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

Good morning, ladies and gentlemen, and welcome to the Annual General Meeting of the Shareholders of AirBoss of America Corp. We are making today's meeting available through both the video and teleconference facility. 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 Corp. Joining me today are Chris Bitsakakis, President and COO; Frank Ientile, CFO; Chris Figel, EVP and General Counsel; and Patrick Callahan, CEO of AirBoss Defense Group. I would also like to introduce our Board of Directors who are participating electronically: Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Stephen Ryan and Alan Watson. For your information, we will start the meeting by addressing the formal agenda matters. Once all of these matters have been addressed, Chris Bitsakakis, Frank Ientile and I will each make a short presentation, including a discussion of our first quarter '23 results, a brief overview of our fiscal '22 and an update on our strategic initiatives. We will then follow that with a Q&A session, where we would welcome questions from those of you on the conference call or the webcast. In conducting the business of the meeting, I would appreciate your cooperation in allowing us to move efficiently through the agenda. And we're going to make the best of our time, certain shareholders have been asked to move and second resolutions, 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 is advised that the annual report containing the audited consolidated financial statements of the corporation for the fiscal year ended December 31, '22, was mailed to shareholders of the corporation on April 6, 2023. The notice of this meeting, the accompanying management information circular and the form of proxy were also mailed to the shareholders of the corporation on April 6, 2023. I direct that the proof of service be annexed to the minutes of this meeting. Chris Bitsakakis, myself and our Chief Financial Officer, Frank Ientile, 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 company is entitled to one vote for each common share held. There are 3 formal items of business to be dealt with today: a, to receive the annual report and financial statements of the corporation for the fiscal year ended December 31, '22; b, to elect each of the 7 nominee directors for the Board for the ensuing year; and c, to reappoint the corporation's auditors, KPMG LLP, for the ensuing year, and the authorization of the directors to fix the auditor's remuneration, all as described in the management information circular of the corporation dated April 6, 2023. With the consent of the meeting, representatives of Computershare Investor Services Inc., 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 to confirm a quorum for the 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 scrutineer's report on attendance be annexed to the minutes of this meeting. As the first item of formal business, I'd like to ask Frank Ientile to table AirBoss' annual report to shareholders, which includes the audited consolidated financial statements of the corporation for the fiscal year ended December 31, 2022, together with the auditor's report.

Mr. Chairman, the corporation's fiscal 2022 annual report is tabled.

Thank you, Frank. A copy of the 2022 annual report has been mailed to all shareholders who requested a copy. Copies can be found online under AirBoss' profile at sedar.com. We will now move to the second item of formal business, the election of 7 directors to AirBoss' Board of Directors. Nominations have already been proposed by management in the proxy circular. All 7 of our current directors have agreed to continue serving on the Board of Directors. Details about each of the director nominees are contained in this series' proxy circular. Shareholders are required 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. Morris Eddy, would you please confirm -- or would you please nominate the individuals listed in the proxy circular's directors for the coming year?

Mr. Chairman, I nominate each of Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Stephen Ryan, Pete Grenville Schoch and Alan J. Watson as Directors of Airbus to hold office for the ensuing year or until their successors are elected or appointed.

Thank you. Nadine Kruse, will you second the nomination, please?

Mr. Chairman, I second the nominations.

Thank you. Are there any other nominations? I declare the nominations closed. Morris Eddy, may I have a resolution, please?

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

Nadine, 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 meeting. On behalf of management, I've received proxies representing over a majority of votes cast for the election of each director nominees in our proxy circular. Based on the proxy report received, greater than 90% of the shares voted were cast in favor each of management's nominees. Accordingly, along with myself, the following other 6 nominees have being properly elected as Directors of AirBoss for the coming year: Anita Antenucci, David Camilleri, Mary Matthews, Robert McLeish, Stephen Ryan and Alan Watson. If any shareholder or proxy holder is interested in the exact number of votes cast for or withheld from each nominee, you can get the particulars after the meeting from the Secretary. A press release and report on voting results indicating the detailed results of the vote on the election of directors will also be publicly filed after this meeting on SEDAR. Next is the reappointment of KPMG LLP as the auditors of the corporation and authorization of the auditors to fix the remuneration of the auditors. Morris Eddy, may I have the 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 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.

Nadine, 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 votes cast for the 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, greater than 90% of the votes cast were cast in favor of the resolution. Accordingly, I declare it carried. If there is no further business for this meeting, I will request most of the formal meeting be terminated. Morris, would you please bring a motion to terminate the meeting?

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

Thank you. Nadine, will you second the motion?

Mr. Chairman, I second the motion.

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

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 CEO of AirBoss, will give an overview of our current operations; and following, Frank Ientile, Chief Financial Officer, will discuss our financial results and outlook for '23. We will now -- with the formal meeting over, we'll now move on to our management presentation. In terms of an agenda, we'll start with the Annual Chairman's awards, followed by a management presentation and overview of our first quarter results, which were released yesterday. And then we'll take questions, starting with analysts covering our company and then from shareholders. To respect people's time, we will do our best to be expedient. Every day at AirBoss, there's inspirational work being done across all divisions and departments with team members going above and beyond to ensure our continued success. In 2019, we created our annual Chairman's Award Program to formally recognize the special efforts made by AirBoss employees. It is a peer-to-peer recognition program that as employees identify, recognize and appreciate a broad range of strong contributors who will go above and beyond for AirBoss. When selecting the Chairman's recipient, we ensure that we have a strong representation of our AirBoss employees by presenting an award to one peer nominated hourly employee and 1 peer nominated salary employees, who have both shown exceptional dedication and commitment as they have gone above and beyond for AirBoss. I'm pleased to announce that yet again, we have had great employee participation this year with the highest number of nominees to date totaling 236 employees nominated from across the organization and the selection of 13 divisional winners. From these 13 divisional winners, there were 2 employees that stood out and best exemplified the Chairman's Award attributes. We're delighted to announce today that this year's winners are John Maher, Director of Quality from ADG facility in Jessup, Maryland; and Neladean Irwin, Production Operator from our AEP facility in Auburn Hills, Michigan. John is a Quality Director for ADG. Over the course of 2022, he continuously supported ADG as it navigated through some difficult challenges. He also works tirelessly to ensure that the quality systems are consistent across ADG's various locations. John has a passion for quality and team members describe his approach as refreshing and informative. He's a great collaborator who goes the extra mile to support the organization. Neladean is a line leader at AEP in Auburn Hills and has been with the company for nearly 29 years. She is often described by others as an outstanding hard worker, who takes the time to mentor and train employees. Her team has everything necessary to be more efficient and makes others on the floor feel welcome. Her extensive experience, coupled with her solid troubleshooting skills, gives her the ability to achieve positive results and adapt to fast-paced occasions. Despite her daily workload, she always takes the time to help others reach their goals to become a better AirBoss employee. She is a wonderful companion to AirBoss and a valuable member of our team. To recognize their efforts, John and Neladean will both be receiving the 2022 Chairman Award trophy, a cash award and a few other prices that will be given at a later date. On behalf of the Board and our shareholders, I want to take this opportunity to thank all nominees and winners across the organization for their outstanding contributions to AirBoss. With that, I would now like to turn the meeting over to Chris Bitsakakis for a review of our results. Chris?

Thank you, Gren. And thank you to all of those that are joining us virtually today. As a reminder, this presentation contains forward-looking statements, including our estimates of future developments. We 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, we will discuss certain non-GAAP measures including EBITDA, adjusted EBITDA, adjusted profit per share. Reconciliations of those measures are available in our MD&A. And finally, please note the reporting currency is in U.S. dollars. On the heels of record financial performance and growth in 2021, our focus in 2022 was on the integration of, an execution from AirBoss' recently expanded operating platform. Many of the business challenges we faced in 2021, including raw material sourcing and cost inflation, persisted last year as well. So the work of our team to capture production and cost efficiencies throughout business segments took on new importance. In '22, consolidated sales totaled $477 million, which, while well above the sales levels we posted prior to the pandemic, fell short of the record revenues we delivered in 2021. Reduced sales within our AirBoss Defense Group, due to the decrease in large-scale deliveries of PPE in 2022, were the primary source of year-over-year decline. I'm pleased to report that within 2022, we made important new inroads across the business. We achieved record results within our AirBoss Rubber Solutions segment, and we returned to gross margin contributions from AirBoss Engineered Products in the fourth quarter which, as Frank will discuss later, has continued in Q1 2023. We knew we were up against a fairly challenging set of financial comparables from 2021. But nonetheless, we're encouraged by the advancements made across many parts of our business throughout 2022. I want to take a moment to highlight our track record of dividend growth. Since the time we first started issuing dividends on our common shares in 2010, we have delivered annual dividend growth averaging approximately 15%. We continue to view our dividend as an important part of the total returns we offer to our investors. Looking now at our segmented businesses, I'll start with some background on AirBoss Defense Group. ADG offers industrial and military-grade protection against a variety of threats to human life. Its products range from personal protective equipment, or PPE, for health care settings, to innovative solutions for blast monitoring and other applications designed to protect military and law enforcement personnel. Our mission is to leverage AirBoss' expertise in engineering design, manufacturing and supply chain management to build ADG's leadership role in the survivability solutions value chain. In 2022, ADG contributed $133 million in net sales and gross margins of negative $11 million, reflecting an impact of an inventory write-down we had to take within this business segment in quarter 3. In the last -- in the latter part of 2022, ADG successfully secured a series of new contracts, the most recent business in December involves the delivery of Made in America COVID testing kits to the Defense Logistics Agency in the U.S. This contract win is tangible evidence of our strength as a key supplier to large-scale customers, and our ability to collaborate with industry partners to enhance our market access. Overall, despite a lower level of activity compared to record results in 2021, ADG made tangible progress last year and remains well positioned to capture new opportunities in 2023. Moving next to AirBoss Rubber Solutions. On the back of strong advancements made in our customer's rubber compounding capabilities, ARS delivered record financial results in 2022. From a strategic perspective, the focus for ARS has been on improving margins through the introduction of higher-margin compounds and growing specialty and color compounding within our overall mix of business. These efforts, along with investments made to improve automation and efficiency, led to record annual net sales of $236 million and gross margins of $33 million. Our long-term priorities for ARS remain intact, to deliver growth by positioning ARS as a leading specialty supplier in North America, along with an innovative portfolio of specialty compounds, combined with strong production capabilities. Turning now to AirBoss Engineered Products or AEP. We are very pleased with the progress made within 2022 and the changes within AEP that have improved the positioning and resilience for the long term. The AEP team made important advancements in 2 key areas. The first was an internal focus on strengthening its operations through automation, capturing operating cost efficiencies and developing innovative products with better margin profiles. The second part was to advance its external relationships with new customers as well as its existing long-term customers. Its product development initiatives supported efforts to extend AEP's customer reach into new nonautomotive industries and diversify its market participation. Importantly, in 2022, we delivered on our commitment to working with AEP's key long-term partners and customers to resume a more stable financial footing for its continued operation. With rapid cost increases related to personnel, logistics and raw materials, it was essential for us to reestablish contract pricing and terms within AEP that better accommodated these market changes. I'm excited to say that with the successful updating of our arrangements with our key partners, we have been able to reverse the pattern of operating losses and resume profitable performance within AEP. With that, I'll now turn it over to Frank for a review of our Q1 2023 financials. Frank?

Thank you very much, Chris, and good morning, everyone. As Chris mentioned, any dollar amounts reported today are in U.S. dollars, except for the references to dividends per share, which are in Canadian dollars. To be respectful of your time today, I'll aim to be brief in my summary of our Q1 2023 results. Starting with Airbus consolidated results, net sales for Q1 2023 were $117.1 million, a decrease of 19% from the prior year, primarily due to the absence of certain contract deliveries within ADG for the same period in 2022, partially offset by increased sales within our AEP business segment. Q1 adjusted EBITDA decreased to $10.3 million, driven by the decrease in gross profit. Q1 adjusted profit was $1.6 million or $0.06 per diluted share. ADG's net sales in Q1 2023 came in at $28.6 million. The year-over-year decrease in net sales was due to delivery towards the HHS Nitrile Glove contract in Q1 of '22. Gross profit in ADG in Q1 was $8.7 million or 30.5% of shares. Net sales in our Rubber Solutions segment came in at $55.2 million or a decrease of 2.7% compared to Q1 of '22. The decrease was mainly driven by reduced momentum at our customers' operations as a carryover from softness in Q4 '22. Overall, volumes were down 24.1%, and this was partially offset by the slightly more favorable mix. Gross profit within ARS was $7.6 million, which was a decline of 5.3% from Q1 of '22 due to lower volumes and the impacts of product mix. Net sales in our Engineered Products segment increased 37.1% to $40.9 million, supported by higher volumes in SUV, light truck platforms during the quarter, and the continued trend towards positive gross margins at AEP delivered in Q4 of '22. Q1 '23 gross margins for the business segment were $5.6 million. Turning again to our combined results. Operating cash flow, excluding working capital, was $7.3 million in Q1 of '23. Cash flow provided by operating activity during the quarter was $6 million. CapEx in Q1 '23 came in at $0.8 million versus $2.1 million of Q1 '22, and related minor plan upgrades were within ARS and AEP. Our net debt at the end of Q1 '23 was $107.6 million. We maintain a revolving credit facility of $250 million with an accordion feature of an additional $75 million. Currently, $126.6 million is drawn against our debt facility. And now, Chris, back to you for closing remarks.

Thanks, Frank. I want to take a moment to remind our investors of the combined capabilities we bring from across our company and how we use these to create and maintain competitive advantage in our core markets. We have strategically built AirBoss so that we can share strengths and best practices across our platforms as we bring value to our customers through multiple channels. Our core skill set is in manufacturing and marketing high-quality, proprietary rubber-based products and other products for numerous applications, including defense, heavy commercial, automotive and others. We share our skills and resources across our platform to drive growth and profitability for all 3 of our business segments: Airbus Defense Group, Airbus Rubber Solutions and Airbus Engineered Products. We are committed to using our scale, our ability to capture operating efficiencies and our innovation skills to bring long-term value to our customers. Our work to build AirBoss as base of domestic manufacturing [indiscernible] has brought important value as we address the changing requirements for our customers and markets. Our manufacturing capacity, as well as our proven track record of successfully managing complex international supply chains, places us in a strong position to pursue new large-scale government contracts, which is a key focal point for us in 2023. We have a number of initiatives underway that support our growth prospects for 2023. For ADG, we continue to see sales opportunities for the expanded portfolio of survivability solutions ADG is able to bring to the table. As we execute on announced business, we continue to pursue new contracts to deliver PPE consumables and also to supply innovative new survivability solutions to the defense and first responder markets. For ARS, we plan to strengthen the momentum built in the business in 2022, with further expansion of our portfolio of compounds and improvements in the segment's overall margin profile. We continue to view acquisitions as a potential source of new products that fit well with our client base and skill set and that fortify our supply chain. And for AEP, we see opportunities to strengthen this business with new product innovations, more emphasis on higher-margin products and diversification to new end markets. We look forward to keeping in touch with all of you about the progress we are making in the business in 2023.

As we wrap up our prepared remarks, we would like to thank the team at AirBoss for their dedication and work ethic throughout '22 and as we progress into '23. The performance of our business from both an operations and financial perspective are made possible by the contributions our employees make every day to innovate, drive production efficiencies and capture new market opportunities. We are grateful for the dedication and persistence of our entire AirBoss team. We also want to recognize the valued relationships we maintain with our customers and suppliers. Our partnerships with you remain a valuable point of differentiation and a pride for us as a company. I also want to thank our covering analysts, bankers, auditors and advisers for their support throughout 2022. And finally, I offer my thanks to our shareholders for their ongoing support to AirBoss. We will now start the Q&A session. Please be patient as we will aim to start with the sell-side analysts covering the company, followed by shareholders. As mentioned at the opening, this meeting is being made available both by conference call and by webcast. As an administrative convenience, we will now take the questions from those who have submitted questions through the conference call line and then open up the meeting to questions from those attending via webcast. After which, we'll then open the floor for questions from individuals attending here in person. At this time, we will proceed to questions, if any, which are queued up in the conference line.

Your first question is from Ahmed Abdullah with National Bank of Canada.

The first question I'll ask on Rubber Solutions segment. You called out the volumes were down about 24% with the vast majority of sectors being down. Can you call out maybe or elaborate further on, has there been a customer sector that was more of a drag versus another one? And how are your inventory levels at your customers right now looking ahead?

Chris, I'll ask you to take that.

Thank you for the question. It's a great question. Most of that reduction was in our tolling volume. And just if you recall, when we talk about tolling volume, that is related to customers that have large-scale custom mixing or compounding capabilities of their own that are able to in-source some of the material that they source to us throughout the year. So the largest drop was in that tolling mixing component. As you can see, we were able to make up some of that through focusing on more specialty compounding, but that is the main drop from there. But as we've progressed towards the end of the quarter, some of that started to rebound. We saw a little bit of that drop towards the end of Q4 and went into the first half of Q1 and started to rebound towards the end of Q1. So in terms of inventory levels, much of the inventory levels that they were carrying are starting to be depleted. So we're starting to see some more ordering that's a little bit more normalized. But again, on the tolling side, we're not seeing the massive return of all that volume, but we have some significant nontolling opportunities that are coming forth here in Q2 and Q3 that we feel pretty confident we'll be able to replace much of that volume.

Okay. And on the Engineered Products, you called out that the increase was due to higher volumes in SUV and light truck platforms, but we all are aware of improved arrangements with your customers. How much of that net sales increase was really also an adjustment to the pricing with key customers?

Yes, I think it's fair to say that the majority of it was the price negotiation -- the result of the price negotiations with our customers that were then supported by some additional volume on the light truck and SUV market.

The next question is from David Ocampo with Cormark Securities.

I guess I just wanted to start first on AEP. When I take a look at the revenue increase there, obviously, quite strong at 37%. I was wondering if you guys could break down how much of that lift is from the commercial renegotiations versus an improvement in volumes.

Yes. Thanks, David. As I mentioned earlier, the majority of that was from the commercial negotiations, and that was further supported with some additional volume. And we also have some new products that are coming online. But I'd say the result of the negotiations in Q4 of 2022 resulted in much of that improvement.