AirBoss of America Corp. (BOS) Q4 FY2025 Earnings Call Transcript & Summary

Hello, and welcome to the Fourth Quarter 2025 Conference Call for AirBoss of America. [Operator Instructions] I would now like to turn the conference over to Gren Schoch. Please go ahead.

Thank you, operator. Good morning, everybody, and thank you for joining us for the AirBoss Fourth Quarter and Annual '25 Results Conference Call. My name is Gren Schoch. I'm the Chairman and Co-CEO of AirBoss. With me today are Chris Bitsakakis, our President and Co-CEO; Frank Ientile, our CFO; Chris Figel, our EVP and General Counsel. Our agenda today will start with a review of the operational highlights for the quarter and year, followed by a discussion of our financial results before we open the conference line to questions. Before we begin, I'd like to remind listeners that our remarks today contain 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, our financial reports and our MD&A, all of which are available on SEDAR+ and our corporate website. We may also discuss certain non-GAAP measures. Reconciliation of these measures are available in our MD&A. Finally, please note that our reporting currency is in U.S. dollars. Therefore, references today will be in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Chris Bitsakakis for the operational review.

Thank you, Gren, and good morning, everyone. 2025 represented a marked improvement for AirBoss compared to 2024 despite pronounced economic and geopolitical headwinds that affected each segment to varying degrees. Compared to 2024, 2025 concluded with a $23 million increase in consolidated revenue, a $12 million increase in adjusted EBITDA and a free cash flow of $37 million, which helped drop our net debt to $67.6 million from $98.9 million at the end of 2024. This improved our net debt to trailing 12-month adjusted EBITDA to 1.99x compared to 4.51x at the end of Q4 2024. Despite the strong consolidated performance, AirBoss Rubber Solutions, or ARS, in particular, experienced significant market softness as key U.S. customers work to establish new more tariff-friendly supply chains while working with pre-existing U.S. raw material inventory. AirBoss Manufactured Products, or AMP, however, had strong performance across both its defense and rubber-molded products businesses, supported by deliveries under previously announced contracts and footprint optimization initiatives. Management at both segments continued implementing risk mitigation strategies in response to these challenges, including cost controls and continuous improvement initiatives that helped drive the concerted effort to improve profitability and strengthen the balance sheet. The company navigated ongoing uncertainty related to economic conditions, geopolitical developments, tariffs, inflationary pressures and supply chain disruption while maintaining focus on executing its long-term strategic plan. Given the cross-border nature of its operations, a significant portion of products manufactured in Canada are sold into the United States and may be subject to existing or future tariffs. While most products currently qualify under USMCA or CUSMA, the company continues to evaluate and implement contingency plans to mitigate potential impacts under existing agreements and more particularly in advance of any future trade negotiations or agreement negotiations -- renegotiations. Despite this environment of continued economic uncertainty, management remains focused on converting key opportunities to support sustainable long-term growth. The company currently expects volume recovery at ARS to commence midway through 2026, although the timing and magnitude of recovery could be affected by additional tariff duties or evolving trade restrictions or market conditions. ARS experienced continued and pronounced softness in Q4 2025 compared to Q4 2024, with revenue contraction and reduced margins driven by overall softness in most customer sectors. This was primarily attributable to tariff-related market conditions as customers continue to manage potential exposure through the sale of pre-existing inventories. As a segment, ARS continued to invest in research and development to support enhanced collaboration with customers and remains committed to executing its strategy focused on specialized products, expanded production of a broader array of specialty compounds and enhanced flexibility in attracting and fulfilling new business opportunities. AMP experienced overall volume improvement in Q4 2025 compared to Q4 2024, primarily driven by this defense products business and improvements in the rubber molded products business. The defense business had improvements in both revenue and gross profit, mainly driven by deliveries under recently announced awards. The rubber molded products had improved volumes despite continued volatility related to the original equipment manufacturers or OEMs, periodically shuttering production to rebalance vehicle inventory levels throughout 2025. During the quarter, the company substantially completed its relocation of its operations in Jessup, Maryland to Auburn Hills, Michigan to optimize its footprint. The business continued its focus on cost management, operational efficiencies, automation and diversification into adjacent product sectors. Management also continued its focus on operational improvements and working with key customers to leverage opportunities aligned with its growth initiatives. The company's long-term priorities consist of the following: Firstly, to grow the core Rubber Solutions segment by emphasizing Rubber Compounding as the core driver for sustainable growth and productivity, focusing on innovation and custom rubber compounding while aiming to expand market share through organic and inorganic means while striving to achieve enhanced diversification by broadening the product breadth through technological advancements and investments in specialty compound niches. And secondly, to focus manufactured products growth strategy on diversifying and expanding its range of rubber molded products while positioning current and future core defense products to take advantage of new growth opportunities within NATO and other partner customers around the world as many nations around the world set more aggressive defense spending goals. AirBoss continues to focus on these long-term priorities while investing in core areas of the business to expand a solid foundation that will support long-term growth. I will now pass the call over to Frank for the financial review. Frank?

Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in U.S. dollars. Percentage changes compare Q4 2025 to Q4 of 2024, unless otherwise noted. To be respectful of your time today, I will be brief in my summary of our Q4 2025 results. Starting from the top line, AirBoss' consolidated net sales for Q4 of 2025 were $106 million, an increase of 15.3% from $92 million in Q4 2024. This improvement was due to increased sales at AirBoss Manufactured Products, partially offset by lower volumes at AirBoss Rubber Solutions. Consolidated gross profit for Q4 of 2025 increased by 30.4% to $19.9 million compared with Q4 of 2024. This was primarily the result of increased sales from AirBoss Manufactured Products. Turning now to our individual segments. Net sales at AirBoss Rubber Solutions for Q4 of 2025 were $45.8 million, a decrease of 3.3% compared to Q4 of 2024. Volume decreased by 3.5% with declines across most customer sectors. Tolling volume was down 65%, while non-tolling volume was down 1.2%. Gross profit at Rubber Solutions for Q4 of 2025 was $5.3 million compared with $5.9 million in Q4 of 2024. The decrease in gross profit was principally due to lower volumes across most customer sectors and product mix, offset by managing controllable overhead costs and continuous improvement initiatives. At AirBoss Manufactured Products, net sales for Q4 of 2025 were $72.5 million, an increase of 50.4% compared to Q4 of 2024. The increase was a result of higher volumes in the defense products business and increases across the rubber molded product lines despite continued volume softness and volatility related to the original equipment manufacturers. Gross profit within AirBoss Manufactured Products for Q4 of 2025 was at $14.7 million compared to $9.4 million in Q4 of 2024. The increase was primarily a result of new business awards at AMP's defense products business, margin improvements at AMP's rubber molded products business, further supported by operational cost improvements in the segment by managing controllable overhead costs and continuous improvement initiatives. For the full year of 2025, consolidated net sales for AirBoss were $410.2 million, up 6% from $387 million in 2024. The full year gross profit for 2025 improved to $71.1 million, 17.3% of sales from $54 million, 14% of sales in 2024. For the year ended December 2025, net cash provided by operating activities was $49.1 million versus $8.8 million as at the end of 2024. Free cash flow for the year ended December '25 was $37.3 million versus negative $1.8 million in 2024. For the year ended December 2025, capital investments of $4.5 million were made by ARS and $6.6 million were made by AMP. These capital expenditures related to cost savings initiatives, growth initiatives, upgrading existing property, plant and equipment. On December 31, 2025, our net debt balance was $67.6 million versus $98.9 million at the end of 2024. We expect to fund the company's 2026 operating cash requirements, including required working capital investments, capital expenditures and scheduled debt repayments from cash on hand, cash flow from operations and committed borrowing capacity. The company's asset-based revolving credit facility provides financing up to $125 million with an accordion of $25 million. On December 31, 2025, $71.5 million was available under this facility and $24.3 million was drawn. With that, I will now turn the call over to Chris. Chris?

Thank you, Frank. Operator, at this point, we can open the line up for Q&A.

[Operator Instructions] Your first question comes from Ahmed Abdullah with National Bank.

You updated your strategic priorities to double down on defense products and remove the commentary around strategic review. Can you give us some color as to what drove that decision? And are you seeing any early green shoots related to the increased NATO defense spending you referenced earlier?

Yes. I mean, like any strategic review, it's not meant to go on indefinitely. And so we took some time to take a look at all of our different product lines and made some assessments in terms of what is sort of a long-term strategic growth priority for us and what may not be. And I think it really fell along the lines of how it fit into the vertical integration strategy that the company has. So from that perspective, we feel that strategic review is complete. It doesn't mean that we're in the process of divesting of any of those businesses that did not fit directly into that long-term strategic plan. However, we are still nurturing those businesses. We're still building them up and looking for the right opportunity to decide where they would best fit. So from that perspective, I think we have a very good and clear direction for the future of the business. In terms of the NATO spending, we are seeing significant opportunities as our partner countries around the world have made statements of increased defense spending. We see quite a lot of activity coming out of Europe. And we're hearing a lot of good things from the Canadian government, and we are in contact with the government here in Canada and throughout our NATO partners. So we're fairly optimistic that in this period of uncertainty around the world and increased defense spending that AirBoss Defense Group should have opportunities ahead that can really drive significant growth.

Okay. And during your period of strategic review, has there been any engagement around possible divestitures? Or was it really more of an internal process without really shopping around any lines?

It was really mostly an internal process. Although throughout the process, we were in contact with outside consultants in terms of what makes sense and what possible opportunities for divestiture could be out there. But again, the idea behind that is if something doesn't fit strategically to the long-term plan of the company to make sure that we maximize the value of it before we look at a divestiture. And that's the process that we're in right now.

Okay. Just switching gears to the ARS business. On the outlook commentary related to ARS, can you help us bridge the gap between the ongoing weakness here and your view of a recovery in mid-2026? What building blocks are you seeing that would kind of support that recovery taking place?

So we have a bunch of new customers that we're launching right now. And so we're looking at those volumes going forward to be able to estimate some level of recovery. We're seeing early this year increases from many of the customers that were quite slow last year. So we are assuming that -- and not just assuming because we have lots of conversations directly with our customers and the reductions were pretty broad-based across many of them. And so we saw this sort of industrial slowdown as our customers in the U.S. who -- their supply chains are really global, took the last 2 quarters of last year, worked off existing inventory and we're working on establishing new supply chains that were more tariff-friendly for them because a lot of their products coming in were -- had tariff supplied to them and -- but not the rubber, of course, because it was still covered under CUSMA. So as they were trying to reestablish their supply chains and bring some more efficiency into what was going on with them, they were getting rid of old inventory and their sales were dropping. We're seeing now in early this year some return of that broad base. And we are also launching new customers, some very high-volume customers and also some smaller customers on the specialty side that will drive increased margin. So we're assuming that through the ramp-up and launch phase here in the first and second quarter, we should be able to see those results going into the second half of the year. Now of course, that's predicated on any new and exciting information coming out of the U.S. administration related to CUSMA to tariffs and to any other sort of geopolitical events, but that's what our modeling is showing right now.

Your next question comes from Tim James with TD Cowen.

First question, just returning to the -- your expectation for a volume recovery in ARS midway through 2026. Does that mean you expect like a sequential improvement in volume as you go through the year? Or do you expect year-over-year volumes could actually turn positive middle of the year?

Yes. I mean if you look at Q1 and Q2 last year, they were pretty strong quarters. So I haven't compared our modeling to the quarters of last year. But what we're looking at is the performance in Q3 and Q4 of 2024. And as we look at the new customers that are coming online and some assumptions based on a recovery from what we saw late last year, we're seeing a sequential improvement from the beginning of the year into the second quarter that we should then carry forward into Q3 and Q4.

Okay. My second question, Chris, what work remains, if any, to prepare the company for a negative outcome with regards to CUSMA negotiations? And I'm just thinking in terms of sourcing materials and the locations of your own operations to limit cross-border shipments. Are you kind of in a good place, do you feel like in terms of risk mitigation at this point? Or is there other work that needs to be done?

No, I'd say we're in a good place. We did a lot of work all of last year, and we actually spent a lot of money taking every single compound, for example, that's currently compounded in Canada, taking it to our southern location, getting approvals to our customers, getting the approvals that we needed in place, running samples. So we did a lot of work to make sure that we were prepared for anything. I guess that work happened sooner than we needed it. And hopefully, we don't need it this year. But we're in a position where we have contingency plans set up that we're going to be able to handle whatever happens out of CUSMA. Now obviously, for us, clarity is the most important thing. I mean not knowing is really very difficult because you have to plan for any sort of inevitable event. We have done that, of course. But at the same time, if we had some clarity, we'd be able to know. For example, if in September, CUSMA was no longer there, we'd be putting into our contingency planning execution right now. So hopefully, the negotiations happen in a way that our business is not affected. But in a worst-case scenario, we have our contingency plans set up and ready to execute on them.

Okay. Just wondering next, if you could elaborate on the product mix changes in ARS that negatively impacted gross margin year-over-year in the fourth quarter.

Yes. It's -- I mean, it's interesting. Obviously, if you look at all of our competitors, and of course, one of them being a public company that it's very easy to look up. But all of our competitors had significant drops in volume last year and especially particularly in the last 2 quarters. And with that, you have to get a little bit more aggressive on pricing in order to defend your business from the open capacity that exists. So I think there's sort of a temporary drop in margin based on a bit more of an aggressive strategy to defend the business that we do have still. And I think that's really the biggest driver behind that. The other part of it is all of the contingency planning that we did last year required significant amounts of free samples basically that we had to make and provide to our customers, which then also reduced our gross profit in terms of doing that, but it was necessary in order to make sure that we have our contingency plans in place.

Okay. That's helpful. Just then finally, just thinking about '26, can you give us a sense for your CapEx requirements? Forgive me if I missed that earlier. And I'm also wondering, and I know this one is a hard one to sort of provide thoughts on, but working capital requirements in '26, whether you can sort of generate some cash from working capital this year, whether it may require some cash. Just those 2 items and the impact on '26 would be helpful.

Yes. Thanks, Tim. As it relates to capital, again, our investment, we believe, will be a moderate step-up from 2025, obviously, investing in projects that support payback and are part of the strategic growth from that perspective. But we'll basically be looking at maintenance CapEx plus a little bit more as it relates to the growth. And in terms of working capital, obviously, we have a strong focus and had a strong focus in a very successful year in 2025 with respect to managing working capital and converting obviously some of these sales opportunities into cash in a much quicker cycle. We expect 2026 to be an investment in working capital as we continue to launch some of the previously announced awarded programs as well as some new programs that are coming up. So we do anticipate there being a bit of a cash burn in '26 relative to '25.

Your next question is a follow-up from Ahmed Abdullah with National Bank.

Just on the rubber molded products, you mentioned an increase, and then you also mentioned in your release that there's volume softness and volatility related to OEM production. Can you just give us a bit more color as to what drove that increase in such a backdrop that has the softness and volatility?

Yes. No problem. Late last year, we launched the production of the MALO program for the defense group. So the rubber molding division ramped up multiple presses in order to begin the ramp-up for the deliveries of the molded overboots for the U.S. military contract that we had announced previously. The volume production there for that MALO is the highest volume production we've ever had. And so it required presses, machines and a lot of people and a ramp-up of volume that really drove a significant increase in the rubber molded business at a time when the auto side was sort of volatile, a little bit up, a little bit down depending on car lines and that sort of thing. So that's really what offset some of the volume reductions on that side.

Okay. And I guess one for Frank. On the delevering, we have no financials yet, but looking at your CFO, can we assume that the increase in the CFO in this quarter is primarily driven from a working capital inflow rather than an outflow?

Yes, it's definitely a working capital inflow, a combination of, again, some -- obviously, deliveries of the contracts with the quick conversion of cash. Also, keep in mind, Ahmed, from the restructurings and everything we've done in the previous periods, obviously, the lower cost base is also supporting it and then managing our direct working capital levers as we tightened up on inventory, really work to get our collections in faster. And obviously, the combination of those helped support the strong quarter from that perspective.

Okay. And I guess final one for me. Any updates on the real estate sale in Kitchener?

Yes. I mean we Obviously, it's still part of our long-term strategic plan to move out of that facility into a new modern facility. Having said that, with the drop and the softness in the condo market, it's made it a little bit trickier for developers to take on such a big project in this time of uncertainty. But certainly, we have lots of conversations ongoing almost on a weekly basis of people that are interested in what could transpire in that facility with us. Of course, we're not in a hurry to move at a discount. We're hoping to be able to get very close to what the appraised value is before we move on it. But there's lots of activity in that area. It's shifted a bit from a pure residential type development into more of a mixed use, which could include things like data centers and commercial locations and a variety of ideas that people are bringing to us. So we're still very active in that area, but we're also being very patient about it in that we're still operating there and still doing very good work there. So we're not in any hurry to fire sale it. So hopefully, as the residential construction rebounds a little bit and some of the other ideas that we're getting maybe start to solidify, we'll be in a position to announce something there. But we're not in a hurry, but we're still actively involved in lots of conversations about it.

There are no further questions at this time. I'll turn the call to Chris Bitsakakis for closing remarks.

Thank you, operator, and thanks again to everybody for attending today's call. Please feel free to reach out to us directly or through our Investor Relations team if you have any questions on our results or any questions in general. Thank you again, and have a great day.

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