Great questions.
First on supply capacity - the big change over the last year or so has been a transitioning to Pyrogel manufacturing in Plant 1, and outsourcing of Energy Industrial supply to a Chinese contract manufacturer. This approach has been largely validated in the last ER. So their energy industrials business can now be supplied by the Chinese contract manufacturer, and they focus exclusively on Pyrothin in Plant 1. The stated capacity of Plant 1 has expanded over the last couple of Q’s to what you stated above.
Now on to Plant 2, the one that worries you. This one has a history. They did, in fact get burned by EV exuberance - but a few years before the current point in time. They enthusiastically started investing in Plant 2 in 2021/2, raised equity to finance it, and then mothballed it, but kept it on life support. That tanked the share price.
In Q1 2023 they pivoted. This is important as it builds my confidence in the team to see that they did exactly what they set out to do in Q1 2023.
Here is the CEO quoted in Q1 2023 ER:
During this possible and even likely recession scenario, we are taking a conservative approach to the preservation of our capital which equal $205 million at the end of Q1 2023. During this period of time, we plan to reduce our OpEx and CapEx to grow our revenue significantly and to focus on our profitability.
The key pivot is to right time the final stages of the construction of Plant 2 in Statesboro, Georgia and in the meantime, to largely dedicate our Plant 1 aerogel manufacturing capacity in East Providence to PyroThin thermal barriers in order to serve our EV OEM customers. We estimate that we have the ability to generate approximately $400 million of PyroThin thermal barrier revenue from an EV dedicated Plant 1.
Our goal is to time the startup of Plant 2 to match the revenue ramp of our EV OEMs beyond the approximately $400 million of revenue capacity available for Plant 1. To put the approximately $400 million revenue number in content, we anticipate thermal barrier revenue of between $70 million and $100 million for the year 2023 and between $250 million and $300 million for 2024.
To be clear, we plan to slow our capital investments during 2023 and 2024, but not our growth. And at the same time, we will remain poised to take full advantage of our opportunities.
With respect to supplying our valuable energy industrial business, after one year of development and negotiations, we have reached a manufacturing agreement with a Chinese aerogel manufacturer to supply energy industrial product to us beginning no later than January 2024. The product will be produced to our quality specifications and shift by us under our labeling through our distribution and to our customers. We believe that the manufacturing agreement enables to maintain and grow our energy industrial business and to largely dedicate Plant 1 to our EV PyroThin thermal barrier business.
→ Since then they did exactly as they set out to do, and got efficiencies out of Plant 1 which allows them to get to a higher annual revenue than what they thought back then.
About the DOE loan. This one carries a lot of weight for me, as they will use this to fund Plant 2. It is worth noting though that they’ve made progress on cheaper financing sources even without the DOE loan as they very recently closed a favourable debt transaction of $225m which they said would unlock project financing for Plant 2 at treasury rates. They gave an update about this on 20 August. https://qcast.page.link/QS1ngMmoWoQXGL419 . That, and previous comments by the CFO makes me believe that they will try to finance Plant 2 with debt and not equity.
I would also argue that the current CFO Ricardo Rodriguez knows his debits from his credits, and was possibly brought in to right the ship. He first appeared in the ER’s in Q4 2021 as Chief Strategy Officer, and Q1 2022 he was CFO and the old CFO was gone. That transition was either a hospital pass, or the company already knew there was trouble brewing, as the share price languished for the whole 2022. They significantly missed earnings estimates as the EV boom was delayed. A year later in Q1 2023 they announced the “pivot” above.
Now your two specific questions:
- Why did they not raise their guidance more? I think they got burned previously by getting ahead of themselves and didn’t want to do it again. But in the Q&A it was clear that significant outperformance was possible: $50m-$65m on Pyrothin and $10-$20m on energy industrial for the year. But it’s not certain so they didn’t want to include it.
- Why is the election relevant? Maybe because the signatories, etc are well known and stable, and could change? Idk. But this one is important to me too, as getting this loan will mean that the DOE buys, and to my mind therefore endorses, the long-term forecast/future demand which will be served by Plant 2, which will have a capacity >$1b of Pyrothin. So if they do announce having gotten this loan in the upcoming ER, I think it will be hugely positive. And if they don’t, it will not sit very well with me becuase the CFO has now created the expectation that it will be done before the election.
Certainly not without risk, this one.
-wsm.
