Ladies and gentlemen, thank you for standing by and welcome to the Aspen Aerogels Incorporated Q1 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, John Fairbanks. Thank you. Please go ahead, sir.

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 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 the 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 ended March 31, 2020. In addition, the Investors section of Aspen’s website will contain an archived version of this webcast for approximately 1 year.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 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. The forward-looking statements made today represent the company’s views as of today, April 30, 2020. 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 definition 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 will 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 Q1 2020 earnings call. I will start by providing an overview of our Q1 business results and by sharing our current perspective on the business environment during this particularly uncertain period framed by COVID-19. I will also discuss our ongoing strategy to address global opportunities, promoting resource efficiency and sustainability by leveraging our aerogel technology platform. As part of the strategic discussion, I will include comments related not only to our core energy infrastructure business, but also to our two electric vehicle initiatives. Next, John will review our Q1 financial performance and describe the set of actions we have taken to ensure the long-term financial strength of the company. We will conclude the call with a Q&A session. I should note that John and I are operating from 2 different locations, so bear with us during the Q&A session. Before I begin with my normal business comments, I do want to wish good health to you, your family and friends and to your work colleagues. The 300 of us at Aspen are staying close as a team and supporting each other, our families and our communities. Our goal is to keep everyone safe and healthy and to keep the company strong. We are also focused on the next normal and what it means to our strategy and to our drive to profitability. To this end, we have formed two cross-functional teams. One team is focused on the next 30 to 90 days and is tasked with positioning us to regain our full momentum as quickly as possible. The second team is focused on Aspen Aerogels 1 year from now and tasked with harvesting certain of the positive work practices and efficiencies from this COVID-19 period that are worth…

Thanks, Don. I would like to start by running through our reported financial results for the first quarter of 2020 at a summary level. First quarter total revenue grew 2% to $28.4 million from $27.9 million in the first quarter of 2019. First quarter net loss improved to $3.2 million or $0.13 per share from $6 million or $0.25 per share last year. First quarter adjusted EBITDA was positive $0.5 million compared to negative $2.6 million a year ago. We define adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, stock-based compensation expense and any other items that we do not believe are indicative of our core operating performance. I will now provide additional detail on the components of our results. First, I will discuss revenue. During the first quarter, total revenue increased by 2% to $28.4 million. Of the total, product revenue grew $1.5 million or 6% to $28.3 million. This increase in first quarter product revenue was driven principally by continued strong shipments to the PTT LNG Nong Fab project and solid growth in our core U.S. petrochemical and refinery markets, offset in part by a decrease in project-based revenue in the subsea and Canadian markets. Our total revenue reflected a decline in research services revenue of $1 million, resulting from our decision to focus our R&D resources on improving the profitability of our existing businesses and on leveraging our aerogel technology platform into new markets. Total shipments during the quarter decreased by 6% to 8.2 million square feet of aerogel blankets, but our average selling price increased by 13% to $3.47 per share – per foot, sorry. Increased average selling price reflected the full impact of both of our annual price increases over the past 2 years. Next, I will discuss gross profit. Gross…

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

Hi, Don and John.

Hi, Eric.

Hi, Eric.

Hi, so just – I know this is – you are kind of in uncharted territory here. And I know low oil does impact the upstream part of your business, which is relatively small. But if you’re able to, if you think about kind of where the business is now and the impacts that you anticipate going forward, I mean, how would you break this down between COVID and oil if you’re able to do that, keeping in mind that your day-to-day – your refinery and petrochem business in the past has held them pretty well in the face of low oil?

Yes. Let me start. I would say that, I think, COVID had the most immediate impact on our maintenance work. I think many of us were sort of frozen in place as we were trying to do the right thing and making sure that we could keep workers safe, cetera. And I think that applies to our customers and end users as well. Maintenance is something that needs to go on, and they do have some latitude with respect to the scope of any given activity. And again, we think that the COVID side of it is temporary and that demand will come back. For us also, we have a relatively low market share in most of the markets that we serve. And so our ability and our focus is to try to gain market share as well and try to minimize the negative impact of these kinds of events. I think the low oil and gas price, again, as I said in my comments, has a bit more of, I would say, a longer-term impact potentially on our project side of the business. We certainly noticed that in 2014, 2015. And any historian of our company would know that we continue to grow our maintenance business throughout those years, including ‘16, ‘17 and ‘18, but had a drop-off in our project work. And that was really – that learning was the basis for our – creating a projects-oriented team that is solely focused on filling the pipeline, being sure we’re in specifications and winning projects consistently. And again, there is no question that these two things, COVID and low oil, will have some impact on that. Again, I think it will impact us mostly as time passes. Our projects are, for the most part, moving forward here in Q2 and foreseeably through this year.

Yes. Just sticking with the project side, I know LNG it’s a little bit of a mixed bag. I mean you mentioned – we know about PTT, you mentioned the project in India and Calcasieu Pass, really the only export project that is moving forward here as of late. But I would – I mean what are you seeing on the import side? I would think a low price environment for a country like Thailand is a pretty positive setup. So just wondering maybe what the pipeline on the import terminal side looks like?

Yes. I think wherever you see and the PTT LNG project that we are serving today in Thailand is a very good example of this. This is a country that is displacing its coal. And obviously, this lower gas pricing makes LNG ever more competitive with coal overall. So, we see a lot of the displacement, especially in some of these emerging countries drawing more LNG and again, displacing the coal. So that part of the equation, I think, is a positive for us. I think that the export side might be a little trickier for the next year or so until the market settles. But again, we’ve got our sight set on some projects here in 2020, one of which we’ve already won. But our real focus is to be sure that as we complete deliveries of PTT LNG in late this year or quite possibly Q1 of next year that we replace that project with a lot of other projects as well.

Yes. Okay, thanks for that. And then last one for me, just on the thermal runaway opportunity on the EV side, I know you were working with a number of companies, one of them more advanced than others. Just curious since the last call if you can expand on that a little bit. Has that – has the number of OEMs or potential OEMs grown? Have you advanced with that one customer? Just any details there would be very helpful.

Yes. We have done both of those things, frankly. I would say we have expanded the number and also the depth of the trials has increased as well with our principal targets. And the back and forth from a technical point of view, the sampling, the testing, the optimization of the materials, I would say, has been pretty intense, actually. Very regular conversations, I would say, almost daily. And so, look, this is an important problem that we are trying to contribute a solution to and we remain really excited about the opportunity. And again, as I say, this idea of passive fire protection is exactly what we do. And we’ve applied that capability to hydrocarbon plants for more than a decade now, and we really know our way around this space. Of course, there are some special considerations in electric vehicle, and we’re really focused on that optimization process. And it’s been exciting, and we remain confident.

Okay. Thanks a lot.

Thank you, Eric.

Your next question comes from the line of Thomas Curran from B. Riley FBR. Your line is open.

Good evening, guys. Glad in this call find you both well.

Thank you.

Don, when it comes to your energy infrastructure end markets, how would you rank insulation projects in order of resilience? And on the maintenance side, what percentage or percentage range of annual spending is generally considered mandatory or in some way required by regulations, even if there’s a bit of latitude there in terms of the scope of it or allowance for a temporary pause?

Yes, hard to give exact percentages, of course. But my – I think the way I would think about it is that our materials are usually part of – are used as part of broader turnarounds. And people are going in for corrosion inspection oftentimes and displacing or replacing pipe, corroded pipe, etcetera and that is the – that is probably the principal driver of a lot of the work that is – a lot of the value proposition that we bring to refineries and petrochemical plants. And if you think about that portion of the market, that is not really a discretionary maintenance item. That is a significant safety issue and is an important driver. So we believe the value that we bring demonstrated now for a long time in that market to the premier companies in that space. That – let me just say that business tends to go well through thick and thin. And I think the history through the low oil price era of late ‘14, ‘15 and ‘16 demonstrated that part of it. Again, what we saw, Tom, in this or what we’re seeing, I should say, and around the spring turnaround work, I think, might be another example here. We did see a number of locations, particularly perhaps over on the petrochemical side but on the refining side as well sort of expand their scope during the lull. That was nowhere near the majority. We saw much more conservative actions of doing the minimums, shall we say, or pushing out to the fall, so a little bit of a mix. Again, I would call it a net negative, though I don’t want to paint too rosy the picture of that. But it’s worth it as we’ve been pushed out a bit from here in Q2, and we think that it will very likely start to come back here in the fall turnaround season.

And then just in terms of – on the project side, how would you rank your end markets when it comes to project resilience from most resilient in terms of exogenous shocks to likely to be first to pause or delay an FID decision?

I think you know well, Tom, the – oftentimes, these projects really have a multiyear scope to the FID process itself. And there’s no question that we have seen some pausing going on just prior to the FID being made. We have not seen – once FIDs have been determined, we’ve not seen turnbacks, if you will, from that process. And so from a resilience – look, I think the petrochemical guys are probably a bit healthier and more determined right now than the refining side. Again, I would say the LNG – the receivers are more resilient, if you will, are more aggressive than the exporters at this point. It’s pretty early days, too, Tom. This has really been – really something that really kind of, as we all know, really started to impact the market really over the course of the last 45 and 60 days approximately. And so I think a lot of people are seeing where they can take advantage of the situation and other times where they need to sort of hunker down and just hit survivability mode. Most of our end users are not – they’re not – this is not about survivability for them. These are big, strong entities that have been through this type of thing in different forms for a long period of time.

I appreciate that. And then when it comes to the passive fire protection opportunity related to EV thermal runaway, given how you just described the evolution of your discussions, how they deepened and expanded, what does that suggest for the original time line you’ve shared for when you might be positioned to announce a first partnership and then go on to see first sales? Could you actually remain on track for that original time line despite the disruptions represented by COVID-19?

Yes. So far, on the thermal barrier side, on the fire protection side, we have not seen meaningful delays. Our research teams are working, call it, in sort of a staggered way in the sense that they’re in the labs for two or three days and then typically, instead of going to their desks for two or three days to capture their work, they’re obviously going home instead. And so that has been able to lower the density, if you will, in our research and development labs. And our counterparties – our counterparts, I should say, on this work more or less seem to be having the same pattern. It’s interesting on our carbon aerogel on the battery materials side, again, working with a large South Korean company and a large German company as our evaluation partners. They are a bit ahead of us in terms of coming back to work. And so that part, I don’t want to say we haven’t skipped a beat because, again, I think this has been an unsettling time for everyone involved, but we’re not anticipating significant delays in that work.

It’s encouraging. Thanks for taking my questions.

[Operator Instructions] Your next question comes from the line of Sameer Joshi from H.C. Wainwright.

Thanks, John. Thanks, Don for taking my questions. Just a follow-up on previous questions related to the EV-related opportunity. Did – is the Cryogel opportunity also near to having meaningful revenues or is it just the thermal runaway opportunity that you will see some revenues surround in 2020?

Yes. Sameer, if I understood you correctly, the portion of the two opportunities we have in electric vehicles, the thermal barrier opportunity is one that we believe will generate initial, and I want to emphasize, not large, but initial revenue in 2020. And we would hope to build meaningfully from there. On the carbon aerogel side, on the battery materials side, that, for us, is more of a 3- to 5-year revenue opportunity. Again, our real focus in 2020 on that, I guess, as a marker of success and validation would be to deepen the relationships that we have with SK and Evonik and to enter into some additional relationships with some brand companies, so to speak, when it comes to battery manufacturing and electric vehicles.

Understood. Thanks for that clarification. On the inventory buildup front and as it relates to the bill of material reductions that you have achieved over the last year. Going forward, how much of revenues would be supported by this inventory buildup? And any supply chain disruptions? How does that affect your bill of material and then gross margins?

Yes. John, do you want to take that?

Yes. Yes, I will. So the finished goods inventory at the end of the first quarter would support roughly $10 million worth of revenue. So, that buildup put us in a position where we could handle a significant amount of orders even if we had lost access to the East Providence plant, which we don’t expect to at this point in time. It will have a modest delay to the sort of the benefits that we would otherwise receive from the reformulation of a few of our products because we’ve brought in the raw materials to support the prior formulations. But frankly, that will be relatively insignificant once we fully implemented all three of the bill of material cost-reduction initiatives. During the second quarter, we’ll very quickly start to reap the benefit of those cost reductions.

Understood. And then one last one from me, the cost reductions or wage reductions that you have implemented, what – can you give us like a quantitative or just in terms of percent reductions over the first quarter costs in terms of operating expenses?

John, do you mind?

Yes. So we took – there was a – we have made the decision not to provide the annual wage increases, which would have run in the range of 3% to 4%. So that was savings against our 2020 plan. We then – for executives and managers, we had a 5% wage decrease. But I think as Don noted, the bigger impact is the likelihood that we will not pay out any incentive compensation related to our performance in 2020. And as Don said, variable compensation can be up to 50% of his total compensation. And so – or more. And so there really is a very significant overall wage reduction associated with the actions that we’ve taken to date.

Understood. I will take my questions offline. Thanks.

Thank you, Sameer.

Your next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Your line is open.

Hi, thanks for taking my question. I guess I just had a question around the thermal runaway application. And if you’re using the foam in the anode, what does that do to the reduction of airflow since most of the batteries are air cooled? How is that – could you just help me better understand that?

Well, Jed, I think it’s possible. I’ve confused you in the past. Our anode material is focused on our carbon aerogel program. And the thermal barrier, these are really separation materials that are used between cells and around modules. And so our – what we’re trying to do is not eliminate the chance of the fire, but – or the energy, but rather minimize or impede the propagation of it from cell to cell and module to module. So again, I think a little bit – your question is a little bit mixed between our two different opportunities that we.

Got it. So the two different products, I understand that. But from an air flow perspective, so the thermal runaway, you’re trying to actually reduce the air flow so you don’t have that. I’m just, I guess, curious in terms of the – and maybe I am conflating the two. But it would seem like there is a – that there would be still a – I guess it’s a balance in terms of the thermal runaway product versus the cooling needs, correct?

Correct. And we’re not playing a direct role in the cooling fluids, but rather, again, creating thermal barriers, again, to try to contain the sudden energy loss to the, let’s call it, the bad cell, if you will. And again, trying to keep the energy isolated to that cell or at least impede the propagation of that energy from cell to cell.

Got it. And so in your discussions with the battery manufacturers, so I guess I’ll form it as a question. How would you split the discussions with cell manufacturers versus battery/module or auto OEMs that are – have that assembly process?

Yes, our primary work in the thermal barrier side has been with EV manufacturers themselves. And our primary work on the carbon aerogel battery side has been either with a battery manufacturer, of course, like SK or a battery materials player like Evonik. And so that has been – having said that, I do talk about expanding the scope and the number of partners we have on the carbon aerogel side, and we are having discussions that include the auto manufacturers themselves. So we think that it is quite likely that we’ll touch all of those bases, battery materials, battery manufacturing and the EV manufacturers themselves in these discussions.

Got it. And maybe this is just a neophyte question, but so in those discussions, are you starting to find and formulate where there is kind of a sweet spot in terms of battery size or battery chemistry, I guess, on the anode or a certain energy density that your solution tends to work best with?

Well, one of the benefits of our evaluation agreements and in particular, with SKC, part of SK Group have been this targeting of performance and cost, frankly. And so – and with some of the other companies that we’ve worked with, they’ve given us very specific targets. And to the tune of saying, if you can reach these targets, if you can demonstrate this performance, there’s always the cost caveat in there, too. So it’s a cost performance deal. We would like to take this to another step. And so again, the answer is yes. Our research team is very much focused on a core set of targets. And it does really, I think, outline stage to stage in our progress. And so again, our team is using these partnerships for this sort of targeting purpose.

Got it. Could you elaborate on that? On what – I recognize that you have found the areas that are sweet spots. But could you let us know what that seems to be?

Why don’t we do that in another forum, Jed, I’d be happy to. And of course, I’d really like to have our – a portion of our team join me in that discussion to really focus in on those – on that kind of technical detail.

Perfect, great and thank you very much for all the details on the quarter. Thank you.

Thank you.

There are no further questions at this time. I turn the call back to Don Young for closing comments.

Thank you, Jason. We appreciate your interest in Aspen Aerogels. We look forward to reporting to you our Q2 2020 results at the end of July. Be well, and have a good evening. Thank you.

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