AirBoss of America Corp

TSX:BOS

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the AirBoss of America Second Quarter 2021 Investor Conference Call. I would now like to turn the conference over to Gren Schoch, Chairman and Chief Executive Officer. Please go ahead.

[Peter Grenville Schoch, Chairman & CEO]

Thank you, operator. Good morning, everyone, and thank you for joining us for the AirBoss Q2 '21 Results Conference Call. My name is Gren Schoch. I'm the Chairman and CEO of AirBoss. With me today are Chris Bitsakakis, our President and COO; Frank Ientile, our CFO; and Chris Figel, our Executive VP and General Counsel. In terms of an agenda, we'll take a few minutes to review some operational highlights for the quarter and then briefly review our financial results before opening the call to questions. Before we begin, I'd like to remind you that today's remarks include non-IFRS measures, reconciliations between our IFRS and non-IFRS results can be found in our MD&A. Additionally, management's outlook for '21 and beyond, anticipated financial and operating results, our plans and objectives and our answers to your questions will contain forward-looking information within the meaning of applicable securities laws. In particular, expectations around the impact of the COVID-19 pandemic, our business acquisitions, results of operations and financial condition and that of our customers and partners are uncertain and subject to change. This forward-looking information represents our expectations as of today and accordingly, is subject to change. Such information is based on current assumptions that may not materialize and is subject to a number of important risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on the forward-looking information. A description of the risks that may affect future results is contained in AirBoss' AIF and MD&A, which is available on our corporate website and in our filings with the Canadian Securities Administers on SEDAR at www.sedar.com. With that, I'm going to turn it over to Chris Bitsakakis, our President, to give you a review.

[Chris Bitsakakis, COO & President]

Thank you, Gren, and good morning, everyone. I'm happy to report another record quarter of profitability in Q2 2021 and positive momentum as we enter the second half of 2021. The company continues to perform well, supporting our strategy of innovation and diversification, driving continued growth and profitability. Notably, we continue to effectively manage our operations through the second quarter despite many customers, including automakers, tire makers and related suppliers struggling with supply chain issues, including freight delays out of Asia, driven by the lack of available containers, increased demands on raw materials as global economies recover, unprecedented increases in raw material pricing driven by supply constraints and availability and electronic chip shortages. Our record profitability was driven primarily by an increase in sales, continued operational cost containment and our potential acquisition in late October of a 45% ownership of AirBoss Defense Group that we did not already own for $20 million in cash and 3.5 million shares of AirBoss at CAD 17.87 per share. During the quarter, we also announced an increase to our dividend to CAD 0.10 per quarter, a 43% increase from the prior dividend. This decision reflects a step change in our scale, capabilities, sales opportunities and, of course, profits stemming from the realization of the strategy we have been driving for the last several years, which culminated in a record 2019, a record 2020 and another prolific year this year. As it relates to operations, in Q2, we saw significant year-over-year increases in sales in our Rubber Solutions and Engineered Products segments, which were significantly impacted by COVID in the second quarter of 2020, as customer volumes improved though they continue to be impacted by ongoing global supply chain issues. During Q2, AirBoss Defense Group successfully completed its contract to deliver powered air purifying respirators or PAPRs and related peripherals to the U.S. Department for Health and Human Services, or HHS, in April. While we have provided our products to the health care sector in the past, the completion of these PAPR contracts, which are critical to National Healthcare has widened the aperture of opportunity for ADG to include the health care sector on a much larger scale. Our ability to deliver on these PAPR contracts to FEMA and HHS on time and on budget and the sheer scale of our domestic production capacity has resulted in us becoming a trusted supplier to HHS, which is responsible for maintaining the national strategic stockpile of PPE. At the end of the first quarter, we received an award from HHS worth up to USD 288 million for the supply of patient examination nitrile rubber gloves. Near the end of Q2, we commenced initial deliveries of these gloves to HHS. The continued penetration into the health care sector has contributed to the ongoing customer sector diversification of our business, which has been the key strategy of ours to mitigate the impact of any economic or industry-specific cycles. As it relates to ADG, the segment continues to execute on its growth strategy, including expanding its proprietary products. ADG completed the acquisition of BlackBox Biometrics, developer of the Blast Gauge System of lightweight wearable blast overpressure sensors, which we anticipate will be a future growth opportunity for this segment. This acquisition enabled us to protect B3's technology from competing interests and we anticipate that it will help us improve our margin profile and cross-sell B3's products to other militaries. B3's technology and products also have applications to health care markets as its sensor systems monitor, record and analyze blast and impact events to protect not only war fighters but also first responders and athletes from traumatic brain injuries. As I noted, ADG has commenced initial deliveries of nitrile patient examination gloves to HHS. We expect the vast majority of this contract to be recorded as sales in the third and fourth quarter, leveraging our decades of global supply chain management expertise and relationships, we believe we have established a competitive advantage through the following; our expertise in rubber products, our exclusive relationships we have entered into with the global nitrile rubber glove suppliers and our trusted domestic supplier status with the U.S. as well as other governments. We believe these factors to position us well to win further nitrile glove contracts in the future. The strong demand for these gloves is anticipated to continue with an estimated global shortage of 215 billion nitrile gloves and the forecasted tripling of health care spend on PPE by 2027, according to the Health Industry Distributors Association. Further glove contracts are just 1 portion of the more than $1 billion in contract opportunities over the next 24 months that we are competing on, including other new large government health care PPE contracts as well as domestic and international contracts for supply of CBRN Wearables and potential orders for new Husky 2G vehicles and related vehicle sensors and equipment. We remain confident we will win a portion of these. As I noted previously, this pipeline excludes the potential competition for the supply of gas masks to the U.S. military, which we are hopeful to compete for and win as our industry-leading low burden masks we did in recent years in Canada and Australia. Such a contract could be worth upwards of $1 billion of sales over an extended time frame, potentially beginning in 2024. It also excludes large-scale rollout of our blast gauges, which are currently in field testing with the U.S. Army and in competition for the U.S. Special Operations Command. The magnitude and continued increase in sales opportunities compared to previous years gives us significant optimism for continued growth at ADG in the coming years. Our longer-term priorities include capitalizing on ADG's enhanced scale and capabilities to pursue an array of growth and value creation opportunities in the broader survivability solutions segment, serving both defense and first responder markets. While in the short to midterm, ADG is anticipated to continue to be our primary driver of profits, we are also expecting improvements in our Rubber Solutions and Engineered Products segments, though there is still potential for COVID-19-related weakness, including ongoing supply chain challenges in the second half of this year on these segments. At AirBoss Rubber Solutions, we are seeing the benefits of the sizable capital investments of approximately $16 million that we made in AirBoss Rubber Solutions over the past 30 months, notably in upgraded equipment and growth initiatives, including increasing our compounding capacity in the Southeastern United States and adding dedicated color and specialty compounding lines at our flagship facility in Kitchener, Ontario. ARS continues to focus on optimizing its equipment capacity, specifically in the Scotland Neck, North Carolina plant while continuing to optimize the use of automated small ingredient weighment system in Kitchener, which is running at steady capacity. This segment recorded strong year-over-year increases in volumes as well as progressive traction this quarter. However, continued significant raw material price increases, coupled with international freight constraints, proved challenging on the supply chain, which carried over from the previous quarter. This was further challenged by labor shortages, primarily driven by the pandemic, which are anticipated to continue into the third quarter. ARS' development in sales in niche products, including colored rubber, continues to grow in line with our margin expansion strategy with new customers. Additionally, ARS has continued to develop new compounds, proprietary compounds and continuously improve existing compounds to maintain its leadership position as a supplier of custom rubber compounds and formulations. We are also taking advantage of our scale and global supply chain management expertise to onboard new customers seeking new suppliers in the current environment to drive volume and growth in our core markets. The continued focus on operational excellence supported production of a broader array of compounded products, black, white and color as well as providing enhanced flexibility in attracting and fulfilling new business. We have made further inroads in utilization of our small volume specialty 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. In Kitchener, we have continued to invest in its R&D expertise and lab capital to support enhanced collaboration with customers and better reflect the company's focus on innovative R&D and proprietary technical solutions. Our longer-term priority for ARS remains to grow the segment by positioning it as a specialty supplier of choice in the consolidated North American market with a growing focus on building defensible leadership positions in selected compounds. In Engineered Products, we have continued to focus on our operational improvement plan, including managing variable costs and focusing on sustaining a stable workforce while weathering the volume volatility in the automotive sector and specifically on our products for SUV, light truck and mini-van platforms. During the second quarter, AEP continued its focus and commitment to drive efficiencies and best-in-class automation as evidenced by the installation of a series of new injection molding presses, the latest in almost $14 million in capital investments we have made over the past 30 months, notably in growth and cost-saving initiatives to upgrade the segment's capital equipment to the latest standards with the aim of leveraging automation for high volume, low-margin commoditized parts and enabling us to increase production of more technically sophisticated parts, which can generate higher margins. A second robotic work cell in addition to the one that we put into production in Q3 of last year is scheduled for installation later in 2021 and intended to be ready for production in early 2022. AEP generated significant year-over-year growth over Q2 2020 when COVID resulted in a temporary shutdown but saw a sequential decline in sales, as global supply chain challenges and shutdowns in Asia added to logistical challenges associated with the supply of certain molded products. Despite these near-term challenges, our longer-term priority remains to drive improved performance from AEP through a combination of disciplined cost containment, client relationship expansion, new product development, sector diversification and a more aggressive stance on the renegotiation of low-margin contracts. Our continued -- our continuing record results have placed us in a strong financial position and have given us the ability to be aggressive with opportunities that present themselves. While we have a clear strategy to grow organically, historically, we have also undertaken strategic M&A in order to acquire important parts of our supply chain, diversify our products and customer base and penetrate new sectors. We continue to seek ways to leverage our balance sheet, strength and accelerate our growth strategy through M&A as evidenced by our recent merger with CSI and acquisition of B3. At ADG, we are examining upstream and downstream M&A opportunities. This includes acquiring control of components used in our existing products or onshoring certain aspects of our supply chain. We are also looking at potential complementary products for our medical health care and Chem/Bio products in our defense and survivability systems. Within our AirBoss Rubber Solutions, we are reviewing potential M&A opportunities that will accelerate this segment's growth strategy, including reinforcing the investments we've already made in expanding from traditional black high-volume product lines into lower volume but typically higher margin color and specialty markets as well as expanding into select regions in the U.S. to broaden our reach. Within AirBoss Engineered Products, our M&A focus is on opportunities to expand our access to and product set for nonautomotive sectors. As it relates to our outlook, our growth is not dependent on M&A. It is difficult to predict the continued normalization of the economy in the near term due to the impact of COVID-19 and global supply chain issues. But as I have stated previously, the outlook remains healthy over the medium term with industry estimates for approximately 4% top line growth over the next 5 years. We have obviously outperformed the industry over the past number of years and our aim remains to continue expanding our market share while increasing our margins through a combination of product mix and operational efficiencies, complemented with strategic and disciplined M&A. Our focus remains to cultivate strong internal processes that lead to organic growth in excess of market growth, while assessing both tuck-in and transformational acquisitions as we look to leverage our strong balance sheet to accelerate our strategic growth targets. With that, I will now pass the call over to Frank Ientile for the financial review. Frank?

[Frank Ientile, Chief Financial Officer]

Thank you, Chris, and good morning, everyone. As a reminder, please note all dollar amounts presented are in U.S. dollars, except for dividends per share, which are in Canadian dollars. Percentage growth figures are for Q2 2021 versus Q2 2020, unless otherwise noted. Starting from the top, external sales increased 5% to $118 million on a consolidated basis, largely due to strong growth in volumes at our Rubber Solutions and Engineered Products segments and continued execution at ADG, including on HHS contracts. Consolidated gross profit increased 6% with margin steady at approximately 28% driven by the increase in sales and government assistance. Adjusted EBITDA decreased slightly by 2% to $25 million, with the increase in gross profit offset by higher administrative costs and smaller foreign exchange gain. The large sequential gain compared to Q1 2021 relates to growth in sales profit, partially driven by initial commencement on the HHS glove contract and increased government assistance. Profit and adjusted profit attributable to the owners of the company was just under $18.5 million or $0.65 per diluted share, a record for AirBoss compared to $6.7 million or $0.27 per diluted share in Q2 of 2020. Turning to our individual segments. ADG's net sales decreased 31% to $57 million, with the decline due to the execution on the FEMA contract in Q2 of 2020, which was partially offset by the completion in Q2 of '21 of deliverables under the HHS PAPR contract in addition to the commencement of deliveries under the new HHS nitrile glove order. Gross profit at AirBoss Defense Group decreased by 11% to $25 million, with a decrease driven by the change in sales previously noted. Net sales at AirBoss Rubber Solutions increased 79% as Q2 2020 was a low point for the industry due to the initial impact of COVID-19. The sales increase was driven by large increases in tolling and mixing volumes with increases across the vast majority of sectors due to increased momentum at most customers' operations despite continuing supply chain challenges related to raw material supply and elevated freight costs. Gross profit at ARS increased by 40%, driven by the increase in volumes and sales and managing controllable overhead costs, partially offset by lower gross margin of approximately 13% of net sales compared to just under 17% in Q2 of 2020 due to increased raw materials, labor and logistics costs and a decrease in government-directed subsidies. Net sales in Engineered Products segment more than doubled to $28 million due to much stronger volumes in the SUV, light truck and mini-van platforms as Q2 2020 had closures of most of the original equipment manufacturers and Tier 1 customers in the industry. However, AEP experienced softness towards the end of the quarter specifically surrounding the global electronic chip shortages, which continue to challenge production schedules across all OEMs and Tier 1 suppliers, combined with raw material shortages and freight and logistics bottlenecks. Gross profit at AEP increased by $3.4 million to $2.7 million. This was primarily a result of higher volumes in the automotive sector, a continued focus on controllable operational cost containment and government-directed subsidies, partially offset by higher labor, material and logistics costs. Free cash flow for the quarter was an outflow of approximately $9.7 million, with increased profits offset by cash used for working capital of $17.6 million and tax payments of $7.4 million. The working capital outflow was used for shipping costs to deliver nitrile gloves for HHS and inventory primarily for material at the Rubber Solutions segment in relation to higher volume and at the Engineered Products segment for safety stock due to anticipated shipping delays. CapEx was $3 million in Q2, split relatively equally in the quarter between growth initiatives, cost savings and replacement of upgrading equipment. CapEx has been approximately $17.5 million over the trailing 12 months. During the quarter, $7 million in cash was used for the B3 acquisition and a further $5 million related to the 2020 acquisition of the minority interest in ADG with the final $5 million payment made this past July. Our balance sheet and liquidity is in a strong position to support further M&A and other internal growth investments as well as the announced dividend increase. During the quarter, we announced that we had increased our revolving credit facility from $60 million to $150 million to fund upfront costs under the contract to provide nitrile patient examination gloves to HHS. As at the end of the quarter, we had a net debt of $12.9 million for a net leverage ratio of 0.12x EBITDA. We are reaffirming our guidance ranges for 2021 as provided in our March 16, 2021 news release and reiterated on May 12. Our current guidance for 2021 excludes potential upside opportunities, such as any other significant contract wins or material M&A. Operator, that concludes our prepared remarks this morning. We would now like to open the call to questions.

[Operator]

[Operator Instructions] The first question is from Kevin Chiang from CIBC.

[Kevin Chiang]

Congrats on a solid Q2 there. Maybe just turning to Engineered Products. Just given what's happening in the auto supply chain. I'm interested in hearing what you're seeing as you enter into, I guess, Q3 and maybe what your thoughts are on overall production in North America in the back half of the year. And given the strong gross margin print in the second quarter, is that something you think you can hold on to even as you kind of work through this very fluid production situation in North America?

[Chris Bitsakakis, COO & President]

Yes, Kevin, I'd be happy to answer that. What we are seeing and hearing right now, particularly the big elephant in the room is this chip shortage thing that seems to be having a domino effect combined with shipments of Asia that there are many constraints both cost-wise and availability of capacity for shipping overseas. And we see a fairly significant constriction of the supply chain continuing on into the end of this year. Having said that, the chip suppliers are telling us that by the middle of the -- end of the third quarter into the beginning of the fourth quarter, they should be seeing some relief in terms of their ability to supply. However, most forecasting services are assuming that's going to be closer to early 2022. So we expect these shortages to continue. We expect the supply chain to continue to be constrained throughout the balance of this year, and we expect raw material costs to continue to be escalating as the global economy starts to pick up. Now of course, if there is any more additional slowdowns from a fourth wave of COVID-19, we may see some sort of pause in that economic recovery. But at this point in time, there's plenty of headwinds to go around in that automotive space. However, most people are forecasting those to be concluding sometime in Q4 of this year or Q1 of next year.

[Kevin Chiang]

That's helpful. And I know you -- part of the improving profitability within AEP is, maybe for lack of a better work or kind of repricing lower quality contracts or maybe lower quality revenue. Do you find that's been easier given the supply chain disruptions and that your OEM customers that might be underpriced, are looking to secure product from suppliers that can deliver such as yourselves? Or has that initiative been pushed out as maybe that OEM -- maybe focused on the chip shortage and repricing other contracts isn't a priority for them?

[Chris Bitsakakis, COO & President]

Yes, that's an excellent question. From our perspective, it's kind of a tale of 2 worlds. Approximately 75% of our customer base out of AirBoss Engineered Products has been working with us very helpful, understands sort of the long-term picture on the supply chain issues and are working with us to address it. I mean just to give you an example, we've had to deal with 17 force majeures this year. Prior to that, the most we've ever had in a year is 3. So it's been quite an intense time period for us. And thankfully, the strength of our supply chain leadership and the breadth of our global reach within AirBoss of America, we've been able to mitigate a lot of that. And in 75% of the cases, our customers have worked very closely with us on those issues. 25% of our customers or at least 25% of our contracts have been much more difficult in that the customers have shown very little interest only because they're getting so bombarded by so many people at the same time. It's kind of hard to get on the top of their list to get in front of them and have some sort of cooperative discussion around fixing the contractual issues, the supply shortages and those kinds of things. So I'd say we're doing better than most companies in this area, but we continue to have some concerns as we go into the latter half of this year, at least with a small number of our contracts, which we still need to get raw material price relief, which we don't have yet and some sort of concessions on supply chain disruptions that they need to work with us on. So we continue to push it. And like I said, we're so far 75% successful, which is probably much better than most of our competitors, but we still have some work to do.

[Kevin Chiang]

That's great color. And maybe just last one for me, and I appreciate it's still early days here. But as we look past 2021 into 2022, you do lay out a very robust pipeline of growth opportunities in your MD&A and in your release. I'd be interested in knowing when you look at the run rate EBITDA you've accomplished in 2020 and what you're guiding to in '21. If you were to hold that run rate, how much of that is already, let's say, secure when you look out into 2022 versus maybe contracts you need to go out and win in order to maintain the level of earnings power you've seen over the past couple of years here?

[Chris Bitsakakis, COO & President]

Yes. Well, when you look at 2019, which was a record year for us, our pipeline was significantly smaller compared to where we're at today. Going into 2020, our pipeline was significantly smaller than what it is today. And so going into '22, we're sitting on the largest pipeline of blue-chip opportunities that we've ever had. So although we can't announce wins right now, if you consider that a percentage of those wins will happen, we feel pretty good that the momentum that we've had in our organic growth going into -- from '18 to '19, '19 to '20, '20 to '21, we are in a better position now for '22 than we were for '20 and '21 or '19, especially. So we feel pretty confident that we're going to be able to continue this growth. And we're also pretty confident that given the strength of our balance sheet, we should be able to make some interesting and formidable acquisitions going forward, which we haven't really done in the past. And when you consider the fact that even with all that growth and all the products that we're quoting on right now, we still haven't sold significant numbers on Blast Gauge, but those contracts are coming up in 2022 potentially. And we have new products coming through the pipeline. We have a new mask that we're developing that's in for NIOSH approval right now that we think is going to be a really big seller going into 2022 that we've never sold before. We have a lot of the Husky sales that we've kind of forgone the past 2 years while we were growing everywhere else. Those contracts are starting to come up and be negotiated now. So yes, we feel pretty confident for 2022. We can't guide you to what that top line is going to be right now, but we can tell you that our pipeline of opportunities is stronger than it was going into either '21 or '20.

[Operator]

The next question is from Maggie MacDougall from Stifel.The next question is from Tim James from TD Securities.

[Tim James, Research Analyst]

Congratulations on a good quarter. My first question, just, Chris, on the -- you cited over $1 billion in opportunities over the next 24 months. I'm wondering, one, if you could give us a bit of a sense for what's the average, very approximately, contract value within that basket of opportunities? And is there any way you can provide a bit of a sense for the expected timing, including over what period they generate revenue? Or maybe the last part of my question, is that $1 billion for revenue over the next 24 months? Or is that $1 billion in contracts that you could secure over the next 24 months?

[Chris Bitsakakis, COO & President]

It's $1 billion in contracts that we could secure over the next 24 months. Generally speaking, though, the turnaround time from being awarded these contracts that we're looking at right now to when we start deliveries is not years. It's not like the automotive industry where you get awarded a contract 4 years before the car gets built. In this particular case, we are normally within the same calendar year or the same 12 months getting award and starting deliveries. In terms of your question on the range, it's hard to give you an average on that because there's contracts that are as small as $10 million and $15 million, there's contracts in the hundreds of millions as well. So it's kind of a range of opportunities. And as we've mentioned earlier, that does not include Blast Gauge, which we think we're in a program of record competition right now that we should hear about by the end of Q4. So we're pretty optimistic that as these contracts get awarded, the revenue will be realized within the 12 months of the award.

[Tim James, Research Analyst]

And so just to go a little further there, should -- like do you expect some of these contracts to come to fruition this year? And again, I realize the nature of the timing and gauging, it's very difficult. But should some of these come to fruition and be confirmed this year? Or could these all be contracts that are actually finalized in 2022?

[Chris Bitsakakis, COO & President]

Yes. I think there's the potential for some revenue still this year on some of those contracts. I think a lot of -- as we get closer to the end of Q3, of course, the probability then shifts into -- more into 2022. But we are still tracking some potential awards this year that would start some revenue generation this year. But like as I said, as we get into September, October, that mostly shifts into 2022.

[Tim James, Research Analyst]

Okay. Just wondering maybe you could talk about, a question for Frank, I suppose, the working capital requirements, thank you for the detail on sort of what's transpired here in the second quarter. By the time we get to the end of the year, can you give us a sense for whether working capital will still be a net drag on the business? Or should most of the impact that we're seeing reverse itself? And maybe a bit of color on Q3 specifically on that front would be helpful.

[Frank Ientile, Chief Financial Officer]

Yes. Tim, it's Frank here. A great question. And just as we've mentioned previously, given primarily working capital tied up to support obviously inventory for some of the challenges mentioned as well as the delivery of the HHS nitrile glove order, we see a continued drag on the cash flow for Q3, but we do anticipate by the end of Q4 being back to slightly above Q4 2020 cash levels as we complete the order and obviously continue to convert some other contracts that are in delivery now. But we do anticipate a further drag in Q3 as was always planned and was also tied to the bulge in order to help support and fund the HHS nitrile glove order.

[Tim James, Research Analyst]

Okay. So you mentioned back to -- or hopefully back to cash levels equivalent to Q4 '20. For the year, do you expect working capital still to be a net drag or a net user of cash? Or could it actually generate cash, working capital?

[Frank Ientile, Chief Financial Officer]

I think it might generate marginal cash at the full year, but it would be close.

[Tim James, Research Analyst]

Okay. Okay. That's helpful. My last question, Chris, just turning to Engineered Products. Could you give us a bit of an update on the cost structure of that business now relative to competitors in the market? And I'm thinking in particular because there's been some new investment and efficiencies going in there. And maybe with a reference to both prior to adding the new presses and then sort of post the addition once you get everything in place that you are planning.

[Chris Bitsakakis, COO & President]

Yes, I think with the targeted size and focus of the investments that we've made in this facility, I think we are going to be world-class leading edge technologically in rubber to metal bonded NVH products. And I think -- so I think that investment plan ends around October of this year as we start installing that second fully robotic automated work cell. So we've accomplished our task of bringing the technology level to the highest world standards with the most efficient labor utilization and the highest level of automation and throughput. And so we're pretty proud of where we're at technologically there. Of course, many of those improvements are just being installed right now. And so we expect the second half of the year to be an improvement operationally over the first half of the year because of this turnover of the asset base. However, given the climate of significant labor shortages or raw material increases, some difficult contracts that we're trying to renegotiate, it's hard to see that exactly on the bottom line. But as we take care of those other issues and things start to stabilize, I think the rest of the world will see what we as management are seeing now, which is a highly efficient operation that is poised really well to compete not only in -- and compete and be more selective on the automotive growth that we have and compete on the nonautomotive side in a very, very strong way compared to our competitors. So we're fairly optimistic that way. And as we remind everyone, we continue to consume rubber in that division where that profitability doesn't show up at AirBoss Engineered Products. It resides within AirBoss Rubber Solutions. So as we look at that integrated supply chain and the backward integrated supply, we're pretty confident going forward that our strategy is going to play out correctly. Of course, there will be a bunch of noise right now with everything that's going on with COVID-19 through labor and raw materials and shipping and force majeures and all that kind of stuff that clouds it a little bit. But the mid- to long term, I'd say we're pretty optimistic right now that we're on the right track.

[Operator]

[Operator Instructions] The next question is from Ben Jekic of PI Financial.

[Ben Jekic, Senior Diversified Industries Analyst]

Great number, guys. Just I would say 2 questions. Number one is on the government assistance. Can you just give an update on how long would that last quarter, the amounts and the impact?

[Frank Ientile, Chief Financial Officer]

Yes, Ben, it's Frank here. For Q2, the Canadian subsidies amounted to $995,000 relative to Q1, which was actually just over $2 million. We don't anticipate an effect from sort of July going forward to really be receiving much at all, and there's also a clawback there, so we wouldn't be recognizing any relative to the latest changes. So we anticipate that going down and not being really affecting the financials from Q3 moving forward.

[Ben Jekic, Senior Diversified Industries Analyst]

Okay. Perfect. And the second question, maybe I'll ask both of them at the same time. So just maybe Chris can answer, the $1 billion in contracts over 24 months, is that mostly AirBoss Defense? And I guess sort of the extended question is just maybe on a higher level, when you deal with customers in Rubber Solutions and Engineering Products, is there a bit of a halo effect coming like given that AirBoss as a whole is generating such momentum, like are you feeling that there is a bit more added receptivity in these 2 other segments?

[Chris Bitsakakis, COO & President]

Yes. I mean we're certainly getting a lot of attention as a company in the rubber and plastics industry even if you read the R&D news and that sort of thing. Some of the excellent work that ADG has done to help in the fight against COVID-19 has given our company, I'd say, some goodwill and has opened some doors for us and people recognize our name more. And so I think from that perspective, some of the work that we've been doing on the PPE side has helped the other segments as well. In terms of the pipeline itself, ARS, as an example, has -- to this day, a pipeline of new opportunities that's significantly larger than what it was in the past, how many years put together. So however, the ability of ADG to kind of pull in these big contracts, that's not exactly the way it works at ARS or AEP for that matter. ARS and AEP are more like a series of singles and doubles and triples, where ADG has those singles, doubles and triples, but then hits a big home run once in a while and pulls in some pretty big revenue, those large-scale contracts, you won't see them at ARS. Like, you won't see ARS announcing a $288 million contract. It's more building up the business and driving and taking market share and that sort of thing. But -- so certainly, a big portion of our pipeline is ADG, but the other 2 divisions are participating. And when you compare where they're at compared with to where they were at before, they are also having an excellent forward-looking opportunities for them significantly higher than they've seen in the past.

[Operator]

Next question is from Tim James from TD Securities.

[Tim James, Research Analyst]

Just a quick follow-up here, maybe for Frank. I just wondering if you can, the total $6.5 million, I think it was in government forgiveness that came in the quarter. How should we think about allocating that amount to each of the 3 segments?

[Frank Ientile, Chief Financial Officer]

Yes, Tim, $5.5 million was allocated to Engineered Products group and just over $900,000 is allocated to our Scotland Neck facility, which is part of the Rubber Solutions segment. And the bulk of it, I'd say 90% of it, was allocated to cost of sales, the rest was SG&A for each of those in proportion.

[Operator]

The next question is from Maggie MacDougall from Stifel.

[Margaret Anne MacDougall, Head of Research]

Just one question on my end. So I noticed some discussion around potential for M&A. And I was wondering if you could talk a bit about what multiples you're seeing for potential deals in terms of purchase price of EBITDA or maybe earnings if that's more applicable. And then if there's sort of like a post pre-synergy multiple consideration that you're taking into account when you go about looking for deals.

[Peter Grenville Schoch, Chairman & CEO]

Well, Maggie, they're all over the map depending on what segment it is and what we're looking at. I mean, we've seen some that we have tried to buy that have ended up going for multiples as high as 16. Generally, rubber compounding multiples are between 9 and 11. Obviously, those are multiples that are significantly higher than we trade at. So we need to try to buy things cheaper than that or structure it with earnouts, such as we did with the B3 acquisition that we made earlier this spring. So we have to try to buy -- let's put this way, we can't just go out there and buy EBITDA at the multiples that things are trading at. So we have to buy -- we have to try to find things which are really synergistic and which where 1 plus 1 equals 3 rather than 1 plus 1 equals to 2. I don't know if I answered your question or not, but...

[Margaret Anne MacDougall, Head of Research]

Sure. So you're -- I mean, basically, you're saying that multiples are varying depending upon what kind of business it is you're considering. And then because of your present valuation, you do look at synergies as being quite valuable in terms of making financial sense of the transaction?

[Peter Grenville Schoch, Chairman & CEO]

Right.

[Chris Bitsakakis, COO & President]

And Maggie, one of the things that we're trying to do now, and we have been doing for the past few years is to develop relationships with companies that we think would be complementary to our stable of companies and build those relationships over time so that when the opportunity arises to acquire them, we're acquiring them prior to them getting to an auction or some sort of process, which generally when private equity and other groups get involved it starts to drive up those multiples. So we try and do a lot of that work upfront, develop those relationships, make sure that within the industries in the space that we compete in, we know who the players are and they understand our desire that we have a vision for perhaps putting the companies together and then selling them on that vision and being able to negotiate prior to some sort of auction or some sort of process. And we think that that's going to yield some success for us going forward as well.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Chris Bitsakakis for any closing remarks.

[Chris Bitsakakis, COO & President]

Thank you, operator, and thank you again to everyone for attending this morning's call. We are proud of how we have performed this year, and I want to thank our employees across the organization for this. We are excited about the future of the company going forward, and we hope everyone stays safe. Until then, I hope you're all well. Thank you very much.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.