales and marketing efforts and those investment have resulted in strong technical and commercial positions in our core and adjacent markets and in several promising opportunities in potential new markets. With respect to potential new markets, another element to our strategy is to utilize partnerships to diversify our end markets and thus our sources of revenue. Our goal is to leverage our Aerogel technology platform to create Aerogel-enhanced products to enter new markets using a partnered approach. Our BASF agreements, for example, position us for success in the building materials market. The commercial technical and financial characteristics of the BASF agreements are important components for future relationships with other world-class companies. On a related note, we commissioned during the third quarter of 2016 a full scale pilot line at our East Providence facility, which is dedicated to creating next-generation products and to improving operational excellence in our production facility. The pilot line is an important asset for research and development as we leverage our Aerogel technology platform with category leading global partners to create next-generation Aerogel products for existing and new per markets. Overall, we are confident that the strength of our technology and the ROI that we bring to our end users across multiple markets will enable solid performance for our company for years to come. We will maintain our commitments to grow profitably to prudently scale up our operations and to remain financially strong. We are well-positioned to leverage the anticipated recovery in the energy sector and to continue to develop valuable adjacent and new markets. We have a strong team of people and we are confident in our ability to execute our strategy and to realize our vision for the company. Now, I'll turn the call over to John for a review of our financial results. John?

Good afternoon. Thanks Don. I'd like to start by running through our reported financial results for the fourth quarter and fiscal 2016 at a summary level. Fourth quarter total revenue declined 26%, $27.6 million versus a record $37.4 million in 2015. Fourth quarter net loss was $5.7 million, or $0.25 per share versus net income of $1.6 million or $0.07 per share last year. Fourth quarter adjusted EBITDA was negative $2.1 million compared to positive $5.4 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. Patent enforcement costs had a significant impact on both our net loss, adjusted EBITDA during the fourth quarter this year. We incurred $1.9 million of patent enforcement costs during the quarter versus $100,000 in the fourth quarter of last year. For the full year, total revenue declined 4% to $117.7 million. Net loss was $12 million for $0.52 per share in 2016 versus a net loss of $6.4 million or $0.28 per share last year. And adjusted EBITDA for the year was $3.9 million, down from $9.1 million in 2015. Patent enforcement costs, again, had a disproportionate impact on both our net loss and adjusted EBITDA during 2016. We incurred $3.6 million of patent enforcement cost during the year versus $200,000 in 2015. I'll now provide additional detail in the components of our results. First, I'll discuss revenue. Fourth quarter total revenue was comprised of product revenue of $27.2 million and research services revenue of $435,000. For the year, products revenue was $115.5 million and research services revenue was $2.2 million During the fourth quarter, product revenue decreased by $9.4 million, or 26% versus last year's record level of $36.6 million. This decline was driven by a significant decrease in Subsea revenue and continued weakness in the global downstream markets, offset in part by strong growth in shipments to the multiyear South Asia petrochemical project. In our view, the root cause of weak demand for our products continues to be constrained capital investment and low activity levels in our core energy markets. During the quarter, shipments increased 10% to 10.6 million square feet of Aerogel blankets, while our average selling price decreased by 17% $2.55 per square foot. This decrease in average selling price reflected a year-over-year decline in the mix of our higher price Subsea products in combination with an increase in revenue from the South Asia petrochemical project, which is characterized by project based pricing established in 2013, the high mix of lower priced 5-millimeter products. For the year, product revenue decreased by $5 million or 4% versus 2015. This decrease was driven by $20 million decline in our Subsea revenue year-over-year, offset in part by strong growth in shipments to the South Asia petrochemical project. Revenue from the South Asia petrochemical project doubled versus 2015 levels more than $29 million and comprised approximately 25% of our product revenue. For 2016 total blanket shipments increased by 5% to 44.3 million square feet, while our average selling price decreased by 8% versus a year ago to $2.61 per square foot. Again the decrease in average selling price reflected the year-over-year decline in the mix of our higher price subsea products in combination with the increase in revenue from the lower-priced South Asia petrochemical project. Looking forward, we anticipate that continued constrained capital investment and low activity levels in our energy markets and the conclusion of the South Asia petrochemical project lead to a decline in product revenue of 2017. As a result, we expect product revenue during 2017 of between $100 million and $110 million versus the $115.5 million generated during 2016. We expect our average selling price for the full year 2017 to increase to $2.75 per square foot plus or minus $0.10 due to the expected reduction in the mix of the lower-priced South Asia petrochemical project revenue and the impact of our 2017 price increases. This average selling price expectation is included in our 2017 annual 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. By $300,000 decline in the fourth quarter of 2016, research revenue increased by 13% during the full year to $2.2 million. For 2017, we project that research services revenue will approximate $1.75 million. This estimate is also included in our 2017 revenue guidance. Next I'll turn to gross profit. Our gross profit $3.7 million and our gross margin of 13% during the fourth quarter represented a significant decrease from record levels in the fourth quarter of 2015. This decline in gross profit was driven by the 10% decline in shipment volume year-over-year, the unfavorable shift in mix from higher margin subsea revenue to the lower margin South Asia petrochemical project revenue, and a relative decrease in capacity utilization and manufacturing productivity during the fourth quarter this year from record levels last year. For the year, our gross margin of 20% was unchanged from 2015. However, gross profit dollars decreased by 5% to $23.3 million, due principally to the decline in revenue during the year. Again this revenue declined was due to the shift in mix from higher price subsea revenue to the lower priced South Asia petrochemical project business. Our gross profit and gross margin are highly dependent on product revenue and associated capacity utilization levels. Due to the high proportion of fixed costs in our manufacturing operations, we project that the percentage decrease in gross profit and gross margin during 2017 will exceed the expected percentage decrease in revenue during the year. As a reminder, our variable contribution margin is approximately 45% is a result the decrease in revenue and capacity utilization will lead to disproportionate decrease in both gross profit and gross margin. Accordingly, we expect gross margins to the decline to the mid-teens for 2017. This gross margin expectation is included in our 2017 guidance. I'd like to emphasize that we've not seen any significant change the economics of our business. Our value proposition remains strong and our product pricing, material cost, and manufacturing expenses are relatively stable. Projected decrease in gross margin in 2017 is principally a function of the expected decline in revenue volume and capacity utilization. Next I'll discuss operating expenses. Fourth quarter operating expenses grew by $1.3 million, or 16% to $9.4 million. This growth in operating expense was driven by $1.8 million increase in patent enforcement cost, offset in part by $500,000 year-over-year reduction in all other operating expenses during the quarter. For the year, operating expenses grew by $3.6 million, or 12%, $34.5 million. This increase in operating expenses was a result of a $3.3 million increase in patent enforcement costs and $1.2 million for increased investment in sales, personnel, and marketing programs, offset by a $900,000 year-over-year reduction in all other operating expenses, principally associated with decrease in incentive compensation. Looking forward, our 2017 guidance includes our expectation that operating expenses will increase by approximately 8% year-over-year. This projected operating expense increase reflects a planned increase in our research and development spending in sales personnel combined with a budgeted expense increase for incentive compensation, patent enforcement actions. Next, I'll discuss our balance sheet and cash flow. We ended 2016 with $18.1 million in cash at minimal debt, net current assets of $50.2 million, shareholders' equity of $115.6 million. In addition a $20 million revolving credit facility remains untapped. We recently extended the term of the facility through January 2018. I'll now provide our initial guidance for 2017. Total revenue is expected to range between $102 million to $112 million. Net loss is expected to range between $18.2 million to $21.2 million. Adjusted EBITDA is expected to range between a loss of $2 million and a loss of $5.4 million. EPS is expected to range between a loss of $0.78 a loss of $0.91 per share. This EPS guidance assumes weighted average of 23.4 million shares outstanding for the year. This 2017 outlook also assumes appreciation and amortization of between $10.6 million and $10.8 million, stock-based compensation of between $5 million and $5.2 million, and interest expense $200,000. In addition, this initial financial outlook includes between $3.9 million and $4.4 million of costs and expenses associated with our patent enforcement actions for the year. These patent enforcement costs will be frontloaded. We expect to incur 60% of the projected costs in the first quarter of 2017. But the remainder is spread over the final three quarters of the year. During 2017, we will focus on controlling capital expenditures maintain a strong balance sheet and financial flexibility. Our 2017 capital budget of approximately $7.3 million is comprised of $2 million in new projects to be initiated during the year and $5.3 million in final expenditures for the pilot line, for equipment and support of the new power market product, and for other projects approved and initiated during 2016. We expect capital expenditures will be frontload during the year with $6.2 million of spending projected for the first half of 2017. During the second half of the year, we plan to constrain capital expenditures to a level slightly greater than $0.5 million per quarter. Turning to cash at an aggregate level, we expect to use cash during the first half of 2017 to fund frontloaded operating losses, patent enforcement expenses, and capital expenditures. During the second half of the year, we expect to generate cash due to projected improvements in operating performance, anticipated declines in patent enforcement costs, our efforts to constrain new capital spending during the year. In the context of the range of our 2017 guidance, we expect to exit 2017 between $10 million and $14 million of cash on hand. While we don't plan to provide specific quarterly guidance on a routine basis, we think it's important from time-to-time to provide our investors with a general view to our expectations during the year. During 2017, our financial performance in the first quarter is expected to deviate from recent quarterly trends and to reflect the new floor for the company. As noted earlier in my comments, we expect revenue of between $102 million and $112 million for the full year. Within the scope of this annual guidance, we expect revenue of between $20 million and $24 million during the first quarter with growth expected from this space throughout the year. As I also noted earlier in my comments, we expect gross margins in the mid-teens for the full year. However, given the direct differential in quarterly revenue projections during the year, we expect gross margins of approximately 13% during the first quarter into the second quarter as well with improvements into the high-teens expected during the second half of the year. We also expect operating expense levels to be significantly higher in the first quarter of 2017 due to patent enforcement related expenses of between $2.3 million and $2.6 million during the period. Accordingly, we are projecting a first quarter adjusted EBITDA loss of approximately $4 million with improvement anticipated on a quarterly basis throughout the remainder of the year. This projected improvement reflects our general expectation of increasing revenue levels, proving gross margins, and decreasing IP enforcement costs over the final three quarters of the year. As always project work and product mix create quarterly variability, we will update our annual guidance at the time of each earnings release during 2017 or as otherwise necessary. I'll now turn the call back to Mariama for Q&A. Mariama?

[Operator Instructions] Your first question comes from Eric Stine with Craig-Hallum. Your line is open.

Hi Don, hi John. Maybe we can just start in LNG, you laid kind of how things have transpired and the penetration you've made over time. But based on kind of lessons learned in some of your more mature segments, I mean any thoughts on when you would expect to see involvement in some of these larger projects -- the $20 million plus type of opportunities?

Not in 2017 Eric, I can tell you that.

Okay.

But I can -- we have a team of people focused on this segment and as projects emerge in all regions, including in Asia where a lot of the activity is taking place, we think we're in a very good place to compete for those projects. So, again, as I said in my notes, 2017 is user baseball metaphor is going to be made up of singles and doubles, and I think there's some -- I think that's interesting, that's a nice base of business and avoiding, if you will, that revenue gap driven by one or two projects as we experienced from the Subsea 2015 to 2016 and from the South Asia project 2016 to 2017 Again I think it will be made up of smaller pieces of the business and will get that growth from penetration across much broader group of customers and much broader number of segments. So again LNG point, we think we've done that, we've done the legwork we prove our value and we are going to compete hard for projects as they come up around the world.

And just think about LNG I mean is this enrolls with EPC firms is it with the project owners or is it the combination of both?

It is really a combination of both. The work you know we talked a little bit about the work that we did in Thailand the PTT project this year that was very much with the contractor and with the asset owner as well very much with joint effort. We performed well in that project and that the area that is rich with opportunity and so that was an important one for us to perform well.

Yeah, okay. Thank you. May be last one, just turning to petrochem and this is I guess a little more of a longer-term question, but I was thinking about other geography Saudi Aramco of course been making a lot of noise in the last couple months, is that they are looking to remake themselves into and petrochemical power? And just curious your historical involvement with Saudi Aramco whether it's apparent company or the joint venture since I know those are kind of two different animals?

Yeah. So it has been not significant historically some of the joint work that they did with Shell we were involved with here in the United States in particular and again there is a little bit of history to this Eric. If you go back to the point in time, when we were sold out in 2014, 2015 even the beginning of 2016, we were a little hesitant to open another region, i.e. the Middle East and because we were having enough trouble just a delivering on the regions we had begun to penetrate and so it was really about a year ago that we dedicated assets to the Middle East not only Saudi Aramco but across the region and we are developing distributors and contractors and working with end-users again across that region and you are right it is which way opportunity both directly there but also some the joint venture work on outside of the region.

Okay. Thanks for the details.

Thanks, Eric.

Your next question comes from John Quealy from Canaccord. Your line is open.

Hey, good afternoon folks. Can you hear me, alright?

Sure, I can.

Hey, guys. First on that $90 million to $100 million give or take base business, can you just talk about the visibility there what you did to build that up I am imaginable bottoms up but just give us a sense of confidence in that sort of recurring business that we are expected to see in ‘17?

As I indicated in my script that number has increased from the low 70s into the low 80s most recently and as I said we’re going to build it up into 90 and $100 million range. A little bit of it goes to sort of the progression story that I told about LNG in a way and how that relates I think to some of our other segments. We are penetrating these accounts, we’re getting more and more activity at each facility. We’re building a relationship in new facilities, so again I think it's just a natural progression of us penetrating this -- penetrating these accounts and being effective globally. John mentioned an increase in investment in our sales and marketing organization and we have more feet on the street. We are working on our distributors harder. We're pushing those accounts hard and again we think that we have a very good chance of growing that downstream business, the other components of that of course were continued progress in our district energy market. We are introducing the power product in the second half of the year which will make a small, but hopefully building contribution. And then of course we also put in place on a smaller price increases but nevertheless price increases in the range of 2 or 3% here in 2017 which as you know the math will work for us in that way as well.

Okay. Great. And then the second question on the patent/litigation costs just bigger picture can you just walk us through your strategy there, is it is an aggressive enforcement in defense moving forward? Would you be opening open to settle with certain parties , how should we think about your philosophy around spending in the aggressive mission and where we are in the cycle around those costs obviously pretty heavily weighted here in the first half?

So couple of thoughts, this company has spent upward $100 million in research and development. Developing developments Aerogel technology platform and it is valuable and it deserves to be protected and that's what we’re doing. I would say that we are being aggressive here in the United States and in Europe and we will continue to be aggressive. On the dollars spent in 2016, John mentioned them 3.5 to $4 million range and then heavy spending on now where, we are sort of in high season right now with the with the U.S. effort and as we expect as John said meaningful Q1 expenditures in that area we think that we will prevail in these action and that will send a strong message across market. So that’s our philosophy we do not anticipate that this will be on analysts at these kind of levels, but again we try to go out on pre-emptively and aggressively artificers them this early on.

And then the last question on the new product side and some of the new initiatives you had, how should we think about ‘17 in milestones around for example BASF in Europe or the new utility product launching in ‘17. I mean should we see you these in order flow this year in ‘17 or is this more of the seating the market getting the channel ready and then ‘18 is when we expect some of the orders? Thanks guys.

Thank you. So on the utility side of the power product, we’re really excited, we’re right on schedule we’re installing equipment in our East Providence facility and we’ve got team working accounts there. We would love when we launch that product in the second half of the years as we've been saying for a while launch it with that with a lead customer if you will or kind of have a partner customer and really come out of the gates hard. I'm not suggesting that it could be large-volume in 20 in the second half of 2017, but we think we will lay the groundwork for an interesting contribution and 20 – 2018. We are confident that we’ve got a winner there. Second on BASF, we’re working very closely with BASF on a range of opportunities that improve our company and build out that relationship. Again there will be some contribution, steady contribution from the building materials segment BASF and some of our other partners in that area in 2017, but we really are thinking that 2018 and 2019 will be breakout years for those products. Other questions, Mariama?

Your next question comes from Sean Hannan with Needham & Company. Your line is open.

Thanks. Can you hear me.

Hi, Sean. How are you?

Hi. Okay, so it sounds like at this point now there is rough expectation you should see some continued pickup into the back end of the year, if I recall correctly in terms of your visibility on lead times, that something that certainly improved at least the lead times of improve your visibility has perhaps shrunk over the course of last 12 to 18 months. So I'm just trying to see if I can get a better understanding of what gives you that viewpoint that you can grow in the backend of the year, is that growth versus the first half completely incremental from some of these adjacencies such as power and so on and so forth or how can we otherwise think about that? Thanks.

So, first on the -- from a core market point of view, again, we expanded our sales and marketing organization. We have -- I think we're doing a good job penetrating these accounts and getting more feet on the street -- both our own and our distributors and I would just say that in those core markets, we're -- we feel there's some buildup occurring and so we've got a good chance. Because these are smaller orders, right, these are containers and not project work, it's maintenance activities. You're right we don't have visibility in the sense of purchase orders, but activity levels, we're feeling that we're going to build momentum throughout 2017. Each quarter -- our goal is for each quarter to be better than the quarter before and we feel we're well-positioned to do that. That's on the core side. Of course the adjacent markets are going to incremental contributors to that. District energy and power, building materials, these are areas where we think that we can put some growth on the boards here of throughout the year. And again with power contributing in the second half of the year, again, not enormous numbers, but incrementally positive. That's why we're confident that the second half is -- will be stronger than this first half.

Okay. And then in terms of downstream energy, my understanding is that after a fairly prolonged period of push outs of turnarounds due to -- and otherwise favorable conditions right for facilities keep operating that there is an expectation and there's growing chatter that turnarounds are really starting -- are going to start to become much more active this year and at least in the U.S. that there is a pretty good expectation of a healthy uptick. So, I would suspect from a maintenance standpoint those are you where you have some of your opportunities. Just trying to figure out if that's part of some of your thinking in 2017? Is that a factor at all -- any color around that would also be helpful? Thanks.

So, essentially -- our planning purposes what we have said is that 2017 is going to look a lot like 2016, just in terms of -- I mean to say further decreases in the U.S. market as I cited, but sort of flattish market. And we certainly are listening for and pushing hard on the maintenance fees and being a little richer this spring and this fall than it was in 2016. And we've been doing the rain dance around that for a while as a lot of companies like ours have been doing and it's got to happen and we think there's a good chance -- we're hearing the same things that you're hearing around spring and the fall this year.

Okay. So, it sounds like you're hopeful, but you're attempting to be conservative and pragmatic as it translates to the numbers. Is that fair?

We're -- instead of taking with the -- operating under the premise that it's going to be -- tomorrow's going to be a lot like yesterday and we have to drive our numbers based on this current energy end market. We're not going to get bailed out by any big project or any -- we're not counting on anything other than what's there today. And so our team needs to be effective penetrating these accounts and developing these adjacent markets and driving growth and that's what we're doing and we're getting better at it with every day that passes. Again that's why we think that building momentum one quarter after the other throughout 2017 and positioning ourselves for a gross spurt starting in 2018, that's what we're focused on here as a team.

Great. Okay. Thanks very much.

Thank you, Sean.

Your next question comes from Ben Kallo with Baird. Your line is open.

Hi guys. This is David [Indiscernible] on for Ben Kallo. Thank you for taking the question. I just want to follow-up on that last point where you're not expecting tomorrow be any better than today. How long can that strategy carry out? And do you need -- looking into 2018, 2019, 2020, the energy markets to rebound and what if they don't?

We are operating in a large market here. Just in the energy infrastructure alone, it’s a market that is measured upwards of $3 billion. And so obviously we have globally 3%, 4%, 5% of that market, maybe a little higher in some regions, little lower in other regions. We have an enormous amount of opportunity -- with the opportunity we have before us today even in the market that we're experiencing today to continue to grow this company. And yes, we would grow more rapidly, there's no doubt in a more friendly environment, but we think we can grow the company even in the environment we're in and that's at the core market. We also know that we can develop these adjacent markets with success. District energy, the LNG market, the power industry, and those are sort of new opportunities for us to grow. And then we talk about new markets and building materials with BASF is an example of that. I think, again, not so much for 2017 or 2018 because new markets will contribute a little longer term. And so again our ability to grow, penetrate our current accounts, get more market share as we have been doing year in and year out in good markets and that bad, will enable us to be successful here.

Got it. Thank you for the color.

Thanks [Indiscernible].

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

Hey Sean.

So, Don I wanted to talk about Plant 2 a little bit. Last quarter we talked a hurdle with something 25% increase in shipments over maybe a seven or eight quarter lead-time that's kind of hurdle our get towards projects sanctioned. So, just given another quarter under your belt, updated guidance for the more visibility, just curious your updated thoughts around the Plant 2 framework?

Yes. So, there really a few factors that we're looking for to pull the trigger sort of speak Sean on that. And just to restate, I think I might've said last our last quarterly call is that from the time we pull the trigger, if you will, to the time we have that operational will be approximately seven quarters. And so the factors that we're looking for, we would love to see these activity levels and you might have heard us talk about this base business kind of concept just sort of singles and doubles, we really love that -- growth from that segment and we love our projects, but growing that base creates a little bit whipsaw in our numbers. So, that activity in the downstream numbers will be important to us. We'd love to see and we're working the project pipeline all the time. We're not anticipating any knockout type projects in 2017, but we see lots of opportunity in 2018, 2019, and 2020 area. And so as we -- as those become a little closer in and we gain a little more visibility and we work our way into those specifications and become lead participants in those projects, we'll have some visibility on that and that will give us more confidence as well to pull that trigger. And the third area I think is this notion of diversity that we have. Continuing to have things like district energy, LNG, power, building materials, and potentially some other segments absorb more and more of our capacity on the increment that too will give us confident. So, I think those three things or activity downstream, some projects on the horizon that were in that driver seat on and more diversity. I think some combination of those three things will make it relatively easy to pull that trigger. I think the hard thing would be if we had another $60 million project sitting out there like the South Asia project that we're just completing without growth in the base business and the diversification that we're talking about. I think that's a much harder decision to make. And so we're really focused on those three elements that I described.

Okay, that's fair. And then just about talking about -- you gave us a little more on BASF, just curious if there's any update on additional partnerships in the pipeline?

Well, we're -- nothing that we're able to announce now. We're working on projects or new markets let me say and a lot of that work starts on the technology side, on the research and development side. This idea of enhancing products using our Aerogel technology will work component in a system. These are some of that without lying to shorthand too much, these are some of the ideas that we have and some of the discussions that we're having and we're in the midst of proving out some of that technology to demonstrate that we've got something that is special and unique and protected.

Okay, great. Thanks.

Thanks Sean.

There are no further questions at this time. I will now turn the call back over to Don Young.

Thank you, Mariama. I appreciate your help. Again, thank you for joining us today. We appreciate your interest in Aspen Aerogels. We look forward to reporting our first quarter 2017 results to you in early May. Have good evening. Thank you.

Thank you.

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