Good afternoon. My name is Jessie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aspen Aerogels' Q3 2017 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. John Fairbanks, you may begin your conference.

Good afternoon. Thank you for joining us for the Aspen Aerogels' conference call. I'm John Fairbanks, Aspen's Chief Financial Officer. There are a few housekeeping items that I would like to address before turning the call over to Don Young, Aspen's President and CEO. 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 compared to the most applicable GAAP measures is available on the Investors section of Aspen's website, www.aerogel.com. Quoted in the press release is a summary statement of operations, a summary balance sheet, and a summary of key financial and operating statistics for the quarter ended September 30th, 2017. In addition, the Investors section of Aspen's website will contain an archived version of this webcast for approximately one year.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. Such statements are subject to risks and uncertainties. Aspen Aerogels' actual results may differ materially from those expressed in these 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 Investors section of Aspen's website. Forward-looking statements made today represent the company's views as of today November 2nd, 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. 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 also available on today's press release. 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 Q3 2017 earnings calls. I will start by providing comments about the business and our performance; next, John will present financial details for Q3 and year-to-date 2017 and comment on our guidance for the remainder of the year. We will conclude the call with a Q&A session. I plan to cover four topics in my prepared remarks. First, I will comment on our recent victory in our patent enforcement action at the United States International Trade Commission, the ITC. Second, I will review the three important indicators related to the performance of our business that we believe will mark 2017 as a successful year. Third, I will discuss the current commercial environment including our market outlook for the remainder of 2017. And fourth, I will reiterate our strategy and describe the longer term scope of our opportunity. As we announced in June 2016, we took a series of legal actions to assert our rights against companies that infringe our intellectual property. We filed a complaint with the ITC alleging that two China-based companies engaged in unfair trade practices by selling Aerogel products in the United States that infringe or were manufactured by processes that infringed several of our patents. Based on our complaint, the IPC instituted an investigation and conducted a hearing. While the ITC was deliberating, one of the defendants challenged the validity of four of our patents at the United States Patent and Trademark Office. The defendants challenge to the validity of the patents was denied by the USPTO, a very favorable outcome for Aspen. Then on September 29th, the Judge overseeing the ITC investigation found that all patent claims that we asserted were valid and infringed by each of the two China-based companies. The Judge recommended…

Good afternoon. Thanks Don. Let's start by running through our reported financial results for the third quarter and the first nine months of 2017 at a summary level. Third quarter total revenue declined 8% to $27.2 million versus $29.6 million in the third quarter of 2016. Third quarter net loss, $3.1 million or $0.13 per share in both 2017 and in 2016. Third quarter adjusted EBITDA $1.1 million compared to $1.5 billion a year ago. Importantly, our third quarter adjusted EBITDA this year represented our first quarter with positive adjusted EBITDA since the third quarter of last year. We define adjusted EBITDA as net income or loss for interest, taxes, depreciation, amortization, stock-based compensation expense, and any other items that we do not believe are indicative of our core operating performance. Patent enforcement costs had a much less significant impact on our net loss and adjusted EBITDA during the third quarter this year than in recent quarters. We incurred only $53,000 of patent enforcement costs during the third quarter versus $1.1 million in the third quarter last year. The first nine months, total revenue declined 16% to $75.3 million. Net loss was $17.6 million or $0.76 per share in the first nine months of 2017 versus a net loss of $6.3 million or $0.27 per share last year. And adjusted EBITDA for the first nine months was negative $5.5 million compared to positive $6.1 million a year ago. The first nine months of 2017, patent enforcement cost had a disproportionate impact on both our net loss and adjusted EBITDA. We incurred $2.9 million of patent enforcement costs during the-- [Technical Difficulty]

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

Sorry, we had a line issue. And so I'll continue. Importantly, we continue to build sequential momentum during the third quarter. Total revenue this year has improved from $23 million in the first quarter to $25.1 million in the second quarter, $27.2 million in the third quarter. As we discussed during our recent conference calls, our gross profit and gross margin are highly dependent on product revenue and capacity utilization levels. Principally as a result of the sequential growth in revenue, gross margin this year has improved from 10% in the first quarter to 15% in the second quarter to 18% in the third quarter. Gross profit, in turn, improved from $2.2 million in the first quarter to $3.7 million in the second quarter, $4.9 million in the third quarter. And adjusted EBITDA improved from negative $5.1 million in the first quarter to negative $1.4 million in the second quarter, a positive $1.1 million in the third quarter. The future revenue and utilization growth, we would expect to continue to see the percentage growth in gross profit and adjusted EBITDA to outpace the associated growth product revenue. I'll now provide additional detail on the components of our results. First, I'll discuss revenue. Third quarter total revenue was comprised of product revenue of $26.8 million and research services revenue of $386,000. Total revenue for the first nine months was comprised of product revenue of $73.7 million and research services revenue of $1.6 million. During the third quarter, product revenue decreased by $2.1 million or 7% versus last year's $28.9 million. Solid growth in our core energy and adjacent markets and resurgent demand in the subsea market during the quarter was more than offset by the conclusion of shipments to the multi-year South Asia petrochemical project, which comprise more than 30% on…

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

Hi Eric.

Hi Don, hi John. I was wondering if we can just start with subsea. I just wanted to confirm did you say that that the 3Q business level was $5 million. I guess confirm that first. And then you mentioned additional work, any way you can quantify that as you're thinking about 2018?

Yes Eric. Yes, just a little over $5 million for Q3. And what we said in our prepared remarks is simply that we had quarters in hand for both Q4 and for Q1. So, we're going on a strong Q4 in the subsea area as well.

Is that something where -- I mean I know -- well along with the refinery and petrochem, you've been a little hesitant to kind of view that as sustainable. I mean is it -- what you're seeing in some scene, does that make you more confident that that is something that's sustainable or are you still kind of taking a wait-and-see approach on that?

If you go back, we've been doing subsea work since -- I'd say about 2005 and our historic averages in that space are sort of in the $4 million to $8 million range. When you go back to those years where we had a spike in oil prices, $80, $90, $100 oil prices, those numbers -- our subsea numbers went up considerably. John, correct me, I think we had roughly $15 million in 2014 and over $20 million of subsea business in 2015. It came down in 2016 to numbers approximately $3 million or $4 million, if I remember correctly. And this year we've seen a nice uptick -- let's just say, oil prices have stabilized and technology has improved, cost cutting has taken place, combinations have taken place of companies in the subsea, and they have found a way to be more economic -- at projects, they are economically attractive in these areas. They're extending existing assets. Our products are terrific in that longer pipelines have greater thermal challenges. So, we continue to do win dominant amount of those more challenging opportunities. And all I can tell you is we've got to get Q4 lined up, we've got good Q1 lined up, and there's a lot of -- let me call this sort of positive body language out there across 2018 as projects are being either dusted-off or conceived of right now. So, -- again, we feel better about that about business, we do not expect to return to 2014 and 2015 levels. But to be solidly in our historical range is -- feels good to us.

Yes, that's great after where it's been as of late. Okay, maybe just turning to refinery, that part of the business continue in this round of earnings releases as I hear companies talking about the 2018, they're seeing increased activity, they've got set up and I know to this point again you've kind of been a little conservative on that. I mean is this an area where you're starting to see that oil being part of it, but just increased confidence in -- from market participants, seeing that potentially that gets back on better footing as well?

Time will tell. I've traveled a lot the last six weeks. I spent time in the field with all of our salespeople around the world and our partners and many of our end users. And I would say that things do feel more positive and I'll be more quantitative with you once we get a few more purchase orders in hand. I think that these levels are still below where they were in say 2014 and even the first part of 2015. So, we're still below those levels of overall market activity. We've grown our base revenue as I said in my in my comments, we will continue to hear in 2017 and we'll strive to, again, in 2018. We know that we're taking market share. We know we're penetrating our accounts and we know that we're moving down this adoption progression that I talk about from maintenance to small scope project work to larger scope project work. And we -- in both our core and our adjacent markets, we continue to make progress moving towards some of that larger scale project work. And while 2018 may or may not bring any large projects, we are in a very strong position in 2019 and 2020 for some of this work that we see that has been initiated. So, again, I'll tell you more quantitatively when we have purchase orders in hand I think. But we do feel better about that market. As I said in my remarks, we did see a little pause right after Hurricane Harvey here in the United States, but it was just pretty temporary and we feel there's nice opportunity for us here in Q4 and going into 2018 to provide solutions to some of the flooded insulation that that occurred and they've now evaluated. So, we're in a good position to grow from there.

Okay, that's great. Thanks a lot.

Thank you Eric.

[Operator Instructions] The next question comes from Chip Moore with Canaccord. Your line is open.

Thanks. Maybe just dovetail on your comments there. Obviously, some short-term impacts with those storms in the Gulf, but this would seem to be a good case study, I guess, on the advantages of your product. Any changes in sort of discussions, customer behavior that you're seeing post those events?

I think, -- again, you don't ever wish that kind of devastation anywhere and certainly Hurricane Harvey was devastating. And we do believe that our materials really shine in resisting flooding or we're being able to recover from flooding relatively quickly. Hydrophobic open porous -- we do not -- we are not harmed by that once the flooding recedes. And in replacing other materials that were on these pipes, we do it quickly and we do it with high performance. So, it's just a nice combination of events, frankly. We are able to demonstrate that the product that was installed can withstand that kind of an event and again, go on very rapidly and get these assets up and running quickly. So -- and we're seeing that, there's no question.

Yes. Okay, good. And maybe if we switch over to the new power-gen product, maybe you can elaborate a little bit more on sort of how those initial orders have been coming and then sort of longer term as you get specked [ph] in with turbines and things like that, how you see that playing out?

So, we came out of the gate in July -- the beginning of Q3 and with our launch and we've said that we will get between $1 million and $3 million of orders here in the tail end of 2017 and we'll be comfortably in that range. And I think very importantly we've begun to build some case studies and those are the best-selling tools that we can have. And so we feel that we're in a strong position. And the other thing that's so important is that we have been able to work our way into the specifications of some of these key players. And without being in the specification, you're always tempting to, sort of, crash the party frankly and being in the specs positions us for maintenance small scope and we believe over a longer period of time larger scope work in those high temperature ranges that are consistent with power generation. It’s a big market too, Chip. We also -- the more we have begun to work that market, the more convinced we are that we have a role to play in that market that consumes $1.4 billion of insulation every year.

Yes. No, that's great. I will hop back in queue. Let someone else in, but thank you.

Thank you.

[Operator Instructions] Your next question comes from Ethan Potasnick with Needham & Company. Your line is open.

Yes. Hi, this is Ethan Potasnick filling in for Sean Hannan. I was just curious if you could talk about the BASF partnership now that it's about 16 to 17 months' old. I'm wondering if you guys could share the degree that to which it's being additive? I know you guys talked about -- you guys were hoping to double building materials revenue in 2017 as well 2018. So, could you guys provide more color on the degree this is being realized in building materials? And what the BASF partnership is specifically contributing and perhaps when that should contribute more?

Yes. Thank you, Ethan. There are three elements to those agreements that occurred in the summer of 2016. The first one -- or one element was around technology development and so we have a joint development agreement with them where we are developing a next-generation product for the building materials market. And that work is going well. We're not quite in a position to announce the specifics of that, but what I would say is it's a product that we believe will be valuable in the market, excellent thermal performance, great energy efficiency capabilities, very important in the market today, a product that has limited combustibility -- non-combustibility, which, of course, has taken heightened visibility here over the course of the past several months. So, that's one element and a very important element and we are working very closely with BASF at that tactical level and making progress. Second element of that -- of the agreement, related -- really think of it is as almost kind of a consulting role in some of our operations in our plant. They are expert in several areas that are relevant to our manufacturing, not necessarily with Aerogel specifically, but with areas around material handling, a whole host of areas that where they are helping us put best practices in place. And we believe that we will see the benefit of that denominated in yield and throughput improvements in our east province manufacturing plant. Again, working closely and I think very good productivity in the partnership with that element. And then the third element was the rollout of what we were referring to as Spaceloft A2 in our building materials effort, a first-generation product that we have gone through testing and certification, particularly in the European market. And that process takes longer than we had anticipated and -- but we still believe that that product will contribute here in 2018 and beyond. What I would just kind of try to categorize for you is this generally speaking building materials was roughly 4%, 5% of our revenue here in 2017. We believe it can play a much larger role as we rollout in 2018, 2019, especially if we continue to make progress with the next-generation product here. So that will have some attributes that we think will be important. Let me just say, sort of, more broadly, we are working closely with BASF on some of our other -- we talked about the Aerogel Technology Platform, there are lots of concepts that we have traded ideas with BASF around, and again, it's an important and strong relationship for our company and we're confident it will pay dividends here in the short-term, medium term.

Okay, great. And then on the operational side, could you describe some of your efforts to become more efficient, drive better margin, and what incremental dollars are we realizing today versus a year ago? And possibly what can we potentially -- you guys gain further from here?

Let me start and I might have John -- I mean the most important thing for us driving margin is driving volume through that plant. It's a big fixed asset and today we have the ability to generate roughly $150 million of product through that plant. In our economics, the model underlying that plant have remained strong. Even though our gross margins are a little lower, it's purely a function of volume going through that plant. We've continued to make progress in the efficiency of that plant; again, around throughput and yield that we believe will allow us to drive those gross margins and EBITDA margins that we've talked about for a long period of time as we fill that plant. John, do you want to add to that?

Sure. I think as Don said, we really had -- we've had the time with a plant that hasn't been full over the course of the past few quarters, to really focus on operational efficiency, operational excellence and those efforts really are starting to pay-off. It's a combination of time spent, new process -- actually evolving process technology, and some capital expenditures over that time period. But our yields are now -- in our plant are at record levels. Our ability to run product through the plant, our throughput and productivity is at record levels. And the product that we're producing is of the best quality that we've seen now in our history. And so we've really put that operating of that -- the capacity -- the excess capacity, we've actually been able to use it to position ourselves that when we see the volume that Don talked about, we will be more profitable than we originally anticipated. And just in rough terms, we think we could generate gross margins now about two points higher than maybe what we thought we could do 12 to 15 to 18 months ago and that would also drop right down to the bottom-line. So, we're -- we still need to get that volume fill that plant, but when we do, we expect profitability to be even higher than we [Indiscernible].

Okay, great. Thank you.

You're welcome.

There are no further questions at the time. I'll turn the call back over to Don Young.

Thank you, Jessie. Appreciate it. Thank you for your interest in Aspen Aerogels. We look forward to reporting our fourth quarter 2017 and full year results to you in February 2018. Have a good evening. Thank you.

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