AirBoss of America Corp.

Thank you for standing by. This is the conference operator. Welcome to the Airbus of America fourth quarter 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I would now like to hand the conference over to Grand Schock, Chief Executive Officer. Please go ahead.

Good morning, everyone, and thank you for joining us for the Airbus fourth quarter and year-end 2022 results conference call. I'm Grand Schock, and I'm the Chairman and CEO of Airbus. With me here today are Chris Fitzsikakis, President and COO, Frank Gentile, our CFO, and Chris Fegel, our EVP and General Counsel. Our agenda today will start with a review of the operational highlights for the quarter and year, followed by a discussion of our financial results before we open the conference lines to questions. Before we begin, I will 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 the most recent annual information forum and annual NDNA, both of which are available on CDAR and our corporate website. Also, we will discuss certain non-GAAP measures, including EBITDA. Reconciliations of these measures are available in the earnings release. And finally, please note that our reporting currency is U.S. dollars. References today will be in US dollars unless we indicate otherwise. With that, I'll now turn the call over to Chris for the operational review.

Thank you, Guy, and good morning, everyone. On the heels of a record year of financial performance and corporate growth in 2021, our focus in 2022 was one of execution and integration from our newly expanded operating platform. Many of the challenges we faced throughout the business in 2021, including raw material sourcing and cost inflation, continued into 2022, and these conditions made the work we do to pursue production and cost efficiencies throughout each of our businesses that much more important to our success. Our consolidated decline in sales in 2022 was mainly due to the reduced revenues within our Airbus defense group due to the decrease in large-scale deliveries of PPE in 2022. These declines were partially offset by record results within Airbus rubber solutions and by a return to gross margin contributions from Airbus and Clear products in the fourth quarter. We were up against a fairly challenging set of financial comparables from 2021, and although our financial results in 2022 did not match this record performance, we're very pleased we've made meaningful advancements across many parts of our business. Within the latter part of 2022, our Airbus Defense Group announced that it successfully secured a series of new contracts that demonstrate the diverse array of technologies it provides to its customers. The most recent is an agreement we announced in late December, which ADG will be supporting delivery of Made in America COVID testing kits to the Defense Logistics Agency in the U.S. These kits will become a strategic part of the U.S. military's ability to effectively respond to any future national emergencies. Our newly strengthened U.S.-based manufacturing capabilities supported our success during this competitive bid process. The first half of contract deliveries are expected to be completed by the end of Q2 this year, and we'll be monitoring the status of the remaining half of the deliveries against this agreement after that. Earlier in Q4, we also announced 40 million of contracts to manufacture and supply a total of 13 Husky 2G vehicles to two separate customers. These counter-improvised explosive device, or CIED, vehicles are equipped with industry-recognized route clearance and threat detection systems, which are a key part of ADG's suite of survivability solutions. We expect to fulfill the majority of this contract within 2023. We view these contract wins as tangible evidence that we have the technology, the production capabilities, and the execution strength we need to maintain a role as a key supplier to large-scale customers, including the U.S. military as well as others. These awards also demonstrate the importance of partnerships in strengthening our technology offerings and market access. Looking at our M&A activities, our operations teams were focused on the seamless integration of our two most recent acquisitions, Black Box Biometrics, or B3, and Ace Elastomer. These acquisitions were completed in mid-2021, and while they were added to separate business segments, they shared common benefits through their addition of valuable new capabilities and skills to our platform of technology solutions. ACE has added significant value to our Airbus rubber solutions business segment, advancing us into a lead role in the color and specialty rubber compounding space. Our rubber compounding capabilities are now stronger, we've expanded our geographic reach into key markets in the U.S., and the new skills and talent we added to our team have been a significant benefit to us. As we've integrated B3, we've seen similar benefits. The B3 team has brought valuable engineering and technical bench strength, along with access to portfolio products focused on noise and impact detection and monitoring, which are now an important part of the survivability solutions we offer within our Airbus Defense Group, or ADG. For ADG, we remain optimistic about our positioning to win new sales opportunities. In 2022, we worked with potential customers on field testing of new products like our Airbus 100 half-mask respirator, which is a more cost-effective and portable alternative to other products available on the market. Customer testing also took place for our blast gauge system, which was developed to monitor impulse noise and concussive impacts in military. In fact, our first major competition for blast gauge concluded with the final prototype submissions in late Q4. These technologies, along with others within ADG, diversify the survivability solutions we can provide and significantly expand the market opportunity for this business. Within our Airbus rubber solutions business, or ARS, following a very challenging year 2021, the investments we made to improve automation and efficiency and expand the array of compounds and colors we can supply to our customers led to record financial contributions from ARS in 2022. ARS delivered record revenue in gross margins supported by our expanded production capacity, new compounding expertise, and access to new regional markets. One of the net results of the tough market conditions in 2021 and last year was that the ARS team had to double down on plans to diversify supply lines, broaden its production base, and capture new market share. I'm really pleased to say that the team within ARS successfully adapted and evolved as their business and the markets changed and we're well positioned to carry these capabilities into the coming year. Our longer-term priorities for ARS remain intact. to deliver growth by positioning ARS as a leading specialty supplier in North America, one with a valuable portfolio of specialty compounds combined with strong production capabilities. And although we saw a pullback in tolling volumes late in Q4, we continue to execute on multiple non-tolling opportunities to strive to offset any volume fluctuations from our current customer base. Turning now to Airbus engineered products, or AEP, having faced multiple challenges in 2021 and 22, we're hopeful that we have taken the right steps to improve the financial performance of this division. AEP experienced acute problems from rapidly escalating raw material prices, supply chain disruptions, and specific issues to the global shortages of computer chips needed by the auto OEMs. Similar to our ARS business, our team within AEP had to strengthen its operations through automation. The team within AEP accelerated efforts to reduce operating expenses, develop more innovative higher margin products, and diversify its customer reach into new non-automotive industries. The changes made within AEP have improved the positioning and resilience of this business. As we exited 2022, we were clear in our commitment to working with AEP's key partners and customers to resume a more stable financial footing for its continued operation. We've built strong long-term relationships and we remain confident that we could work together to find a way to address the rapid rising costs related to personnel, logistics and raw materials and have contract pricing and terms that better accommodated these changes. Although it's been a challenging process, I'm excited to say that we have successfully updated our arrangements with our key partners to strengthen the financial condition of AEP. As a result, we were able to reverse the pattern of operating losses we posted through 2022 and deliver profitable performance in Q4. Although we still have multiple opportunities for continuous improvement, we're optimistic about ADP's performance as we move forward into 2023. Through 2022, we were encouraged to see some of the supply chain and logistics challenges start to dissipate, and this has helped us get back to the point where we could serve customer needs in a more normalized way. With this being said, throughout each of our business segments. In the closing part of 2022 and the start of 2023, we've begun to see some signs of slowing business activity as the industrial base has undertaken some limited inventory reduction as projections of a potential economic slowdown this year vary from expert to expert. As in many industries, some purchases along our supply chain are being affected by the need to work down inventory levels and business purchasing and investment is being impacted by rising interest rates in uncertainty and economic conditions in the case of ars our productivity is run at high levels in 2022 so a downturn a downturn in demand could potentially affect its results For AEP, I'd point out that our ability to profitably operate was being significantly hindered by a misalignment between rising production costs and the selling prices we could secure from customers. As I mentioned earlier, we have again resumed stable footing for AEP, and we continue to see opportunity to increase the contributions it can make to our financial results in the coming year. Our focus in 2022 was on integration and execution of our business strategy from our expanded platform. On the M&A front, we continue to monitor potential acquisitions with a focus on adding products or compounds, advancing our technical capabilities, and expanding our geographic reach. As it relates to our outlook, for the reasons I've outlined, we are in a solid position across each of our businesses from a product, production, and execution perspective. Our aim is to continue leveraging our core expertise to expand our market share, support our business investments with strong financial discipline, and maintaining our focus on cost-effective strategic M&A.