Ladies and gentlemen, thank you for standing by, and welcome to Aspen Aerogels, Inc. Q3 2019 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, John Fairbanks. Please go ahead.

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 I’d 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. Included 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 and nine months ended September 30, 2019. In addition, the Investors section of Aspen’s website will contain an archived version of this webcast for approximately one year.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 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 Aerogel’s 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, October 31, 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 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.

Good afternoon. Thank you for joining us for our Q3 2019 earnings call. I will start by providing comments about our performance and outlook. Next, John will review our Q3 and year-to-date 2019 financials and update our 2019 guidance. We will conclude the call with a Q&A session. The third quarter was important for us. Revenue growth accelerated to 48% versus last year. We increased our gross profit by a factor of five versus last year, and we expanded our gross margin by nearly two times relative to the first half of 2019. With this exceptional revenue growth and margin expansion, we delivered positive adjusted EBITDA in the third quarter and created the momentum necessary for an outstanding finish to the year. The good news is that we had a strong quarter, and the better news is that we have the potential both in the short-term and in the long-term to perform more effectively and to enhance significantly our profitability as we look forward into the coming year 2020. Two of our three 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 are on pace in 2019 to exceed these objectives. With respect to project work, as a percentage of total revenue, we have defined project revenue consistent with others in our industry 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. We set our 2019 performance indicator to target…

Thanks, Don. I’d like to start by running through our reported financial results for the third quarter of 2019 at a summary level. Third quarter total revenue grew 48% to $35.4 million from $23.9 million in the third quarter of 2018. Third quarter net loss improved to $2.3 million or $0.09 per share from $6.5 million or $0.27 per share last year. And third quarter adjusted EBITDA was positive $1.4 million compared to negative $2.7 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. Third quarter total revenue of $35.4 million was comprised of product revenue of $35 million and research services revenue of $400,000. They represented growth of $11.5 million from last year’s $23.9 million. This increase in third quarter total revenue was driven by solid growth in our core energy markets in the U.S. and Canada and continued strong shipments to the PTT LNG Nong Fab Terminal project. Total shipments during the quarter increased by 33% to 10.4 million square feet of aerogel blankets and our average selling price increased by 13%, $3.38 per square foot, right in line with our expectations. As a result, we are maintaining our average selling price outlook for the full year of $3.35 per square foot, plus or minus $0.05. At the time of our second quarter investor call in August this year, we reaffirmed our projected revenue growth of between 20% and 28% for 2019, due to an increase in project revenue in both the subsea and LNG markets. Our revenue growth of 48% in the third quarter was…

[Operator Instructions] And our first question comes from Chip Moore with Canaccord. Please go ahead. Your line is open.

Thanks. Hey, good evening. How’s it going, guys?

Good, Chip.

So another quarter of very strong growth, some good progress on margins. Don, maybe you can talk about – it looks like you’re on track to surpass the key objectives here a couple of months away. Anything you can give us on how to think about 2020 in terms of sort of early objectives. Let’s start there.

Yes. Well, we’re not quite ready to provide guidance for 2020, but I can tell you that we’re – we want to be able to build on the momentum that we’re creating here in 2019. And our focus right now is to finish strongly here in Q4. We’re positioned to have a record quarter. We’re positioned to have a record year. And so that is really what’s driving us right now. We think if we do those things well, we’ll have a very promising 2020, which we’ll talk about certainly in the next earnings call.

Certainly. Fair enough. I just had to try. So maybe we could talk a bit more about the project pipeline. It sounds like you’re fairly optimistic. Maybe you can talk about subsea, talk about LNG, what you’re seeing there and how things are tracking.

Yes. So we’ve had a – you’ll remember, dating back now almost two years, we made a pretty significant investment in a project-focused dedicated team. And that team is really working well with our regional folks who are – who have all the local contacts. And we built that pipeline out quite substantially, not only in identification of projects, but in working hard to be sure that we’re in the specifications of many of those projects as possible. And in many cases, a preferred place in those specifications. And so we look at the pipeline for 2020 and 2021 and even 2022, and we really like what we see. We’ve been steady in the subsea business for a long time, and we have an excellent value proposition. But I think what you’re – what we’ll see, as we continue to deliver the PTT order throughout 2020, I believe that we will fill that in with additional LNG orders. Our value proposition is very strong on the LNG side. We really demonstrated our value in maintenance and small projects and now in this large project. And while I can’t guarantee that every project will be between $35 million and $40 million, as the project in Thailand is, there are some really attractive projects out there that we’re well positioned for, here in the U.S. and around the world.

That’s great. Yes, we can certainly hope for it. Plus some of that $35 million to $40 million yields, that would be nice. On the gross margin side, can you talk a little bit more about some of the challenges if, for this third initiative, the situation where we have to have some downtime? Or how should we think about that as we approach, I think, it was Q2 of next year?

Yes, exactly. So this is a – this is something that we’ve been focused on. We executed the first two initiatives very effectively on schedule, and we knew this was going to be the more difficult of the three. We’ve got excellent people working on it. We’re very confident that we will get it in place, and we’re just trying to mix it in, if you will, with the other constraints, if you will, or pressures that we have on our manufacturing facility. Growing nearly 50% this year, it puts a lot of good pressure on our facility and is testing that team. And we’ve been able to slot in the remaining tests required to feel confident about the third initiative here early in the new year. And that’s what gives us confidence that we’ll get it up and running, and working hand in glove with initiative one and initiative two. And as I said in my comments, had we had it in place for Q4, we think it would have added two or three gross margin points to our – well, to what we anticipate to be our Q4 performance here this year. So it’s valuable, and we want to do it perfectly. And that’s what we’re trying to do.

Understood. Makes sense. And yes, maybe last one for me. On the partnership front, right, we have too much time left here in the year. So I just like to gauge your sense of confidence that we see something by year end, not that that’s necessarily critical, but just how far along you are in those discussions? Thanks, guys.

Yes. We’re very active. And we have multiple fronts going, and we are confident that we will do a good agreement, an attractive agreement here this calendar year. You’re right. We don’t want to do an agreement for the sake of doing an agreement. We want it to be something that creates value for us over the course of one year, three years, five years. And – but we’ve – we are confident that we’ll be able to get one or more of those in place before year end.

Exactly, that’s what I’m waiting for. Thanks a lot.

Thanks, Chip.

Thanks, Chip.

Your next question comes from Eric Stine with Craig-Hallum. Please go ahead. Your line is open.

Hi, Don and John.

Hi, Eric.

Eric, how are you?

Yes, I’m doing well. Maybe I’ll give a shot on 2020 and just ask it a little differently. I mean just given like Technip, for instance, very strong results. I mean from your expectations, your commentary, what you’re doing with EP20, I mean is it fair to say that on the subsea side, you expect growth? And then maybe on the LNG side, I know you’re working on the Nong Fab Terminal right now for PTT. I see that PTT recently has come out with plans for their next terminal. I’m just curious, your thoughts on the position you’re in to hopefully win that.

Well, as you know, we had a good year in subsea this year. John, I want to say around $15 million.

$15 million.

$15 million or so, $16 million. And that’s solid performance from us. And it’s not a record year, but it’s a solid year for us in that area. And we see continued activity levels in the subsea. And as you cite, Technip has been our closest partner in this area for, really, since 2004 or 2005. So we feel well positioned to continue to be successful in the subsea area. With respect to LNG, what we’re really focused on is to deliver the PTT project successfully, which we’re confident we will do. And during the year 2020, replace it, if you will, as we look towards 2021 and 2022. So there’s no drop off in project revenue. We just continue to build our project revenue with perhaps a greater diversity of projects. And as I said to Chip, not everyone is going to be $35 million to $40 million. So those are areas that are important to us. But the focus for us, as a team, is not only growing our revenue, but this drive to profitability. We believe that if we, of course, get the third initiative in place, which we’re confident about, take advantage of other opportunities we have to improve our operations that we can continue to expand our gross margins and therefore, have another significant year in improving our EBITDA. I think this year, the middle of the range is something like $11 million improvement from 2018 to 2019. I really want to continue to build, in a substantial way, our EBITDA as we get into 2020 and beyond. And it’s time for this company to really demonstrate our ability to drive gross margin and drive profitability.

Yes, got it. Maybe just turning to the third bill of materials initiative that you’ve got. And I don’t know if you can give any detail on exactly what it is, but maybe more important that 200 to 300 basis points you mentioned, when you said you thought you would get that in the fourth quarter, was that kind of the full impact? Or do you think that as you get into 2020, the impact is greater than that on the gross margin?

I think, Eric, the margin improvement – we would’ve recognized one quarter of that improvement in the fourth quarter of this year. So obviously, we expect that to carry through all of next year, right. So get the annualized…

Okay. But it was a full – that’s the full amount for the quarter? I mean that’s not you’re anticipating – you’d get a month or so.

That’s exactly right.

Okay.

And when I talk about being a complex project or task for our team, there’s a lot of integration as it moves from our research and development group through our – through the transfer of that down into our plant. There’s a variety of third-party testing that needs to be coordinated to, again, to be sure that we’re delivering excellent products. And so there are a lot of pieces to this effort. And again, we, as financially attractive as it is, to do something that really trips up the plant for any period of time is too costly and too risky for us right now. And so we’ve really slotted a period of time early next year to put the final touches on that project and have it contributing, starting on April 1.

There’s one other – Eric, there is one other benefit that’s likely to accrue to us through time next year. This initiative would position us to be able to simplify our operations somewhat. And we would expect some improvements in productivity in a potential optimization of our manufacturing expenses moving forward. But that’s to be seen. And then I think it would – we’d see an increasing benefit to that over the year.

Got it. Okay. Maybe last one for me. You already touched on the partnership that you are targeting by year-end. But just on BASF, maybe what kind of contribution that’s been thus far, with the Spaceloft A2 product. And then I know you’re working towards a second product, so just maybe some discussion around that.

Yes. We continue to work closely with BASF. I and part of our team was in Europe a couple of few weeks ago, I guess, at one of the big trade fairs. And we really had an opportunity to spend some time together, focusing on creating these, what we call lighthouse projects. These are really important projects that demonstrate the value of the high-performance, noncombustible materials, so-called Spaceloft A2. And we’re working hard to do that with BASF. It has not been an enormous revenue contributor this year, but the potential is very significant. Also, our work – we’re really working hand in glove with BASF on this second-generation product as well. And this is a product that we believe has great promise, not only in the building materials area, but in other markets as well. There’s a product form to it, there’s some performance characteristics to the product that we think has real attributes in areas such as transportation and a couple of other areas that we and BASF are focused on. So BASF is a big resourceful company. And we’re – of course, we want to go faster. I think both companies are very pleased with the products we’ve made. Yes, we want to go faster, but we also want to do it right. And we think it’s going to have a very nice impact on the value of our company over the course of, again, one, two and three years.

Okay, thanks a lot.

Thank you, Eric.

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

Thank you. Hi Don. Hi John.

Hi, how are you?

Just going back to the gross margin question. Just wanted to clarify, so this is not an issue with finding replacement raw materials, et cetera, it’s just implementing this improvement in the production process?

Yes. I think, look, just broadly, the initiatives that we have implemented or are planning to implement this year are really in three categories. We’re qualifying, like you said, secondary, lower cost sources of supply for our high-value raw materials. But when we change raw materials, we go through a battery of tests to ensure that our – the characteristics and attributes of our products are maintained, and that there is absolutely no impact to our customers. And so we don’t just go off, out in the market find a new supplier and get a new product and implement it quickly. And so it’s a very disciplined approach to change supply sources. The other place that we’ve been focusing on is optimizing our product formulations and that we could reduce some of the volatile higher cost materials that have contributed to the material cost increases over the last couple of years. And once again, we’d be very methodical in our approach to changing formulations. And then finally, what’s a lot easier, and clearly, we’ve already gotten in place is we’re negotiating lower prices and volume discounts with our existing raw material vendors. So this really is a multifaceted approach. We had three principal initiatives on the slate for this year. And I guarantee you, going into next year, with our drive to profitability, we’ll have another three – another four initiatives to put in place to try to spread our margin and drive better operating performance in the business.

Understood, thank you for that. Could you give any color on how much of the PTT project has now been delivered?

We haven’t – we’re actually – we’re not supposed to discuss the schedule of PTT. We’re contractually bound not to. We have been able to say and at the time we announced the project, it would be shipments in the second quarter of 2019. And we would expect to complete shipments in the fourth quarter of 2020. We are on schedule. But that’s really all I can say to that. But I think you can sort of draw a logical conclusion from that.

Thank you for that. And is there anything else in the near term from a project perspective that is similar in size to PTT that you guys are working on?

PTT is a pretty large project for us. It would be the second largest project that we’ve done after the Reliance project in India, which was approximately $70 million delivered over a much longer period of time. So we have several more projects that we have our sights on, but I would say that those projects are smaller, but they’re plentiful in number. So our focus – and I think when we won that PTT order, I think I might have said, it’s a fantastic order, we love it, we’re going to deliver it perfectly. Sometimes I’d rather have five $8 million orders than one $40 million order, and I think when we look out at the orders that we will win in 2020 and deliver in 2021 and 2022, I think you’re going to see a lot more $5 million, $10 million and $15 million then you will see one or two $30 million or $35 million or $40 million orders. And I kind of like it that way, to be honest with you. We’ll always take the big ones, but I like the diversity, and I like the way they get spread out in time.

That’s good. I appreciate it. I think that’s all I have. I’ll take my other questions offline. Thank you so much. Appreciate it.

Thanks very much.

Thanks Amit.

There are currently no further questions at this time. I’ll turn the call back to Don Young for closing remarks.

Thank you, Josh. We appreciate your interest in Aspen Aerogels. We look forward to reporting to you our fourth quarter results in February 2020. Have a good evening. Thank you.

This concludes today’s conference call. Thank you for joining us. You may now disconnect.