AirBoss of America Corp

TSX:BOS

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the AirBoss Third Quarter 2024 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Gren Schoch, Chairman and Co-CEO. Please go ahead, Mr. Schoch.

[Peter Schoch, executive]

Thank you, operator. Good morning, everybody, and thank you for joining us for the AirBoss Third Quarter '24 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, followed by a discussion of our financial results before we open the conference line to questions.

Before we begin, I would like to remind listeners that our remarks today contain forward-looking statements, including our estimates of future developments. We invite listeners to review the risk factors related to our business in our annual information form and our MD&A, both of which are available on SEDAR plus on our corporate website. Also, we will discuss certain non-GAAP measures, including EBITDA. Reconciliations 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 we indicate otherwise.

With that, I'll turn the call over to Chris, for an operational review.

[Chris Bitsakakis, executive]

Thank you, Gren, and good morning, everyone. During the quarter, we were encouraged by the commencement of shipments under the previously announced Bandolier contract and the awarding of the isolation gown contract from HHS, which we believe both point to a rebound in our defense product line businesses. Since earlier this year, ADG has been awarded over $150 million in new contracts, which will be going into backlog into 2025 and beyond, and those results will be impacting our AirBoss Manufactured Products going forward.

In response to the current economic headwinds that continue to impact each segment, the company continued its risk mitigation plans by managing costs while focusing on continuous improvement efforts to offset some of the pronounced softness experienced in both AirBoss Rubber Solutions and in the rubber molded products business within AirBoss Manufactured Products. Management expects volume recovery to commence in early 2025, subject to inflationary pressures and the global geopolitical climate as well as the successful conversion of key opportunities.

Although ARS had a strong quarter in terms of margin expansion relative to the third quarter of 2023, the segment experienced additional softness compared to the second quarter of 2024, primarily driven by volume reductions across most sectors and saw reduced volumes compared to Q3 of 2023. Despite strong performance during the early part of 2024, there was pronounced softness carried over from Q2 of 2024 as sales were impacted by customers focused on reducing inventory levels through extended summer shutdowns.

The segment remains committed to executing on its strategy to deliver strong results with specialized products, expanded production of a broader array of white and colored compounds and enhanced flexibility in attracting and fulfilling new business through identified synergies and margin expansion. As a segment, ARS continued to invest in research and development to support enhanced collaboration with customers and the continued growth in the specialty compounding market, which we can now demonstrate in terms of the margin expansion that's been reported.

AMP experienced continued softness in Q3 2024 in the rubber molded products part of the business with some significant progress generated in the defense business. The rubber molded products operations were impacted by continued volume softness related to the original equipment manufacturers or OEMs, having seen them shutter production to rebalance vehicle inventory levels, which has been ongoing throughout 2024. The business continued its focus on managing costs and a commitment to drive efficiencies and best-in-class automation, as well as diversification of its product lines into adjacent sectors.

The defense business experienced some positive traction during Q3 of 2024, which is expected to continue into next year and beyond, supported by the commencement of deliveries on some previously announced contracts and additional overhead reductions carried out earlier this year to help mitigate the volume softness that was occurring earlier this year.

Management also continued its focus on operational improvements during the quarter and continue to work with its key customers with the goal of leveraging opportunities aligned with its growth initiatives. The company's long-term priorities remain the following: growing the core Rubber Solutions segment by emphasizing rubber compounding as the core drivers 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 the broadening of product depth technological advancements and investment in specialty compound niches.

Manufactured Products' growth strategy will be focused on diversifying and expanding its range of rubber molded products while simultaneously narrowing the range of defense products through a renewed focus on core competencies. And finally, execution of the strategic review of all product lines currently manufactured and sold by the company in its Manufactured Products segment, while targeting additional acquisition opportunities with a focus on adding new compounds and products, technical capabilities and geographic reach into selected North American and international markets. 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?

[Frank Ientile, executive]

Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in U.S. dollars. Percentage changes compare Q3 of 2024 to Q3 of 2023, unless otherwise noted. To be respectful of your time today, I will be brief in my summary of our Q3 2024 results. Starting from the top, AirBoss' consolidated net sales for Q3 of 2024 were $96.2 million, a decrease of 5.9% from the prior year due to lower volumes at ARS and lower sales at AMP's rubber-molded products business, partially offset by higher sales in the defense products business.

Consolidated gross profit for Q3 of 2024 increased by $2.3 million to $16.1 million compared to Q3 of 2023. This was driven by improved volume and mix at AMP, specifically in the defense business, partially offset by additional softness experienced in the rubber molded products operation, along with additional softness across the ARS customer sectors.

Turning now to our individual segments. Net sales at ARS for Q3 of 2024 were $54.5 million, a decrease of 6.7% compared to Q3 of 2023. ARS experienced a volume decrease of 17.5% with declines in most sectors. Tolling volume was down 74.3%, while non-tolling volume was down 8.2%. Gross profit within ARS for Q3 of 2024 was $8.3 million, which was consistent with Q3 of 2023. This gross profit remained in line with the prior year on lower volumes, primarily driven by margin expansion strategies, product mix, management of controllable overhead costs and continuous improvement initiatives.

At AMP, net sales for Q3 of 2024 were $45.5 million, a decrease of 5.7% compared to Q3 of 2023. The decrease was mainly in the rubber molded products business, offset by improved sales in the defense products business. Specifically, the rubber molded products business had lower volumes in SUV and light truck platforms driven by economic headwinds and increased vehicle inventories, which impacted production schedules across certain OEMs and Tier 1 suppliers in the quarter.

Gross profit within AMP for Q3 of 2024 was $7.8 million compared to $5.6 million in Q3 of 2023. This was primarily the result of improvements in the defense products business, operational cost improvements and reduced overhead costs, primarily offset by unfavorable volume and product mix in the rubber molded products operations.

Cash used in operating activities during Q3 of 2024 was $1.1 million compared to $8.7 million provided in Q3 of 2023. During Q3 of 2024, the company invested $1.6 million in capital equipment versus $1.5 million in Q3 of 2023. Capital expenditures were related to growth initiatives and maintaining existing plant and equipment. By the end of Q3 of 2024, our net debt balance was $97.2 million versus $88.2 million at the end of Q4 of 2023. We expect to fund the company's 2024 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. Our current revolving credit facility provides financing up to $150 million. At the end of Q3 of 2024, $112.4 million was drawn against this credit facility.

With that, I will now turn the call over to Chris. Chris?

[Chris Bitsakakis, executive]

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

[Operator]

[Operator Instructions] The first question is from Ahmed Abdullah.

[Ahmed Abdullah, analyst]

So on the rubber side, obviously, volume pressure continues. However, you communicated that you expect a volume recovery in the early part of 2025. Can you give us some more color around what visibility you have around this expectation and what you're seeing or hearing out there in that regard?

[Chris Bitsakakis, executive]

Yes, certainly. At this point in time, much of what we're being told is somewhat anecdotal from our top customers. And we're hearing from them that they expect a rebound in their end markets as they're seeing greater order intake. As they close out going into Q4. So at this point, it's still anecdotal because we serve so many different kinds of markets, and we don't have, let's say, long-term releases. We have ongoing weekly conversations with all of our top 10 customers. And generally, this is the information that we're being given at this point in time for their end markets.

[Ahmed Abdullah, analyst]

Okay. And I mean, the softness in ARS was driven by inventory reductions, as you've alluded to. Are these inventories at your customers right now approaching normalized levels? How far do you think you are from that?

[Chris Bitsakakis, executive]

Yes. I think we expect some continued softness in Q4, again, in-depth conversations with our customers. During July of this year, several of our customers took extended summer shutdowns in order to reduce inventory. And normally speaking, as they get into December, and this has been kind of ongoing year after year, going into December and over the cutoff for their year-end, they try not to carry a lot of inventory, which is why we expect some continued softness. But again, normally, what happens is early in the first quarter, then they have to try and rebuild up some of that inventory. And given the fact that several of our key customers are seeing higher order intake than they've seen for the last couple of quarters, that's been sort of the basis for our understanding that things should start to recover.

[Ahmed Abdullah, analyst]

Okay. Tolling volumes are continuing to drift lower. Is there a market shift here that's causing clients to steer clear of a tolling order versus non-tolling? Or is it you strategically more focusing on the non-tolling side due to better margins or something along those lines?

[Chris Bitsakakis, executive]

It's actually both. In terms of the actual tolling market, we haven't really lost market share to our custom compounding competitors. As the industrial base has been relatively slow, the tire companies have been in-sourcing their own rubber compound into their own captive capacity for rubber compounding. So in speaking to other people that operate in the space that are more reliant on tolling volume, their volumes are even significantly lower than ours.

So it's clearly an industry-wide phenomenon with -- once the big tire companies start in-sourcing product, it takes a lot of that custom compounding market back into their own captive capacity, which does not make it available for our capacity. So from that perspective, we haven't lost anything other than the in-sourcing. And we've been seeing this year-over-year. When the economy slows down a bit, there's so much capacity at the tire companies, they bring in everything they can. And then when the economy starts to heat up again, they have to outsource more.

And the reason we, 4, 5 years ago, decided to take more of an approach of starting to wean ourselves off of that tolling is because of that lumpy nature of that business. It's kind of feast or famine. Either we're working tons of overtime, trying to keep up, can't get enough material to the tire companies and in other years or quarters, everything has been in-sourced and the capacity we had open for them remains open. So the reason we've been weaning ourselves off of that is because of that variable nature of that revenue stream. We're still going to have capacity available for tolling. It's going to be more opportunistic, and we're going to utilize it when it's there, but we also want to continue to increase the base of business that we know is steady and is there quarter after quarter.

[Ahmed Abdullah, analyst]

Okay. And just last one for me on the defense business. Glad to see that the business is showing strong signs of improvement. Can you give us a sense as to what the pacing will be for the new HHS contract? Are we expected to see shipments start in 4Q and ship out equally over the next 12 to 18 months? How are you seeing timing evolve on that front?

[Chris Bitsakakis, executive]

We're still working with HHS on the delivery schedules for that. They're trying to make sure that they have the warehousing space that they need and the logistics on their side. So we're in discussions with them about that right now. So I can't give you an exact answer, but my suspicion is once we work out the logistics schedule, it will be a very, very even sort of delivery plan after that month after month, it will be a similar amount. It won't be -- will be -- let's say, it won't be variable. It will be whatever the total volume is divided by the number of months that we have to do it. And we'll be able to communicate that a little bit better as we get a better view as to what their delivery schedule looks like on that side.

[Operator]

[Operator Instructions] There are no further questions registered at this time. I would now like to -- we do have a question in the queue from Mr. Schneider from Cormark Securities.

[Adam Schneider, analyst]

Sorry about that. I just had a follow-up question on the HHS contract. I was wondering which facilities these are being manufactured from, and if there are any start-up costs required to fulfill the contract? And if you could provide any color on the margin for that business?

[Chris Bitsakakis, executive]

Yes. So the gowns will not be manufactured in our facilities. We're working with a supply chain that includes outsourced manufacturing that we've been working with -- as you probably know, we've been working with HHS on this requirement for many years now. So we have a very advanced supply chain setup of manufacturers that are not within our facilities. And the start-up costs are being borne by the contract manufacturers that we're using. And normally, we do not give product line by product line margin information for competitive reasons.

[Adam Schneider, analyst]

Okay. And just one quick other one. What does HHS need to see for them to want to exercise the $25 million option? Is that funding dependent? Or do they want to see your ability to deliver quality product on time?

[Chris Bitsakakis, executive]

I suspect it's more about their funding. We've demonstrated throughout our relationship with HHS doing miraculous things during the pandemic and after the pandemic. And we have a very good reputation, a very good delivery rating with HHS. So I can say confidently that, that is not the concern. The concern is mostly about funding from their end.

[Operator]

The next question is from Ahmed Abdullah from the National Bank of Canada.

[Ahmed Abdullah, analyst]

Just a follow-up on the margins. At AMP, they've obviously improved dramatically on the back of the added defense business. And now you have the Bandolier contract and the HHS contract overlapping in 2025. Do you expect a steady year of stable EBITDA margins for the segment? So can we think of a level similar to the 7% EBITDA margin we just saw in Q3? Is that possible for the full year 2025?

[Frank Ientile, executive]

I think, Ahmed, it's Frank here. I think, yes, it is possible, although there are still some moving parts. So it would be difficult to say at this time. But as Chris mentioned, once Bandolier is in delivery mode, HHS, we anticipate. And as Chris said, once we've got that locked in, we'll start to see that sort of profile moving forward.

[Ahmed Abdullah, analyst]

Okay. And do you have any idea when you might be locked in, like you're suspecting it's somewhere in 2025 or first half, second half?

[Frank Ientile, executive]

I think it's going to be first half from everything we're seeing right now.

[Operator]

There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Bitsakakis.

[Chris Bitsakakis, executive]

Thank you, operator. This concludes the question-and-answer session. I would like to thank 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 further questions. And thank you for participating today. Have a great rest of your day.

[Operator]

All participants please continue to -- thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.