AirBoss of America Corp.

Thank you for standing by. This is the conference operator. Welcome to the Airbus 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 Schock, Chairman and Co-CEO. Please go ahead.

Thank you, Operator. Good morning, everybody, and thank you for joining us for the Airbus Second Quarter Results Conference Call. My name is Gren Schock. I'm the Chairman and Co-CEO of Airbus. With me today are Chris Fitzsoukakis, our President and Co-CEO, Frank Antilli, our CFO, and Chris Figuele, 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 of 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 MDNA, both of which are available on CDAR 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 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.

Thank you, Glenn, and good morning, everyone. During the second quarter of 2024, Airbus 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 Airbus 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 U.S. industrial base driving lower volumes, Airbus 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 experienced 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 in 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 Bandelier Award are expected to provide increased momentum into the second half of 2024 and well into 2025. 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 custom 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. Airbus 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?

Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in U.S. dollars. Percentage changes compare Q2 of 2024 to Q2 of 2023 unless otherwise noted. I also want to remind you that Airbus now reports results under two segments, Airbus Rubber Solutions and Airbus Manufactured Products. To be respectful of your time today, I will be brief in my summary of our Q2 2024 results. Starting from the top line, Airbus has consolidated net sales for Q2 2024 over 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 experience 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 solution 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. 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 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 $6 million inventory write-down related to 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. 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 are using a speakerphone, 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.

Yes, good morning. Thanks for taking my question. On the ARS volumes, you mentioned in your remarks 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?

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 going to 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, 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 going to happen fairly quickly once the economy starts to generate more traction. They'll start ordering the larger quantities. They'll start stocking their inventory because it's going to become important to them that they turn around the new incoming orders quicker, sooner rather than later.

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

No, 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 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 segments?

We have a very aggressive continuous improvement plan. We have installed some new automation as an example in one of our facilities in the US. 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 sort of 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. 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 that equation as well.

Okay. And finally, just a modeling question. It's good to see that the Bandelier order is starting delivery. Should we think about this to be equally divided over the next 18 months, or is it all going to come in one quarter versus the other? How should we think about it from a modeling perspective?

I think you're going to 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... 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.

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

Okay. Okay. I'll pass the line. I'll recue.

Thank you.

Thank you.

And the next question comes from Adam Schneider with Coremark Securities. Please go ahead.

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?

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.

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?

I think it's a combination of things. 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.

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

anticipate recovery in ARS volumes to be very closely linked to the overall improvement in the U.S. industrial base. So there's a lot of people out there that are predicting 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 vehicles in North America, so there are more incentives out there. Interest rates are starting to drop, and we expect them to drop more come the fall. And 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. Okay, great.

Thanks. I'll read to you. And the next question comes from Kevin Chiang with CIBC. Please go ahead.

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?

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.

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

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

Okay, that's helpful. You know, Chris, you highlighted the challenging macro, which is a common theme we've heard from other industrial-exposed companies we cover. Just wondering what that means for the M&A pipeline. I know that might not be a free cash flow priority in the immediate near term, but I have to imagine that some of these smaller players are probably suffering as well. And just wondering what that means in terms of what you're seeing on the M&A pipeline in terms of you know, like a seller interest in terms of maybe valuations? Are those becoming a little bit more tempered here just as the market kind of transitions into maybe a slower economic growth period here?

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 non-organic 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 of if the right opportunity comes around.

Yep, that makes sense. And maybe just last one for me, you know, tolling volumes down almost 83%, you know, non-tolling down 12%. I guess how much of this is 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 volume is being down this much is that just that's getting in sourced and you're not really seeing a ton of share shift as maybe some some some players look to act irrationally in this in this tougher market

Yeah, no, we're not seeing a ton of share shift. We're seeing, in fact, probably more the other way. 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. And right now, and particularly a lot of their capacity is tied to vehicle sales, as you can imagine, Tier 1 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 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 here 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. And 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. 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.

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. Thanks, Kevin.

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

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.

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