Q2 2024 AirBoss of America Corp Earnings Call

Code. 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 1 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 shock chairman and co-ceo please go ahead.

Thank you, operator. Uh, good morning everybody. And thank you for joining us for the air boss second quarter results conference call

My name is Gran shock. I'm the chairman and co-ceo of verbos with me today are Chris fukas, our president and Co CEO.

Frank and Tilly our CFO. And Chris Miguel are the 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 lines questions.

Before we begin, I would like to remind listeners that our remarks today contain forward with your statements, including our estimates of future developments.

We evaluate your listeners to review risk, factors related to our business, in our annual information form.

and our MDA mdna, both of which are available on Cedar and on our corporate website,

we will discuss certain non-gaap measures including ebitda reconciliation of these measures are available in our mdna and finally please note that our reporting currencies in US Dollars. Therefore references today will be in US Dollars unless we indicate otherwise

With that, I'm going to turn the call over to Chris for the operational review.

Thank you, grant and good morning everyone.

During the second quarter of 2024, are boss 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 Bandelier Awards which have begun shipping in Q3 as well as increased momentum in the cbrn defense product lines at amp.

Despite weakness in the US 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.

Airbus manufactured products, experience. Continued softness, in Q2 of 2024, in both the rubber molded products and defense businesses, 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 his product lines into adjacent sectors.

The defense business experience. Continued softness, in Q2 of 2024 across the product portfolio at sourcing delays with key customers continue. However, the recent delivery orders on cbrn products, as well as the Bandelier award are expected to provide increased momentum into the second half of 2024 and well into 202025.

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 breathe through technological advancements and investments in specialty compound niches.

And thirdly, the undertaking of a strategic review of all product lines, currently manufactured, and sold by the company, and its manufactured product segments, 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 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 US dollars, percentage changes compared to Q2 of 2024 to Q2 of 2023 unless otherwise. Noted, I also want to remind you that Airbus. Now reports results under 2 segments, airboss rubber Solutions, and Airbus manufactured products.

To be respectful of your time today, I will be brief in my summary of our 22 2024 results.

Starting from the top line airbox is 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, decrease by 9.1 million to 8.5 million compared with Q2 of 2023.

This was driven by decreased volume at manufactured products and specifically in the defense business with additional softness, experience, with the rubber molded products operations, along with the 6 million, glove and gown inventory right down

Turning. Now to our individual segments, net sales and the rubber solution segment for Q2 of 2024 were 59 million, a decrease of 13.1% compared to Q2 of 2023.

Rubber Solutions. Experience, the volume decrease of 20.2% with the clients in most sectors.

Pulling volume was down 82.7% while now. 12 volume 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 growth 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.

That the client was across most product lines.

Specifically the defense product lines experienced continued softness, and the rubber molded products business had lower volumes and 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 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 million dollar inventory, rate down related to the inventory of Nitro 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.

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.

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

We will now begin the question and answer session to join the question queue. You may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speaker-phone, please pick up your handset before pressing any keys to withdraw your question. Please press star then 2

Our first question comes from Ahmed Abdullah with National Bank of Canada. Please go ahead.

My question um on the ARs volumes, you mentioned in your remarks that some inventory reductions and these stocking at customers. Um that's specifically for ARS. Any visibility on how long that the stocking can last um is it an overhang that you see progressing throughout 2024

Yeah, no. In fact, if I'm understanding the question correctly, it's it's kind of the opposite, Ahmed. Um, what we're seeing now is with the the softness in the in the industrial base in the US.

Our key Legacy customers that we're ordering truckloads of material, keeping inventory and ordering ahead, so that they could turn around orders, that they got from their end, customers quicker and now ordering significantly smaller quantities and turning them over quicker. So, my suspicion is, and what I expect for the, the balance of 2024 is really related to what the overall economy is going to do, uh, in in the US. Um, as the economy turns as interest rates come down, and we're starting to see some, some, uh, indication of that through vehicle sales. And, and, and other indicators that we have as that happens, we expect, uh, our customers to then start building up their inventories again. Uh, as they go forward, the timing of that, uh, I'm not sure exactly. But I'd say it's going to happen fairly quickly once, uh, once the economy starts to, uh,

Generate more traction. Uh, they'll start ordering the larger the larger quantities. They'll start stocking their inventory because it's going to become important to them that they turn around the the new incoming orders quicker sooner rather than later.

Okay. So it's it's not at the stocking issue. That's uh, in terms of how much inventory is already in the in the channels.

No. If if not if 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.

Okay, perfect. And

um in the instance that volume pressure continues, uh, do you have more room for cost cutting? Uh in in the ARs business to be able to continue the margin expansion Trend that we've been seeing in the segment.

We have a very aggressive continuous Improvement plan. Uh we have installed some some new automation as an example in in uh in 1 of our facilities uh in in the US.

Um, that hasn't started to generate the Improvement yet. So we see that as some upside, uh, on the margin side there. However, uh, product mix will have, uh, a fairly significant, uh, impact on that as well as we saw in July, for example. Um, some shutdowns taken from uh, customers that uh, were on the higher end of

The margin Spectrum. Uh, we see that coming back around in August and September, so we expect some sort of level of recovery, but I think the answer to your question is, yes. Uh, we still have, uh, ideas that we are implementing in our continuous Improvement plan. Uh, for example, we've 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 cost.

However, like I said earlier product, mix uh will have some uh, sort of uh play in this in the in that equation as well.

Finally, for me just um, you know, modeling question. Um,

It's good to see that the Bandelier order uh is starting deliveries uh should we think about this to be equally divided over the next 18 months or is it all going to come in 1 quarter versus the other? How should we think about it from a modeling perspective?

um, I think you're going to see, uh,

A ramp up to about uh Q4 and q1 of next year, and then some stability at that level for the balance of 2025. I don't know if Frank, if you have another know that 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 whereby by late Q4 and early q1, we will be at that steady state

Okay.

Okay, I'll uh I'll pass the line. I'll reach you. Thank you.

Thank you.

And the next question comes from, Adam Schneider with core Mark Securities. Please go ahead.

Hi. Uh, thank you for taking my question. I'm just filling in for David today. Um, my first question is, do you guys still have, um, any inventory, right? Downs relating to the gloves and gowns.

Paid, uh, any further reductions at this point?

Okay. Great thanks. And um, just another question, uh, what caused the margin strength in ARS was it mostly makes or are they being more disciplined on contracts?

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

Okay, great. And uh, just 1 more quickly. Uh, do you see any? You might have touched on this already, but do you see any early signs of recovery in ARS volumes?

Um, we anticipate recovery in, ARS volumes to be very closely linked to the overall, uh, Improvement in the US industrial base. Uh, so there's a lot of people out there that are predicting, uh, you know, interest rates dropping and then and

Driving some recovery. Uh, we haven't seen that, uh, year to date as yet, but we are optimistic that in in the fall, as interest rates, dropped further. Uh, we will see, uh, a recovery of the industrial base, which will have a direct impact on impact on the Legacy customers uh, of of ARS, you know, just as 1, small example of that, we're seeing uh a reduction of about 2 and a half percent on the sale price of the vehicles and and in North America. So there are more incentives out there. Uh, interest rates are are starting to drop and we expect them to drop, more come, come the fall and when you factor that into vehicle sales, which impacts our a product lines on the on the automotive side, as well as the overall industrial base, uh, around June time frame. The, the the sales rate was at about 15.3 million vehicles in the US. Uh, today, it's at about 16.1 million, uh, vehicles annualized.

So, we see, uh, the signs that there is starting to be a turnaround in, in these areas, but we expect that to be a little bit more prominent and show up uh, at ARS uh, later this year as interest rates start to drop.

Okay, great thanks. I'll uh, read to you.

And the next question comes from. Kevin Chiang with CIBC, please. Go ahead.

Thanks for taking my questions. Um, uh, just back on the inventory. Comment, um, you you you do know, um, in your inventory note that, uh, you have an agreement to sell, the remaining inventory of Nitro gloves, uh, at Book value. Um, just trying to get a sense of um, it sounds like you have a sales agreement in place. Um, so the the risks of the risk of this not moving is is low. So if you can confirm that and then and then secondly, what that might imply for for margins in am or how should we think, how should we be thinking about the flow through of this, the this inventory um, onto amp margins in the near term? I suspect it would be just optically dilutive just to just a just as you kind of rid yourself of this inventory. Am I correct on that as well?

Yeah. Hi Kevin. Uh this is Frank uh yeah to answer your question. We we have a steady flow of sales now and uh we estimate the consumption to occur between. Now through the q1 of 2025 and to your point uh it'll be more of a cash flow uh infusion on the conversion but obviously, uh not realizing margin from that perspective. As you said,

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

I'd suggest right now that it would be sort of steady uh, between, uh, Q3 right through to q1 of 2025 sort of evenly distributed. Okay. That's uh, that's helpful.

Um, you know, you you Chris, you, you highlighted, um, you know, the the challenging macro which, which is, you know, a common thing theme, we've heard from other industrial, uh, exposed, uh, companies. We we cover, um, just wondering what that means for the m&a pipeline. I, I know that might not be. Um, uh, uh,

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, um, you know, like a seller interest, uh, in terms of maybe valuations, are those becoming a little bit more tempered here just as as as the market kind of transitions into, maybe a slower economic growth period here.

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

Yep. That that kind of makes sense. Uh, I mean, just, last 1 for me, um, you know, you know, totally volumes down, almost 83%, uh, you know, non-toxic, um,

I I guess how much of this is just just, I'll call it macro. Headwinds are, are you seeing share shift or you know, in terms of potential competitors acting irrationally? Uh, or or like for example, the total volume is being down this much is is that just that that's getting in source and and you're not really seeing a ton of share shift, uh, as as maybe some. Some, some players looked at irrationally in this, in this tougher Market.

Yeah, no, we're not seeing a ton of shares shift. So we're seeing, uh, in fact, probably more the other way where we're we're, we're we're gaining here and there when and we're continuing down that path, as we're onboarding new new customers. But yeah, it's more of a general, uh, macro thing, particularly on the tooling side, when the big tire companies have open capacity, they insource everything. And when the economy is is really hot and and they don't have open capacity, they Outsource a lot more, a lot of the key, uh, higher more, more technically, uh, important compounds that we do for our entire customers. We're still doing them but the, the massive tooling volumes only happen when uh, when they, when they are running out of capacity. And, and right now and particularly a lot of their capacity is, is tied to vehicle sales as you can imagine, uh, Tier 1 Sales, in addition to, uh, Trucking volume. So when you see, um, Trucking volumes increase, um, when you see, uh, sales volumes in the oh,

Increase. Then generally speaking, the tire companies start to run out of capacity and that's where they overflow, uh, you know, significant volumes of totaling opportunities towards us. The good news here, I guess if you want to look at it this way and and it's it's evident in our, in our margin profile. The good news is here is we're still doing a pretty good job, uh, driving our strategy towards uh, higher end, uh, more specialty type compounding, uh, which is also more stable and it doesn't kind of flow in and out. And, uh, and at the same time, we've we've, you know, implemented significant continuous, Improvement opportunities, which show in our conversion costs reduction in Q2 over 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 a pretty nice filler to absorb some overhead. Make a little bit of money and uh and drive that forward. Uh, so I think we can um 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.

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

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

Thanks. Kevin.

This concludes the question and answer session. I would like to turn the conference back over to Chris bits of caucus for any closing, remarks.

Uh, thank you operator. And uh thanks everyone for attending today's call. Uh please feel free to reach out to us directly or through our investor relations team. If you have any questions on uh on our results or anything in general, thank you again and have a great rest of your day.

And have a pleasant day.