Good afternoon. My name is Jesse and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Aspen Aerogels Inc. Q2 2019 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. 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. Included in the press release is a summary statement of operations, summary balance sheet, and the summary of key financial and operating statistics for the quarter and six months ended June 30, 2019. In addition, Investors section of Aspen’s website will contain an archived version of this webcast for approximately one year.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 statement regarding outlook, expectations, beliefs, projections, estimates, targets, prospects, business plans and any other statement that is not a historical fact. These forward-looking 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 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. 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, August 1, 2019. 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 the most directly comparable GAAP financial measures and a discussion of why we present these non-GAAP financial measures are included in 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 our Q2 2019 Earnings Call. I will start by providing comments about our performance and outlook. Next, John will review our Q2 and first half 2019 financial performance and update our 2019 guidance. We will conclude the call with a Q&A session. The second quarter was important for us, because revenue growth continued to accelerate, and because we completed important gross margin improvement initiatives that will provide significant EBITDA benefits over the remainder of 2019 and into 2020. Two of our 3 performance indicators for 2019 are focused on revenue, specifically to grow total revenue by more than 20% for the year, and to have an increasing percentage of total revenue at least 33% derived from project work. We’re on pace to meet these objectives. We grew total revenue by 36% in Q2 and we expect this strong growth trend to continue into the third quarter. With respect to project revenue, as percentage of total revenue, we have defined project revenue consistent with industry practice to be revenue stemming from a customer specific scope of work, which exceeds $1 million in size. This project revenue is distinguishable from our day-in and day-out maintenance work, which tends to come in smaller, steadier increments, and has grown consistently since 2008, when we first introduced our Pyrogel and Cryogel products. Our regional sales teams are tapping into their deep local relationships in order to position us for project work. And in addition, we built a team dedicated to reestablishing project work to play a more substantial and balanced role in our overall revenue. We set our 2019 performance indicator target for project revenue as a percentage of total revenue to 33%, a significant increase from our performance in 2018. Project revenue was…

Thanks, Don. I’d like to start by running through our reported financial results for the second quarter of 2019 at a summary level. Second quarter total revenue grew 36% to $29.5 million from $21.7 million in the second quarter of 2018. Second quarter net loss improved to $5.3 million or $0.22 per share from $7 million or $0.29 per share last year. Second quarter adjusted EBITDA was negative $1.7 million compared to negative $3.2 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. I’ll now provide additional detail on the components of our results. First, I’ll discuss revenue. Second quarter total revenue of $29.5 million was comprised of product revenue of $28.9 million and research services of $0.6 million, and represented growth of $7.9 million or 36% from last year’s $21.7 million. This increase in second quarter total revenue was driven by strong growth in the subsea market during the quarter, initial shipments to the PTT LNG Nong Fab Terminal project and solid growth in our core energy markets in the U.S. Total shipments during the quarter increased by 18% to 8.4 million square feet of aerogel blankets and our average selling price increased by 16% to $3.43 per square foot. We are increasing our average selling price outlook for the full year to $3.35 per square foot plus or minus $0.05 from our prior estimate of $3.25 per square foot. At the time of our first quarter investor call in May of this year, we reiterated our projected revenue growth of between 20% and 28% in 2019, resulting principally from an increase in project revenue in the subsea and LNG markets. Our second…

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

Hi, Don. Hi, John.

Hey, Eric. How are you?

I’m fine. You?

Good.

So, maybe just starting with the potential partnership in the battery material space, I might be misreading your commentary, but it seems like maybe you’ve sharpened that a little bit and as you’ve gotten into it over the last number of months maybe I guess put your focus into a specific area over another. So, I guess curious if that is the case. But maybe also kind of what you’ve learned as this process is played out? And is it still something that you are hoping that you have at least one partnership by the end of this year?

Yes, I did reiterate that that remains a goal of ours and an expectation of ours to in fact have a partnership this year in 2019. What we’ve learned? I think at the time of our last earnings call, I would say that we were in what I think I referred to a sort of pre-NDA-discussions for the most part with some of the major battery players. And now, we have moved into post-NDA-discussions with a few of them and those – that’s just a much deeper exchange of information and technical data, and that has focused us in certain areas. They have encouraged us to work in one area or another, as we’ve talked to different major players in the area. And I guess, we have become more focused and I would say a little smarter in it. As I said in my commentary, we know a heck of a lot about our aerogel. And the reason that we want to have one or more partnerships in this area is because the expertise in battery systems is really critical to us as we aim our carbon aerogels in, hopefully, the right direction and create a value out of that as of that effort.

Got it. Okay. That’s helpful. Maybe switching gears, just thinking about some of your strong relationships like Technip, ExxonMobil, that sort of thing, I mean now is your capabilities across your platform, your project team, is that kind of on hold? I mean, should we start thinking about that you potentially have some crossover within applications? I guess, the reason I ask, and I know that this is something that might be a ways away from asking, is this a potential award, but I see Technip just awarded a big award for the Arctic LNG project. I know you’re strong with them in subsea. Is that something that down the road you think we could see crossover to LNG?

So I think we have begun to demonstrate a very valuable value proposition on the LNG side. We’re now in 36 LNG facilities around the world, mostly in maintenance work, of course. We have been used in 16 of the last 22 large-scale LNG export terminals built including our Cove Point, which we delivered on – end of 2017, excuse me. [Wheapstone] [ph] in the same time frame, and now, the receiving terminal in Thailand. So I think we are demonstrating both in terms of maintenance and project work, our value in that area. And we have a very strong LNG project pipeline right now. And you’re right to think that we have a very good relationship with Technip, yes, subsea, but broadly across their company as well. And so we’ve got work to do to participate vitally in that Arctic LNG project. And our project team and from myself right down through our organization are working on that project. So we’re targeting it and we think we’ve got a strong chance to compete for that project in a very effective way.

Okay. Good. I’ll stay tuned on that. Maybe last one for me, just in your core, the refinery petrochem business, I know that getting qualified with Saudi Aramco, that’s something that took a while, and was heavy lifting and you’re finally there. Just curious when we should start to expect that to impact the business?

I think what you will you see and getting the qualification if you will with Saudi Aramco was I think important but also symbolic of the work that we’ve done more broadly in the Middle East, and the focus that we have brought to that region over the course of the past year or so – or actually over the course of past two or three years. And so, I would anticipate that you will see the Middle East playing a more and more important role in our, let’s call, our geographic mix in the – later this year and in the years to come. And Saudi Aramco will certainly be a part of that. So again, I would anticipate you’re noticing some good revenue wins coming out of the Middle East here in the coming quarter and year.

Okay. Thanks a lot.

Thank you, Eric.

Your next question comes from Amit Dayal with H.C. Wainwright. Your line is open.

Thank you. Good afternoon, guys. You referred to efforts continuing to – on the raw material front, lowering costs. Is this specifically focused on the subsea products or is it across all product lines?

Amit, that’s a very good question. It’s across all product lines, but it would have an outsized impact on our coal products, our Cryogel Z product and on our more ambient temperature products like the subsea products. And the initiatives really are broadly in three areas. We’re qualifying secondary low cost sources of supply for our highest value raw materials. We are optimizing product formulations to reduce our reliance on some of the more volatile higher cost materials, where we’ve seen increases over the past year. And we’re really working hard with the vendor base to negotiate lower prices and volume discounts sort of across the board on all our materials. As Don mentioned, there were three very significant initiatives that we had targeted in this year. We’ve got a host of others as well. We’ve concluded and have implemented two of them. And they’ll principally be operative in the third quarter. And then, the third we expect to have in place for the fourth quarter. And that, that just – in addition to increased volume and a more favorable mix in the second half, we expect those initiatives to really put a floor under our gross profit margin. As Don mentioned, we expect to be – have 20%-plus gross margins in each of the third and fourth quarters this year.

Understood. And you mentioned also seeing some ASP increases coming into play. Is this going to be limited to 2019 or do you expect the average selling prices, a room for these to continue expanding in 2020 and beyond?

I would say that if you just – two things, one is we have put price increases in place each year since 2013 and that’s both our practice, but it’s also industry practice. So we would anticipate selectively doing price increases in the future as well. The price increase we put in place for 2019 was outsized to match some of the raw material increases that we saw entering into – well, really late in 2018 and here in 2019 and so that’s why we put an outsized price increase in place of approximately 10% this past year, but it is typical of our industry to increase prices in the range of 1%, 2%, 3%, if you look back to 2013, our increases have been more in the 2%, 3%, 4% kind of level, and again, we will be smart about that as we look into 2020, but history is any indication, we will – again we’ll take a good hard look at it.

Thank you. And just one final one. In terms of your project pipeline, it looks like the LNG space is looking more sort of attractive, I guess, in terms of how this is building up from a projects point of view. You had a big win earlier in the year. Is there anything in the pipeline of a similar size that you may be working on or are these smaller project opportunities?

A receiving terminal, again, just really broad strokes. They use roughly $50 million of installation in a project like that and that’s the PTT project in Thailand is an example of that. And as we said, of that $50 million in that project, rough numbers, we had between $35 million and $40 million. There are certain parts of that LNG receiving terminal that our aerogels are not perfectly suited for, but that kind of scope is available to us. And look, $35 million to $40 million, that’s a pretty big project for any company and certainly for ours. There are lots of opportunities in other projects that are doing expansions, maybe not pure big greenfield type projects that enables us to have wins in the 3, 5, 8, 10 range, and if you remember at the end of 2017, beginning of 2018, we had three project wins then and they were in fact 3, 5 and 8, if I remember correctly, John. And so I think you have the full spectrum available to us, which is to say, maintenance work and we really are in our credentials doing being problem solvers on the maintenance side, the small-scale project work, which we consider to be sort of single-digit millions, terrific business for us. And then you get these big projects from time to time. There are a host of them in the project pipeline right now that are in that small project to large projects scale. So we’re excited about those and look every project that we deliver on successfully makes the next one just a little bit easier to win.

Understood. Thank you so much. That’s all I have.

Thank you.

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

Hey, guys. How is it going?

Hey, Chip. How are you?

Good. Hey, so look like you were able to build a little bit of inventory. Is that in support of PTT or anything specifically or what’s going on there?

Yeah. Yeah, precisely, Chip, we at month end and we had increased inventory of our Cryogel Z product in anticipation of additional shipments in the third quarter. So it was specifically for that and our finished goods inventory went up by approximately $3 million in the second quarter. But we felt confident in building that inventory, because we’ve got that strong backlog of project work.

Absolutely. So maybe switching gears. Maybe you can touch a bit on some of the initiatives you’ve made more on the outbound sales side over the years, how some of those efforts are progressing?

Well, look, we made a pretty significant investment in our sales and marketing team end of 2017 and throughout 2018. So that included a bit more geographic reach and including a focus on the Middle East, which I talked about earlier. And again, I would anticipate some wins in that region and so that – to make that investment a good one, in fact. We’ve also added to our technical sales team out in the field and that has a – we still make technical sales with our high performance installation materials and those investments we believe are paying off substantially as well. Interestingly, we’ve seen work in some areas that – the U.S. has been very, very strong, I would say, North America has the potential as well, there is some activity in Canada that were – that we have high expectations for the remainder of this year. So those investments – look, we monitor them and be sure that we make good decisions and we make adjustments as needed. We’re very pleased with the work the project team is doing, again, working very closely with our regional teams. It’s the regional teams who have a tight close relationships and it is the project teams that are really working hard with the EPCs and being sure that they know how to bid our materials appropriately. So sales and marketing is critical to us the fact that we’re going to meet and exceed our revenue targets for the year from a performance indicators point of view, the 20% plus growth and then the 33% of project revenue of total. We have those numbers we believe well in hand. So we’re excited about the work that they’re doing in sales and marketing.

That’s helpful. And maybe one last one guys, for me. An update on BASF building materials traction and then sort of where we stand on partnering on potentially some new stuff.

Yeah. BASF has really been interesting for us here. We’ve continued to work hard both on our first generation product in the building materials area, the so called Spaceloft A2. We’re working closely. We got a team of people here recently from BASF helping us with our second generation product as well. Again, high performance non-combustible material principally or at least initially targeting the building materials area, but we also believe it has broader applicability as well. So BASF continues to be an important partner. Of course, they made their second $5 million prepayment earlier this year, which was helpful. It’s interesting to – I mean, BASF has gone through one CEO retired, and another one has come on. He is very, very focused on innovation, on speed. He was the former CTO of the company, especially coming out of the performance materials area. We want to be a poster-child for them in terms of innovation and speed and so we had close relationships with the earlier team and we are developing, I think, equally and really exciting relationships with some of the new senior leaders at BASF as well. So it is a company that we remain very, very close to and have a multi-dimensional relationship with.

Great. I’ll hop back in queue. Thanks a lot, guys.

Thank you, Chip.

There are no further questions. With that, I will turn the call back to Don Young for closing comments.

Thank you, Jesse. We appreciate your interest in Aspen Aerogels and we look forward to reporting our third quarter results to you on October 31. Have a good evening. Thank you.

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