Aspen Aerogels Inc Stock

Good morning. Thank you for attending the Aspen Aerogels, Inc. Q2 2026 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to your host, Neal Baranosky, Aspen's Head of Investor Relations. You may proceed, Mr. Baranosky.

Thank you, Holly. Good morning, and thank you for joining us for the Aspen Aerogels Second Quarter Financial Results Conference Call. With us today are Don Young, President and CEO; and Grant Thoele, Chief Financial Officer and Treasurer.

The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide presentation and earnings release. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statements on Page 1 of the slide deck as the content of our call will be governed by this language.

I'd also like to note that from time to time in connection with divesting of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officers will file to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the excess price of options.

I'll now turn the call over to Don. Don?

Thanks, Neil. Good morning, everyone. Thank you for joining us for our Q2 2026 earnings call. My comments will cover our Q3 outlook, our commercial activities, including the growth projections for energy industrial the evolving demand environment in our electric vehicle business and the progress we are making to develop battery energy storage systems as a potential third growth segment for Aspen.

I will cover the strides we have taken in staging the restart of our aerial manufacturing plant in these Providence and the efforts made to mitigate any supply disruption to our customers.

We are pleased to announce both another European OEM design award, this one from Jaguar Land Rover and a strong outlook for Q3 performance. Grant will amplify these points with his comments. Turning to the third quarter. Our outlook calls for revenue of $65 million to $80 million and adjusted EBITDA of $7 million to $15 million. The underpinning strength is broad-based, robust energy industrial project deliveries increased North American demand for PyroThin thermal barriers as GM raises production to align with EV sales and targeted inventory levels and elevated production ramps by several European EV OEMs and in anticipation of growth in 2027.

Let me provide some additional perspective on each of these drivers. Our Energy Industrial segment continues to target approximately 20% growth in 2026 despite the East Providence disruption and relatively subdued refining and petrochemical activity. Strong project demand is driving our second half performance and is an important contributor to our robust third quarter outlook. In Energy & Industrial, we bring proven technology, deep experience and an excellent record of customer service to the segment's demanding applications. Market conditions remain favorable, and our customers have amassed significant project backlogs. Our team continues to build a robust pipeline of opportunities extending throughout the decade which represents a strong foundation for continued growth.

In LNG, we are actively engaged with customers, EPC contractors and construction teams. We have opportunities to expand our scope on several projects, increasing the size of our 2026 opportunity and extending our visibility into 2027. LNG has become one of our clearest and most dynamic growth lanes, particularly in the United States, the Middle East and Africa, where large-scale infrastructure investments are advancing into executable commercial opportunities. We expect our LNG-related activity to more than double in 2026 compared to 2025 and to provide continued momentum throughout the decade.

As I noted earlier, refinery and petrochemical activity has lagged our expectations. We believe customers are prioritizing uptime and high utilization rates, compressing certain maintenance windows. Over time, reliability requirements should bring this work back into scope, and we remain well positioned to support customers as turnaround activity normalizes. Taken together, these market dynamics support our expectation of approximately 20% growth in Energy Industrial in 2026 with additional strong growth anticipated next year.

More broadly, the growing need for Energy Security, supply diversification and reliable power to support electrification is driving a multiyear investment cycle in global energy infrastructure. We believe these underlying market drivers will create significant growth opportunities for Aspen through the balance of the decade. We remain focused on scaling Energy Industrial into a $200 million high-margin business without the need for incremental capital investment.

Turning to our PyroThin Thermal Barrier business, where we saw 81% quarter-over-quarter growth in Q2. U.S. EV demand has recently stabilized at approximately 6% of new vehicle sales, roughly half the level reached in 2025 when incentives and regulatory support were more favorable. Within this market, GM LTM captured approximately 13% of U.S. EV sales during the first half of 2026, implying annual sales of more than 120,000 vehicles.

GM produced EVs at a rate below its sales volume during the first half, resulting in a significant reduction in finished vehicle inventories. GM now appears positioned to increase production to align with current sales rates while modestly rebuilding inventory, consistent with its stated demand-driven approach. The resulting increase in demand for PyroThin is already evident in the third quarter and represents another important driver for our strong Q3 outlook.

On the European front, we see increasing momentum with strong structural drivers for battery electric vehicles, resulting in new vehicle registrations approaching 25%. Most recently, we added Jaguar Land Rover as our seventh European OEM customer. Our PyroThin Thermal Barriers have been chosen for select JLR vehicle architectures, which will support multiple models across its portfolio of iconic brands. This award further validates the value of our technology and represents another meaningful building block for our European business.

On our past two earnings calls, we projected 2026 revenue from European OEMs between $10 million and $15 million. We are now increasing that outlook to $20 million to $30 million, based on first half revenue of approximately $11 million and the growing breadth of our awarded business, now spanning 7 OEMs and 9 vehicle platforms. This expanding European opportunity is a third important contributor to our strong Q3 outlook.

More broadly, we are encouraged by the momentum across our European portfolio and continue to believe the region will become an increasingly important contributor to our revenue in 2027 and beyond. Looking beyond our current segments, we are investing to establish Battery Energy Storage Systems or BESS as a promising adjacent growth opportunity. These systems present complex thermal challenges that closely resemble those we have solved on demanding EV platforms, positioning Aspen's proven technology, application expertise and domestic manufacturing capabilities to serve this growing market.

We are actively engaged in technical qualification programs and commercial discussions with leading utility scale and critical power developers. While full commercialization will require time, we continue to expect initial BESS revenue in the near term and believe this opportunity can become a meaningful contributor to our growth and profitability.

At our East Providence aerogel manufacturing plant, we initiated a stage restart on May 14, just over a month after the explosion in the high-temperature oven cause damage confined to a specific area of the facility. We continue to make progress toward restoring full production capacity, which we expect to complete during the first half of 2027. To date, we have avoided significant supply disruption to our customers through a combination of existing inventory, production from our external manufacturing facility and more recently from the staged restart of the East Providence plant.

We have more work to do, but we believe the actions we have taken are expanding our short- and long-term supply flexibility strengthening both our operational resilience and our ability to serve customers most reliably. During this period, we are incurring certain extraordinary operating and capital expenses as we maintain supply to our customers and restore full production capacity. We maintained property damage and business interruption insurance are fully engaged in the claims process and expect a significant portion of these losses to be referable.

Grant will provide additional detail in his remarks.

Most importantly, we are extremely grateful that no employees were seriously injured in the incident. I also want to recognize the Aspen team for its tireless efforts to achieve a safe and disciplined restart in the plant and for its unwavering commitment to our customers and to the success of Aspen.

Grant, over to you.

Thanks, Don, and good morning, everyone. I'll cover our Q2 2026 results and Q3 outlook along with key drivers for the remainder of the year. Second quarter revenue was $49.8 million, including $20.4 million from Energy Industrial and $29.5 million from Thermal Barrier, which included $4.9 million of previously deferred revenue recognized in connection with the GM settlement received in Q1 of this year.

Total revenues increased 32% quarter-over-quarter. Energy Industrial revenues declined 6% quarter-over-quarter, below expectations as customer demand remained constrained by logistics and inventory challenges tied to the conflict in Iran, along with some demand push from Q2 to Q3. We expect a significant rebound in Q3 as Subsea project revenue land for the year.

Thermal Barrier revenues exceeded our expectations due to two factors: First, GM vehicle production ramped up to levels reflective of underlying sales rates after a soft Q1. More on this later, but we believe production and sales rates will track closer together than in past cycles. Second, European Thermal Barrier revenue grew 14% quarter-over-quarter, from $5.1 million to $5.8 million. Volumes may be lumpy as these customers manage preproduction inventory, but it's increasingly clear that these programs will ramp.

Gross profit was $3.3 million or 7% gross margin, reflecting lower production volumes that couldn't fully cover fixed manufacturing costs. This includes $5.3 million of incremental costs from the April incident at East Providence, which are not indicative of normal operations. Excluding these incident-related costs, adjusted gross profit was $8.6 million or 17% margin. Adjusted operating expenses, excluding impairments or similar losses, restructuring charges and other onetime items, were $23.1 million in Q2. Reported OpEx of $32 million included an $8.9 million loss on property damage related to the April incident. That loss was offset by a corresponding $8.9 million insurance receivable recorded in other income, which we concluded proceeds were probable and expected in Q3.

GAAP net loss was negative $23.3 million in Q2 versus negative $23.7 million in Q1 and adjusted EBITDA was negative $6.6 million in Q2 versus negative $12.7 million in Q1. That's nearly a 50% earnings improvement on 32% revenue growth. Our EBITDA add backs typically see little movement from quarter-to-quarter. But the April incident introduced a new temporary category of charges not indicative of our core operating performance. We add back these incident-related charges in the quarter incurred and submit these types of costs under our business interruption insurance policy.

From a cash perspective, these insurance proceeds are expected to lag the related charges by approximately one quarter. These incident-related charges generally fall into three primary categories: First, expedited freight for finishing roles in parts in our Thermal Barrier business; second, professional fees predominantly for services at East Providence to restore production capacity. And third, starting in Q3, the incremental cost of temporarily sourcing certain Energy Industrial products from our external manufacturing facility.

In Q2, charges were limited to the first two categories and totaled $5.3 million, which was added back to adjusted EBITDA. We have initiated the claims process under both our property damage and business interruption coverage and expect our claims submittals will largely match these expenses incurred. While East Providence resumed production through a stage restart in May and continues to produce high-quality products for both business lines, full production capacity has not yet been restored. As a result, we expect to continue incurring incident-related charges until the facility's full production capacity is restored in the first half of 2027.

Turning to liquidity. We ended the second quarter with $153.4 million in cash, cash equivalents and restricted cash down $22.2 million from $175.6 million in Q1. Three items drove that activity. First, investing and financing activities used $9.4 million, in line with our expectation of approximately $10 million per quarter, given lower capital spending and quarterly debt amortization. This was partially offset by a $3.5 million draw on our revolver for a net outflow of $5.9 million.

Second, we incurred $5.3 million of incident related charges and increased purchase orders with our external manufacturing partner for approximately $3 million. This activity will likely vary based on anticipated volumes and our ongoing supply mitigation efforts until East Providence returns to full production capacity.

Third, Cash used by operating activities when excluding incident-related charges, was $8 million, representing our underlying quarterly burn. With our Q3 outlook calling for return to positive adjusted EBITDA, we expect our cash trajectory to improve in the near term. Debt payments in Q2 were driven by $6.5 million in principal amortization connected to the term loan, resulting in a term loan balance of $79.5 million at quarter end. We drew $3.5 million on our revolver, increasing the balance of $10.9 million and have ample availability under this facility.

As a reminder, our primary financial covenant under the MidCap facility requires us to maintain cash equal to at least 100% of the term loan balance, with $153.4 million of cash against the $79.5 million term loan, we continue to have substantial covenant headroom.

Turning to Slide 6. Before turning to quarterly guidance, let's take a pulse on how our prior assumptions are tracking. We anticipated revenue growth throughout 2026, supported by three primary drivers. First, we assume GM production would continue to recover as inventory levels normalize and destocking subsides. We're on track as production rates are ticking up.

Second, the ramp of our European Thermal Barrier programs, which we initially guided to approximately $10 million to $15 million of revenue in 2026. We're outperforming and we're raising that outlook to $20 million to $30 million of revenue given our first half run rate.

Third, we expect approximately 20% growth in Energy Industrial with a greater concentration of project activity in the second half. We're still on track with Q3 project work building toward two strong back-to-back quarters. For the third quarter of 2026, we expect increased revenue and profitability relative to Q2, with total revenue expected to be between $65 million and $80 million. This range represents between 30% and 60% growth quarter-over-quarter. The wide range is driven mainly by our GM vehicle production assumption.

Breaking down our revenue guide. We anticipate Energy Industrial revenues to land at approximately $40 million for the quarter, roughly double Q2 revenues, headlined by LNG and subsea projects. Our Q3 guidance for the Thermal Barrier business has two primary drivers. We've assumed GM production at an annualized rate of approximately 90,000 to 125,000 vehicles in the quarter, a noticeable step up relative to the first half of the year. Given recent sales rates and activity levels we're planning internally to meet demand at the high end while keeping in mind historical volatility and thus guiding conservatively towards a broad range of outcomes.

GM sourced approximately 40,000 vehicles annualized in Q1 and 100,000 vehicles annualized in Q2. The current IHS forecast has GM producing approximately 112,000 vehicles annualized in Q3. Our European Thermal Barrier customer volumes have been consistent in 2026 with revenues of $5.1 million and $5.8 million in Q1 and Q2. In fact, with $10.9 million of revenue generated this year, we have already surpassed all of 2025 European Thermal Barrier revenues of $8.6 million. With that momentum, we're confident in raising our 2026 outlook to $20 million to $30 million of European Thermal Barrier revenue.

As a reminder, these European programs have not reached serial production, but most of them will SOP in 2027. Looking ahead to 2027, it's very exciting to land Jaguar Land Rover as another design award with volumes anticipated to ramp in 2027. Our Thermal Barrier awarded pipeline of $135 million revenue reflects customer provided full production volume assumptions and normal platform ramp profiles. We model these programs conservatively and even under moderated volume assumptions, we are targeting meaningful growth by doubling our 2026 outlook to $40 million to $60 million of revenues in 2027.

Given the product mix included in our revenue range, we expect Q3 adjusted EBITDA to be between $7 million and $15 million, which includes adding back incident-related charges of approximately $5 million to $10 million. Again, these costs are comprised of expedited freight, professional fees and the incremental cost of temporarily sourcing certain Energy Industrial products from the company's external manufacturing partner until East Providence returns to full production capacity.

Turning to our liquidity outlook. Let's start with what we can control. CapEx and scheduled debt payments should total around $10 million in Q3 when excluding East Providence restoration CapEx. Working capital will be more variable, driven by where we produce and sell finished goods, safety stock builds tied to EP's recovery pace and supply chain -- and a supply chain that has lengthened during this period. Insurance proceeds paid in arrears relative to the cost they cover could also create period-to-period timing differences.

Regardless of that timing, we're confident we'll at least maintain and likely grow our approximately $63 million net cash position by year-end. When it comes to the sale of Plant 2 assets, the previously disclosed nonbinding letter of intent expired without a definitive agreement. We had a handful of buyers at the time we reached this agreement, have reengaged them and also continue to actively market the assets. As a result, proceeds from the potential sale of Plant 2 assets are most likely a 2027 event, and would be applied directly to reduce our term debt on a dollar-for-dollar basis.

With all levels of liquidity today, we still see flexibility to further delever the business, and we're evaluating a host of options while staying nimble to opportunistically invest in strategic growth initiatives. As we continue to navigate 2026, driving incremental profitability with new commercial activity and maintaining balance sheet strength remain our top priorities.

Don, back to you.

Thanks, Grant. To close, we believe our current growth strategy to scale Energy Industrial, to drive growth and diversification for PyroThin Thermal Barriers, to expand into attractive adjacent markets and to target breakthrough R&D opportunities represents the best path to deploy our financial strength and to deliver long-term value for shareholders. We expect our performance in Q3 to be a good indicator of sustainable growth and profitability in 2027 and beyond.

With that, we'll open the call to answer your questions.

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

So maybe if we could just start with Energy Industrial. I know that these two large subsea projects had been expected to hit in 3Q. It sounds like maybe it's more of a 3Q, 4Q event, but you're still guiding to an extremely strong quarter. So just curious, clearly, there are some other positives going on there. So maybe talk about how that breaks down between certainly subsea, LNG, the more subdued maintenance business today? And then maybe what you're kind of thinking about sequentially for Q4?

Thanks, Eric. Our subsea work is primarily falling into Q3. We have strong LNG activities in both quarters. And so that is really what is supporting the growth outlook or the strong Q3 outlook that we provided, we think we'll continue to have an active Energy business in Q4 as well.

Our guide in Q3 does not particularly count on any recovery or robust refinery or petrochemical work, although we do believe that over -- as I said in my comments, over any period of time that, that work will come back into scope as those facilities focused on reliability and maintain those facilities, as I know they will.

Got it. And then I guess for my follow-up, maybe just on Thermal Barrier, you've kind of done this in the past in terms of laying out what your OEM -- what your OEM partners are communicating in terms of what your Thermal Barrier awards could be worth, and I know you have cut that in terms of your outlook. But just curious, I mean, you're not seeing any necessarily hedging on that amount. You talked about your $135 million. This continues to just be you're being conservative given how you've kind of approached the outlook in the past?

Yes. So Eric, I think the $135 million is full volumes from the customers at the -- just the kind of the price per part. So $135 million is obviously -- we're ready to supply that as the demand comes. But that's why we're -- we've always kind of taken this conservative approach because these programs do ramp. There's other supply chain considerations. So our $20 million to $30 million '26 outlook, we believe and we're very confident in growing that into 2027.

Sorry, Eric, I was just going to add just one. I think that the interesting thing here in our Q3 outlook and in our comments this morning, we've won these design awards now over the course of the past couple of years. And what's encouraging is that we're turning awards into revenue, and we're seeing that here -- we saw it here in the first half of the year. We're seeing it as well in the second half of the year. And it's a visible ramp. It's a diverse group of OEMs and it really builds, I think, our PyroThin business in a productive, more sustainable long-term manner.

And just one other note on that, Eric. I think that what is really important is that we already have the manufacturing capability in place to serve all of these European Thermal Barrier customers. and it requires a minimal CapEx from this point on. So we're ready to supply as that demand comes in.

Your next question comes from the line of Colin Rusch with Oppenheimer.

As we think about the third quarter guidance and the balance of the year in preparation for this 2027 ramp in the EU, how much selling, do you think is really required to start meeting the needs of those production ramps and when do you expect it to start?

Selling on our part, Colin, I mean, look, these are.

Yes, selling inventory for production because they'll need some inventory on...

Got it, sorry. Yes, there's no question that we -- as they move to SOP, there will be a bump. And we do expect this to be a little bit lumpy over the course of these quarters, including probably the quarters in 2027, but the trajectory is definitely up and to the right. We have a very favorable EV market structurally in Europe. As I said in my comments, I think getting close to 25% EV penetration in the EU and our design award OEMs are benefiting from that and will benefit from that. And so we are confident that we can grow that business through the remaining part of this year in really served launch mode for a robust 2027, as we shared in Slide 6.

Okay. And then from a cost perspective, we're seeing a handful of inflationary pressures around raw materials in various parts of the supply chain. I just want to get a sense of how that's trending for you guys and any sort of mitigation strategies that you have in place that we should be thinking about from a cost management perspective?

Yes, Colin, I think it's kind of a boilerplate response, but really, we have a robust supply chain. And we also our supply chain does extend over -- through our external manufacturing partner. And so Think about it as we have a diverse set of suppliers that that we can call upon for both kind of regionally over with our China partner and then also here for the East Providence facility. So we're actively looking ahead and particularly with these all the BAM items related to the European programs and their ramp. We are being opportunistic about that doing kind of more bulk ordering to get the price per part down and really being prepared on the inventory side.

So in some of my comments, I think what you could infer is that working capital as we grow into this ramp, we expect it to be a use of cash. And obviously, that's going to be kind of safety stock and also just building that inventory up for all these ramps.

Your next question comes from the line of Itay Michaeli with TD Cowen.

This is Justin on for Itay. Maybe the first question kind of going back into the European Thermal business part. I guess what do you guys need to see to get more confidence in being able to further narrow that gap of the $135 million you're calling out on the awards versus the kind of implied $40 million to $60 million that you're expecting to roll on? Is that just like market dynamics? Like what would give you more confidence to be able to kind of narrow that gap?

And then Grant, maybe more mechanical kind of tying to this on Q3. Like what's the -- how are you baking in of the $25 million to $40 million Thermal revenue for like the GM deferred piece in the quarter? Just trying to square some things out there.

Let me take the first part, and Grant, you can you take the second. Look, I think our -- the difference between the $135 million that we have on Slide 6 and the implied $40 million to $60 million. I think it's just born out of experience, frankly. We've been at this now for 5 years, and we've been trained to be careful with these numbers. And so we believe that, look, we've started this year thinking we're going to be $10 million to $15 million this year, and we've upped that to $20 million to $30 million this year.

Again, we just think that or 2x from 2026 numbers for 2027 are just prudent numbers that we just feel like we're on that trajectory. There's nothing that keeps us from being -- we're prepared to do numbers bigger than that, and we're capable of doing that, and that would be upside for us as we go into and work our way through 2027.

Yes. And just on the GM deferred piece. In my remarks, it's basically $4.9 million of deferred revenue recognized and that's quarterly, Justin, all the way through the end of 2027. So every quarter, you can tack on the [ 4.9% ] as a deferred revenue, you just need to make sure on a cash basis, you're backing that out.

Yes, perfectly. I just want to make sure that it was even through -- because I think it was like [ 3.5% ] in the first quarter, obviously, but [ 4.9% ] in the second. So super helpful there. And then maybe kind of question on the U.S. LNG capacity and maybe how to frame the 2027 comment that you had on building into '27 for the EI growth. Like obviously, the LNG capacity expectation is 35% that you have year-over-year in '27. Like how should we be thinking about the EI growth opportunity on the heels of the 20% that you've guided to for 2026 against those backdrops, like is it another 20% year? Is it 20% plus? Like what's the right way to kind of frame that EI opportunity in 2027 as you kind of progress to that $200 million annual run rate that you're looking towards for that business?

Yes. Thank you. Look, I think that we have an opportunity to continue to grow the EI business at this pretty brisk rate approximately 20% here in 2026. And so we think we have the opportunity to do that again in 2027. And just to put that in perspective, that basically gets us to our AI revenue in the year 2024. And so again, we have the capability to knock out those kind of numbers and frankly, out to that $200 million number without any capital requirements or any significant capital requirements. And so we're capable of that, and we also believe that we've got the backdrop for that kind of for that kind of growth.

It will be a mix of both day-in and day-out maintenance work and turnaround work and then layered on some project work. As I said in my comments, when I look at our set of customers, whether they're LNG customers or subsea customers or people doing engineering firms doing some of the larger turnarounds, they have amassed pretty significant backlogs through 2027 and really beyond that. And it is our job to make sure we get our fair share of participation in that work. We're very close to those companies. We've been excellent in delivering customer service, high-quality product to them really since -- for the past 15 years.

Your next question comes from the line of Ryan Pfingst with B. Riley Securities.

Could you give us a sense of potential volumes or cadence, I know stated that it's slight to begin next year, but just kind of the cadence of volumes related to those programs.

On the JLR side. I would say that it has the ability to be noticeable in 2027 without giving a specific number and that it is a robust multi-vehicle program that we think can be a meaningful part of our European business going forward over the course of '27, '28, '29.

Appreciate that, Don. And then on the Battery Storage side, could you just talk about your latest customer conversations there and maybe any potential validation milestones that we could expect to see here in the future?

Yes, we have been talking about near-term revenue in this over the course of the past quarter, and we reiterated that today. I think -- that is probably the best milestone we can give you. We're not building in any meaningful revenue in 2026 year. But I do think having some initial revenue here in the near term is the best valuation we can provide to investors and to the market, frankly.

Look, this is a really interesting market for us because it obviously has characteristics of our thermal barrier business. That's basically what is going on here. But it tends to be in a more industrial setting. And so we have a presence in both of these markets, and we have a role to play. I don't -- our goal here is to complete qualification processes with a couple of the large developers, and then they go on to win projects and utilize our product in those projects. So that's the sequence of events here. And I'm hoping that we'll be able to provide a good update for you in our next earnings call.

The next question comes from the line of Chip Moore with Roth Capital.

I wanted to follow up on Energy Industrial, Don. I think maybe if we look out to, call it, [ 2030 or ] so, just speak to the pipeline of what you're seeing, understanding it's going to be lumpy and you probably come a little later on some of these projects. But how does that compare maybe to past cycles you've been through?

There seems to be more intensity than any time I can remember in -- from an investment cycle and energy infrastructure when I look at the geographic diversity of what we're doing, when I -- and as I said in my comments, a lot of our LNG activity is being driven here in the United States, but also in the Middle East, also in Africa. And so we're seeing really broad-based programs going on.

And I think it's in response, of course, to the desire for supply diversification and some of the global events today have brought a tremendous amount of focus on this again, from a global tensions point of view, but also when we think about the need for diversification or I should say, electrification around data centers and some of these other high reliability efforts.

We are, I think, well positioned. But I think at a macro level, we're in a pretty unusual moment in time here over the course of the next few years. And again, I think we're really well positioned with a lot of experience, a first-class name in this space and the capacity to to meet any needs going forward, certainly through that period through 2030, as you say.

We have reached the end of the Q&A session. I will now turn the call back to Don for closing remarks.

Thank you, Holly. We appreciate your interest in Aspen Aerogels and look forward to reporting to you our third quarter results in early November. Be well, and have a good day. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning. Thank you for attending the Aspen Aerogels, Inc. First Quarter 2026 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to your host, Neal Baranosky, Aspen's Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may proceed, Mr. Baranosky.

Thank you, [indiscernible]. Good morning, and thank you for joining us for the Aspen Aerogels First Quarter 2026 Financial Results conference Call. With us today are Don Young, President and CEO; and Grant Thoele, Chief Financial Officer and Treasurer. The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com.

During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide presentation and earnings release. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statements on Page 1 of the slide deck as the content of our call will be governed by this language.

I'd also like to note that from time to time, in connection with the vesting of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officers will file Form 4 to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the exercise price of options. I'll now turn the call over to Don. Don?

Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q1 2026 earnings call. My comments will cover an April event in our manufacturing facility in East Providence, our growth outlook for the Energy industrial segment, the evolving demand environment for electric vehicles and our progress in developing a battery energy storage systems segment. I will also provide an update on our strategic review process. Grant will amplify these points with his comments.

On April 8, we experienced an operational disruption in our aerogel manufacturing facility in East Providence. The incident involved an explosion in a high temperature oven and resulted in plant damage confined to that specific area of the facility and the temporary cessation of operations. We are immensely grateful that no employees were seriously injured in the incident and want to recognize the Aspen team for their tireless work towards a safe and disciplined restart of the facility. We currently expect a staged restart of operations to begin in May, subject to continued progress in our mechanical, operational and safety reviews as well as ongoing coordination with local and state agencies.

To date, we have mitigated any significant commercial impact of the disruption by working through inventory and by leveraging the capacity of our external manufacturing facility. It will take time to restore full capability to the EP plant a task that will receive our full attention once we complete the restart phase. We are also closely -- we are also working closely with our external manufacturing facility to enhance its capabilities to support our Energy, Industrial and Thermal Barrier segments and to enhance short- and long-term supply flexibility, all of which is intended to strengthen our operational resilience and commitment to customers.

Turning to our Energy & Industrial segment. Even with a messy start to the year due to the EP disruption and delivery delays in the Middle East, we still have our sights set on 20% revenue growth for the year. We believe we will gain considerable momentum in the second half of the year, leading to further growth in 2027 and 2028. With energy security and supply diversification paramount and structurally higher energy prices projected, our customer base is gearing with urgency for a multiyear investment cycle in global energy infrastructure from which we expect to benefit. These dynamics are translating into 3 clear growth drivers for our business.

First, Subsea. We continue to build a strong pipeline of opportunities that extend through the decade. We were recently awarded a second subsea project deliverable in Q3 and with the win announced earlier this year, positions us in 2026 to be within our historical annual revenue range of $10 million to $20 million. Second, LNG and natural gas infrastructure. LNG has become one of the clearest and most dynamic growth lanes for us. We are seeing positive developments in the United States and in the Middle East with large-scale LNG infrastructure activity moving from market interest into executable commercial opportunities.

Our confidence is not based only on the LNG macro cycle but also based on our concrete engagement with project level execution. We are actively working with customers, EPC contractors and construction teams and believe we have the potential to increase our scope on several projects, which would increase our 2026 opportunity and extend visibility into 2027. We believe this supports our expectation that LNG-related activity can approximately double in 2026 versus 2025 and provide continued momentum into 2027.

Third, maintenance and turnaround work remains an important deferred demand opportunity. Refiners have continued to prioritize uptime and operate at high utilization, which has compressed some maintenance windows. Over time, reliability requirements should bring that work back into scope, and we remain well positioned to support customers as turnaround activity normalizes. Taken together, we believe these drivers support our expectation of approximately 20% growth in energy industrial in 2026. We anticipate building momentum through the second half of the year and remain focused on scaling this segment into a $200 million high-margin business without the need for incremental capital investment.

Turning to our PyroThin thermal barrier business. The EV market in the United States remains in reset mode. Market share for EVs in the U.S. appears to be settling at approximately 5% to 6%, roughly half the level of when incentives and regulation favored EV adoption. GM's monthly market share for EVs this year has averaged 14.1%, which would suggest a sales rate over 100,000 EVs in 2026. GM produced EVs in Q1 and in April at levels below current sales volume, resulting in lower finished vehicle inventory levels.

We anticipate GM will begin aligning production rates more closely with sales volumes, consistent with its stated objective of operating in a demand-driven manner and adapting to current market conditions. GM has maintained its full line of EV nameplates and has stated that it remains dedicated to its long-term EV success, including in its Cadillac division, where EV sales represented 28% of total sales in 2025 and over 30% in Q1 2026.

We see a different dynamic in Europe where battery electric vehicles now account for more than 20% of new vehicle registrations and where stronger structural drivers are supporting the early stages of production ramp-up among the OEMs with whom we have design awards. Our EU thermal barrier revenue in Q1 increased more than threefold versus the prior quarter -- prior year quarter and we believe this momentum could translate into 2026 revenue in the range of $10 million to $15 million. Across these European awards, we are supporting programs that incorporate battery cells from a diversified global supply base, including European, Korean, Japanese and leading Chinese manufacturers.

We are encouraged by our momentum in Europe and again, believe the region will be an important contributor to our revenue in 2027 and beyond. Looking beyond our current segments, we are also advancing new growth opportunities. In battery energy storage systems, we are actively engaged in multiple qualifications and commercial discussions with developers serving grid infrastructure, data centers and other high reliability applications as system architectures evolve toward higher energy density, the thermal challenges increasingly resemble those we have already solved in EV platforms. With proven performance and domestic manufacturing capability, we believe we are well positioned to enter this market and generate initial revenue in 2026 following a period of market change and internal restructuring, we initiated a strategic review in Q4 last year.

Our goal was to execute a disciplined evaluation of our strategic options to ensure our growth strategy and capital allocation priorities were aligned with maximizing long-term shareholder value. The process allowed us to open the aperture to compare our existing opportunities to a wider array of strategic alignments and capital structures. While optimizing strategy is an ongoing endeavor for all good companies, we are confident that our current approach, scaling energy industrial, driving new growth and diversification for PyroThin thermal barriers, expanding into adjacent markets and continuing targeted R&D to create breakthrough opportunities represents the best path to deploy our financial strength and deliver long-term value for our shareholders. Grant, over to you.

Thanks, Don, and good morning, everyone. I'll cover our first quarter 2026 results and Q2 outlook, along with drivers for the remainder of the year. As we signaled on our last earnings call, Q1 2026 was projected to be the lowest revenue quarter of the year, and we remain confident that it will be. We also anticipated sequential revenue growth each quarter through 2026, which we continue to track towards as expected. First quarter revenue was $37.9 million, including $21.6 million from Energy Industrial and $16.3 million from thermal barrier. Total revenues declined 8% quarter-over-quarter. Energy Industrial revenues came in below expectations, declining 15% quarter-over-quarter.

Customer demand was constrained by ancillary impacts from the conflict in Iran, creating logistics and inventory challenges. Our supply chain and commercial teams have taken targeted steps to mitigate further disruption. On the positive side, we have secured 2 project awards in Q1, both expected to contribute revenue this year. Thermal barrier revenues were in line with expectations and flat quarter-over-quarter, although we did see softer GM production volumes as they continue to destock inventory, encouragingly, GM's market share grew during the quarter, a positive commercial signal. In Q1, we received $37.6 million in claim proceeds from GM.

The GAAP treatment of the claim is informed by ASC 606. This payment is recognized as revenue ratably through the end of 2027, with $3.5 million booked as revenue for Q1 and approximately $4.9 million revenue per quarter thereafter. Gross profit of $4.3 million or 11% gross margin reflected the impact of lower production volumes being unable to fully cover fixed manufacturing costs. Gross margin at the segment level was 15% for energy, industrial and 6% for thermal barrier.

Adjusted operating expenses, excluding impairments, restructuring charges and other onetime items remained relatively flat from $21 million in Q4 '25 to $21.2 million in Q1 '26. Q1 results included a few onetime items, a $2.2 million property tax charge related to Plant 2 and approximately $1 million of charges related to nonrecurring professional services. GAAP net loss was negative $23.7 million in Q1 versus negative $72.9 million last quarter. And adjusted EBITDA was negative $12.7 million in Q1 versus negative $18 million last quarter, representing a 29% improvement despite slightly lower revenues.

Moving to liquidity. We generated $17 million of cash in Q1 and ended the quarter with $175.6 million in cash and cash equivalents versus $158.6 million at the end of 2025. The increase in cash was driven by the receipt of $37.6 million GM claim proceeds, along with a working capital benefit of $8 million, while CapEx of $1 million and debt payments of $15.6 million represented the primary uses of cash aside from Q1's operating loss.

Debt payments in Q1 were driven by $6.5 million in principal amortization connected to the term loan and a $7.6 million reduction in the revolving credit facility. Our term loan balance at the end of Q1 was $86 million. Our sole financial covenant under the MidCap facility requires us to maintain cash equal to at least 100% of the term loan balance with $175.6 million of cash against an $86 million term loan, we have substantial covenant headroom.

Turning to Slide 6. For the second quarter of 2026, we expect increased revenue and profitability relative to Q1, with total revenue expected to be between $40 million and $48 million. This range represents between 5% to 28% growth quarter-over-quarter. Our Q2 guidance assumes GM production at an annualized rate of approximately 55,000 to 65,000 vehicles in the quarter, an increase versus Q1 where GM sourced the equivalent of 43,000 vehicles annualized.

The current IHS forecast has GM producing nearly 100,000 vehicles for 2026, which points to more production weighted to the second half of the year. Given the product mix included in our range, we expect adjusted EBITDA to be between negative $10 million and negative $4 million for the second quarter. This profitability range is dependent on supply mitigation efforts. So all the variability resides above the gross profit line. A few items worth noting here, mainly around production and supply. The incident at EP is creating near-term cost pressure.

Our teams are doing an exceptional job managing supply continuity, but expedited freight, expedited repair costs and inventory build across both EP and EMF will all result in elevated costs in Q2 and potentially Q3. Elevated costs in this circumstance are difficult to estimate as production evolves by product, location and customer, particularly as we balance safely restarting EP. Protecting supply and meeting customer expectations is our clear focus during this time.

As a reminder, our restructuring actions were designed to achieve EBITDA breakeven at $50 million of quarterly revenue. Our Q2 guide reflects progress toward that target, and we expect to reach it in the second half of the year, assuming success of our ongoing production and supply mitigation efforts. All estimates reflected in our guidance assumes that the staged restart of our East Providence plant proceeds as we currently expect.

Turning to our liquidity outlook. Let's start with what we can control. CapEx and scheduled debt payments should total less than $12 million in Q2. And Alternatively, working capital will be more variable depending on where we produce inventory and ultimately sell finished goods. Additionally, we will build to higher inventory targets for safety stock at quarter end, depending on the pace at which EP comes back online. We will continue to be prudent with cash during this period, but want to strive for the high end of our Q2 revenue range. As a result, we could see total cash outflows of $20 million to $30 million for Q2, which includes $12 million of CapEx and scheduled debt payments, again, highly dependent on our ongoing production and supply mitigation efforts.

With Q1 as our base, we anticipate sequential revenue growth through 2026, supported by 3 primary drivers. First, GM production continues to recover as inventory levels normalize and destocking subsides. Second, the continued ramp of our European OEM programs which we expect to contribute approximately $10 million to $15 million of revenue in 2026. We see activity picking up here.

Third, we expect approximately 20% growth in energy industrial with a greater concentration of project activity in the second half. As volumes increase, while we continue to lower our cost structure we expect improved operating leverage and margin expansion throughout the year. Full year capital assumptions remain unchanged from the last earnings call. We continue to expect less than $10 million of capital expenditures and approximately $26 million of scheduled debt payments.

Proceeds from the potential sale of Plant 2 assets are most likely a Q4 event rather than Q3. We and would be applied directly to reduce our term debt on a dollar-for-dollar basis. Combining these assumptions with our profitability expectations for the rest of the year, we anticipate ending the year with a strong net cash position. As a result of restructuring by reducing our fixed costs, we've built a financial framework that supports both resilience and growth as evidenced by our progress reducing EBITDA breakeven levels from $330 million revenue in 2024 to our $200 million revenue target in 2026 and even further to our $175 million revenue target by the end of 2027.

With ample levels of liquidity, we still see flexibility to further delever the business, and we're evaluating a host of options while staying nimble to opportunistically invest in strategic growth initiatives. As we continue to navigate 2026, driving incremental profitability with new commercial activity and maintaining balance sheet strength remain top priorities. Don, back to you.

Thanks, Grant. To close, while the first half of 2026 has been shaped by temporary disruptions and evolving market conditions, we believe the fundamentals of our business are solid. We see market signals -- positive market signals across our energy and industrial platform alongside growing diversification and new growth in thermal barriers. As we move through the year, we expect to build momentum and further strengthen our positioning for sustained growth into 2027 and beyond. With that, we'll open the call to your questions.

[Operator Instructions] Your first question comes from the line of Eric Stein of Craig-Hallum Capital.

This is Luke on for Eric. So I guess, first, just on the European demand for thermal barrier, just following the record quarter on that front. I mean do you think OEMs are looking to accelerate production in part just because of the volatility in energy markets? Could you just talk about what you're hearing from customers in the pipeline? And also, would you expect to be leaning on the EMF to meet that ramp just with everything going on in Rhode Island right now?

In terms of the ramp, I think it's a little too early to associate their active first quarter and the levels of activity that we're seeing here in 2026 with higher energy prices and switching from ICE vehicles to EV vehicles. I think more broadly, though, this has been building for some period of time. We've seen significant EV market share gains in Europe and the OEMs with whom we have won awards are beginning to benefit from that. In terms of supply, look, we want to be sure that we have as much flexibility as we can and make sure we're capable of meeting expectations of our customers. And everything that we can do to assure that we're going to do. And that does include having capability in our East Providence facility and in our Chinese EMF supplier.

Got it. So I guess just for my follow-up, switching gears here to EI. I mean you've talked about ultimately scaling that business to, let's say, a $200 million annual business. Do you have line of sight into just some of the subsea and LNG opportunities that could really make that a real possibility before the end of the decade? And just what are some of the factors that ultimately would get you there?

Yes. I really think it's the 3 things that I touched on in my earlier statements. And certainly, Subsea is one of them. If you think back, as I cited, our historic range for a long time going back, I want to say, to 2008 or so, has been in the range of between $10 million and $20 million in '23 and '24, we had numbers that were closer to $30 million. And in '25, we had a very quiet year, a number less than $5 million.

So we see a lot of activity going on, and it's not just the 2 awards that we've won to date, but the roster of opportunities. I can't remember when it's been stronger. And again, our value proposition and our record serving that market is outstanding. So that is definitely one component. And then LNG, as I said again in my statements, we're not just looking at the LNG kind of macro cycle. Our teams are engaged with the owners, with the EPC contractors in the field accelerating projects and expanding some of the opportunities that we have there.

So that has a good opportunity. I have said that we have the opportunity to double the size of that business compared to 2025, both in number of projects and in dollars, and we are aiming to do that. And then the third area has been kind of a quiet area for us. It's our day in and day out maintenance work, turnaround work that we do in refineries and petrochemical plants around the world.

These refiners have been running their plants pretty hard, and they've had relatively narrow maintenance windows. And we know that reliability is critical to them, and that cycle will move and create opportunity for us in that nice baseload day in and day out revenue that we're accustomed to in that area. So if you add those 3 things together, we believe that, that $200 million mark is a very realistic opportunity for us.

With no further questions, we have reached the end of the Q&A session. I will now pass the call back over to Don Young for closing remarks.

Thank you, [indiscernible]. We appreciate your interest in Aspen Aerogels and look forward to reporting to you our second quarter results in August. Be well. Have a good day. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning. Thank you for attending the Aspen Aerogels Inc. Q4 2025 and Full Year 2025 Financial Results Call. [Operator Instructions]

I would now like to turn the conference over to your host, Neal Baranosky, Aspen's Senior Director of Investor Relations and Corporate Strategy. Thank you. You may now proceed, Mr. Baranosky.

Thank you, Gabby. Good morning, and thank you for joining us for the Aspen Aerogels Fourth Quarter and Full Year 2025 Financial Results Conference Call. With us today are Don Young, President and CEO; and Grant Thoele, Chief Financial Officer and Treasurer. The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com.

During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide presentation and earnings release.

On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statements on Page 1 of the slide deck as the content of our call will be governed by this language.

I'd also like to note that time to time in connection with the vesting of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officers will file Forms 4 to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the exercise price of options.

I'll now turn the call over to Don. Don?

Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q4 2025 earnings call. My comments will cover the evolving demand environment for electric vehicles and our related organizational adjustments, our growth outlook for the Energy Industrial segment and our progress in developing a battery energy storage systems segment. I will also outline our strong liquidity position and the strategic review process that we are undertaking to explore opportunities to maximize shareholder value. Grant will amplify these points with his comments, and we look forward to your questions.

Throughout 2025 and into 2026, we streamline the organization, lowered our fixed cost base, strengthen liquidity and positioned Aspen to operate effectively in a resetting EV market. As expected, U.S. EV sales in Q4 dropped significantly. GM followed suit with a ramp down of its EV production rates beginning in Q4 2025. We expect GM and other North American EV OEMs will determine the demand for EVs absent incentives and regulation during the first half of 2026 and align inventory and production rates based on the new market conditions.

From this reset level, we expect EV penetration to resume growth, though at a more measured pace than in prior years. GM has maintained its full line of EV nameplates and has stated that it remains dedicated to its long-term EV success including in its Cadillac division, where EV sales represented nearly 30% of total sales over the year 2025.

In Europe, we see stronger structural drivers for our PyroThin thermal barriers segment. The key factors of market penetration, charging infrastructure and steadier policy guidelines create a more visible multiyear adoption trajectory for OEMs. Battery electric vehicles now represent over 20% of new vehicle registrations in the region. At our last earnings call, we disclosed the battery design award from a major European OEM. That customer is Volvo Car, bringing our total to 7 European OEM design wins. We remain actively engaged with other European OEMs as they advance to their next-generation EV platforms, and we anticipate securing an additional award during the year. Across these European awards, we are supporting programs that incorporate battery cells from a diversified global supply base, including European, Korean, Japanese and leading Chinese manufacturers. We are encouraged by our momentum in Europe and believe the region will be an important contributor to our revenue in 2027 and beyond.

Our Energy Industrial segment is poised to grow through the year 2026. Revenue in 2025 of $102 million was comprised largely of baseload maintenance and limited LNG work and was largely absent subsea project work where we had record years in 2023 and 2024. We believe 2026 growth in this segment could reach 20%, supported by 3 primary drivers. First, we now have a robust pipeline for subsea projects and anticipate strong demand throughout the decade as more subsea developments move into deeper water and more challenging environments.

Aspen has led this segment for 2 decades, and we are well placed to benefit from the current subsea cycle. We are off to a good start in 2026 with our first award win for an attractive North Sea pipe and pipe subsea project, which we expect to deliver in Q3. Second, LNG is an attractive growth vector for our energy industrial segment, and we're positioned across the entire LNG value chain, not just liquefaction. The market is in a multiyear build cycle, and we expect our LNG and natural gas infrastructure activity in 2026 to roughly double versus 2025 in both project count and revenue contribution, and we also see steady opportunities through the decade.

Accelerating electricity demand keeps natural gas central for reliability and speed to power. We are positioned to convert this demand into profitable growth for our Energy Industrial segment. And the third key factor is pent-up demand for maintenance and refinery and petrochemical end users who have run their facilities hard and profitably over the past year while minimizing maintenance and turnarounds. Again, we are well placed to meet this demand and to increase our important baseload maintenance revenue.

Collectively, these 3 drivers support the potential for 20% growth in 2026 for our Energy Industrial segment with opportunities for similar growth in 2027 and 2028. In 2026, we are investing in our Energy and Industrial business by adding to our customer-facing sales and technical service teams around the world. Our objective is to scale Energy Industrial into a $200 million high-margin segment without the need for incremental capital investment.

As part of our growth -- long-term growth strategy, we are also investing in the development of additional commercial segments to leverage our unique technology, sales and technical service teams and existing manufacturing assets. We believe the effort will diversify and broaden Aspen's addressable market. A key example is battery energy storage systems or BESS, where macro policy and technology shifts are aligning in our favor. As developers move toward higher density LFP architectures, they are encountering the same thermal propagation challenges we have already solved in EV platforms.

We are actively engaged in multiple qualifications and bids supporting grid infrastructure, data centers and other high reliability applications. With EV proven performance in domestic manufacturing capability, we believe we are well positioned to participate in this growing market beginning in 2026. We have taken decisive actions to strengthen and increase the flexibility of our balance sheet. We ended 2025 with approximately $159 million in cash and in a strong net cash position. In March, we will receive a payment from General Motors of nearly $38 million related to a commercial settlement associated with prior EV capacity adjustments. In addition, we have advanced the sale of our Plant 2 assets and are entering due diligence with the leading bidder following a competitive process. In addition, we continue to manage cash and working capital tightly.

In parallel, we have structurally reduced fixed cash costs by approximately $75 million annually and expect further streamlining in 2026 with a longer-term goal to lower our adjusted EBITDA breakeven to $175 million of revenue. Importantly, beyond the breakeven level, incremental revenue carries an expected 50% to 60% adjusted EBITDA margin while requiring limited incremental capital investment. Again, we are initiating a strategic review to ensure our growth strategy and capital allocation priorities are aligned to maximize long-term shareholder value. Following a period of market change and internal restructuring, this review is a disciplined evaluation of our strategic options. Importantly, it is being conducted from a position of financial strength and operational progress. Our objective is clear: ensure our strategy, capital structure and asset base are optimized to drive long-term value creation.

Grant, over to you.

Thanks, Don, and good morning, everyone. I'll review our fourth quarter and full year 2025 results, provide our Q1 outlook, discuss the European EV market and close with our strategic framework. 2025 was a transitional year for Aspen. North American EV production level fell in response to accelerated deregulation and end market demand while energy industrial results were weighted toward maintenance activity with fewer large project awards. We believe the recovery is around the corner as EV demand finds a floor and a new baseline is established with momentum building our energy business. More on this later.

Fourth quarter revenue was $41.3 million, including $25.3 million in energy, industrial and $16.1 million in thermal barrier. GAAP net loss was $72.9 million, and adjusted EBITDA was negative $18 million. Gross margin was materially impacted by lower production volumes and certain discrete items incurred during the quarter. Adjusted operating expenses, excluding impairments, restructuring charges and bad debt expense declined from $22.6 million in Q3 to $21 million in Q4, reflecting continued cost discipline.

Q4 results included several onetime items: a $22.5 million noncash charge related to underutilized assembly equipment, which materially impacted conversion costs and gross margin, a $3 million of bad debt expense associated with a customer solvency issue. Several year-end material adjustments, temporary -- temporarily elevated material costs to 48% of revenue in Q4, which we view as nonrecurring.

Importantly, we do not believe Q4 profitability levels reflect our go-forward cost structure. Lower EV production volumes during the year reduced manufacturing absorption, particularly in Q4, and we responded by implementing structural cost actions.

Turning to full year performance. Revenue totaled $271.1 million with $102.2 million from Energy Industrial and $168.9 million from thermal barrier. GAAP net loss was $389.6 million and adjusted EBITDA was $2.9 million. Gross profit was $46.3 million, representing a 17% gross margin. Excluding onetime items, gross margins would have been approximately 27% and adjusted EBITDA approximately $13 million for the year.

Despite P&L headwinds, we generated $6.1 million of cash in Q4 and ended the year with $158.6 million in cash and cash equivalents. This performance reflects disciplined working capital management, inventory optimization and materially reduce capital expenditures. In December, we amended our MidCap credit agreement to enhance covenant flexibility and we maintain a substantial liquidity cushion under the revised terms.

Turning to Slide 4. For the first quarter of 2026, we expect total revenue between $35 million and $40 million. We anticipate approximately $25 million of that revenue to come from the Energy Industrial segment. Our guidance assumes GM production at an annualized rate of approximately 40,000 to 50,000 vehicles in the quarter down from the 72,000 annual rate in Q4. This decline was anticipated and reflects typical Q1 planned production downtime and inventory drawdown, along with the effects of GM's previously announced EV transition actions. We expect production levels to normalize as the year progresses.

Accordingly, we expect Q1 to represent the lowest revenue quarter of the year. From this base, we anticipate sequential revenue growth through 2026, supported by 3 primary drivers. First, increasing GM production as downtime subsides and EV volumes normalize through the year. Second, the continued ramp of our European OEM programs, which we expect to contribute approximately $10 million to $15 million of revenue in 2026. Third, we expect approximately 20% revenue growth in Energy Industrial with a greater concentration of project activity in the second half of the year.

As volumes increase and we continue to lower our cost structure, we expect improved operating leverage and margin expansion throughout the year. Given the mix in the revenue range, we expect adjusted EBITDA to be between negative $13 million and negative $10 million for the quarter. We expect working capital being neutral to slightly positive and capital expenditures to remain minimal. Including scheduled debt amortization, we anticipate approximately $10 million to $15 million of net cash outflows in the quarter.

Including the expected $38 million payment from GM, we anticipate ending Q1 well above our 12/31 cash balance of $158.6 million. This level of liquidity provides flexibility to further delever the business, and we're evaluating a host of options, while staying nimble to opportunistically invest in growth initiatives. Over the past year, we have methodically restructured Aspen to operate with a significantly more efficient cost base while preserving long-term revenue capacity.

In 2024, adjusted EBITDA breakeven was approximately $330 million of revenue. In 2025, that level declined to approximately $270 million. And by the end of 2026, we will have reduced that further to approximately $200 million. Looking ahead to 2027, as further structural efficiencies are realized, we're targeting an adjusted EBITDA breakeven level of approximately $175 million of revenue.

For 2026, we currently expect $10 million of capital expenditures and approximately $35 million of scheduled debt payments, including $24 million of term loan principal amortization. Proceeds from the potential sale of Plant 2 assets would be applied directly toward term debt and offset scheduled principal payments on a dollar-for-dollar basis. Factoring in scheduled debt amortization, disciplined capital spending and improving profitability through the year, we expect to expand our net cash position from approximately $60 million today to over $70 million by the end of this year. As we navigate 2026 maintaining balance sheet strength remains a top priority.

Let me turn to Slide 5 to highlight our positioning in Europe, which we view as a structurally attractive EV market with increasing visibility into future platform launches. EV penetration is projected to approach 40% of European production by 2030, supported by continued infrastructure expansion, OEM electrification commitments and evolving regulatory frameworks. Importantly, Aspen is embedded across major European EV platforms spanning both passenger and commercial vehicles.

Our European-only pipeline represents approximately $220 million tied to 2027 launches, expanding to more than $450 million in 2028. These figures reflect customer provided full production volume assumptions and normal platform ramp profiles. We model these programs conservatively and even under moderated volume assumptions, we continue to see meaningful growth potential into 2027 and 2028. These programs incorporate similar part designs allowing us to utilize common assembly equipment across these platforms. This supports capital-efficient growth with minimal incremental CapEx as most of the required equipment is already in place.

While this slide highlights Europe, we remain actively engaged in quoting programs in North America and Asia as well. Taken together, Europe is positioned to become a meaningful revenue contributor beginning in 2027 with attractive capital efficiency as these platforms ramp.

Lastly, I'll build on Don's comments by framing our long-term strategy around 3 clear priorities. First and foremost, we have a healthy balance sheet. This provides flexibility, flexibility to operate through market volatility, allocate capital deliberately and pursue growth from a position of strength. With that foundation in place, our strategy centers on 3 pillars. First, continue driving structural operating leverage. We've reset our EBITDA breakeven level from $330 million in 2024 to $175 million in 2027, with additional efficiency opportunities ahead. Above that level, incremental revenue delivers 50% to 60% EBITDA margins, meaning a core market recovery translates directly into profitability.

Second, strengthening and optimizing our capital structure. We have line of sight to increasing our net cash position by the end of 2026. We've transitioned to a capital-light, flexible manufacturing model that eliminates the need for new plant construction and allows us to scale using existing assets and swing capacity. This flexibility allows us to fund key growth initiatives while maintaining a strong liquidity profile. And third, accelerating growth through aerogel platform expansion and pursuing transformative opportunities to unlock the full potential of the business. We are scaling our core EV and energy industrial platforms, including growing European EV momentum and renewed subsea and LNG activity, and at the same time, broadening our aerogel technology into adjacent markets and other next-generation energy applications.

Through our strategic review process, we're evaluating unique and transported pathways that could accelerate growth and enhance long-term value creation. We've engaged highly qualified advisers to rigorously test our assumptions, evaluate capital allocation options and sharpen our strategic road map. Importantly, this review is being conducted from a position of strength, not necessity. Our objective is clear: thoughtful and disciplined execution of our strategy that maximizes value creation.

In closing, we've stabilized the business with a strong balance sheet and built a financial framework that supports both resilience and growth. We remain confident in our core markets and in the differentiated value of our aerogel technology. With a deliberate strategic review underway and a clear 3-pillar framework in place, we are positioned to expand our addressable markets, strengthen our competitive position and deliver sustainable long-term shareholder value.

Operator, over to you for Q&A.

[Operator Instructions] Our first question is from Eric Stine from Craig-Hallum.

So maybe just starting with PyroThin and let's see, it's Slide 5, that is very helpful. I guess I just wanted to confirm, so the numbers you're giving for 2027 and 2028, the awarded number. Is that the full value of what is being provided by your customers? Or is that discounted as I know when you've done it in the past, you have given it a pretty healthy discount.

And then curious, as you think about these numbers, I know a lot of these programs are in ramp mode. But when you compare that to GM, and I know there's uncertainty as to what GM looks like as well. I mean what do you think the mix looks like when you get out into 2027 and 2028 between your primary OEM today and a lot of these programs that are coming on in Europe?

Good questions, Eric. To answer your first one, it is fully full customer volumes in 2027 and 2028, so that blue shaded portion of the chart the 120 and the 150, that's what they have provided to us. And when we look forward at '27 and '28, there are -- there's a lot of activity. You can see how much floated activity we have with programs that start in 2027 and really ramp in '28, combined with our awarded programs today.

As we think about North America versus Europe and the shifts in mix in '27 and '28, it's probably fair to assume that GM will probably continue to be at least half in 2027 and 2028. We're opportunistically looking at these kind of quoted pipeline and current awards that they will ramp faster. And so that mix could change. And -- it's worth noting that these are all at similar margins. So our 35% gross margin target, these will be very accretive to the current business.

Got it. That's helpful. And then maybe just for my follow-up. So you mentioned -- and you have a little bit in the past that battery storage, I'm wondering if you can provide any clarity. You mentioned that you're actively involved in some quoting and some potential opportunities, maybe clarity there. And just -- I mean, if you're able to any idea or any estimate of what you think that means in terms of fitting into that 20% growth for EI in '26?

Eric, this is Don. So actually, we think about it independently. When we talk about the potential for 20% growth in EI, we are focused on our core maintenance LNG, subsea type work. And so this contributions from energy storage would be in addition to that. We are deep in the qualification and bidding activity levels. We are providing significant sampling and as we go through that process, auditing, et cetera, of our facilities. So we are deep in that process. And as I said in my script, we anticipate beginning revenue in this new segment here in 2026.

Our next question is from Colin Rusch from Oppenheimer.

Just I want to dig into the stationary storage product. There's a lot of interest around rack level storage and indoor applications. And I'm just curious about where you're seeing interest? Is it really for some of these larger systems that are outside some of the data centers looking at various duty cycles around kind of voltage management and some of the heavy [ duty ] cycling or is it more tailored towards some of the UPS systems and some of the things that may end up inside billings, just where it seems like some of your CD attributes could be more valuable. We love any sort of color on that.

Yes. Thank you, Colin. It's both actually. We are doing some of the larger-scale external systems, but we're also doing rack-level modular type systems as well. Again, as you point out, where fire safety is most critical, right? And that's what we're bringing to the party in this particular case. So we're working with large companies on this project -- on these projects, I should say. And again, we're deep in the qualification and bidding process. We have some policy, not only are we bringing important technology to it, but we have some policy advantages as well with our domestic capacity here in the U.S., which is creating benefit for those projects.

Okay. Awesome. And then I guess, a market where it seems like there's some applications, and we have heard a lot about it in around the military, certainly if you're doing things out at sea and there's a buildup of incremental EVs or EV-related devices. Just curious about any sort of initial conversations or potential for you guys to enter into the defense market in a little bit more substantial way?

It's an interesting question. And -- we do have a team, as I've talked in the past, this idea of broadening our addressable market defense, and we have deep roots in the defense industry going back to our early first decade really, we are focusing on certain applications within defense or -- our first priority, though, in adding a segment is on the energy storage side most immediately, and that's where we're applying the majority of our resources.

Our next question is from George Gianarikas from Canaccord Genuity.

I'd like to focus on in the energy industrial side and ask if you've tried to make an assessment as to what your market share trends have been over the last several quarters. And it's good to see it getting back to growth this year, but I'm just sort of curious as to what if you've discerned what the lack of growth was due to last year?

Thank you, George. It's -- we, of course, spend a good amount of time analyzing this. And I think we can point pretty clearly to the lack of project work that separates our 2023 and 2024 numbers from our 2025 number. Let's just say roughly a $30 million, $35 million gap between the earlier years and last year. And you can go straight to Subsea, for example, and that accounts for the vast majority of that gap.

And our market share in that segment is extremely high. Yes, we occasionally lose a project, but not very often. And so the fact in 2025, there just weren't many projects to be had. And when we look at the pipeline for 2026, 2027 and 2027 -- sorry, '28, it is much more robust. And the project that we won earlier this year gets us back -- I mean, 2023 and 2024 were unusually large years for Subsea, more typically is a number in the mid-teens and the project that we won earlier this year that we will deliver in Q3 gets us a long ways towards getting back to that average level, and we have other projects that we're trying to tie down now for the second half of this year.

And that's why, George, we believe that we will grow our energy industrial business throughout the year. We'll build on it quarter in and quarter out through the year and do believe that we've got that opportunity to grow that business by 20%.

And maybe as a follow-up, on Slide 5, you talk a lot about this growth potential for Europe, particularly in '27, '28, I'm sort of curious as to how you juxtapose that with some of the news coming out of Europe that the ACC I know they're still operating, but they appear to be winding down some of their growth projects? I mean are there other battery manufacturers that you're working with to supply some of the OEMs that are involved in that joint venture?

Yes, George. I think both Grant and I had referenced in our comments, we are, in fact, working with battery cell manufacturers who are European, Korean, Japanese and a couple of the leading Chinese manufacturers as well. So that has given us a more robust, I think, outlook on Europe and a little less dependent on any single cell manufacturer. You mentioned ACC. We had NorthVolt as well, as just as an example, in the NorthVolt case, those battery cells were replaced by Asia-based cell manufacturers. And we're we're right in the middle of those programs. So that diversity is important to us, I think, and gives us confidence about that the European market.

Our next question is from Chip Moore from ROTH Capital Partners.

Don, maybe on adjacent growth opportunities beyond best. Any more you can share on what you might be looking at, obviously, building materials in the past has been something you've targeted. But any update on some of those end markets?

We have a strong background on the B&C side, and we are working on a product today that we believe can be effective in that -- in a slice of that market. It's a very large market. And so a slice is additive for us and incremental for us. And as we pointed out, incremental revenue is extremely valuable to us. It is a product that we would most probably supply from our EMF supplier. And we want to make sure we have just the right product, it gets certified properly. And then we renew the relationships that we had in that space.

And we did before we became tight on capacity in the late teens, we developed that segment into a multimillion dollar effort on our part. And we think we can rekindle that with our fire safety and thermal performance characteristics.

You think you're up with sort of the target market still?

I'm sorry, say that again?

Europe, in particular, would that be more of the target opportunity for that type of product?

Yes, sorry. Yes. Just the building type and more of the thermal efficiency regulation and the style of buildings in Europe suit our retrofit type approach to the market and increasing thermal performance in existing buildings.

And maybe just my follow-up question. Just on the strategic review, just any more you can give us on the process and time line and potential options that you might consider?

Thank you, Chip. Look, from the strategic review, we have had a lot of change in our commercial markets. We have restructured the company significantly. We are -- we have strengthened our balance sheet significantly, and we have made -- we can feel that we're making operational progress that translates into quarter-over-quarter growth throughout this coming year. And from a strategic review point of view, we just want to make sure that we had some external influences on our thinking and that we don't get too caught in our own thinking. So testing our assumptions externally, we think is a prudent thing for us to do. We're able to do it again much more off of our front foot as opposed to our back foot. And so we're going to be very deliberate about it on the one hand, but this is important to us, and we're going to do it with urgency, and we have a broad view. We're in our early stages. So we don't want to take anything off the table, but we're not prepared quite yet to say what the logical outcome would be of that effort.

And maybe just to add to Don's comments, we are in the early stages. But right now, we have plenty of cash runway. So this is not about just kind of bolstering the balance sheet more or anything like that. What -- really, what we are focused on is foreign gasoline on the fire. We want to accelerate growth. And to do that, we want to have world-class advisers and have fresh thinking and make sure that we are pursuing every strategic opportunity and while maintaining optionality for the business. So we're going to be very deliberate in our search and in our process. And in doing so, I think that we'll naturally over time, funnel down these opportunities to find that unicorn.

Our next question is from Ryan Pfingst from B. Riley.

To follow up on battery storage first. Can you size the revenue opportunity, maybe if not this year, perhaps later in the decade as it matures or still early to do that there?

It is still early, Ryan, to really get to exact numbers or exact projections, if you will, by the end of the decade. But what I would say is that we know it's a growing market, an important market and we wouldn't do it unless it could be impactful, and also leverage our current technology and our current manufacturing capability.

So for us, this is a little bit of between in the sense that it leverages our expertise around thermal barriers, but it's in more of an industrial setting. So it is a natural extension of our existing markets and capabilities. But again, what I would just say, over the course of the remaining part of this decade, we wouldn't be doing it if it didn't have impactful growth potential.

Got it. Appreciate that. And then maybe one on the EV side and quoting activity. Don, I think you mentioned it in your prepared remarks, but how are you thinking about potential wins this year? And how do those wins compare to some of your current OEM partners in terms of scope?

We -- I did indicate that we think we're in a strong position to add an additional opportunity in Europe, and potentially here in the United States as well. And we don't exclude some of the work that we're doing in Asia as well. So we do think we have the opportunity to add 1, 2, possibly 3 additional awards. What I would say about the awards is that these OEMs are more experienced. Their technology has developed more significantly than even 2 years ago or 3 years ago, let alone 5 and 6 years ago when some of the platforms that are rolling off now were originally conceived. So our work is much faster and more technical and with just a greater knowledge base, not only for ourselves but for those OEMs as well.

So we see these programs proceeding much more effectively. And as I said, we we see the European market just the structural aspects of that market with steadier policy and a more mature infrastructure to be a great opportunity for us as we showed, I think, in the opportunity base in one of our slides here today.

We currently have no further questions. So I will hand back to Don for closing remarks.

Thank you, Gabby. We appreciate your interest in Aspen Aerogels, and we look forward to reporting to you our first quarter results in May. Be well, and have a good day. Thank you. .

Thank you. This concludes today Aspen Aerogels Inc. Q4 2025 and Full Year 2025 Financial Results Call. Thank you for joining. You may now disconnect your lines.

Good morning. Thank you for attending the Aspen Aerogels Inc. Q3 2025 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to your host, Neal Baranosky, Aspen's Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may proceed, Mr. Baranosky.

Thank you, Micai. Good morning, and thank you for joining us for the Aspen Aerogels Third Quarter 2025 Financial Results Conference Call. With us today are Don Young, President and CEO; and Grant Thoele, Chief Financial Officer and Treasurer. The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com.

During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide presentation and earnings release. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially.

These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statements on Page 1 of the slide deck as the content of our call will be governed by this language. I'd also like to note that from time to time in connection with the vesting of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officer will file Form 4 to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the exercise price of options.

Our CEO, Don Young, has established a prearranged Rule 10b5-1 plan to sell a limited number of shares for tax purposes in connection with a onetime personal real estate transaction.

I'll now turn the call over to Don. Don?

Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q3 2025 earnings call. My comments will cover the introduction of 2 new members of the leadership team, the unsettled commercial environment for electric vehicles, an update on our energy industrial segment, a discussion of the versatility of our flexible aerogel blanket, as we target adjacent markets, the announcement of the design award from a major European automotive OEM and the beginning of the ramp for ACC, a lot to cover. .

Grant Bailey, our new CFO, will amplify these points with his comments. We look forward to your questions. At the time of our last earnings call, we announced that Grant would assume the role of CFO effective October 1. Grant joined Aspen in 2021 and has been a key architect of our corporate finance and strategy functions. He brings to the CFO position an important blend of operational depth and transactional experience.

After 3 years at KPMG, Grant gained experience in operations and business integration at Learfield Sports and in optimizing financial performance and capital structures during his time at Providence Equity Partners. His experience and disciplined approach will serve Aspen well as we execute the next phase of growth and value creation. I'm also pleased to welcome Glenn Deegan, our new Chief Administrative Officer. This new position for Aspen combined into a single role, the Chief Legal Officer and Chief Human Resource Officer responsibilities. Glenn brings more than 25 years of legal, HR and transactional leadership with deep experience guiding organizations through complex M&A, governance and integration initiatives.

He joins Aspen from Ultra Industrial Motion Corporation, a $2 billion global leader in motion control and automation products, where he served as Chief Legal and Human Resources Officer. Glenn play a pivotal role in major strategic transactions, including Ultra's $4.95 billion acquisition by Regal Rexnord Corporation in 2023. His experience in successfully integrating companies and aligning people, culture and governance through transformational change will be invaluable. We welcome Grant and Glenn to their new positions.

Our core objective is to build a strong, profitable, capital-efficient business. The focus during the first 3 quarters of 2025 was to streamline and simplify the organization to optimize our cost structure, build resilience and drive profitability, and of course, to prepare for the rapidly changing North American EV environment. North American EV sales in Q3 were at record levels, powered by the pull forward of demand in response to pending changes to rebate incentives and regulatory standards.

GM grew U.S. market share during the quarter to 16.5%, second only to Tesla. During October, however, GM shifted gears and significantly ramped down its EV production rates. We expect GM and other EV OEMs to align production rates according to consumer demand based on the new market conditions. GM has suggested that it will determine the natural demand for EVs early in 2026.

We believe EV growth for GM and other OEMs will start again from that reset number. Despite these market headwinds, we do see brighter spots for our PyroThin thermal barrier segment. In October, we won a battery design award from a major European OEM, an account with great promise and the potential to ramp in 2027.

We anticipate naming the company at the time of our next business update. In addition, we are seeing signs that another European customer, ACC, is preparing to wrap its battery cell production in 2026. As a reminder, ACC was created to serve the European EV market with high-volume, high-quality lithium-ion battery cells and is strategic to Aspen because it is owned in part by Stellantis and Mercedes-Benz, both companies important to Aspen as we seek to ramp our business in Europe in 2026 and 2027.

And one other brighter spot, on-shoring and near-shoring in response to shifting trade policy and geopolitics are creating advantages to companies such as Aspen who can provide high-performance, domestically produced solutions. Proximity enhances our ability to support new opportunities with our existing BEV and EI customers and is opening the door to adjacent market opportunities. An example of the latter is battery energy storage systems or BES, where 2 powerful shafts, 1 technical and 1 policy driven are converging to open a new opportunity for Aspen.

To improve economics and pack more energy into the same footprint, best developers are moving to higher-density LFP designs, essentially applying EV style engineering to grid-scale storage. And by doing so, creating the same thermal propagation challenges that we have already helped the EV industry to solve. Our PyroThin thermal barrier technology with its extremely low thermal connectivity, excellent fire resistance and minimal thickness is exactly what developers need as they compress thousands of cells into a single rack or modular.

On the policy-driven side, domestic content rules are making local sourcing, both a supply chain preference and a financial incentive. We are working with 2 large advanced energy storage battery and system technology companies on near-term opportunities to supply PyroThin thermal barriers where the battery modules support the rising demand from data centers, grid infrastructure and other high reliability applications. We are also pursuing a range of high-impact electrification projects from carbon capture to pressure geothermal where asset owners are seeking low carbon solutions for site-specific power generation.

Again, we are well positioned to serve their thermal management needs with high-performance domestically produced solutions. Our Energy Industrial segment cannot make up for the volatile EV revenue in the near term, but we do see this segment stabilized and beginning to grow again. Our Energy Industrial revenue this year has largely consisted of baseload maintenance work. Project-oriented revenue has been lacking in 2025 after record performance in 2023 and 2024. We see activity levels, strengthening across the board and anticipate a healthy growth year for Energy Industrial in 2026.

We see subsea opportunities in the backlogs of key customers that we expect will generate subsea project revenue for us in 2026. We are quoting subsea project work with potential revenue exceeding $80 million over the next 3 years, including $15 million to $20 million in 2026. And on the LNG side, we will supply Cryogel to the Venture Global CP2 LNG project in Cameron Parish, Louisiana during the first half of 2026.

Again, we anticipate a strong growth year in 2026 for the Energy Industrial segment and a return to a trajectory towards a robust $200 million Energy Industrial business in the years to come. As part of our long-term growth strategy, we are executing a disciplined initiative to diversify into markets adjacent to our Core Battery and Energy Industrial businesses.

In addition to the battery energy storage systems and electrification opportunities described above, our team is focused on other potential adjacencies based on commercial potential, speed to market, product differentiation and the ability to leverage our existing manufacturing platform. We believe [indiscernible] and broaden Aspen's addressable market and contribute revenue levels beginning in 2026. The initiative reinforces our commitment to innovation-driven growth and enduring shareholder value. Grant, over to you.

Thanks, Don, and good morning to everyone joining us today. I plan to cover Q3 financial highlights, our Q4 and fiscal year 2025 outlook, along with the financial framework and long-term strategic positioning. .

Looking at Slide 3. Q3 revenue landed at $73 million, a decline of $5 million or 6% quarter-over-quarter, driven by Thermal Barrier revenues softening 12% from Q2 to $48.7 million. This was partially offset by a 7% increase in Energy Industrial revenues to $24.3 million, representing a stabilization of our EI segment from the recent low in Q2.

Gross profit of $20.8 million decreased by 18% quarter-over-quarter, predominantly driven by less volume to absorb fixed costs at our manufacturing facilities. Gross margin of 28.5% declined from 32.4% last quarter. We adjusted our production schedules in Q3. However, we won't see the benefit of more efficient manufacturing operation until Q4. Ultimately, lower EV volumes drove the majority of the decline in combination with increased scrap rates in preparation for ACC's volume ramp over the next few quarters. We saw this dynamic with our successful ramp of GM at the beginning of [ cereal ] production.

Thermal Barrier segment gross margin was burdened by fixed costs and onetime scrap charges, resulting in 24% gross margin for the quarter down from 31% in Q2. Segment gross margin for Energy Industrial landed at 36%, in line with Q2 and above our company target of 35%. We lowered our OpEx rate, excluding onetime items from impairments and restructuring charges from $24.6 million in Q2 to $22.6 million in Q3.

We will continue to look for opportunities to streamline and simplify our operations to further reduce this run rate in the coming quarters. Adjusted EBITDA declined by $3.5 million quarter-over-quarter to $6.3 million in Q3. In terms of Q3 cash flow, we had a favorable working capital of $12 million due to supply chain and inventory optimization efforts, lowered CapEx spend below $10 million, opportunistically paid down $14.8 million on our revolver to lower interest expense and paid down quarterly amortization on our term loan for $6.5 million. We ended Q3 with $152.4 million in cash and equivalents.

Next, let's turn to Slide 4 to review our Q4 outlook. Over the past few months, the administration has removed [indiscernible] and penalties for CAFE standards, and we expect similar actions regarding EPA rules. These regulatory shifts have occurred faster than originally anticipated. As a result, supply side incentives are no longer driving portions of EV production, leading consumer adoption and demand as the primary forces influencing how many vehicles reach dealer lots.

GM and other OEMs are clearly taking decisive actions to align production with current consumer demand. workforce reductions, capacity adjustments and temporary plant closures underscore that the near-term environment remains uncertain and difficult to forecast. GM has indicated that it expects to determine the natural level of EV demand early in 2026 and is recalibrating production accordingly.

While this represents a meaningful step down from prior growth expectations, we believe EV volumes will begin to grow again from this lower base. For the fourth quarter, we currently expect total revenue between $40 million to $50 million. We anticipate the mix between our segments to be grounded in approximately $25 million for the Energy Industrial business with more variability in the Thermal Barrier segment. It's worth noting over the past few weeks, we've seen GM demand erode, leading to a higher degree of uncertainty.

Additionally, the mix between segments is important to overall profitability given different unit economics of each business. With $40 million to $50 million of revenues for Q4, we'd expect between negative $14 million to negative $6 million of adjusted EBITDA, respectively. Given our new Q4 outlook and the resulting impacts on liquidity, we are engaging with our lenders at MidCap for near-term covenant relief. It's worth noting we have over $150 million of cash as of September 30, representing a strong net cash position.

When taking our year-to-date actuals and Q4 guide, revenue could range from $270 million to $280 million, with adjusted EBITDA of $7 million to $15 million for the year. In October, Q4 volumes declined below our previous guidance assumptions in August. It's clear that OEM reactions to a deregulated environment have accelerated beyond prior expectations. When bridging to our prior outlook, by far and above the driving factor and lower expected full year results is driven by EV market headwinds, combined with a less favorable product mix, which results in higher material costs on average for 2025.

We now believe that the fourth quarter adjusted EBITDA levels are representative of our go-forward cost structure. Several onetime items in this quarter have temporarily impacted profitability and actions have already been taken to improve our breakeven threshold. Material costs as a percentage of revenue in the second half of 2025 were slightly higher than our go-forward run rate due to shifting production between East Providence and our external manufacturing facility.

Projects tied to cost reductions at our manufacturing sites, primarily production optimization and yield improvements will begin to materialize in 2026 and 2027. We also expect our operating expense run rate to level out between $20 million and $22 million with additional savings opportunities tied to the implementation of our company-wide ERP system and synergies from integrating our Mexico facility. As a result, we believe we can achieve adjusted EBITDA breakeven approximately at $200 million of annual revenue with line of sight to further improvements as we move throughout 2026.

We expect to end the year with $25 million of CapEx, excluding Plant 2 or approximately $5 million of spend in Q4. In regards to plant 2, we continue to pursue buyers for the property and equipment. We expect equipment sales to begin trickling in within Q4 and over the next few quarters, while the building sale has a longer tail over the course of 2026.

Turning to Slide 5. As we look ahead to 2026, I'd like to outline how our financials could perform at various volume levels within our core business. It won't come as a surprise that there remains a wide range of potential outcomes on the EV thermal barrier segment. While we have stronger confidence that the Energy Industrial segment will return to growth next year. We continue to pull every operational and financial lever available to ensure the business remains stable and efficient.

The EV landscape continues to evolve. And while we use IHS forecast and customer provided volumes as key inputs, we apply our own insights, scenario analysis and appropriate discounts to those forecasts to model and plan for various production scenarios. When we think about GM, their recent public statements suggest that the volumes we're seeing in Q4 likely represent a floor for production levels based on their current EV portfolio.

GM has been clear that the EV demand will be soft through early 2026 as the market resets to a more natural level of consumer demand following the end of incentives. Importantly, GM is better positioned than many OEMs. They've gained U.S. market share, maintained pricing discipline with fewer incentives and remained highly committed to EVs as a strategic priority. From this lower base, we expect GM's production to rebuild as demand normalizes and the company continues to expand its EV portfolio.

The IHS current forecast for 2026 has GM delivering approximately 175,000 LTM vehicles. Assuming $10 million to $15 million of other OEM revenues, we could potentially generate approximately $135 million of revenue at full IHS volumes for the Thermal Barrier segment. However, given the degree of uncertainty that we see in the market today, it would be prudent to take a significant discount to IHS volumes. As a reminder, with our expected cost structure in 2026 and after crossing the breakeven adjusted EBITDA threshold at $200 million revenue, we expect to drop approximately $0.50 to $0.60 to the bottom line on every dollar of additional revenue.

With operating cash flow tied to revenue and growth levels, we project a total of $45 million in cash outflows from investing and financing activities or approximately $10 million of CapEx and $35 million of debt payments in 2026. From where we sit today, we believe we can maintain over $100 million of cash on our balance sheet at the end of 2026 when assuming breakeven adjusted EBITDA. Looking even further out at our core markets, 2027 introduces European EV customers ramping up, along with continued healthy growth for the Energy Industrial business.

We believe we can return to growth in 2027, supported by awarded European EV customer forecast that have the potential to generate over $150 million of revenue in 2027 at full volumes. Along with GM growing off its 2026 EV reset, continued growth in Energy Industrial and untapped adjacency revenue.

Lastly, I'll build on Don's comments around our strategy going forward. As we look to Aspen today, our focus is on unlocking the full potential of our aerogel technology, the foundation of our differentiation. It's a platform that has high barriers to entry, a deep IP moat and strong sustainability tailwinds. Over the past few years, we've aggressively pursued capturing the EV opportunity, and in doing so, have greatly improved our technology, manufacturing capabilities and footprint.

In addition to strengthening our core markets and optimizing our capital structure, we are laser-focused on expanding Aspen's strategic optionality to accelerate growth, unlocking new verticals and long-term value creation. Our aerogel products currently serve 2 core markets with a highly specialized value proposition, but we see a much larger opportunity ahead that helps drive our strategy, including expanding our aerogel technology platform into adjacent markets and enhancing aerogel performance with complementary specialty materials.

In order to execute this strategy, we'll explore strategic partnerships, pursue organic and inorganic opportunities by canvassing the landscape of specialty materials companies and taken all of the above approach to broaden our portfolio offering with high-value products at accretive margins. We believe our aerogel technology platform provides a springboard into new addressable markets within Specialty Materials that share our focus on lightweight, thermal management and sustainability.

By broadening our capabilities with a specialty materials platform anchored on aerogel, we opened the door to solving mission-critical problems for our customers.

Think energy storage materials, advanced composites and thermal interface and fire protection systems, all solutions that expand our relevance across diversified markets. As I step into the CFO role and look ahead, my focus is on ensuring that our strategy is matched by disciplined execution and thoughtful capital allocation. I'm challenging the organization to think boldly, act strategically and relentlessly pursue new opportunities that expand our impact and deliver long-term value for Aspen and its shareholders. Don, over to you.

Thank you, Grant. Before we move to Q&A, I would like to reinforce a couple of key points. These are clearly trying times for EV OEMs and companies such as Aspen. We have been forced to change our expectations after 3 years of significant revenue growth and margin expansion. We continue to believe that electric vehicles have a significant role to play and that EV demand will reset at a lower market share and then resume a growth trajectory.

Our Energy Industrial business is well positioned for a policy approach in the United States that promotes an intensified focus on energy and power generation. We anticipate that the segment will have a strong revenue growth trajectory in 2026 and beyond. The work on adjacent markets leverages our valuable technology and products as we diversify and expand our end markets.

Overall, we have designed Aspen with a lean operating cost structure in order to generate substantial profits from incremental growth.

Operator, let's turn to Q&A, please.

[Operator Instructions] Our first question is from the line of Eric Stine with Craig Hull.

So first, I guess I just want to touch on the EBITDA breakeven the $200 million, the level that you are looking to get to. If I do the math there, it looks like you would be targeting kind of mid-20s gross margin, given where your OpEx -- you think your OpEx goes to and if you're expecting EV weakness likely, even though it will maybe improve, but weakness in the first half, I would think that the margins suffer a fair amount. And so I'm just trying to figure out how -- what are the puts and takes to get to that level where you can be breakeven at $50 million? I mean, are there additional steps to be had or maybe thoughts there would be great. .

Yes, sure. I'll take that one, Eric. I think overall, we've taken decisive action over the course of 2025 and have significantly reduced our overall fixed cost run rate. I think that some of those changes are also materializing over the next few quarters. There's certain -- in terms of production capacity, production yield improvements that are planned projects that have a targeted kind of return that will happen within the first half of next year. And overall, the mix is very important to that breakeven level. That is kind of a disclaimer on it. The more thermal barrier, the better in terms of achieving that breakeven EBITDA threshold sooner. But overall, we see your overall thought on the first half of the year, EV being soft is kind of directionally in line with we're thinking it is.

So I mean it sounds like this is not -- I mean, you're not trying to communicate that this is a run rate you think you're at or a level you're at entering the year. It sounds like this is more of a second half level that you get to because some of the things that you had planned and that hopefully, we're going to have some impact here in late '25 or more now '26 events? .

Yes. And I think that they will materialize in the beginning of 2026. There's just some of the -- more of the production kind of yield improvements and projects that are tied to the plant that will be kind of that mid 2026 time frame.

Sorry, Eric, I was just going to add. You know that we've taken actions through the year, including in the third quarter. And I think those will be more clearly reflected as we get into Q1 of next year as they filter their way through the income statement.

Okay. Got it. But no -- it's nothing -- you're not necessarily signaling additional steps. I suppose you could take those if needed, but not it's really kind of what's already in motion that gets you to that level. .

Correct, correct.

Maybe just Energy Industrial, I mean, clearly more optimistic on that. It's been, I think, a pretty weak first 3 quarters here. But when you're talking about a resumption of growth and back on the trajectory to $200 million, just curious based on what you see the LNG project for CP2, some of the other things? I mean, what -- any thoughts on magnitude of what that growth could be in '26 again to get back to those higher levels?

Well, we've been producing here in the mid-20s basically off of our baseload maintenance work and very, very little project work through the period. We do believe that we have an opportunity in the Subsea business to be in that $15 million range in 2026. Again, a big uptick from this year. But really, if you look out over the course of 5-plus years, that's a fairly normal level for us. Of course, we had big record years, $25 million, $35 million in 2023 and 2024. So that's definitely part of it. .

We also just -- we're seeing the LNG project that I referred to and other activities give us a nice little boost there. So I think you will see contribution from projects. I also think we have the ability to grow that baseload maintenance work. There have not been a lot of turnarounds in refineries this year to date. They're operating at pretty large spreads, and I think they've been reluctant to do some of the normal maintenance, but that is inevitable, and we think we'll see that as we enter into 2026. So a combination of our baseload maintenance growth and add some project activity on top of that, and we feel like as we call it a healthy growth year for 2026.

Okay. Maybe just last one for me. I mean so many questions to ask about the EV space. But maybe just clarity on, you mentioned as much as you can provide on the battery manufacturing coming out of Europe. Stellantis, Mercedes, what kind of contribution could that potentially make in '26?

Overall, we're seeing the European OEMs would be between that kind of $10 million to $15 million range in 2026. We're obviously taking a discount to the volumes that they have provided. And so that could fluctuate. We're bullish on the European EV market kind of compared to the North American market as of right now.

[Operator Instructions] The next question is from the line of Colin Rusch with Oppenheimer.

Do you have a sense of where channel inventories are at this point with the pull-through in the September quarter and kind of initial sales in October with GM. Does it still feel like you need to do some channel correction here? Or do you feel like the channel is fully cleaned out?

We've made progress, Colin, for sure, and moving products through distribution. Again, it's not perfectly transparent for us. But we know that it has improved markedly from earlier this year.

Okay. That's helpful. And then on the stationary storage side, obviously, there's a very, very large pool of demand that's happening there and the duty cycles that those systems are going to engage in are intensifying and diversifying. I want to just get a sense of what you guys are seeing from a demand perspective and the design perspective on that because that looks like an opportunity that may emerge sooner than later to be honest.

Colin, it's been an interesting push for us as we think about what we refer to as these adjacent kinds of markets a little off to the side of our core market, which we consider this to be exactly that. And what has been beneficial to us is not only the domestic supply incentive aspect of it. But at a technical level, we have seen the battery cells move to a higher-density LFP format. Again, as I said in my prepared comments, really using sort of EV engineering at grid level scale. And that feeds very neatly into our thermal barrier work. And we have made substantial progress in working with 2 large companies to date. And we believe that we will have this part of our business contribute to our 2026 revenue in a notable way. .

The next question is from the line of Ryan Pfingst with B. Riley.

I'm bouncing around Colin's apologies if this was already covered. But is the new European OEM award, is that a platform award? And could you give some sense of the potential volumes that we could see there in '27 or maybe '28 when it's more fully ramped.

Yes. I'll take that one, Ryan. I think that it's not necessarily a platform. I believe it's kind of a model approach. And it will be in 2027. And the magnitude is reflected and kind of that $150 million European OEM revenue that I said kind of in my script here, that is at full volumes, and it's inclusive of this award. And so the discount to that, even taking $50 million to $75 million of that would be really, really beneficial to our P&L, considering we already have the fixed cost and the manufacturing in place to achieve that revenue level. .

Appreciate that. And then shifting gears. Battery storage sounds like an exciting adjacent market opportunity. Curious what some of the other applications are that you're looking at? Is there anything in the data center world that could be interesting for your technology just given the insulation aspect?

Well, Ryan, these battery modules are supporting data centers that are coming out of it. These are site-specific energy storage systems. And so we are participating at it from that angle at this point. You asked about -- I believe you were asking a bit about other potential adjacencies. And look, we've got a team working on it. You're very familiar with the building and construction market that we had pursued earlier. And that's one of the businesses that we want to have just the right partner for. And we believe that we can have that contribute to our revenue and again, diversify our markets. We built that into a multimillion dollar business back in the late teens, and we are planning to resume that as well, just as another example.

The next question is from the line of David Anderson with Barclays.

I was trying to get a little bit better handle on kind of where you see kind of overall GM to include bolt in there, kind of where the numbers look like they could bottom out in the first quarter just in terms of the overall volumes of vehicles. I'm looking at the IHS numbers, which just seen just completely wrong. I mean it doesn't make any sense to me of what they're showing. In fact, they actually raised their numbers on '26 this past quarter. .

So I'm trying to understand, I almost have to kind of push that aside. Where do you think we kind of bottom? I know they're kind of guiding like 40,000 cars in kind of 4Q. But realistically, where do you think we've bottomed in the first quarter? And how much could you see that growth throughout the year?

Look, it's definitely an uncertain moment in time. I mean I'm a little reluctant to try to give an exact number. We do discount the IHS numbers in our own planning. We take other inputs as well, including from our customers themselves. And we try to triangulate really around those kind of numbers. So Dave, I'm just reluctant to project at this point what we think GM is going to do in Q1.

And I think just to add to that, David, is it?

Sorry, go ahead.

No, no, no. I was going to say if you still think that first quarter would be the bottom, is that the right way directionally to think about it, at least? .

Well, we think somewhere here in Q4, Q1 will -- and GM has said this, that they expect to let me say now where they are from a demand point of view in this new environment in early 2026. And so that leads me to believe that Q4, Q1 is clearly the bottom, especially after the demand pull forward that people experienced in August and September, leading into the October 1 day. .

That makes a lot of sense. I'm just curious, as you start building on the European side, the design of the batteries in terms of your Thermal Barrier and how that fits in there in terms of, say, revenue per unit. How does that look in Europe versus the U.S.? Is it the same? Is it a little less, a little more? How should we think about that as you build out that side of the business?

Yes. Most of the European OEMs are prismatic. And kind of the CPV on that has historically been between kind of that $250 to $350 million mark. So obviously, different than [indiscernible].

Okay. And then, Don, I want to go back to the battery storage. A few years ago, you guys were talking about getting the battery architecture side of using some of your technology and what you've used to build aerogels, look at some of the -- I believe it was on the cathode side that you were looking to add into. Is any -- the discussion you're having today, is any of that part of it? Or are you just talking about the thermal barrier part. And I was wondering if you could also dig into that a little bit more on the battery surge. I've never heard of thermal runaway being an issue. In fact, I never heard about thermal runway to sort of talking to you. But I haven't heard that doing an issue in like the larger battery storage side because I always thought it was part of the cycle, cycling up and down, and maybe that's what's happening here. If you could kind of dig into that a little bit about kind of where you fit in there? Because I was surprised to hear about that as sort of a new side of the story.

Yes. These are akin to our PyroThin thermal barriers, Dave. And what is changing, I think, from a technology point of view, is that they are moving to higher density cells, and that is creating concern around thermal propagation or thermal runaway, which we address in slowing the propagation and controlling that. There's also some policy aspect to this as well, which these projects have incentives to have domestic supply. And again, we contribute to that as well.

So it's really a combination of our technology and that those policy changes or incentives, I guess, I would say, that are benefiting us in this space. So we're making these materials, we're really expert in helping them design around our materials, and there are -- they are trying to get as much density and as many cells into a limited amount of space as they can. And again, that suits us very well.

I think the only thing I'd add to that is that we have -- we already have the infrastructure in place to deliver that for that entire opportunity, right? It's very -- it's like-for-like with our current thermal barriers. And so we already have the production, the capabilities and really it's kind of tooling to get that. So I think that's a key point that there's not a kind of capital investment required to kind of get to this opportunity. .

The next question is from the line of Leanne Hayden with Canaccord Genuity.

Just to start, I'm curious given lower just given lower EV demand levels, how do you think about leveraging capacity out of your Rhode Island facility versus outsourcing to your external manufacturing partner?

That's a good question. I think that, really, this is on -- this comes down to a regional basis, right? We want to do what's best for allocating profits accordingly between the production facilities. As of right now, we have capacity we can use in both our East Providence plant and our external manufacturing partner. And it just comes down to whether it's domestic or international, we have the capabilities at both facilities to kind of deliver on the demand. .

Got it. Okay. And I noticed you're targeting decreasing CapEx into the fourth quarter and into next year. Curious how long you think you can maintain these lower levels?

I think that the one kind of caveat to that is there are certain programs that we are quoting right now that could require a little bit more capital investment, akin to kind of getting our -- kind of our automated equipment down in Mexico. But it's not -- we're not building a new plant right now. And so when we think about CapEx, it is maintaining our assets and making sure that there is efficient and run as efficient as possible. And so we're going to be very selective. Obviously, cash is king. And so we're going to have -- any capital investment is going to be tied to a return that is reviewed by myself and my team with a business case and make sure that we're allocating capital accordingly.

At this time, I would like to pass the call back over to Mr. Baranowski for any further remarks.

Actually, I will take it. Thank you, operator. This is Don. We appreciate your interest in Aspen Aerogels and look forward to reporting our fourth quarter results to you on February 12. Be well. Have a good day. Thank you. .

Thank you all. This now concludes today's conference call. We appreciate your participation, and you may now disconnect your lines.

So we don't know of too many companies quite like Aspen Aerogels. We often talk about transferable skill sets in energy services, products and services in traditional energy. They now have new emerging markets in new energy. Well, no one has done it quite as well or as quickly as Aspen Aerogels with an established product line in traditional energy that is seeing a step change in revenue as a supplier to EV batteries.

I'd like to introduce Mr. Ricardo Rodriguez, who joined Aspen in November 2021 and serves as the company's CFO and Treasurer. Thank you very much for joining us today.

Thanks, Dave. Thanks for having us. I was talking to Neil that it feels a little bit like we're on a paddleboard here sending after Baker Hughes and Carnival's cruise ship just went by.

So thanks for having us. We really appreciate it.

Absolutely. So maybe we just start with the -- for the uninitiated, what is Aspen Aerogels? Can you talk about your business and sort of the core product behind the story?

Absolutely. So the core technology of the company is a materials platform. And aerogels were invented in the '50s. They're the lightest material that humans have created. And in our case, what the company really pioneered is a practical use for silica-based aerogels. And an aerogel is an open pore structure material that when you use silica as the base for it, it traps air in a very unique way, unlike any other thermal isolator. And so that makes it 3x to 10x better than any other competitive form of thermal insulation that you could use, along with a bunch of other benefits like it being fireproof, hydrophobic, et cetera.

And in the first 20 years of the company's history, that proved critical for Energy Industrial infrastructure. So if you think about oil refineries, where you only have so much space around the piping to isolate that thermally, and none of the other materials can do it, that's where we started to come in. Then we added another product to do the same thing for very cold processes, so cryogenic processes within LNG facilities. And then in subsea piping, so pipe and pipe insulation, that's a market that we pretty much have to ourselves, where you need the insulation to be as light as possible, while still isolating the pipeline from very cold water temperatures.

And then to your earlier point on why we're really playing the energy transition, so well, it's the same material or a variation of the same material. Around the time I joined the company almost 4 years ago, General Motors came to us looking for a solution to protect vehicles and batteries from thermal runaway inside of the cells of electric vehicle batteries. And if you don't know what thermal runaway is, you may remember those Samsung tablets that were exploding on people's bags and particularly on planes. And in essence, what was happening there is when you put a tablet in a plane, the cabin pressure is such that you actually press the positive and negative side of these battery cells, you're causing a short inside the cell and it blows up and the lithium-ion materials and some of the other stuff inside of these cells is pretty flammable.

And so General Motors looked at what the other automakers were doing when it came to really pushing every last bit of performance and energy density out of these cells. And given the size of the cells and how much they were trying to get out of them, they knew that they had to put some form of passive insulation that took up as little space and weight as possible. And that's where our team actually showed up first with some of our Energy Industrial product, and they would go back to their hotel rooms at night, shading it down to the minimum thickness that GM could get away with, and those became the first EV thermal barrier prototypes.

And to put it in perspective, we did roughly $145 million of revenues last year serving our traditional energy infrastructure markets with these rolls of insulation. And then our EV thermal barrier business basically grew from about $7 million of revenues in 2021, which is when GM started production, to over $300 million of sales last year.

We being an advanced materials platform, protected with over 400 patents, a pretty intricate process that has a lot of know-how that is very tough to replicate, we actually set the company out to operate with a target gross margin of 35% plus gross margins and to deliver at least 25% EBITDA margins. And as we've grown, we've geared the company to deliver that and more. We delivered a little bit more than that last year at the gross margin level.

And then I think this year, we're taking a bit of a reset, as you've indicated in your research around the volumes for GM, right? The election has been pretty impactful in terms of the policy that's driving EV volumes here in the U.S. temporarily, even though consumer preferences, we believe, are still going to prevail in the long term. But that's in essence, us today. We expect to do just over $300 million of revenues this year across both segments and to still be generating meaningful EBITDA, and we've got a cost structure that's now even better than what we delivered the $450-plus million of revenue with last year.

Can we talk about a little bit more about the aerogel product itself? You're not the only one that has aerogel. So how is your aerogel product different than some of the other -- I think there's a couple of other companies that make an aerogel-type product. And also, what's the IP? How do you protect the IP around this?

Yes. So we were out looking for additional capacity to supplement our ramp in 2023 and actually looked at other "aerogel" companies. And I would be surprised, if you add them all together, to get more than $50 million of revenues, even in China. The main differentiation is quite a bit of evolution around the chemistry and the process that makes ours mechanically way more pliable than any other "aerogel" material that's being touted.

And then also when it comes to delivering the thermal isolation and the right composition to deliver this open pore structure that I mentioned, there are quite a few controls in the process that we've developed over time that give us the ability to deliver a product that just performs 3x better than some of the comparable materials that we've tested.

And the proof is that the western OEMs have tested this "aerogel" material and have not awarded any business after having tested ours and given us the business. We actually audited a lot of these potential "aerogel" suppliers, as I said, in 2022 and 2023, as we were looking for additional supply, and then spent over a year getting our partner in China to provide us with some external manufacturing facility, because they needed quite a bit of handholding on the process side and the trade secret side in order to deliver a product that could have our brand name on it.

If we talk about the Energy Industrial business a little bit. First, I want to talk about the end markets. You touched on them. Can you kind of go through the major drivers for the thermal -- for the aerogel products in the Energy Industrial business?

Yes. So on the Energy Industrial side, we basically have 3 applications. And then I'll go through the markets. As I mentioned, the main applications are hot processes. So we have a product called Pyrogel and a couple of families within them that go into refining. Then our Cryogel product goes for cryogenic process and that mostly ends up in LNG facilities, sometimes even covering entire tanks within LNG facilities.

Other chemical processes. Last year, we did a carbon capture project. So wherever you're operating at very cold temperatures and you need to protect the energy loss, we can come in. And then the third branch within the Energy Industrial side is the pipe and pipe installation for subsea pipelines that I mentioned as well. We sell the product through distributors. These are relationships that we've built over the past 20-plus years. And now more than 20 years into this journey, we have an installed base of about $1.5 billion of product.

And if you think of the maintenance cycle at these facilities, part of the maintenance cycle includes cutting up insulation to inspect for corrosion. And so that drives a healthy baseload of business for us, especially on the Pyrogel side, as this insulation is cut up and then being replaced. That gives us an opportunity to replace materials like mineral wool and perlite as the piping gets rearranged and there's an opportunity for us to take share from them.

And then, of course, whenever a new project is announced or started, we work pretty hard to come in and capture additional market share in that. And that ends up driving about a good 1/3 of our revenues in a given year.

So when you kind of pull it all together, how do you see sort of the longer-term growth target of Energy Industrial?

Yes. For Energy Industrial, we've said that growth between 10% and the low teens would make sense. I think the onus is really on the team to develop that, not just on the 3 applications that I mentioned. But it's very interesting. As we go around the world, you'll find these niche applications that people end up using our product on. Like not that long ago, I actually found out that the Formula 1 teams were using our Pyrogel product to cover the exhaust of the race cars. I mean, very little product, but it really makes you think, okay, wherever there's energy loss, we have a role to play, right? Or wherever there's performance that could be gained from preventing energy loss, we can be there.

The company, in 2021, right, as the opportunity on the EV thermal barrier side came along, actually built a building materials insulation segment. And it got a meaningful amount of revenues very quickly, only for them to shut it down in order to supply the EV thermal barrier opportunity. But I think really, the onus is on the team over the next 12 to 18 months to assess all of these additional applications, invest a little bit of OpEx, get some revenue in return, and then really get that snowball effect outside of the 3 segments that I laid out. And I think that in combination with the installed base that we have and new projects can definitely drive 10% plus growth in this segment.

I did see Brad Pitt talking about the Aspen Aerogel products. He was talking about it. That's pretty interesting. Shifting over to the Thermal Barrier side. It's been a really interesting business that kind of came out of nowhere. Can you talk about the origins of this? It kind of took everybody by surprise. And I had never even heard of thermal runaway before. Can you just talk about the genesis of this, of how GM started using your product?

Yes. I mean -- so GM was actually familiar with aerogels because a long time ago, they looked at aerogels as a potential heat-shield barrier on the core vent. If you think about internal combustion engines catch on fire all the time. And if you could have a better heat shield made of a material like Pyrogel, it'd be amazing. But they determined that for various reasons, it didn't make a ton of sense. But then GM actually cold called our team in 2020 saying, "Hey, we're jumping into this EV investment with the Ultium platform" at the time. They had a target of having the capacity to produce 1 million EVs by 2025. And they, in essence, came to the team looking for a solution.

And if you look at what used to be put into electric vehicle batteries before, it was, in essence, this polyurethane foam that is there for mechanical reasons, right? So when you're putting the battery pack together, you want the cells to sit there firmly without moving and shaking around, because that can then cause these cells to fail. But they wanted us to replace those foams with a foam-like material that delivered all of the properties that we were known to deliver on the energy side, right? So great thermal isolation, fireproofing, and then they added this third leg of the stool, which was the mechanical properties. And that's where a lot of the work went in to develop those mechanical properties to make the material thinner. That in turn gave us an ability to produce a lot more -- get more capacity out of our assets. And that's how we ended up with the thermal barriers as we know them today.

The product releases some silica dust and GM said, we don't want to deal with the dust inside of the battery pack plants. And so we came up with a method to encapsulate the rectangles of aerogel. And that cutting, encapsulation and dimensional testing is what we set up a couple of facilities in Mexico to do in 2022. And I mean, right now, we're at the rate where, I mean, we produce over 90 million parts in a year.

So what's the -- so what other EV or battery OEM makers use to prevent thermal barrier -- thermal runaway?

Yes. I mean, it's a multidimensional problem. The main thing that they do is they actually throttle back the battery, right? So Tesla, their current battery architecture, for better or worse, was guided by decisions that had to be made in 2006 and 2007. And the cells available at the time were cylindrical laptop battery cells, right? So that put Tesla on a path where they're set on using cylindrical cells.

But if you actually look at the EV market today, with China, 91% of vehicles out there have pouch or prismatic cells. So only Tesla, Lucid, Rivian and some lingering BMWs are using cylindrical cells. And on those cylindrical cells, you don't necessarily have a lot of space to put a thermal barrier like ours. And so you have to sort of play around with probabilities as you're charging, discharging and using the vehicle.

And so that means that if you or I were to buy a Tesla, theoretically, that car could have maybe 400 miles of range. But you'll see that the EPA cycle rating is probably for like 350 miles of range. And then in the ebbs and flows of daily driving with different temperatures, we will probably be getting about 280 to 290 miles of real ranges that batteries throttle back through the controls of the battery.

What we're seeing with GM is that when GM advertises a vehicle with 310 miles of range, you're getting 310-plus miles of range. So they're able to use regen more aggressively, knowing that we're there as a passive layer. They're able to heat up one cell, knowing that, that heat won't spread to the next one. They're able to use charging a lot more aggressively. You're seeing now vehicles with 800-volt architectures that enable faster charging. And generally, there's a thermal barrier in those vehicles, enabling that faster charging without as much risk. And so yes, I think OEMs are starting to see that there's quite a bit of opportunity that unlocks itself when it comes to maximizing the performance of the battery cells when you have a passive layer of insulation like ours.

So when you get into fast charging, does that increase the risk of thermal runaway?

It does, significantly, especially at either very cold or very hot temperatures.

What are the Chinese views?

The Chinese, some of them play this game of probabilities that I mentioned as well. And some of them on very high-performance applications use this "aerogel" that we discussed that tends to be stiffer and provides less thermal isolation. And sometimes, we've seen several videos of those Chinese EVs or buses catching fire, and the material is there, and it buys you time, but not as much as we think it could.

So aside from GM, can you talk about some of the other kind of European EV manufacturers and the opportunity set there?

Yes. We've been supplying Toyota as well since 2021 on the bZ4X and the Subaru Solterra and the Lexus variant of that vehicle as well. We also have an award from Audi for their next-generation A6 platform. We also have an award from Scania, Volvo Truck, with Stellantis for the vehicles that will be equipped with the cells made by ACC in France. That's actually the program that we're looking forward to launching here in Q4 of this year, and that will ramp up next year. And then Porsche also awarded us business for the replacement Boxster and Cayman platform. Again, another high-performance EV that will really look for fast charging and fast discharging. And then we also announced an award with Mercedes-Benz, so Daimler that will kick in, in 2027 for those vehicles that will also be supplied with those cells from ACC.

So when you talk about awards with these various auto manufacturers, what does an order mean? Is that just like a call out like you now have an agreement with them, but do you actually know what the numbers are going to be? Or is it more of a call out?

No. So we actually have been given the business and we're designed into a specific vehicle that is about to start production. We have agreed to pricing. They've given us indicative volumes. Several of us have worked in the auto industry before at the company, and we know that you can't totally take the OEM volumes at face value. If you add up the volumes they give you, you end up with a car market that's 5x the size of the car market. And so we've been pretty eyes wide open about sizing this correctly. If we would have believed the 1 million units by 2025 from GM, we probably wouldn't be here today, right?

But we actually did get that number right. Like we said that in 2021 that, that number was going to hover between 200,000 and 350,000 vehicles in 2025. And so yes, I mean, it basically means that you have to start committing a little bit of capital to get ready to supply those programs for when those vehicles start production, and that we've agreed to pricing and that we're designed in. And that, I believe, gives us quite a bit of staying power, because to design us out, you need a lot of development work and capital to, in essence, make a change, right? And you also wouldn't want to be the engineer that took out the critical safety component that's addressing thermal runaway.

So for me, on GM, it's obviously outside my lane. I rely on my colleague, Dan Levy, who covers GM, who talks about kind of the production forecast of EVs. What are they telling you now? And actually, maybe just step back a little bit of kind of been a lot of volatility over the last couple of months with the big bill and other things happening. So kind of what's been the messaging from GM? How are you kind of seeing this trend? What are they saying to you right now?

Yes. So I mean, GM, even before 2021, really put itself in a path to get as strong of a foothold as it could on EVs, right? And they invested pretty much their entire market cap on EV capacity and EV launches. I actually think they're betting even a brand like Cadillac on EVs. If you look at all of the new product offerings from Cadillac, they're mostly EVs. And some of the vehicles that we supply, which at this point there are now about 17 nameplates with GM, they've actually gotten a strong foothold in the market.

The #2 EV sold in the U.S. after the Tesla Model Y is actually the Chevy Equinox. And so we're actually pretty encouraged to see GM gaining share, sometimes even over-indexing the share that they have on the coasts of the U.S. on their internal combustion vehicles getting new customers. There's also quite a few customers that are leaving their Teslas to look for an alternative, and GM is there ready to take them.

Having said that, yes, I think the election was kind of transformational in many ways relative to some of the energy policy and the fuel economy standards and the fuel and the emission standards that the OEMs were being held to, especially for 2025 and beyond. And so now the OEMs don't have as much of an incentive for having a certain percentage of their new cars sold in the U.S. being EVs. In fact, quite a bit of that regulation is being tested right now and removed. But at the same time, we do see GM and what they tell us is that they've invested so much in launching these vehicles. They're getting customers that they otherwise wouldn't get and that, that will have them really focused on maintaining that share even after the $7,500 credit for consumers has gone here at the end of the month.

The incentives on the production side for making EV cells and assembling EVs in the U.S., I think, will actually only increase with the Trump administration. And so it's kind of a balance. The consumer credit, if you look at the data for EVs, it actually just enabled the OEMs to increase the prices by about $5,000 on average. So consumers didn't necessarily get that benefit unless they were really leasing the vehicle, getting a cheap lease. And with the Trump administration, we actually see quite a few incentives for making the cars in the U.S. with U.S.-made content and then that favors us with our USMCA content that we are selling into these EVs.

So I mean, I think we'll have to make a bet on where the volumes will land and kind of visit it next year. But we don't think that it will be a bigger reset than what we saw from last year to this year in terms of volumes for GM. And then we obviously have all these other awards with other OEMs that I mentioned in 2027 contributing to the P&L pretty favorably. And again, with this 35% plus gross margin target which, in the auto industry is relatively rare, like we really gear the company to pay back all the capital that we've deployed to chase this opportunity with attractive margins.

You had to do a lot of supply chain jujitsu over the last couple of years. Yes, you still maintain the 35% -- you've got to the 35% operating margin target. Can you talk a little bit -- so all of your thermal -- all of your Energy Industrial is now manufactured overseas?

Most of it. Except for the part that is -- now that we have some extra capacity in Rhode Island, we are making some of the U.S. product here in the U.S. with a lot of raw materials also from either the U.S. or Europe as well. But yes, for the rest of the world, our energy product is made by the external manufacturing facility in China.

So you're confident to get back to those 35% margins? When do you think you can get back to that?

Yes. I mean we showed good progress towards that between Q1 and Q2, right? So I think that right now, the company is geared in essence, at that $85 million per quarter revenue run rate, we can deliver the 35% gross margins. It's a lot easier to do it on the energy side. We delivered 36% gross margins here in the past quarter, even though the demand rate was nowhere near what it would need to be for us to be at 85% in total. And then on the on the EV thermal barrier side, if we were doing $60 million of revenues per quarter, we would have 35% gross margins, and we did $55 million.

It was just a question of volumes?

Correct. Yes. I think it's just the fixed cost absorption, which the team keeps working on reducing further and further. And I think that will yield benefits in definitely in 2027, when we expect the demand to truly be there, potentially even higher than what we did last year.

Great. Well, why don't leave it there. Ricardo, thank you very much.

Thanks for having us. Really appreciate it.

Thank you very much.