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

Good morning, ladies and gentlemen, and welcome to the Annual General and Special Meeting of the Shareholders of AirBoss of America Corporation. As you are all aware, out of an abundance of caution and in keeping with the regulations of the 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 the COVID-19 pandemic and mitigating risk to the health and safety of our communities, shareholders and employees. Accordingly, I would like to welcome everybody who has been able to join us today in one form or another. I am Gren Schoch, Chairman and CEO of AirBoss of America. Joining me today are Chris Bitsakakis, President and COO; Frank Ientile, CFO; Chris Figel, EVP and General Counsel; and Patrick Callahan, CEO of the AirBoss Defense Group. I'd also like to introduce our Board of Directors who are participating electronically: Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian Robbins, Stephen Ryan and Alan Watson. For your information, we will start the meeting by addressing the formal agenda matters. Once all these matters have been addressed, Chris Bitsakakis, Frank Ientile, Patrick Callahan and I will each make a short presentation, including a discussion of our first quarter '21 results, a brief overview of fiscal '20 and an update on our strategic initiatives. We will then follow that with a Q&A session, where we will welcome questions from those on the conference call or on the webcast. 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 asked to move and second the resolution, which we will consider at this meeting. I will call on them at the appropriate times. I would now like to call this meeting to order. Chris Bitsakakis and myself will act as co-chairs of the 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, 2020, was mailed to the shareholders of the corporation on April 8, 2021. The minutes of this meeting, accompanying management information circular, a form of proxy were also mailed to the shareholders of the corporation on April 8, 2021. I direct that the proof of service be annexed to the minutes of the meeting. For your inconvenience, extra copies of these materials are available for anybody wishing copies. Chris Bitsakakis, myself and/or our CFO, Frank Ientile, will be available to answer any questions concerning the financial statements during the general question period that for -- 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 vote -- to 1 vote for each common share held. There are 4 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, 2020; to elect each of the 8 nominee directors to the Board for the ensuing year; to reappoint the corporation's auditors, KPMG LLP, for the ensuing year and the authorization of the directors to fix the auditor's remuneration; and to approve all unallocated awards under the 2015 Omnibus Incentive Plan, all as described in the management information circular of the corporation dated April 8, 2021. With the consent of the meeting representatives of Computershare Investor Services, the corporation's registrar 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 to confirm a 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 is properly constituted. I direct that the scrutineers report on attendance be annexed to the minutes of the meeting. As the first item of formal business, I'd like Frank Ientile, our Chief Financial Officer to table AirBoss' annual report to the shareholders, which includes the audited consolidated financial statements of the corporation for the fiscal year ended December 31, 2020, together with the auditor's report.

Mr. Chairman, the corporation's fiscal 2020 annual report is tabled.

Thank you, Frank. A copy of the 2020 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' profile at sedar.com. We will now move to the second item of formal business, the election of 8 directors to AirBoss' Board of Directors. Nominations have already been proposed by management in the proxy circular. Our 8 current directors have agreed to continue serving on the Board of Directors. Details about each of the director nominees are contained in this year's proxy circular. Shareholders are required to cast the votes for each individual nominee rather than voting for the entire slate. The meeting is now open for nominations for the election of 8 nominees. Barb Lee, would you please nominate the directors -- 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, Stephen Ryan, Pete Granville 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 Eddy, will you second the nominations, please?

Mr. Chairman, I second the nominations.

Thank you. Are there any other nominations? 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 Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian A. Robbins, Stephen Ryan, Pete Gren Schoch and Alan J. Watson and be elected as directors of AirBoss for the ensuing year or until their successors are elected or appointed.

Morris, will you second the resolution?

Mr. Chairman, I second the resolution.

Thank you. As you know, management solicited proxies for the business of today's meetings. On behalf of management, I have received proxies representing over a majority of votes cast for the election of each of the director nominees named in our proxy circular. Based on the proxy report received over 75% of the issued and outstanding shares were voted in the election of directors. More than 95% of these folks were cast in favor of each of the management's nominees. Accordingly, along with myself, the following other 7 nominees have been properly elected as directors for the ensuing year: Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Brian Robbins, Stephen Ryan and Alan Watson. If any shareholder or proxy holder is interested in the exact number of votes cast for or withheld for each nominee, you can get the particulars after the meeting from the secretary. A press release 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. The next item of former business is the reappointment of KPMG LLP as auditors of the corporation and authorization of the directors to fix the remuneration of the auditors. Morris, can I have a resolution, please?

Mr. Chairman, I move the following resolution. Be it resolved 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 General 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.

Thank you. Barb, will you second the resolution?

Mr. Chairman, I second the resolution.

Thank you. On behalf of management I have received proxies representing over a majority of the votes cast for reappointment of KPMG LLP as the auditors of the corporation and authorization of the directors to fix the remuneration of the auditors. Based on the proxy report received, more than 75% of the issued and outstanding shares have been voted, and more than 95% of these were in favor of the resolution. Accordingly, I declare it carried. The next item of formal business is the approval of unallocated awards under the company's 2015 Omnibus Incentive Plan for a further 3-year term as recorded by the TSX and the plan itself. A copy of the plan was included in the appendices to the information circular for this meeting. As a full explanation of this approval on the panel is set out in the info circ and was filed on SEDAR. I will not repeat such information here. However, if there are any questions regarding this matter, they can be directed towards the secretary at any time after the meeting. Barb, may I have the resolution to approve the unallocated awards under the 2015 Omnibus Incentive Plan, please?

Mr. Chairman, I move the following resolution, whereas the Board of Directors of the company adopted on April 8, 2015, the 2015 Omnibus Incentive Plan, which does not have a fixed maximum number of common shares issuable. Number two, the shareholders of the company approved the 2015 Omnibus plan by a majority of votes cast on May 14, 2015, and the rules of the Toronto Stock Exchange provide that all unallocated options, rights or other entitlements under the security base compensation arrangement, which does not have a fixed number of maximum securities issuable, be approved every 3 years, be it hereby resolved as an ordinary resolution of the company that all unallocated awards under the 2015 Omnibus Plan are hereby approved and authorized. The company has the ability to continue granting awards under 2015 Omnibus Plan until May 13, 2024, which is the date of 3 years from the date of the shareholder meeting at which shareholder approval is being sought, and any one director or officer of the company is authorized and directed on behalf of the company to take all necessary steps and proceedings and to execute, deliver and file any and all declarations, agreements, documents and other instruments and do all such acts on things whether under corporate seal of the company or otherwise, that may be necessary or desirable to give effect to the foregoing resolution.

Morris, will you second the resolution, please?

Mr. Chairman, I second the resolution.

Thank you. On behalf of management, I've received proxies representing over a majority of votes cast for approval of the unallocated awards under the company's 2015 Omnibus Incentive Plan for a further 3-year term. Based on the proxy report received, more than 75% of the issued and outstanding shares were voted, greater than 85% of these votes were cast in favor of the resolution. Accordingly, I declare the resolution carried. If there's no further business for this meeting, I will request the motion that 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?

Mr. Chairman, I second the motion.

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

I see you all. Is anybody 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 of AirBoss, will discuss our results of operations and operational initiatives. And following him, Frank Ientile, Chief Financial Officer, AirBoss, will discuss our financial results. Patrick Callahan, CEO of AirBoss Defense Group, will provide an overview of AirBoss' ADG's performances and operational initiatives. With the formal meeting now over, we'll move to the management presentations. In terms of an agenda, we'll start with the annual Chairman's awards, followed by management presentation and overview of our first quarter results, which were released yesterday. And then we'll take questions starting with the analysts covering our company and then from shareholders. To respect people's time, we will do our best to be expedient. In 2019, we inaugurated the Annual Chairman's Award Program, which recognized one employee for their outstanding contribution to the customer and the company. It is a peer-to-peer recognition program that has employees identify, recognize and appreciate coworkers from a broad range of strong contributors who go above and beyond at AirBoss. This year, we have decided to select 2 winners of the Chairman's Award to ensure that we have proper representation of our AirBoss employees when choosing the Chairman's recipient. As we have a tremendous number of excellent employees at AirBoss this award will be presented to 1 peer nominated hourly and 1 peer nominated salary employee, who have shown exceptional dedication and commitment, and have gone above and beyond for AirBoss. I'm pleased to announce that yet again, we have had great employee participation with a total of 145 nominees from across the organization, which resulted in a total of 16 divisional winners. From these 16 divisional winners, there were 2 that stood out and best exemplified the Chairman's Award qualities. Today, I'm delighted to announce that this year's winners are [ Hector Ponce ], Team Leader, Filters from the ADG Landover plant; and [ Selena Biggelgy ] production supply coordinator at AEP in Auburn Hills, Michigan. Hector is the first shift team lead at Filter plant in Landover and is responsible for the production of all filter products. Using his keen attention to detail, Hector leads his team in daily production goals, which include exceeding daily quotas to meet shipment dates, reducing scrap and ensuring quality standards are upheld to meet strict contract requirements. His drive and dedication on leading the production efforts have resulted in ADG successfully delivering more than 2.5 million filters in the last 12 months on ADG's FEMA and HHS contracts with a record low scrap. To achieve this, Hector regularly works 12-hour days. Not only does he go the extra mile, but he does so with a pleasant and inclusive demeanor. Selena is a member of the production control team at AEP in Auburn Hills. She has seen many changes and disruptions over the past year as COVID has impacted the supply chain in unforeseen ways. Throughout this challenging time, Selena has covered on-site support for our team and worked tirelessly with production operators to get materials where they're needed to go. She goes out of her way to seek out and help supervisors and her coworkers to ensure material arrives on site at the time it is needed. At the same time, Selena has maintained a positive attitude, juggling home school activities with her work responsibilities and assisting other departments and suppliers with material concerns. To recognize their efforts, Selena and Hector will both be receiving the 2021 Chairman's Award trophy, a cash award and a few other prizes to be given at a later date. Before I conclude, I would like to give an honorable mention to a critical team at AirBoss. Even though the Chairman's Award is designed for individual performance beyond the call of duty, the supply chain team that is assembled and dedicated to backup production in 2020 was supported by key members from Landover and flexible locations was instrumental in delivering on the FEMA and HHS contract. Ed Kiell's team who consists of Ben Arnold, Amanda Pidsosny, Joe Shenfeld and Tyler Myers worked tirelessly on coordinating the supply chain for the FEMA contract in an incredibly tight time frame and during COVID no less which in turn led directly to the award of the HHS nitrile program. This resulted in being one of the major highlights and successes of 2020 for AirBoss. Although we have not yet come up with a team award, this particular team deserves special recognition for their commitment to the organization. On behalf of the Board and our shareholders, I want to take this opportunity to thank all our nominees and winners across the organization for outstanding contribution to AirBoss. With that, I would like to turn the meeting over to Chris Bitsakakis for a detailed review of our results. Chris?

Thank you, Gren, and thank you to all of those joining us virtually today. As a reminder, this presentation contains forward-looking statements, including our estimates of future developments. We would invite listeners to review risk factors related to our business, in our annual information form and our MD&A, both of which are available on SEDAR and our corporate website. Also note that our reporting currency is U.S. dollars, We will discuss certain non-GAAP measures, including adjusted EBITDA and adjusted EPS. Reconciliations of these measures are available in our MD&A. Looking back at 2020, it would be an understatement to say that the past year has presented businesses, governments and communities globally with significant challenges due to the tremendous toll taken by COVID-19. However, I'm proud to say that AirBoss has stepped up to provide a critical role in the fight against this pandemic and has ensured the important supply of our products and solutions to our customer base globally, including critical personal protective equipment or PPE for frontline health care workers. In the early days of the pandemic, we worked proactively to mitigate the impact on our business, employees, and stakeholders by ensuring the integrity of our supply chain, including identifying surge capacity where appropriate to help support the business. Also putting in place enhanced health, hygiene, and personal protective equipment protocols to safeguard our employees, customers and suppliers and establishing lines for our rubber molded defense products and our powered air purifying respirators, also known as PAPR's at our Michigan facility. And finally, leveraging our increased scale and capabilities to ramp up enormously the production of PPE, notably our PAPR's to arm the U.S. Federal Emergency Management Agency, or FEMA, and the Department of Health and Human Services, or HHS, in the fight against the pandemic. Our success penetrating the health care sector more than offset natural slowdowns in volumes in other areas of our business stemming from the economic downturn. The result was a second consecutive record year for AirBoss in both our top line and bottom line and a 35% return on equity for our shareholders. The record EBITDA we generated in 2020 enabled us, unlike many other companies, to continue to execute on our growth strategy across our segments, including making significant investments in growth and cost-saving initiatives. Even after such investments, we generated record free cash flow in 2020 and exited the year with net cash and the strongest financial position in our history. Yesterday, our Board approved a 43% increase in our quarterly dividend to CAD 0.10 per share from CAD 0.07. Our success during COVID is not unusual. 2020 marked our 25th straight year of operating profitability, including through 3 different recessions, and we have consistently outperformed the broader rubber and plastics industry, achieving a compounded annual growth rate of approximately 19%. This track record of outperformance has been due to our consistent review of product lines to focus on areas where we can leverage our innovation and competitive advantages. Our horizontal diversification across customer sectors, which we strategically cultivate to mitigate the risk of economic and contractual cycles and develop natural hedges and strategic acquisitions to bolster capabilities in target sectors and increase our ownership of the value chain where and when appropriate. This strategy was the basis of our creation of the AirBoss Defense Group at the beginning of 2020, which merged our in-house Defense division with Critical Solutions International. ADG combined CSI's sales and marketing expertise and global leadership in counter explosive route clearance with AirBoss's global leadership in the proprietary design, development and manufacturing of chem bio protective equipment, including gas masks, gloves, boots and respirators. It has also resulted in significant step change in the overall scale and capabilities of AirBoss. To provide further detail on ADG, I will turn the call over to ADG's CEO, Patrick Callahan. Patrick?

Thank you, Chris, and good morning, everybody. The idea behind the creation of ADG was to create a full value chain of our survivability platform, one that we combine decades of experience, expertise and innovation in manufacturing, engineering, and design with marketing, distribution and supply chain management expertise for a broadened customer base across the globe, and that's exactly what is happening. Simply put [Technical Difficulty] ADG provided broad complementary platforms with survivability solutions and products that our expert team can leverage to cross-sell to our existing and ever-evolving global customer base. As Chris mentioned, we have widened our aperture of opportunities by establishing health care as significant [Technical Difficulty] for our personal protective equipment. When COVID hit last year, we were proactive in reacting [Technical Difficulty] various government bodies to ensure that we were aware of the broad range of already certified products and that they were aware of all of our certified products that we produced domestically that we could help in the fight against the pandemic from our rubber PPE, to our Isopod's to our respirator. We believe directly [Technical Difficulty] COVID-19 would result in medical equipment being purchased more like [Technical Difficulty] centralized purchases, strategic stockpiling and domestic supply chain priority. This resulted in multi-order [Technical Difficulty] However, most notably, with the $240 million of orders [Technical Difficulty]. These PAPR's are 99.97% effective at filtering airborne particulates, provide better alternative to traditional N95 masks, which as their name suggests are only 95% effective, and therefore not ideal in high shedding environment for frontline health care workers and personnel [Technical Difficulty]. Over the past year, we have delivered over 150,000 of these PAPR equipment, over 3.6 million [Technical Difficulty] including protective goods, on-time and on-budget to FEMA, HHS and the Department of Veterans Affairs. Once these systems are distributed in full, the related replaceable high-efficiency [Technical Difficulty] are expected to present ongoing recurring revenue for [Technical Difficulty]. Additionally, we have launched an online portal to deliver PAPR's directly to health care [Technical Difficulty]. We are also working to develop a more mobile version of our PAPR for health care personnel.

Hi, Patrick, one moment. Can you just move closer into the mic?

I'm sorry. Is that better?

Yes. Thank you.

These awards built on our successful history of providing protective survivability solutions to several governments. Directly stemming from our successful supply of PAPR's and demonstrated ability to manage the global supply chain during the first quarter of 2021, we announced that we received a purchase order of up to $288 million of HHS for the supply of nitrile rubber gloves. We are certainly in the early stages of executing on that order, and we anticipate deliveries to occur in the second half of 2021. HHS is asking for a follow-on order of up to the same quantity of gloves. However, we now expect the department to seek future orders for a potentially larger quantity, and we intend to complete that business. Though there being a limited number of qualified competitors and our status as trusted supplier, we believe we are positioned well to win any potential future contracts. We also expect opportunities to compete with other future nitrile rubber gloves contracts in the coming years. The strong demand for nitrile rubber gloves is expected to continue with an estimated global shortage of 215 billion nitrile rubber gloves. In a forecast tripling of healthcare spend on PPE by 2027, according to data from Health Industry Distributors Association. Also during the first quarter, we announced the acquisition of 100% ownership of BlackBox Biometrics. B3 is the developer of the revolutionary BlastGauge System of lightweight wearable blast overpressure sensors, which have been outfitted by U.S. Special Forces, Army and SWAT teams across the United States. We expect the acquisition to close in the very near future. We already had a minority interest in B3 and had exclusive sell rights of the Blast Gauge System to the U.S. military, along with providing joint training and service support to customers around the world. This acquisition furthers the long-standing relationship between ADG and B3 enabling us to market B3 solutions internationally and for nonmilitary applications while protecting the technology from being sold from competing interest. The collection, measurement and interrogation of blast overpressure is critical to helping understand and prevent concussion events, posttraumatic stress order, which has proven to lead to hearing loss, sight loss, brain damage and suicide. The Blast Gauge is the market leader for wearable blast for protective measurement sensors with military and first responder communities. It is currently in full field testing with the U.S. Army and is in competition so far. We believe there is essentially a significant escalation and usage of the Blast Gauge system in the coming years. Due to part the National Defense Authorization Act for fiscal year 2020, which included requirements for the Pentagon to document blast exposure in troops, medical histories, including date, duration and measured blast effect. This directive by the U.S. Congress received bipartisan support and comes with clinical [Technical Difficulty] exposure and the adverse effects on the brain and vital organs. As the blast field systems are appraised annually, this is essentially a significant recurring revenue stream to AirBoss beginning 2022. Of course, we continue to execute on our traditional core defense business as well. During the first quarter of 2021, reading out that we have been awarded a contract by the U.S. Department of Defense for the manufacture and sale of our extreme cold vapor barrier boot, commonly referred to as Bunny Boot over the next 3 years. We also received a follow-on order from the U.S. Department of Defense for our Molded AirBoss Lightweight Overboots, thereby reaching the maximum $27 million value of the contract we had announced in September of 2019. As a preferred supplier of protective rubber gloves and boots for the U.S. and other militaries for many decades, we expect to continue to receive similar contracts in the future. Additionally, in 2021, we will be executing on anticipated $36 million contract extension we received with foreign militaries to procure protected payloads, spare parts and training in support of the Husky 2G vehicle system. Under the base contract award in 2017 and valued at $132 million, CSI successfully delivered 41 Husky vehicle systems with associated protected payloads. We expect Husky sales and sales of the Husky vehicle to resume in the near future as the impact of COVID subsides globally. During 2021, we will continue to work on the production efficiency of our latest-generation gas mask, which we believe to be the world's best. This low-burden mask won recent contracts in contract awards for Australia and Canada and in 2020, received the highest technical score for European NATO countries but was slightly edged out on pricing. We are working on lowering cost of this product in preparation for a potential competition potentially in 2024 to supply the U.S. military with gas masks, a multiyear contract opportunity that could be worth upwards to $1 billion. These are just a handful of the opportunities that exist at ADG in the near and medium term. And we are tremendously excited about the future of the company. I look forward to updating you in future years on our progress, and I'll now turn it back over to Chris. Thank you.

Thanks, Patrick. I'll now provide a brief update on our other segments. Within our AirBoss Rubber Solutions, compounding volumes declined during the middle part of 2020, in line with the overall economic downturn, but experienced a V-shaped recovery in the latter part of the year, in line with the industry. We continue to execute on our strategy of filling the new compounding capacity we added in 2019 and increasing margins by developing new proprietary compounds in collaboration with our customers and by increasing specialty and color compounding within our mix of business to complement our traditional strength in black rubber. Our development and sales of colored rubber continued to grow in line with this margin expansion strategy. We also continue to develop new compounds, proprietary compounds and improve existing compounds. We have also made further inroads in utilization of our tilt mixer, which should support the production of increasingly specialized higher-margin compounds, further diversifying our offering and enhancing penetration with both existing and new customers. Supporting these capital investments are the investment we have continued to make in our R&D expertise and lab capital to support enhanced collaboration with customers and better reflect our focus on innovative research and development and proprietary technical solutions while competitors process rubber formulations on behalf of their customers. Our differentiation is that we have the capability, scale and equipment and personnel to work with our customers to develop proprietary compounds that solve their problems. In the first quarter of 2021, we saw progressive traction executing on our strategy with volumes increasing. A recent fire that has impacted operations at our largest competitor was one of the factors, which increased our volumes, and we believe we are in a strong position to maintain this business through our focus on innovation and collaboration. However, the increase in raw material prices, coupled with international freight constraints proved challenging on the supply chain and negatively impacted our gross margins. We have recently moved to incorporate the ability to pass on raw material price changes on a monthly basis rather than quarterly with our customers to mitigate its impacts in the future. As the pandemic recedes and broader business conditions stabilize, we anticipate being able to return to steadily growing volumes over the mid and long term as we continue to take market share and roll out specialty compounds. We also continue to review potential M&A opportunities in select regions in the U.S. to broaden our reach and capabilities. Our AirBoss Engineered Products business also faced challenges in the face of COVID-19 as automakers and Tier 1 part suppliers temporarily shuttered operations during the second quarter of 2020. Despite these challenges, we were able to rapidly pivot certifying AirBoss engineered products to help fulfill the large PAPR awards we received [Technical Difficulty] defense products. Our traditional focus on light trucks, SUV to minivans, helped our work volumes recover ahead of industry levels once key customers restarted their operations midyear. Increasing pricing pressure from offshore automotive part supply, increase in steel tariffs and customer givebacks have driven margin erosion at ADG for several years. Beginning in 2021, we are essentially kicking off year 3 of our 5-year strategy to turn around the segment and return it to healthy profitability, a strategy temporarily interrupted by the impact of COVID-19. This is a multistage process, which is being driven by automation to drive continuous efficiencies, including our new robotic work cells, the first of which came online in 2020 and the second anticipated later this year. A focus on innovation to produce more technically sophisticated and, therefore, higher-margin parts and aggressive negotiation on terms related to certain contracts, which are currently unprofitable. Sales into non-auto sectors, potentially including renewable energy, marine, rail, construction, equipment and appliances. In 2020, we saw some initial progress on this initiative with approximately 10% of net sales coming from non-automotive sources. During the first quarter of 2021, we commenced installation of new injection presses to support our long-term transformation through automation and continuous improvement as well as diversification of products into sectors adjacent to the automotive space. Our target remains both the operating profitability in the future, though this is dependent on continued normalization [Technical Difficulty]. I'll now turn it over to Frank for a review of our Q1 2020 financials. Frank?

Thank you. As a reminder please note all dollar amounts presented are U.S. dollars, except for dividends per share, which are in Canadian dollars. To be respectful of everyone's time, as we had previously disclosed, a preview of our Q1 results and actual results are in line. I will be aim to be brief. Starting from the top, net sales increased 14% to $107 million, driven by growth across all segments, notably ADG. Gross profit increased 40%, driven by increased net sales as well as production efficiency at ADG. Adjusted EBITDA increased by 48% to $14.4 million, with margin expansion driven by the increase in gross profit combined with lower expenses, partially offset by a $4 million increase in corporate expenses related to the growth of the company's share price. Profit and adjusted profit attributable to the owners of the company was $6.3 million or $0.22 per diluted share. This compares to adjusted EPS of $0.08 in Q1 of 2020. Turning to the individual segments. ADG sales in Q1 increased to over $45 million. The 29% increase versus Q1 of 2020 was primarily the result of execution of the previously mentioned HHS contract. Gross profit in this segment was $21 million or 46% of sales, a 96% increase from $11 million or 30% of sales in the same period for 2020. EBITDA increased 135% to $17 million in Q1 2021 versus $7 million in Q1 2020 due to strong operating [Technical Difficulty]. Net sales in the Rubber Solutions segment increased by 9% to $37 million, driven by higher customer volumes. Gross profit decreased by $0.7 million or 12% to $5.2 million with margin compression related to increased raw materials and logistics costs referenced previously by Chris. EBITDA decreased by $0.5 million or 10% to $4.1 million with the decline in gross profit. Net sales in the Engineered Products segment increased by 8% to $32 million, driven by higher customer volumes in the SUV, light truck and minivan platforms in addition to continued production of certain molded defense products. However, as a result of higher labor, material and logistics costs, gross profit decreased by $2.2 million and was negative $300,000 in Q1 of '21. EBITDA decreased to a loss of $1.6 million due to the decline of gross profit, partially offset by lower operating expenses. Operating cash flow, excluding working capital, was approximately $17 million versus $6 million in Q1 of 2020, reflecting our strong growth in EBITDA. However, due to working capital usage, cash flow used in operating activities during Q1 of 2021 was $4 million. CapEx was $5.2 million in Q1 versus $2.3 million in Q1 of 2020, primarily related to the addition of 14 presses being delivered during Q2 at Engineered Products. Our net leverage at the end of Q1 of '21 was essentially nil. Last month, we announced that we had increased our revolving credit facility from $60 million to $150 million to help upfront costs under the contract to provide nitrile patient examination gloves to HHS. We are, therefore, reaffirming our 2021 guidance ranges for 2021 as provided on our March 16, 2021 news release. In terms of quarterly cadence through the year, we now expect sales under the nitrile rubber glove contract to be recorded almost entirely in the second half of 2021, rather from Q2 to Q4, so sales will be back heavy in the back half of the year. Additionally, as our PAPR's contract with HHS is now complete substantially, we will receive less contribution from it in Q2 than in Q1, and we, therefore, expect Q2 2021 to be generally in line with Q1 of 2021. On a year-over-year basis, we anticipate improvements in ARS and AEP though offset by the fact that ADG benefited from the FEMA contract in Q2 of 2020. We expect to start seeing significant sequential growth in Q3. It is important to note that our current guidance for 2021 excludes potential upside opportunities, such as any other significant contract wins in opportunities or M&A that we are pursuing. With that, I will turn the presentation over to Gren for some closing remarks.

Thank you, Frank. In recent years, we've begun to increasingly focus on the sustainability of our business, assessing our environmental footprint, social license and initiate initiatives in our approach to governance. We believe each of these elements are increasingly important to a growing range of stakeholders, including suppliers, customers, investors and employees. Given the steadily growing emphasis on each of these areas, we have taken the preliminary step of identifying benchmarks and mapping out a formal ESG strategy to guide us in the years ahead. We look forward to updating all stakeholders as we embark on this next phase of our growth as an organization. With the election today, I'd like to thank our ongoing Board members and formally welcome Stephen Ryan to the Board. Stephen is a highly regarded Washington, D.C. lawyer, who further enhances our expertise and insight and our work with government agencies, particularly in our growing presence in the U.S. marketplace. In closing, I'd like to thank all our employees for their hard work and dedication during a difficult and uncertain time. Our success is a credit to the enormous contributions of our employees who, in the face of COVID, kept our essential segments operating, helped our customers succeed, supported our ongoing investment in innovation, and surging demand for our suite of survivability solutions. We simply could not have accomplished all we did in 2020 without their extraordinary efforts. We also want to recognize our customers and suppliers. We are emerging stronger knowing that we can accomplish -- we can accomplish in partnership. I also want to thank all our shareholders for their ongoing support and belief in AirBoss. Finally, I would like to thank our covering analysts, bankers, auditors and advisers for their assistance over the last year. Thank you all very much. With that, I will turn this over to questions, and I'm going to ask Chris to chair the Q&A session.

Thanks, Gren. We will now start the Q&A session. Please be patient as we will aim to start with sell-side analysts covering the company, followed then by shareholders. So as the questions come in, I will refer the question to be answered by anyone on the panel here or Patrick or Gren. So I will coordinate how those questions get answered. As mentioned at the opening, the meeting is being made available via conference call and via webcast. As an administrative convenience, we will now take questions from the analysts.

[Operator Instructions] Our first question comes from Yuri Lynk of Canaccord Genuity.

Chris, you guys had originally anticipated delivering some of the glove contract in the second quarter. It sounds like that slipped a little bit. So am I correct in that observation? And secondly, can you give us any updated thoughts on the second portion of that contract that still hasn't been awarded? How you feel about that?

Yes, no problem at all. Originally, the plan was to start shipments in late Q2 and then with the majority still kind of filtering into Q3 and Q4. But of course, and it's been in all the news with significant logistics delays globally, it's taken a little bit more time to get the supply chain geared up and lined up and we wanted to do that. So the delivery will be shifting more actually almost exclusively into Q3 and Q4. It will still be on time to our customers and we still stand behind the guidance that we gave for the overall year. But yes, will shift more into Q3 and Q4, and I guess logistical and freight issue. We are always challenged, but certainly COVID-19 with the elements that created an additional slight delay, but we're not concerned about it. In terms of the second part of that contract, we were awarded an option for that same size as the original award. Having said that, we are seeing that there are significant demands for additional gloves and there may be additional opportunities beyond that, that we are planning to deal with.

Just a point, an additional point, we will be -- or we expect to be shipping gloves in Q2. The problem is that the revenue doesn't get recognized until they're actually received and approved by the customer. And that just with the logistical delays in getting stuff from Asia over here, add the time to approve that, we're anticipating that we won't be able to actually report the sales until early in Q3.

Our next question comes from David Ocampo of Cormark Securities.

I just wanted to circle back on the option with HHS. I understand that there's a need in the stockpile. But are they looking at any specific performance metrics for them to exercise that option view, whether that's on-time performance or anything like that?

Yes. Certainly, you can imagine with such a big order prior to the award of the option, you're going to want to be comfortable with our performance. And I remind you that one of the reasons why they came to us is because of our significant positive performance with them in 2020. And once we prove ourselves out on this first part of the order, then the option and additional options after that will become available for us.

And Chris, are there any risks for the margins of the contract? Like do you guys have fixed cost pricing with your suppliers as well as your freight? I know costs have shot off quite dramatically over the time a little bit. I just wanted to get some color on that.

Yes. When we first bid on this program, we had made certain assumptions on freight. And as Gren mentioned at the Chairman's award presentation, our supply chain team has been working diligently to make sure that from a freight standpoint, we are within the parameters of what we had originally budgeted. And it is a fixed fee contract that we have with our suppliers. So we don't expect any surprises necessarily on the margins that we expected when we first quoted it.

And then if I could sneak one last one in. Patrick, you talked a little bit about the low-bearing gas mask and how you're looking to reduce the cost on that business, on that product. Is the cost mainly coming from a reduction in -- or elimination of features? Or is it just cost efficiencies?

Thank you for the question. It's mostly cost efficiencies. So obviously, what we're going to do is put together a menu of options sort of depending on what the U.S. puts out of requirements that we can satisfy all of those, but still having the base [Technical Difficulty]. But as far as cost efficiencies, that's really what's driving, taking the cost out of the production. Remember, this is still a relatively new product. So we've learned a lot in 3 years in winning 2 massive competitions. And we've made a lot of strides, a lot of success in the last 12 months in taking cost out of the product.

Our next question comes from Tim James of TD Securities. Our next question comes from Maggie MacDougall of Stifel.

We have seen some issues with gas supply in the U.S. because of the pipeline being down. Has this had any impact on your operations so far in Q2?

This has not had any impact on our operations in Q2. We did have some impact to our operations during the Texas Big Freeze where some of our polymer supply comes from. But no, the gas that we're bringing about on the East Coast is not affecting our operations at all.

Okay. Great. Then a second question. You guys had a really nice juicy dividend increase announced concurrent with the quarter. You've got a lot of business coming down the pipe in defense. It looks like there's a recovery happening in the U.S. at least and Canada will catch up. So you're going to be in a really great balance sheet situation and free cash flow situation even better than you already are. How should we be thinking about capital allocation either for growth or return to shareholders?

Yes. I can address a little bit the M&A part of that question. Certainly, as we mentioned in other calls, we are seeing more positive and potentially both transformative and tuck-in merger and acquisition opportunities than we've ever seen that we're reviewing costs. We're being diligent. We're being prudent and making sure that it's a good fit and that the payment works in our favor. So we continue to look for opportunities to grow our recurring revenue base through acquisitions that make the whole company better. We also are investing in new CapEx that is going to create additional efficiencies, and we've talked a lot about the turnaround at AirBoss Engineered products. And we are in the mid phases of that with 7 presses having arrived this month, another 14 through the rest of this year and 1 more robotic press coming towards the end of this year. So we continue to invest in our own operations. With the growth that we're seeing and the expectation of this V curve, we expect to be looking at more potential capacity required in Rubber Solutions as well that we're going to be thinking about how we execute on that. We're also -- we just launched earlier an automatic small ingredient chemical wing system in our Kitchener plant. And we have a new bulk handling carbon black system weighmen system that we're looking for additional efficiencies in our Scotland Neck facility. So we're investing in our current CapEx. We are looking for M&A opportunities. And Gren, if you'd like to address the other portion of the uses of funds, that would be great.

Sorry, I was on mute there. I was just saying, Maggie, we also -- we increased the dividend significantly this quarter. We are always mindful of doing whatever we think is required to generate maximum shareholder returns. If you look at our return on invested capital last year and continuing this quarter as being very high. Obviously, the best, most profitable growth is the large organic growth that we've been experiencing. But over the last year, we made 3 strategic acquisitions, and we paid off our debt. We do have substantial working capital requirements in the next 2 quarters to fund this big new business that we have with the gloves. However, we should end the year in exceptionally good position, and we will try to do more strategic acquisitions. We will continue our dividend policy. And if the opportunity is there, we will buy back stock.

Our next question comes from Tim James of TD Securities.

I'm just wondering, looking at flexibles specifically, you've got some injection presses in place, now a number of additional ones coming this year. The one robotic work cell was installed last year, another one this year. I'm just wondering what is required in terms of kind of getting the margin recovery here from a new business or a contract perspective. It seems like you've got kind of all the capital equipment in place. Again, we have to, I realize, work through kind of the logistical challenges that, that business is facing. But in terms of new business developments, how do you feel about the pipeline there? Are you kind of set up the way you'd like to be to get the eventual margin you anticipate from that business?

Yes, that's a great question, Tim, and thanks for asking it. Our approach to turning flexible around is kind of a three-pronged approach. We're bringing the asset level to a modern point where we can be the most efficient in everything that we do. And that, I think, that program kind of ends at the end of this year. We're going to be feeling really good at the end of this year on where our asset level is at. And I think we'll have an asset level that is as efficient as anybody else, of course. Secondly, we had planned to diversify and balance our portfolio, so it's not so highly weighted in automotive. And that is progressing really well as well. In 2020, if it wasn't for flexible jumping in to help on the search and passive side on the PAPR's, it would have been extremely difficult to deliver such a Herculean effort for FEMA and HHS. So the flexible played an integral role in delivering on that [Technical Difficulty] and they are currently also producing the rubber molded MALO boot for the U.S. military. So we've been able to put some military jobs in there because of their [Technical Difficulty] those kinds of things. In addition to that, we are really [Technical Difficulty] some fairly significant nonautomotive opportunities that we think should transition through to the next year or so that we think should be transformative for flexible. And when you consider the capability of their asset base where it's going to be in [Technical Difficulty] that does fit nicely. The one area [Technical Difficulty] aggressively on right now that is turnaround is that when we're looking at our portfolio of products and customers, we have approximately a quarter of our [Technical Difficulty] numbers that are on [Technical Difficulty]. It happened over the last year as we've been [Technical Difficulty] customers on getting pricing [Technical Difficulty] in order to [Technical Difficulty] contracts. And so [Technical Difficulty] very aggressive customer to make sure that [Technical Difficulty] either getting the pricing that we need or find some sort of other resolution. And the reason why it's so important right now is we -- as this V-shaped economy starts to rebound, any inflationary price pressures, particularly on steel, will have a significantly negative effect. And so it's really critical now that we see this ahead of us to get those contracts straightened out. So that's sort of the 3-pronged approach, getting our asset level -- asset base up to a technological level where we compete globally in a most efficient manner, being able to diversify away from automotive and thirdly, being able to improve or shed some of those nonprofitable contracts.

Okay. My next question, Chris, just going back to your commentary earlier in the call, you mentioned moving to kind of a monthly structure in terms of passing along higher input costs. And correct me if I'm wrong, I thought that was in respect to the Rubber Solutions business. But I'm just wondering then, given the challenges that we've seen here early in the year, should we see some benefit from that when we get kind of the Q2 and the Q3 results? Like is there a pretty quick response time in terms of where the benefit that should come from that?

Technical glitch. Can you still hear me?

Yes, I can.

Okay. Great. So going into the end of Q4 2020, we started seeing an increase in some of our commodity prices. Some of it due to force majeure situations. And just as an example, normally, we deal with 2 or 3 force majeure/allocation-related issues per year with our supply base. And we have backup plans and backup plans for our backup plans. We have dealt with 17 of those since the end of Q4 in 2020 to today. So add to that the significant issues with global freight forwarding and those kinds of things. January and February, we saw a significant spike in our raw material costs, both raw material and freight-related costs, and because we were on a quarterly pricing model with our customers, we were not able to catch up, and because our concern was that as we -- as the world comes out of this pandemic, and the recovery is very quick, the inflationary pressures may catch us off guard if we're only pricing quarterly. And that's why beginning in March of this year, we had the difficult conversation with our customers that we would go to a monthly pricing model in order to be able to capture them as they happen because being able to predict the volatility could put us sort of on the outside looking in, and which is why you'll see from our Q1 financials, we did have some purchase price variance in January and February in AirBoss Rubber Solutions that we were then able to rectify in March and going forward. So going into that monthly pricing model is something we've not done before, but we felt it was necessary because of the volatility that we expect as the world recovers from this pandemic and the impact on both raw material pricing, freight forwarding and all the other challenges that we face.

If I could just add a quick follow-on to that, Chris. That's very helpful. What about from a kind of an industry-wide perspective, does that -- are you seeing that from your competitors as well? How does that influence, if at all, kind of the competitive position of AirBoss?

Yes, that's a great question. And so normally, what our process is, Tim, is our purchasing people work very closely with our supply people, our supply chain people and our operating people. And we go through all the BOMs and all the pricing models by customer in AirBoss Rubber Solutions. And then we look at what that delta is. And quite often, when we approach our customer with these deltas, our customers will push back and say, well, your competitor is not pushing through such a large increase on this particular commodity as an example. But thankfully, because we have 200 proprietary compounds that have been in the field for a long time and a really good positive working relationship with our customers with a lot of trust that we're able to negotiate with them in a way that we cover our expenses and make sure that we don't arbitrarily impact them from a competitive standpoint. And so this has been the same process for years now that was happening quarterly, and that hasn't changed. Now it's happening monthly. So the same conversations, the same concerns, the same sort of give and take a little bit to find a spot where it all makes sense. The one change this year is that as we were going in for these kinds of monthly price increases, we were hearing from the market that everybody was resorting to either a more frequent pricing update or increasing their pricing more than what the actual price was in anticipation of what that quarter could end up at, which then actually put us in a stronger competitive position by being -- by going to monthly pricing, which, as far as I know, we're the only one of our competitors that went to that monthly pricing model. And it seems to have worked in our favor versus other competitors that are anticipating the increase in trying to pass it all on early in the quarters. So I think from that perspective, we are doing well with our customers, and we're not losing any. In fact, we're quite busy right now.

There are currently no further questions from the phone line.

Very good. So for administrative convenience, we will now take questions from those who have submitted questions through the conference call line and then open up the meeting to questions from those attending on the webcast after which we will then open the floor for questions from individuals here attending in person. At this time, we will proceed to questions, if any, which are queued up. Do you have any Chris?

Thanks, Chris. The first question is related to AirBoss Defense Group. And it is, do we have a strong footing in the Canadian Army? Meaning do we contracts giving them as much product as we do with the American Army? If not, why not?

Patrick, would you mind taking that?

Sure. Yes [Technical Difficulty] forces. We have Husky vehicles with the Canadian military, and continue to work with the Canadian military on counter IED. We have supplied blast gauges to the Canadian military. We've also supplied all of our rubber molded solutions for chemical protection, both our AMG and our MALO, and a number of other products within PPE. The main reason that we do not supply as much to the Canadians as we do to the U.S. is just based on size. The Canadian military is a far smaller military with a far smaller budget than the U.S. military. But I'd say by percentage, based on what they spend every year, we have a very, very good position with the Canadian military, and we have a lot of future opportunity with them as well.

And just to add to that, we are really the go-to chem bio protective equipment supplier to the Canadian military as well as many other NATO militaries. And we have very, very good relationships with the Canadian military as well. Next question, please.

Mr. Chairman, that actually concludes all of the questions from those attending via webcast.

Okay. Very good. It appears there are no further questions. Ladies and gentlemen, thank you for taking the time to attend the meeting. We'd like to thank everybody for your attendance. And thank you for your support throughout the year, both to our employees, our stakeholders and our customers.