AirBoss of America (TSX:BOS) Q3 2026 Earnings Call

0:00 Good day, everyone, and welcome to the Q3 2026 conference call for Air Boss of America. Today's call is being recorded. If you have a question today, please press star 1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Gren Schoch. Please go ahead, sir.

0:17 Thank you, Lisa. Good morning, everyone, and thank you for joining us for the Air Boss of America Corp. Q3 2026 results conference call. My name is Gren Schoch. I'm the chairman and co-CEO of Airboss of America. Joining me today are Chris Bitsakakis, our president and co-CEO, Frank Ientile, our chief financial officer, and Chris Figel, our EVP and general counsel. Before we begin, I'd like to remind listeners that our remarks today contain forward-looking statements and forward-looking information, including statements regarding our expectations, estimates, and Outlook for Future Developments. We encourage listeners to review the risks and uncertainties described in our annual information form and MD&A, both of which are available on CDAR and on our corporate website.

1:11 We will also discuss certain non-IFRS measures, including EBITDA. Please refer to our MD&A for additional information regarding these measures, including reconciliations to the most directly comparable IFRS measures were applicable. Finally, our reporting currency is U.S. dollars, and all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I'll turn the call over to Chris Bitsakakis for the operational review. Chris, over to you.

1:45 Thank you, Grant, and good morning, everyone. The third quarter was another step forward in Airboss's operating performance. Although consolidated sales were slightly below Q3 of 2025, We delivered higher gross profit, improved gross margins, and a return to profitability, including a 17% swing in earnings per share compared to Q3 of last year. This reflects work our teams have been doing to manage costs, improve execution, and pursue new business, even as economic uncertainty, tariffs, and geopolitical developments continue to affect all our markets. We were particularly encouraged by Airboss rubber solutions, where higher volumes and improved margins contributed to stronger year-over-year results. that manufactured products or rubber molded products business continued to make progress while defense deliveries were lower following the completion of previously awarded contracts.

2:34 Across both segments, we have continued to focus on the things we can control, customer service and collaboration, cost discipline, operational efficiencies, and continuous improvement. We're seeing tangible benefits from that work in our gross margin performance even as market conditions remain uneven. Our enhanced approach to customer collaboration has been yielding results with the onboarding of new customers with unique requirements that will help us continue to build on volume growth during these challenging times. Of course, tariffs and trade policy remain important considerations given the cross-border nature of our operations. Although most products qualify under USMCA or CUSMA, we continue to assess contingency plans and monitor potential changes to trained arrangements in order to stay proactive in any adjustments to our supply chain dynamics.

3:23 These geopolitical uncertainties remain real, but they have not changed our focus on serving our customers and pursuing key opportunities in our core markets. We remain focused on converting opportunities into revenue, recognizing the timing will depend on customer requirements, funding, and program schedules. We also expect continued volume volatility across our segments, with any further recovery dependent on improvements in the broader market conditions and New Trade Developments. Turning to rubber solutions, the segment delivered a modest recovery compared with the third quarter of 2025. Sales increased 6.2% supported by higher volumes across certain customer sectors and gross profit increased by 13%. Importantly, gross margin improved to 13% from 12.2% a year ago. We believe these are encouraging results in a market where demand and customer production schedules remain uneven. ARS continues to invest in specialty compounding capabilities, research and development, and closer customer collaboration.

4:24 The objective is to broaden the products we can offer, improve our flexibility, and compete for new opportunities while remaining disciplined on costs. At Manufactured Products, the rubber-molded products business continued to make progress during the quarter, with improved volumes in automotive and non-automotive applications. Since the beginning of 2026, that business has secured new production awards expected to generate up to $100 million in sales over the next five years. That commercial success reflects capabilities we have been building, including our prior investments in automation, and supports our efforts to pursue new onshoring opportunities. Over the past decade, while much of the industry was focused on moving capacity overseas and chasing lower labour costs, we chose to retain our experienced human capital and invest in automation and efficiency plans as a way to offset the competitive disadvantage presented by competing low-cost countries.

5:21 Our higher volume of quoting opportunities and the recent awards are a testimony to the advantage of the longer-term view we held on global versus regional competition. Defense deliveries were lower in the quarter following the completion of previously awarded contracts, which affected AMP's overall volumes. At the same time, ADG secured new orders valued up to $16.9 million, reflecting continuing demand for its survivability solutions among NATO and allied customers. The timing of defense awards and deliveries will of course continue to depend on customer procurement, funding, and program schedules, but we are positioning ourselves to support our customers as defense spending priorities evolve, particularly among NATO and allied nations. Despite lower defense volumes in Q3, gross margin percentage improved in both A&P businesses compared with prior year quarter. We continue to emphasize automation, operating efficiencies, and diversification into adjacent markets.

6:17 Separately, the renewal of our credit facilities extends our financing runway, reduces borrowing costs and gives us additional flexibility to execute our business plan. In these challenging times, there are always unique opportunities that arise, and this additional flexibility gives us greater scope to evaluate opportunities to grow the business through the lens of a longer-term horizon. The company's long-term priorities have not changed and are as follows. We continue to be focused on growing the core rubber solution segment by targeting rubber compounding as one of 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 beans, while building product diversification through a broadening of product breadth through technological advancements and investments in specialty compound niches. And manufacturing products growth strategy is focused on diversifying and expanding its range of advanced rubber molded products while positioning current and future core defense products to take advantage of new growth opportunities within NATO and other partner customers around the world.

7:24 Taking together the progress in rubber solutions, the new commercial awards in AMP's rubber molded products, and the recent orders at AMP's defense products business reinforce our focus on execution and customer-driven growth. We recognize that market conditions remain challenging and we will continue investing selectively in our core capabilities while maintaining cost as planned. I will now pass the call over to Frank for the financial review.

7:48 Frank, over to you. Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in U.S. dollars except for dividends per share, which are in Canadian dollars. Percentage changes compare Q3 of 2026 to Q3 of 2025, unless otherwise noted. To be respectful of your time today, I will aim to be brief in my summary of our Q3 2026 results. Starting from the top line, Airboss's consolidated net sales for Q3 of 2026 were 98.7 million, a decrease of 1.7% from the prior year. The decrease was primarily due to lower sales at manufactured products, partially offset by higher sales at rubber solutions across several customer sectors. Consolidated gross profit for Q3 of 2026 increased by 0.6 million to 17 million compared with Q3 of 2025.

8:39 Gross profit as a percentage of net sales increased to 17.3% for Q3 of 2026 from 16.4% in Q3 of 2025. The increase in margin percentage was driven primarily by higher volumes favorable mix across several customer sectors at ARS, together with improved margins at AMP in both the defense products business and in the rubber-molded products business. This was further supported by managing controllable overhead costs and continuous improvement initiatives. Despite higher margins across the segments, market volatility and economic uncertainty continue to challenge the businesses. Turning now to our individual segments, Net Sales and Air Boss Rubber Solutions segment for Q3 2026 increased by 6.2% to 54.7 million from 51.5 million in Q3 of 2025.

9:29 The improvements were in certain sectors at ARS, although conditions continue to vary across several customer sectors despite continued economic headwinds. Volume was up 9.3% with increases across certain sectors, while tolling volume was down 34% and non-tolling volume was up 10.1%. Gross profit at Airboss Rubber Solutions for Q3 of 2026 increased to $7.1 million from $6.3 million in Q3 of 2025. The 0.8 million increase was primarily a result of higher non-tolling volumes compared to the same period in 2025 in addition to favorable mix. Gross margin percentage increased 13% of net sales from 12.2% of net sales in Q3 of 2025. Net sales in the manufactured product segment for Q3 2026 decreased by 4.7% to 55.4 million from 58.1 million in Q3 of 2025.

10:28 This was primarily due to lower sales in the defense products business driven by the completion of deliveries under a previously announced contract in the prior quarter, partially offset by improved sales in the molded rubber products business. Growth profit at manufactured product segment for Q3 of 2026 decreased to 9.9 million from 10.2 million in Q3 of 2025. The 0.3 million decrease was primarily a result of the lower volumes of the defense products business which had completed a delivery of large defense contracts in the prior quarter as mentioned, partially offset by favorable volume and mix in the rubber molded products business. Turning again to the consolidated results, cash used by operating activity for Q3 of 2026 was 1.7 million compared to 8.7 million provided for Q3 of 2025.

11:18 During Q3 of 2026, the company invested 1.8 million in the business. The capital expenditures were related to growth initiatives replacement and upgrades to property, plant, and equipment within ARS and AMP. At the end of Q3, 2026, our net debt balance was $77.8 million versus $67.6 million at the end of 2025. We expect to fund the company's operating cash requirements, including required American capital investments, capital expenditures, and scheduled debt repayments from cash on hand, cash flow from operations, and committee loan capacity. The company's asset-based revolving line of credit facility provides for a maximum borrowing of up to $125 million with a $25 million accordion.

12:07 As of September 30th, 2026, the total available borrowing capacity under this facility was $72.8 million with $35.7 million drawn. With that, I will now turn the call over to Chris.

12:25 Thank you, Frank. Operator, at this point, we can open up the line for Q&A. Thank you, sir. And everyone, if you have a question, it is star 1 on your telephone keypad. We'll take the first question from Ahmed Abdullah, National Bank of Canada. Ahmed, your line is open. Here we know response. We'll go to Tim James, TD Cowen.

12:59 Thanks. Good morning, everyone. Chris, I'm just wondering if you could talk about, you've had a couple of quarters now where the ARS volumes have increased year over year. I'm just wondering if you, you know, expect that to continue for the next several quarters? And I'm not even thinking necessarily how positive, but do you still, do you just think volumes can continue to increase on a year over year basis?

13:25 Yeah, I do think so, Tim. If you recall, late 2025 and into early 2026, one of our top 10 customers was caught up in the first brand's bankruptcy, and that created a fairly big hole for us to fill in terms of volume and also in terms of margin profile because it was a specialty product, high volume, that was moving the needle on the higher side. on the gross margin. And because of that, we've been aggressively in a difficult market, quite frankly, aggressively going after new customers, developing new products, solving major issues for them. And we're starting to see the fruits of that labor start to hit now. And looking into Q4 and to Q1 of next year, there's several new customers that are coming on board.

14:23 that we'll see that volume ramp up start to happen. So barring any sort of crazy geopolitical or economic surprises, we have a fairly strong, you know, group of customers that have been, that have approved some of our products and they'll be launching them in the next couple of quarters. So we expect that volume increase to continue. Okay, thank you.

14:53 And then Chris, I'm just wondering if you can talk to the extent you're prepared to talk about some of the kind of new product opportunities or new customer opportunities that you're working on, just kind of what parts of the business, you know, to the extent you can update us on any progress, just an update on that initiative and those opportunities.

15:20 Yeah, so we have in both of our segments, we have new product. As you know, we have a fairly aggressive plan for product innovation. A lot of that product innovation is done in collaboration with our customers. So on the ARS side, we continue to expand and grow our silicone products that we launched. We continue to develop new compounds for our new customers. Several of them have launched already, but over the next couple of quarters, we have some new compounds for these customers that are being launched, but we produce them in collaboration. So that's more of a formulaic thing than it is a product development for an end product as our customers are responsible for that.

16:13 On the molding side, we are working on some pretty exciting non-automotive and a number of other products that we think we're going to be able to bring to market in early or late 2027, early 2028. That should really swing the needle on the non-automotive side for our rubber molded products business. And of course, on the defense product side, we continue to get multiple quotes from NATO partners on the products that we currently make. You know, particular attention on products that have not necessarily been a staple of our revenue in the past couple of years, but seem to be gaining a lot of traction.

16:59 So it's not necessarily new product development, but products that we have developed that are gaining new traction on the defense side. And in general, as I mentioned in my notes, our attention to automation and efficiency improvement that we've been focusing on our rubber molded products business We are getting significant amounts of quotes coming in for onshoring rubber-molded products, whereas most of our competitors, or many of them, had moved their production overseas over the past few years. We're in a good position with significant automation in place here that doesn't completely nullify, but partially nullifies the advantage of the low-cost countries, and it allows us to be very competitive as these products now get reshored.

17:44 So, and this is part of, you know, the highlight that we added about 100 million in new business awards over the next five years for the remote products business. That really is a testimony to all the increase in quotes and the focus on efficiency and automation that has put us in a good position to grow this business. So, yeah, there's a lot going on. across the board on product development, but also on process development as well. We're working on some pretty revolutionary ideas on the rubber solution side from a processing standpoint that should put us in an even better competitive window over the next couple of years. So a lot of exciting things going on.

18:32 Okay. That's really helpful. Thank you. My last question just related to working capital, there was pretty significant use of cash I believe receivables and inventory in the quarter. Just wondering if you could talk, Frank, maybe about what was occurring there and then what we should maybe expect from working capital overall as we look at the fourth quarter.

18:58 Sure, Tim. Thanks for the question. Yeah, so the big driver is obviously driven by working capital increase in inventory. primarily proactive purchasing as a result of price escalations with some of the geopolitical issues going on. So that's basically a defensive position for us, which we anticipate to consume and delever in the coming couple of quarters. In addition, timing of some AR higher sales towards the end of the quarter, specifically at ARS and AMP's rubber products business. In addition, there was the balancing out of the previous award of the Bandle, which had some payables that were paid now that the program was finished. So I think the combination and timing of those elements are really what drove the working capital up. We anticipate there still to be a little bit of cash burning Q4, but definitely towards the end of the quarter and into Q1 and Q2 of 2027 to get back into a sort of positive cash position related to the operations.

20:04 Great. Thank you very much, Frank. Thank you. As a reminder, it is Star 1 if you have a question. And up next, we'll go to Ahmed Abdullah from National Bank of Canada.

20:17 Hi, there. This is Amixan Kayat filling in for Ahmed. Sorry about before. We had some technical difficulties. So my first question is on the depend side for the previously announced 16.9 million of defense orders. What cadence should we assume for the delivery schedules and around the split between the fourth quarter and into 2027?

20:38 Yeah, so we're commencing deliveries in the month of November and we expect deliveries to go over November, December and into early Q1 of next year. I'm not sure the exact percentage because this is a long supply chain that has to get delivered to Europe and there's a variety of sort of and many more. I would say that most of that revenue will be recognized in Q4 with the tail end of it in Q1 of next year. I would guess maybe 75-25 but at this point it all depends on the deliveries, on the shipment traffic and the other part is if shipments start to arrive over the Christmas break in in Europe that may be shifting it into Q1 of next year. So we're focusing on getting more than half of it delivered by the end of Q4 and the balance in early Q1.

21:49 Okay, got it. And another question, ANP profitability held up despite lower defense deliveries. Can you give us a sense of the lasting cost improvement efforts here versus favorable product mix? And what does that imply for margins as bandelier deliveries resume?

22:09 Yeah, so I think a couple of elements there. Obviously, there's some timing of costs that occurred in Q3 on the corporate side, as has been noted and disclosed. But having said that, we've also seen margin improvement from the ARS business in the quarter, which was driven by a volume and mix, as well as on AMP, both sides of the business, despite the defense products business having a balance out of an old contract. I think as we move forward, margins will stay pretty consistent from that perspective. But again, there are certain economic headwinds that we continue to manage, and the timing and execution of some of those will obviously drive some puts and calls as it relates to the margin profile. As it relates to the cost outs that were taken in the previous quarters, those are there.

22:57 They're here to stay, and they continue to sustain and support us in the base business across each of the segments.

23:06 Okay, perfect. Thanks. And everyone, at this time, there are no further questions. I'll hand the call back to our speakers for any additional or closing remarks.

23:20 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. Have a great day. And once again, this does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.