AirBoss of America Corp. (BOS) Earnings Call Transcript & Summary

Welcome, everybody. This is the AirBoss of America Annual General Meeting of Shareholders. We're -- everybody can you hear me? We're going to start now.

You are good to go.

Okay. Good afternoon, ladies and gentlemen. Welcome to the Annual General Meeting of the shareholders of AirBoss of America Corp. As you are all aware out of an abundance of caution and in keeping with the advice of health authorities, we are making today's meeting available through both the video and teleconference facility. As the company is proactively dealing with the public health impact of COVID-19 pandemic and mitigating risk to the health and safety of our communities, shareholders and employees. Accordingly, I'd like to welcome everyone who has been able to join us today in one form or another. I am Gren Schoch, Chairman and CEO of AirBoss. Joining me today are Chris Bitsakakis, President and COO; Daniel Gagnon, CFO; Chris Figel, EVP and General Counsel; and Patrick Callahan, CEO of AirBoss Defense Group. Also, our directors are participating electronically: Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian Robbins and Alan J. Watson. For your information, we will start the meeting by addressing the formal agenda matters. Once all these matters are being addressed, Chris Bitsakakis, Patrick Callahan and I will make a short presentation, including a discussion of our first quarter 2020 results, and a brief overview of fiscal 2019 and will update on our strategic initiatives. We will then follow back to the Q&A session, where we will welcome questions from the floor and from those of you on the conference call. In conducting the business of the meeting, I would appreciate your cooperation in allowing us to move efficiently through the agenda. In order to make the best use of our time, certain shareholders have been asked to move and second resolutions, which we will all consider at this meeting. I will call them at the appropriate times. I would now like to call this meeting to order. Chris Bitsakakis among ourself will act as Co-Chair of meeting, and Chris Figel will act as Secretary of the meeting. The Secretary has advised that the Annual Report containing the audited consolidated financial statements of the corporation for the fiscal year ended December 31, 2019, was mailed to shareholders of the corporation on April 9, 2020. The notice of this meeting and accompanying management information circular and form of proxy were also mailed to the shareholders on April 9, 2020. A direct of proof of service be annexed to the minutes of this meeting. For your convenience, extra copies of each of these materials are available for anyone wishing to obtain Copies. Chris Bitsakakis, myself and/or Daniel Gagnon will be available to respond to any questions concerning the financial statements during the general question period that follows the formal business. Before proceeding with the business of the meeting, I would like to take a moment to discuss the voting procedure. Each holder of common shares of the corporation is entitled to one vote for each common share held. There are 3 formal items of business to be dealt with today: to receive the annual report and financial statements of the corporation for the fiscal year ended December 31, 2019; to elect each of the 7 nominee Directors of the Board for the ensuing year, and to reappoint the corporation's auditors, KPMG LLP, for the ensuing year and the authorization of Directors to fix the auditors remuneration. All as described in the management information circular of the corporation dated April 9 of this year. With the consent of the meeting, representatives of Computershare Investor Services, the corporation's registrar and transfer agent will act as scrutineers and report on the number of shareholders present in person and the number of shares represented in person or by proxy. I will now ask the Secretary for quorum for this meeting.

Mr. Chairman, I confirm we have at least 2 persons present, holding or representing by proxy 25% of the eligible votes, which results in a quorum.

As a quorum is present, I declare this meeting properly constituted. I direct that the scrutineers report on attendance via annex of this meeting -- as of this meeting. As the first item of formal business, I'd like Daniel Gagnon, our CFO, to table AirBoss's annual report to the shareholders, which includes the audited consolidated financial statements of the corporation for the fiscal year ended December 31, 2019, together with the auditor's report.

Mr. Chairman, the Corporation's fiscal 2019 annual report is stable.

Thank you, Gagnon. The copy of the 2019 annual report has been mailed to all shareholders who requested a copy. Copies are also available at this meeting and can be found online under AirBoss's profile at sedar.com or on our website. We will now move to the second item of formal business, election of 7 directors, the AirBoss's Board of Directors. Nominations have already been proposed by management in a proxy circular. Our 7 current directors have agreed to continue serving on the Board of Directors. Details about each of the director nominees are contained in the serious proxy circular. Shareholders are recorded to cast their votes for each individual director nominee rather than voting for the entire slate. The meeting is now open for nominations for the election of 7 nominees. Barb Lee would you please nominate the individuals listed in the proxy circular as directors for the coming year.

Mr. Chairman, I nominate each of Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian A. Robbins, Peter Gren Schoch and Alan J. Watson as Directors of AirBoss to hold office for the ensuing year or until their successors are elected or appointed.

Thank you, Barb. Morris, will you second the nominations?

Mr. Chairman, I second the nominations.

Thank you. Are there any other nominations? I don't see any hands, so I assume there are not. I declare the nominations closed. Barb, may I have the resolution, please.

Mr. Chairman, I move the following resolution. Be it resolved that each of the new Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian A. Robbins, Pete Gren Schoch and Alan J. Watson to be elected as Directors of AirBoss for the ensuing year or until their successors are elected or appointed.

Morris Eddy, will you please second?

Mr. Chairman, I second the resolution.

Thank you. As you know, management solicited proxies for the business of today's meeting. On behalf of management, I have received proxies, representing well over a majority of votes cast for the election of each of the Director nominees in our proxy circular. Based on the proxy report received, more than 75% of the issued and outstanding shares were voted in the election of directors. Greater than 90% of those votes were cast completed with each of management's nominees. According, along with myself, the following other 6 nominees have been properly elected as directors of AirBoss for the ensuing here: Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian Robbins and Alan J. Watson. If any shareholder or proxy holder is interested in the exact number of votes cast for or without from each nominee, we'll get the particulars after the meeting from my secretary. A press release and detailed -- and report on the voting results, indicating the detailed results of the vote on the election of directors will also be publicly filed after this meeting on SEDAR. And I would like to thank all of the shareholders for voting. It's much better when we have a high percentage of shareholders voting, and we had over 75% this year.

The next item of formal business is the reappointment of KPMG LLP as the auditors of the corporation and authorization of the directors to fix the remuneration of the auditors. Morris Eddy, may I have a resolution, please?

Mr. Chairman, I move the following resolution. We resolve that KPMG LLP, the present auditors of the corporation, are hereby reappointed auditors of the corporation to hold office until the close of the next Annual Meeting of Shareholders or until their successors are appointed, and that the Directors of the corporation are hereby authorized to fix the remuneration of the auditors in such amounts as the Directors may in their discretion determine for the current fiscal year.

Barb, will you second the motion?

Mr. Chairman, I second the resolution.

Thank you. I will now put the resolution to the meeting. All those in favor of the resolution, please raise your hands. [Voting]

Is anyone opposed? [Voting]

I declare the resolution carried.

If there is no further business for this meeting, I will request the motion of the formal meeting be terminated. Barb, will you please bring a motion to terminate the meeting?

Mr. Chairman, I move that the meeting be terminated.

Thank you. Morris, will you second the motion, please?

Mr. Chairman, I second the motion.

Thank you. All those in favor of the motion, please raise your hands. [Voting]

Is anyone opposed? [Voting]

I declare the motion carried and the formal business of the meeting concluded.

Ladies and gentlemen, I will now make a presentation and announcement regarding the Chairman's Award. Following that Chris Bitsakakis, President and COO, will discuss our results of operations and operational initiatives. Following him, Patrick Callahan, CEO of AirBoss Defense Group, will provide an overview of ADG performance and operational initiatives. Every day at AirBoss, there is inspirational work being done across all divisions and departments with team members going above and beyond to ensure our continued success. To formally recognize these special efforts, last year, I announced the creation of the AirBoss Chairman's Award. This award is presented each year to an employee who has shown exceptional dedication and commitment and has gone above and beyond for AirBoss. To help us identify these contributions and achievements, we put in place a peer-to-peer recognition program called the above and beyond. The main goal of the program was to have our employees help us recognize and identify and appreciate co-workers who have gone above and beyond for AirBoss. So it wasn't just management picking their favorites, it was people who work together, picking the people that they thought deserve recognition. Since the launch of the above and beyond program, I'm proud to announce that we've had a great employee participation. We have 1,200 employees, and out of that, we had a total of 105 nominees from across the organization. This resulted in a total of 19 winners at the divisional level that we narrowed down to 5 employees who were identified as Chairman's Award contenders. Today, I'm delighted to announce this year's winners in [indiscernible]. In no particular order, the runners up for the Chairman's Award are John Blake, Specialty Equipment Supervisor at AirBoss Defense. Over the past year, John has been integrating and identifying creative solutions to support key initiatives. In particular, John's support on a Low Burden Mask program was exemplary. Without him, we would not have delivered on time. And Jim Michalak, Facilities Manager, AirBoss Flexible Products. Jim goes well beyond and all to make sure the plant runs and meets consumer needs. On many occasions, Jim worked tirelessly around the cloud to protect the company and the customer, including on the Thanksgiving of last year, there was a major power outage, and Jim made sure that we carried on through that. Mario Champigny, Director of Engineering and R&D, AirBoss Defense and Acton Vale, Quebec. Mario provides strong technical support and leadership, specifically his expertise, analytical approach and knowledge have greatly improved the development of Low Burden Mask, one of our current most important products. Walid Fath, Director and Engineer, AirBoss Rubber Solutions in Kitchener. Walid has been integral to an unprecedented number of process -- projects in 2019. On top of his normal workload when Scotland Neck required immediate attention early last year as a result of a fire, Walid was part of the team to lead the crisis management, repair and recommissioning equipment, virtually living with Scotland Neck for about 6 weeks. And we had that plant up and running, I think, 5 weeks after a major fire. Without further ado, the 2019 Chairman's Award winner is Rob Moore, Director of Maintenance for AirBoss Rubber Solutions. Rob, just over 1.5 months into his tenure at AirBoss, Rob joined the Crisis Management team at Scotland Neck after the fire, and essentially, lived there until the machine was recommissioned. Rob returned to Kitchener, focused on improvement initiatives and change the operating cost within the maintenance department from one that's reactive to one that's predictive. Rob led the purchase, installation and commissioning in many key assets at Kitchener, including the color line and the tilt mixing line. To do this, he worked through holidays. It is well consistent demonstration of his ability and willingness to go above and beyond that make him a very worthy recipient of the first Chairman's Award. In recognition of Directors, all runner-ups will receive a prize of $2,500 and Rob Moore will receive $10,000. Each of them will also enjoy the celebratory dinner with Chris Bitsakakis [indiscernible]. I want to take this opportunity on behalf of the Board and shareholders to thank all winners across the organization for their outstanding contribution to AirBoss. And with that, I'd like to turn the meeting now over to Chris and Patrick to make a short presentation, after which we will take questions from shareholders or the audience. Chris?

[Audio Gap] They contain forward-looking statements either in our prepared remarks or responses invites us to review our annual MD&A available on SEDAR and our corporate website for a more fulsome discussion of the risk factors affecting our business. By any metric, 2019 was a very successful year for AirBoss. We grew revenue and EBITDA to record levels. EBITDA margins improved 21%, growing from 8.1% in 2018 to 9.8% in 2019, partially reflecting our focus on continuous improvement initiatives and cost management. We also continue to pay a consistent dividend. 2 defining moments for the year were the announcement of the ADG transformative transaction, which we closed on January 1 of this year, and our nearly $20 million investment in growth CapEx, focused on innovation, manufacturing strength and new compound and product development. As a reminder, AirBoss is a well-diversified company and is comprised of our long-standing Rubber Solutions and Engineered Products businesses, paired with the newly formed and strengthened AirBoss Defense Group, in which we own a 55% majority interest. This diversity will help us better weather the challenges and uncertainty associated with COVID-19. In 2019, we made a substantial investment in long-term growth, focused on innovation, new products, capacity and more advanced manufacturing. These investments will help us generate new, higher-value products and compounds, position us to better solve increasingly customer technical challenges, provide us with enhanced manufacturing flexibility, better manage labor allocation support for improved margins. COVID-19 is taking a tremendous toll on our business, communities, families and citizens around the world. At AirBoss, we have worked proactively to mitigate the impact on our business, employees and stakeholders, taking the following steps: Ensuring the integrity of our supply chain, including identifying surge capacity where appropriate to help support the business; obtaining essential status for many of our facilities; putting in place enhanced health and hygiene protocols to protect our employees, customers and suppliers; establishing lines for our rubber-molded defense products and the paper product at the Auburn Hills, Michigan facility to help offset the impact on net sales caused by the closure of the big three and Tier 1 parts suppliers. In parallel with these initiatives, we continue to push forward on implementing and leveraging our investment made in the business in 2019, including identifying and developing new compounds within the Rubber Solutions segment; working to fill capacity for our new white color and specialty tilt mixing lines; installing the new robotic work cell in Auburn Hills, scheduled for the second half of the year; targeting additional opportunities for our PPE lines, both in the face of the ongoing COVID-19 pandemic and in aid of future emergency preparedness initiatives; and continue to focus on contract tenders for the broader defense business. From a balance sheet perspective, we feel AirBoss is well positioned to weather this period of uncertainty and believe we have sufficient cash on hand, cash flow and access to credit facilities, which remained undrawn as of March 31 to fund our ongoing requirements. During the heart of the financial crisis in 2008, we saw a number of companies that lacked balance sheet strength become possible acquisition targets. We believed -- we believe we are well positioned to act on emerging opportunities with an eye to support an engineered product versification strategy, building Rubber Solutions, traditional and specialty compounding capabilities and adding bolt-on survivability solutions at ADG. We reviewed our Q1 2020 results in our conference call this morning, so I will just briefly touch on them. Our solid Q1 performance was driven primarily by the Defense business, including sales of our legacy products with some contribution from those products brought over by CSI and ADG was created. Although, gross and EBITDA margins did benefit from the sales mix, the improvement was also partially the result of some of the steps we have taken over the last 2 years to carefully manage cost and drive efficiencies. Finally, we also announced an $0.08 per share dividend consistent with our track record of delivery on a regular dividend for shareholders. We now want to take a couple of moments to talk about the growth strategy for each of the 3 businesses, starting with Rubber Solutions. Our focus in Rubber Solutions is on leveraging the investments we made in 2019, including our new state-of-the-art R&D tech center that we opened late in the year. While we want to be recognized for excellence in our traditional black rubber compounding, our goal remains to build defensible leadership positions in key specialty segments where we solve increasingly complex customer challenges by delivering innovative new compounds. Diversifying beyond our core and black rubber compounding, in 2019, we installed new white color mixing and tilt mixing lines, which will allow us to obtain better penetration with existing customers, meeting more of their needs as well as targeting new ones. We also doubled our capacity in North Carolina, which we believe will allow us to better serve customers region. With completion of the ADG transaction, Engineered Products now comprises just our traditional anti-vibration business. This business has historically focused on rubber to metal bonded parts and reduced noise vibration and harshness. While the business is currently 98 passenger truck and auto, we are working to diversify into adjacent segments with specific noise, vibration and harshness needs. This includes heavy truck, bus, construction, motorcycles and defense and will allow us to develop a broader range of more specialized, higher margin, less commoditized solutions. We've already put in place a dedicated non-auto team to drive this diversification plan with an eye to launching more new products over the midterm. We are also working to move solutions up the technical curve and provide greater value to customers. As an example, in 2019, we took a positive step in this regard, developing the ability to develop rubber to metal hybrid components with a hydraulic or liquid-filled element. Adding hydraulic damping to a component offers a natural layer of isolation, permits multistage damping and creates a new higher value solution, AirBoss can roll out across a range of market segments and applications. With that, I would like to ask Patrick Callahan, the CEO of our ADG Group, to speak to the next few slides on our defense business.

Thank you, Chris, and good afternoon, everybody. On January 1, we completed the transaction to create AirBoss network, assembling a fully integrated survivability company able to do more effectively marketing, an enhanced portfolio of products around the globe. CSI, the company that was merged with AirBoss Defense right around or [indiscernible]. The value proposition of CSI is around [ data collection, engagement versus threats ]. The Husky vehicle was built to deal with improvised explosive devices, and we were very successful in selling those, and we continue to be successful. That being said, we were a very Husky focused. AirBoss Defense had developed a reputation for developing great chemical, biological, radiological and nuclear protective gear, leveraging its rubber expertise and all also some related products. The thought was, if we could put CSI and AirBoss together and create a fully integrated survivability solutions company that could both develop great products and market and support them globally, that would be a recipe for success. The new ADG has a clear focus on survivability. That's our main value proposition, and we are operating against the backdrop of the largest defense budget request in history, just at $750 billion. AirBoss already had a strong track record. They had won and continue to win with high-quality legacy Seaburn products. As an example, the new LBM, or Low Burden Mask product, which is a major step forward, is easy to dawn or put on and use in combat operations. It builds on AirBoss expertise in rubber compounding and includes enhanced design features, including an antiballistic lens, dual-canister mounts, drinking tube and voice amplifier. AirBoss LBM allows war fighters to continue to operate effectively in the field while staying protected from chemical and biological threats. We believe the combination of the construction and features will prove popular with militaries around the world, and we are actively tendering this product today. AirBoss had already won multiple contracts over the last 2 years, including the last 2 gas mask contracts awarded internationally by Australia and Canada. ADG is currently bidding on a Pan-European gas mask contract, and this was the first opportunity we had a chance to work on together, with CSI helping to assemble the submission even before the closing of the transaction. We have been shortlisted for this contract, and we remain optimistic about its potential. AirBoss Defense is a leader in PPE for chemical and biological threats before COVID-19 appeared, selling equipment to militaries, first responders and health care professionals around the world. We've recently announced an award shown with the newly established team could do in the shape of a $96 million award from FEMA for PAPRs. The first responder space is very fragmented. And why we are in this situation with COVID-19 today because the less stockpiling, the dwindling of stockpiling and lower level of preparedness. Responsibility for preparedness has been delegated down to the local level, unlike the military, where acquisitions are more centralized, and we can deal with a handful of purchasing groups. We think that's going to change, and we have seen a glimpse of that with a large FEMA contract we announced at the end of March. We think this award provides a strong success case behind the formation of ag, and we began actively delivering -- and we began actively delivering on this contract early in the second quarter. When COVID-19 hit, we went on a large number -- we went to a broad number of agencies at both the state and federal level. And going forward, we expect to see more centralized purchasing, especially when it comes to future preparedness. Beyond the FEMA contract, we are seeing increased levels of interests in sales across the portfolio. The COVID-19 opportunity aside, there still remains numerous opportunities within the broader defense space. As an example, exposure to blast overpressure is increasingly being recognized as a contributor to post-traumatic stress disorder and driving hundreds of millions of dollars in treatment cost as well as raising significant quality of life concern for veterans. The Blast Gauge is a wearable sensor that measures exposure to blast overpressure and wirelessly uploads data to a soldier's file for assessment by staff physicians. We believe there is a strong political will to find a solution for TBI associated with blast overpressure. Over the last couple of years, Congress has used federal law to direct the Secretary of Defense to, among other things, conduct a medical study on blast pressure exposure during both combat and training, established limitations on heavy weapon fire exposure during training. Document blast exposure history and service member medical records to determine if future illness or injury is service connected. And then finally, inform on blast exposure risk mitigation efforts. The Blast Gauge is currently in testing with the U.S. military and widespread rollout could translate into a significant source of recurring revenue for ADG. With that, I will turn the presentation back over to Gren for some closing remarks.

Thank you. I'm sorry, I just had a bit of an issue getting rid of -- going off in there, sorry. Just as a reminder, we have forward-looking statement disclosure. Before opening up for questions, I want to -- excuse me, just 1 second here. Thank you, Patrick. This was necessarily a brief presentation on defense, and hopefully, it will give you a flavor of why we're so excited about the growth opportunities there. We recognize that COVID-19 has created both challenges and opportunities for the business globally. Although, the time ahead will have its share of uncertainty, we feel we are well positioned to navigate this stone. In the near term, we expect that the strength we have seen in AirBoss Defense group will more than offset some of the challenges we are experiencing in Rubber Solutions and Engineered Products. As business conditions continue to improve, it is our expectation that each of our segments will have the opportunities to prosper. Over the last year, we worked diligently to build a plan that positions each one of us to drive enhanced growth by focusing on innovative new products and solutions and ensuring that each unit has the people, skills and infrastructure in place to help achieve that goal. Our record net sales and EBITDA in 2019 highlight the progress we are making, and we believe we had some solid successes in 2019 and the first quarter of 2020, including key contract wins as well as growing volumes at both AirBoss Defense Group and Rubber Solutions. We remain committed to acting on opportunities before us and are working to create even greater levels of shareholder value in the quarters and years ahead. With their election today, I'd like to formally welcome Anita Antenucci and David Camilleri to the Board. As a Senior Managing Director at a leading global investment bank, Anita brings years of defense, aerospace and government sector experience to the table, which we expect will be particularly useful as we grow and develop ADG. Anita is one of the top in her field in the world. Likewise, David has won 25 years of experience in the anti-vibration, automotive and aerospace defense industries as well as in rubber compounding, and we look forward to those contributions as we take our next steps in the evolution of the company. And thanking all of our directors for their hard work and stage council, I want to recognize Bob Hagerman, one of our co-Founders of the company and original Director and CEO of the company for more than 20 years. Thank you, Bob, for your 30-year commitment to AirBoss and all you've done for us. On behalf of the entire team, we wish you well on your retirement. Before opening up the floor to questions, I want to acknowledge the sacrifices and efforts of our employees, many of whom have continued to perform their duties under very difficult conditions with the added professional and personal stress associated with this pandemic. We remain committed to doing all we can to keep you safe during this trying time. I also want to extend my thanks to all our shareholders for their ongoing support and belief in AirBoss. We look forward to keeping you posted on our progress in the quarters ahead, especially as we work to build value through our COVID-19 recovery. Although, the shares have performed well recently, we believe the market is not yet reflecting the true growth potential of the company, and we look forward to continue strong performance as we deliver more positive results. Finally, I'd also like to thank our covering analysts, bankers, auditors and advisers for their assistance over the past year. Thank you all. With that, I will turn the call -- I will now open up to questions, and I'll turn the question-and-answer session over to Chris Bitsakakis.

As mentioned at the opening, this meeting is being made available electronically. And as an administrative convenience, we will open up the meeting to questions from those attending via webcast before we then open the floor for questions from individuals attending here in person. At this time, I would like to ask Chris Figel to read any questions which have been submitted electronically.

Thank you, Chris. The first question is for you. What is the strategy for increasing Engineered Products profitability?

The Engineered Products segment has been under some pressure over the past couple of years as margins have been compressed in the automotive space and sales have been reduced. What we did a couple of years ago in the Engineered Products segment, which is the current Engineered Products segment, AirBoss Flexible products as they're known as. We created a strategy that looked at 3 different approaches. The first one was to create a continuous improvement program that aggressively went after improving efficiencies, increasing the ability of the team to continue to make the products in a less expensive way while maintaining the pricing that we had. So we created a new continuous improvement program. We have done a great job in providing new equipment with quicker production times that will allow us to reduce labor content in our parts there. So we've invested about 6 new molding machines that are replacing some of the older machines that are there, and we are already seeing anywhere between the 25% and a 42% improvement in productivity. In addition to that, we created a strategy where we went after some of the parts and customers that we were not making enough margin on, and we have been working with those customers on improving margins and driving the pricing up. Thirdly, we also have looked at bringing in additional revenue from nonautomotive areas. So we created a nonautomotive team that was dedicated at Engineered Products to be able to diversify the product offering from being 100% automotive or about 98% where we're at now to a more 50-50 split over the next few years. We've already been awarded our first nonautomotive program, which launches this fall. We have a variety of other products in the pipeline. And just this month, we launched the production of the molded over boot in the defense space at flexible products. So between investing in new equipment with greater efficiencies, which also includes a robotic work cell that's being installed at the second half of this year, we've been able to reduce our labor content quite significantly. We have worked with customers on increasing prices where we could. And thirdly, we are also diversifying our product offering to allow for revenue that is not associated with automotive. So those are the 3 things that we're really focusing on in that division, and we are already seeing the fruits of that labor.

Thank you, Chris. The next question is for Patrick. It was great to read about the FEMA contract, but I'm concerned about this being a won-and-done deal. I appreciate this is a very large contract deal with the current COVID-19 issue, but what are the chances of winning additional large awards? And how do you think the business will look after the crisis is over?

Yes. Thank you. So we're very optimistic that this is not a won and done. I mean, as I said in my remarks, the nature of how the first responder market looks and the country as a whole at the federal level, it prepares itself for a pandemic has completely changed. Unfortunately, we had to learn that by being completely unprepared. As a defense guy, what I can tell you is that the fragmented approach that we've had in the U.S. and internationally is not effective by chasing down different police agencies and different municipalities. Although, we want to ignore that space. The reality is the federal government has recognized that the federal agencies that are responsible for being cared for pandemic, like FEMA, like HHS, like CDC, they are about to get [indiscernible] now and [indiscernible] stockpiles maybe replenish. They're going to dwindle down to basically nothing. They need to be increased. And that has to be done as a federal level. In a group of a handful of companies that proved itself with some of the best-in-class equipment. The feedback we're getting right now from our PAPRs that are being delivered is that our PAPR is like getting a Ferrari versus a Pinto, they've had in the past. It's an incredible piece of equipment. We've delivered a few thousand now, and we've got 90,000 more to go. When we have that base of product that is scattered around into thousands of hospitals around the country, now you've got thousands of customers that are going to be coming to you looking for replenishment for filters, hoods all of the sustainment you need. We're in a fielding phase right now. In the defense world once you field, you get into a sustainment phase. And the sustainment phase tail can be huge. It will be huge just for this contract alone. But for hard facts, we can tell you, at ADG, we are working a number of opportunities that are of the same size, some larger than the FEMA contract. I'm not saying we're going to win them all, but we're going to win some of them. And the U.S. government is still responding to the emergency today, but they are also strategically looking for what's going to happen tomorrow, and how they're prepared for the next 5 to 10 years, and our company is in that discussion. Internationally as well, we are responding to a number of international needs all over the world in the Middle East. And our customers recognize that we have best-in-class equipment. So I think this year is -- we're already having a great year. I think we're going to do even better. But as far as what the world looks like for us as a company, post-COVID, I don't think of post-COVID, I really don't. I think people recognize that you can't let down your guard. We have to be prepared like we do in defense with chemical warfare. Last time we had a chemical attack on the soldier in a significant level was years and years and years ago, but we prepare for it every day and stockpile chemical protection. That's exactly what they're going to do with biological, pandemic protective equipment, and that's what we'll attack at federal level.

Thank you, Patrick. The next question is also for Chris. Chris, what is the outlook for Rubber Solutions and volume going forward?

So Rubber Solutions has been growing quite significantly over the past couple of years. We've been growing at about 10.2% on compound annual growth rate over the last 2 years. This particular first quarter, we were continuing on that trajectory. Of course, the last 2 weeks of March, things started to soften with the impact of COVID-19. And into April, they softened further, and May is continuing fairly soft. Although, towards the end of May, some recurrence of that same trajectory starting to come back as our customers -- our key customers are coming back online. So in terms of the prospectus going forward, we've made some significant investments in AirBoss Rubber Solutions over the past year. We have capacity that we didn't have before. We have capability on color and specialty compounding, which we never had before. And we've been a quite positive that as this COVID-19 starts to leave our deep conversation and things begin to normalize that there is no reason why AirBoss Rubber Solutions can't continue on that same trajectory. Growing 10.5% a year or 10.2%, more specifically, in a market that was growing 4%, shows we've been gaining market share. Our new R&D tech center has allowed us to work with customers and develop new products that are in development right now and are in advanced trials. So we see that same growth rate continuing.

Thank you, Chris. The next question is for Daniel. Can you please explain the unusual and one-time charges, which impacted your earnings?

Yes. So for the first quarter, we had $2.2 million of professional fees that were related to the closing of the ADG merger in January 2020. As a result, these are nondeductible for tax purposes. And as such, it increased our effective tax rate for the quarter at an unusually high 61%.

Thank you, Daniel. The next question is also for you. We've mentioned a few times the record earnings in 2019. At our Q4 earnings call, you said that IFRS and one-time events accounted for $3 million. The note is that adjusting for those, the company had the same earnings as 2016 and 2017. Can you please comment on that?

Sure. Actually, what we said is that there were 2 -- in 2019, there were 2 adjustments that have had a one-time positive gain. The one was the IFRS, and what we've disclosed, that impact was $2.1 million for the year compared to prior year. And that was just because IFRS was a new ruling that came in as of the beginning of 2019, and so the adjustment was made only for 2019 under the new rules. So that was at $2 million. The other $1 million will have to do with the settlement of the insurance claim that we've got following the fire that we had in Scotland Neck at the beginning of 2019. Now this $3 million is also offset. Last year, we also had some cost, professional fees that relate to the ADG transaction, and that was about over -- just over $1 million. So when you adjust those 2 things, you get to an EBITDA of $29.7 million, down from the $32.1 million. So that $29.7 million was still ahead of the $25.7 million that was reported in the prior year.

Thank you, Daniel. Chris, the next question is for you. How will you actually grow the business going forward? We've been hearing the same strategic plan for the last 4 years. When will the execution and results come?

Yes. If you look at our 3 businesses, you have to kind of look at them individually to be able to have a good answer to that because our strategy is really focused individual in each of these 3 businesses because one strategy doesn't fit all 3. In terms of AirBoss Rubber Solutions, as I mentioned earlier, we've been growing at a 10.2% compounded annual growth rate for the past 2 years. And outside of COVID-19, we expect that sort of trajectory to continue. We've invested in specialty compounding, which we never had before. We've doubled the capacity in our Scotland Neck, North Carolina plant, and we feel that we're in a good position to continue to grow and continue to gain market share as we develop new formulations and new compounds with our customers, using the strength of our new research and development capabilities. On the Defense side, we actually have seen a lot of growth over the years. In 2016, we were at about $48 million in sales. In 2017, at about $64 million in sales. 2018, $73 million in sales. 2019, $83 million in sales. So you see quite a good trajectory on growth for the past 4 years on our defense business. And if you consider 2019, we're at $83 million, and just a few weeks ago, we announced a new contract in our new Defense Group of $100 million on its own. So you can see how 2020 will be a very significant jump in our growth for AirBoss Defense, and we aren't done there. We have lots of new products and programs out of the Defense Group that we are continuing to quote, and we believe that we're going to continue to be able to really dramatically over deliver in that segment this year. On the AirBoss Engineered Products side, which is our group in Auburn Hills, Michigan. We've had some reduction in sales over the past few years. And what we're doing now there is, we're really focusing on more quality than quantity, being able to be more selective on the types of awards that we are going after. Diversifying from just purely an automotive play to a well-balanced auto versus nonauto. We believe that we're going to be able to start growing there again, but growing in a more qualitative way as we really invest in the continuous improvement initiatives, upgrading our equipment and driving those improvements through. So we are seeing the growth on -- in ARS and our Defense Group. We are seeing efficiency improvements and improvements overall in the diversification of our business at Flexible Products.

Thank you, Chris. The next question is also for you. How do you expect the tolling portion of the business to perform as economies start opening up?

Yes. Tolling is an interesting phenomenon for us. And sometimes when you look at the topline of our business, it's important to remember that when we're growing in tolling, you don't necessarily see it on the topline, you see it more on the bottom line because a tolling arrangement allows for our big customers to consign inventory of raw material to us, which we then perform a service to compound the material and send it back to them. And by doing that, we don't necessarily have that uptick in revenue from the raw material itself. And we just -- but you do see it on the bottom line and EBITDA and on forward. So of course, when COVID-19 hit, really, our main customers on the tolling side were the first to shut down, which is basically takes higher companies. So as the entire companies shut down towards the end of March, our tolling arrangements with them have been put mostly on hold. Although, we are hearing now from our key customers that by the end of March, they're going to be slowly ramping it back up again, and we've already started to receive some more orders for the service. The question about where we see it going, I think that's really more of a broader question related to the overall economy. As we get through this COVID-19 pandemic and the economy starts to recover, the tire companies will recover, and we will in line be following them with our tolling services and compounding volumes attached to that.

Thank you, Chris. The next question is for Patrick. Patrick, do all defense contracts get delivered to their maximum? And how long does that usually take? The sales you just mentioned and the commentary that your boot sales are down, that doesn't seem to have the full values yet.

Yes. It depends on what kind of contract you have. So for our boots and glove sales for DLA, we can be on contracts for as long as 3 years. And it can be sort of a moving target where they can -- depending on production, they can up the amount of boots and gloves they want to ramp to. I can tell you right now, on both our glove and boot contracts that we have with defense logistics agency, they've come back to us looking for us to up our production, which is why we've worked so hard -- we're working with Michigan, Auburn Hills to open up that production capability. So they don't always -- in defense, that's why you do an indefinite quantity contract. You don't always know. They can stop at certain points, but that's just not the main business that we work in. We are really a program of record with no competition, and we're in the cycle right now where they have got to restock their shelves for chemical protection. We're in constant communication with our customer, and they've given us the amount. And the amount they actually need for boots and gloves exceeds the contract that we're currently on right now. So they're asking us to go faster and deliver more, and we actually expect contracts to come on top of the ones that we currently have.

Thank you, Patrick. And Mr. Chairman, that concludes all of the questions from those attending via webcast.

Thank you. We will now open the floor to questions from anyone attending via [indiscernible].

It appears that there are no further questions. Ladies and gentlemen, thank you for taking the time to attend this meeting.