AirBoss of America Q2 2024 Earnings Report

AirBoss of America EPS Results

• Actual EPS: -C$0.14
• Consensus EPS: -C$0.06
• Beat/Miss: Missed by -C$0.08
• One Year Ago EPS: N/A

AirBoss of America Revenue Results

• Actual Revenue: $130.48 million
• Expected Revenue: $142.42 million
• Beat/Miss: Missed by -$11.94 million
• YoY Revenue Growth: N/A

AirBoss of America Announcement Details

• Quarter: Q2 2024
• Date: 8/13/2024
• Time: N/A
• Conference Call Date: Wednesday, August 14, 2024
• Conference Call Time: 9:00AM ET

AirBoss of America (TSE:BOS) Corp is a Canada-based manufacturer of rubber-based products for the resource, military, automotive and industrial markets. It operates in three segments: Rubber Solutions, Engineered Products, and AirBoss Defense Group. The Rubber Solutions segment includes manufacturing and distribution of rubber compounds and distribution of rubber compounding-related chemicals. The Engineered Products segment includes the manufacture and distribution of anti-noise, vibration, and harshness dampening parts. The AirBoss Defense Group is engaged in the manufacturing and distributing of personal protection and safety products and the manufacture of semi-finished rubber-related products. Its geographical segments are Canada, United States, and Other countries.

AirBoss of America Q2 2024 Earnings Call Transcript

Key Takeaways

• AirBoss reported Q2 net sales of $95.4 million, down 16.4% year-over-year, driven by lower volumes in both manufactured products and Rubber Solutions.
• The Rubber Solutions segment saw a 13.1% sales decline to $59 million but maintained a $10.3 million gross profit through margin expansion via higher-end product mix and cost-saving initiatives.
• Manufactured Products sales fell 22.7% to $40.7 million, with a $1.8 million gross loss exacerbated by softness in defense and automotive volumes and a $6 million inventory write-down of gloves and gowns.
• Management emphasized aggressive cost cutting and new automation initiatives, and expects the recently awarded Bandelier defense contract—now shipping in Q3—to ramp margins in late 2024 and into 2025.
• Operating cash flow was $11.1 million in Q2, net debt rose to $92.6 million, and $111.8 million remains drawn on the $150 million revolving credit facility, with full-year funding expected from cash, operations, and available borrowing capacity.

Presentation

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the AirBoss of America second quarter 2024 conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star, then zero. I would now like to turn the conference over to Gren Schoch, Chairman and Co-CEO. Please go ahead.

[Gren Schoch, Chairman and Co-CEO at AirBoss of America]

Thank you, operator. Good morning, everybody, and thank you for joining us for the AirBoss second quarter 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 Lentile, our CFO, and 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 risk factors related to our business in our Annual Information Form and our MD&A, both of which are available on SEDAR and on our corporate website. We will discuss certain non-GAAP measures, including EBITDA.

[Gren Schoch, Chairman and Co-CEO at AirBoss of America]

Reconciliation of these measures are available on 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'm going to turn the call over to Chris for the operational review.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Thank you, Gren, and good morning, everyone. During the second quarter of 2024, AirBoss focused on operational execution and aggressive deleveraging activities, despite the continued impact of the economic slowdown occurring in North America. The company addressed the effects of the economic slowdown with aggressive cost cutting in an effort to mitigate any profitability pressures. These actions were particularly focused on the AirBoss Manufactured Products defense business, as was previously announced. The ability to recover from the volume shortfall over the remainder of 2024 will remain subject to the ongoing challenges related to the market softness and ongoing global geopolitical challenges and successful conversion of key opportunities. We are, however, encouraged by the recently announced Bandolier awards, which have begun shipping in Q3, as well as increased momentum in the CBRN defense product lines at AMP.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Despite weakness in the U.S. industrial base driving lower volumes, AirBoss Rubber Solutions improved gross margin percentage year-over-year through continued migration towards higher-end niche products and operational cost improvements. Although overall volume is down across multiple sectors, the onboarding of new customers has helped offset some of the downturn in legacy volumes and is expected to drive additional growth as the economy recovers. The segment remained committed to executing on its strategy to deliver strong results with specialized products and expanded production of a broader array of compounds while driving forward on key long-term strategic imperatives, including newly launched automation initiatives. AirBoss Manufactured Products experienced continued softness in Q2 of 2024 in both the rubber molded products and defense businesses.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

The rubber molded products operations were impacted by continued volume softness related to the original equipment manufacturers shuttering production in the current quarter to rebalance vehicle inventory levels. 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 continued softness in Q2 of 2024 across the product portfolio as sourcing delays with key customers continue. However, the recent delivery orders on CBRN products, as well as the Bandolier award, are expected to provide increased momentum into the second half of 2024 and well into 2025.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

As previously communicated, the company's long-term priorities remain as follows: growing the core rubber solution segment by emphasizing rubber compounding as the core driver for sustainable growth and productivity, focusing on innovation and customer rubber compounding, while aiming to expand market share through organic and inorganic means, while striving to achieve enhanced diversification by broadening a product breadth through technological advancements and investments in specialty compound niches. Secondly, 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 thirdly, the undertaking of a strategic review of all product lines currently manufactured and sold by the company in its manufactured product 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.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

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 lentile, CFO at AirBoss of America]

Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in US dollars. Percentage changes compare Q2 of 2024 to Q2 of 2023, unless otherwise noted. I also want to remind you that AirBoss now reports results under two segments, AirBoss Rubber Solutions and AirBoss Manufactured Products. To be respectful of your time today, I will be brief in my summary of our Q2 2024 results.

[Frank lentile, CFO at AirBoss of America]

... Starting from the top line, AirBoss's consolidated net sales for Q2 2024 were $95.4 million, a decrease of 16.4% from the prior year, due to lower sales at manufactured products, in addition to lower volumes at Rubber Solutions. Consolidated gross profit for Q2 2024 decreased by $9.1 million to $8.5 million, compared with Q2 2023. This was driven by decreased volume at manufactured products, and specifically in the defense business, with additional softness experienced with the rubber molded products operations, along with a $6 million glove and gown inventory write-down. Turning now to our individual segments. Net sales in the Rubber Solutions segment for Q2 of 2024 were $59 million, a decrease of 13.1% compared to Q2 of 2023. Rubber Solutions experienced a volume decrease of 20.2%, with declines in most sectors.

[Frank lentile, CFO at AirBoss of America]

Tolling volume was down 82.7%, while non-tolling volume was down 12.3%. Gross profit within Rubber Solutions for Q2 of 2024 was $10.3 million, which was consistent with Q2 of 2023. This gross profit remained in line with prior year, primarily due to margin expansion strategies, product mix, management of controllable overhead costs, and continuous improvement initiatives. At manufactured products, net sales for Q2 of 2024 were $40.7 million, a decrease of 22.7% compared to Q2 of 2023. The decline was across most product lines. Specifically, the defense product lines experienced continued softness, and 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 One suppliers in the quarter.

[Frank lentile, CFO at AirBoss of America]

Gross profit within manufactured products for Q2 of 2024 was a loss of $1.8 million, compared to $7.3 million in Q2 of 2023. The decrease was primarily the result of a $6 million inventory write-down related to the inventory of nitrile gloves and medical gowns. Cash from operating activities during Q2 of 2024 was $11.1 million, compared to $16.9 million from Q2 of 2023. During Q2 of 2024, the company invested $3.6 million in capital equipment versus $2 million in Q2 of 2023. The capital expenditures were related to growth initiatives and maintaining existing plant and equipment. By the end of Q2 of 2024, our net debt balance was $92.6 million versus $88.2 million at the end of Q4 of 2023.

[Frank lentile, CFO at AirBoss of America]

We expect to fund the company's 2024 operating cash requirements, including 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 Q2 2024, $111.8 million was drawn against the credit facility. With that, I now turn the call over to Chris.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

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

[Operator]

We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question comes from Ahmed Abdullah with National Bank of Canada. Please go ahead.

[Ahmed Abdullah, Equity Research Analyst at National Bank of Canada Financial Markets]

Yes, good morning. Thanks for taking my question. On the ARF volumes, you mentioned in your remarks that some inventory reductions and destocking at customers, that's specifically for ARS. Any visibility on how long that destocking can last? Is there an overhang that you see progressing throughout 2024?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Yeah, no. In fact, if I'm understanding the question correctly, it's kind of the opposite, Ahmed. What we're seeing now is with the softness in the industrial base in the U.S., our key legacy customers that were ordering truckloads of material, keeping inventory, and ordering ahead so that they could turn around orders that they got from their end customers quicker, are now ordering significantly smaller quantities and turning them over quicker. So my suspicion is, and what I expect for the balance of 2024, is really related to what the overall economy is gonna do, in the U.S. As the economy turns, as interest rates come down, and we're starting to see some indication of that through vehicle sales and other indicators that we have.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

As that happens, we expect our customers to then start building up their inventories again as they go forward. The timing of that, I'm not sure exactly, but I'd say it's gonna happen fairly quickly once once the economy starts to generate more traction. They'll start ordering the larger, the larger quantities. They'll start stocking their inventory because it's gonna become important to them that they turn around the the new incoming orders quicker sooner rather than later.

[Ahmed Abdullah, Equity Research Analyst at National Bank of Canada Financial Markets]

Okay. So it's, it's not a destocking issue that's in terms of how much inventory is already in the channels.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

No, if not—if nothing else, they'll probably stay as they are now until the economy starts to show some better signs of life, and then there will probably be a more aggressive restocking.

[Ahmed Abdullah, Equity Research Analyst at National Bank of Canada Financial Markets]

... Okay, perfect. And in the instance that volume pressure continues, do you have more room for cost-cutting in the ARS business to be able to continue the margin expansion trend that we've been seeing in the segment?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

We have a very aggressive continuous improvement plan. We have installed some new automation, as an example, in one of our facilities in the U.S. That hasn't started to generate the improvement yet, so we see that as some upside on the margin side there. However, product mix will have a fairly significant impact on that as well. As we saw in July, for example, some shutdowns taken from customers that were on the higher end of the margin spectrum. We see that coming back around in August and September, so we expect some level of recovery. But I think the answer to your question is yes, we still have ideas that we are implementing in our continuous improvement plan.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

For example, we've seen conversion costs come down in Q2, and we have additional improvements coming in Q3 and Q4, which will continue reducing our conversion costs. However, like I said earlier, product mix will have some sort of play in this, in that equation as well.

[Ahmed Abdullah, Equity Research Analyst at National Bank of Canada Financial Markets]

Okay. Finally, for me, just, you know, a modeling question. It's good to see that the Bandolier order is starting deliveries. Should we think about this to be equally divided over the next 18 months, or is it all gonna come in one quarter versus the other? How should we think about it from a modeling perspective?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

I think you're gonna see a ramp-up to about Q4 and Q1 of next year, and then some stability at that level for the balance of 2025. I don't know, Frank, if you have another-

[Frank lentile, CFO at AirBoss of America]

No, that's about right. There will be a ramp-up over the next couple of quarters, and then it'll be more of a steady state through the end of the delivery period.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Probably by late Q4 and early Q1, we will be at that steady state.

[Ahmed Abdullah, Equity Research Analyst at National Bank of Canada Financial Markets]

Okay. Okay. I'll pass the line. I'll requeue. Thank you.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Thank you.

[Operator]

The next question comes from Adam Schneider with Cormark Securities. Please go ahead.

[Adam Schneider, Equity Research Associate at Cormark Securities]

Hi, thank you for taking my question. I'm just filling in for David today. My first question is, do you guys still have any inventory write-downs relating to the gloves and gowns?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Adam, at this point, we believe the net realizable value is at market and they're priced to move, so we don't anticipate any further reductions at this point.

[Adam Schneider, Equity Research Associate at Cormark Securities]

Okay, great. Thanks. And just another question: What caused the margin strength in ARS? Was it mostly mix, or are they being more disciplined on contracts?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

I think it's a combination of things. Product mix, certainly. You know, a couple of years ago, we announced that we were driving towards more specialty compounding, and that drove our acquisition of Ace Elastomer as an example. But within the traditional ARS plant outside of Ace Elastomer, we've made a conscious effort to drive more into specialty, higher-end compounding. And as the tolling volumes have decreased, we've been able to fill some of that volume with that exact type of product line, which is our evolution towards that, and you see that in the margins going forward.

[Adam Schneider, Equity Research Associate at Cormark Securities]

Okay, great. And, just one more quickly. Do you see any... You might have touched on this already, but do you see any early signs of recovery in ARS volumes?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

We anticipate recovery in ARS volumes to be very closely linked to the overall improvement in the US industrial base. So there's a lot of people out there that are predicting, you know, interest rates dropping and driving some recovery. We haven't seen that year to date as yet, but we are optimistic that in the fall, as interest rates drop further, we will see a recovery in the industrial base, which will have a direct impact on the legacy customers of ARS. You know, just as one small example of that, we're seeing a reduction of about 2.5% on the sale price of the vehicles in North America, so there are more incentives out there.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Interest rates are starting to drop, and we expect them to drop more come the fall. When you factor that into vehicle sales, which impacts our AEP product lines on the automotive side, as well as the overall industrial base, around June timeframe, the sales rate was at about 15.3 million vehicles in the U.S. Today, it's at about 16.1 million vehicles annualized. So we see the signs that there is starting to be a turnaround in these areas, but we expect that to be a little bit more prominent and show up at ARS later this year as interest rates start to drop.

[Adam Schneider, Equity Research Associate at Cormark Securities]

Okay, great. Thanks. I'll requeue.

[Operator]

The next question comes from Kevin Chiang with CIBC. Please go ahead.

[Kevin Chiang, Managing Director at CIBC]

Thanks for taking my questions. Just back on the inventory comment, you do note in your inventory note that you have an agreement to sell the remaining inventory of nitrile gloves at book value. Just trying to get a sense of... it sounds like you have a sales agreement in place, so the risk of this not moving is low, so if you can confirm that. And then secondly, what that might imply for margins in AMP, or how should we be thinking about the flow-through of this inventory onto AMP margins in the near term? I suspect it would be just optically dilutive, just as you kind of rid yourself of this inventory. Am I correct on that as well?

[Frank lentile, CFO at AirBoss of America]

Yeah. Hi, Kevin. It's Frank. Yeah, to answer your question, we have a steady flow of sales now, and we estimate the consumption to occur between now through the Q1 of 2025. And to your point, it'll be more of a cash flow infusion on the conversion, but obviously, not realizing margin from that perspective, as you said.

[Kevin Chiang, Managing Director at CIBC]

Okay. And is—do you expect to get through most of this, I don't know, in the back half of this year, in Q3, or is the timing hard to call?

[Frank lentile, CFO at AirBoss of America]

I'd suggest right now that it would be sort of steady between Q3 right through to Q1 of 2025, sort of evenly distributed.

[Kevin Chiang, Managing Director at CIBC]

Okay. That's that's helpful. You know, you, you, you Chris, you, you, you highlighted you know, the the the challenging macro, which which is, you know, a common theme theme we've heard from other industrial exposed companies we we cover. Just wondering what that means for the M&A pipeline. I I I know that might not be a a a free cash flow priority priority in the in the immediate near term, but I have to imagine that that some of these smaller players are probably suffering as as well. And and just wondering what that means for, in terms of what you're seeing on the M&A pipeline, in terms of you know, I guess, seller interest uh, in terms of maybe valuations.

[Kevin Chiang, Managing Director at CIBC]

Are those becoming a little bit more tempered here, just as the market kind of transitions into maybe a slower economic growth period here?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Yeah, we are certainly seeing more opportunities start to rise, particularly in some of the smaller players, and some of them are interesting. We're keeping an eye on that, and as you know, Kevin, we're trying to keep a very close eye on our long-term strategy. And as we look at a potential nonorganic move, this is probably not a bad time to be able to look for opportunities that otherwise wouldn't exist, and so we are keeping a close eye on that. We have seen more pop up now than we have in the past. And certainly, we are poised to make sure that we're in a position to take advantage if the right opportunity comes around.

[Kevin Chiang, Managing Director at CIBC]

Yep, that, that kind of makes sense. And maybe just last one for me. You know, tolling volume's down almost 83%, you know, non-tolling down 12%. I guess, how much of this is just, just, I'll call it macro headwinds? Are you seeing share shift or, you know, in terms of potential, competitors acting irrationally? Or like, for example, the tolling volumes being down this much, is that just... That's getting insourced, and you're not really seeing a ton of share shift, as maybe some players looked at irrationally in this tougher market?

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Yeah. No, we're not seeing a ton of share shift. We're seeing, in fact, probably more the other way, where we're gaining here and there, and we're continuing down that path as we're onboarding new customers. But yeah, it's more of a general macro thing, particularly on the tolling side. When the big tire companies have open capacity, they insource everything, and when the economy is really hot and they don't have open capacity, they outsource a lot more. A lot of the key higher, more technically important compounds that we do for our tire customers, we're still doing them, but the massive tolling volumes only happen when they are running out of capacity.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

Right now, particularly a lot of their capacity is tied to vehicle sales, as you can imagine, Tier one sales, in addition to, trucking volumes. So when you see, trucking volumes increase, when you see, sales volumes in the OEM increase, then generally speaking, the tire companies start to run out of capacity, and that's where they overflow, you know, significant volumes of tolling opportunities towards us. The good news here, I guess, if you want to look at it this way, and it's evident in our margin profile. The good news is we're still doing a pretty good job, driving our strategy towards higher end, more specialty-type compounding, which is also more stable, and it doesn't kind of flow in and out.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

At the same time, we've implemented significant continuous improvement opportunities which show in our conversion cost reduction in Q2 over Q1, and we're continuing that path in Q3 and Q4. So when you put all those together and then the tolling volume comes back, well, then that's a pretty nice filler to absorb some overhead, make a little bit of money, and drive that forward. So I think we can, with all the improvements that we're making, when some of that tolling volume comes back, we'll be able to convert even better on it. So I think that's kind of the way we're looking at it.

[Chris Bitsakakis, President and Co-CEO at AirBoss of America]

What we can't predict is when that overall macroeconomic climate starts to improve, but certainly we're seeing signs of it now, and we're hopeful that with some additional interest rate cuts, we'll be able to demonstrate that in our numbers later this year and early next year.

[Kevin Chiang, Managing Director at CIBC]

That, that's very helpful commentary. Thank you very much. I'll pass the line here. Thank you. Best of luck in the back half of the year.

[Frank lentile, CFO at AirBoss of America]

Thanks, Kevin.

[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, President and Co-CEO at AirBoss of America]

Thank you, operator, and thanks, everyone, 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 anything in general. Thank you again, and have a great rest of your day.

[Operator]

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

Participants

Executives

• Chris Bitsakakis, President and Co-CEO
• Frank lentile, CFO
• Gren Schoch, Chairman and Co-CEO

Analysts

• Adam Schneider, Equity Research Associate at Cormark Securities
• Ahmed Abdullah, Equity Research Analyst at National Bank of Canada Financial Markets
• Kevin Chiang, Managing Director at CIBC