AirBoss narrows focus, restructures after challenging 2023

NEWMARKET, Ontario—Labor stoppages caused by last year's UAW strike, delays in government sourcing and drawdowns in customer inventory at the end of 2023 made for a "challenging" year for AirBoss of America Corp.

As a result, North America's second-largest custom compounder has restructured the firm into two reporting segments, AirBoss Rubber Solutions (ARS) and AirBoss Manufactured (AMP) Products, eliminating AirBoss Defense Group and AirBoss Engineered Products as standalone business units.

The restructuring took effect Dec. 31, 2023, with results for the quarter and full year reported under the new corporate structure.

"We recently completed an in-depth review of the entire enterprise, yielding a blueprint for a strategic transition related to the future roadmap of AirBoss," Chris Bitsakakis, president and co-CEO of AirBoss, said in a March 7 call with investors and media. "This transition will consolidate all rubber compounding operations into one segment, AirBoss Rubber Solutions, emphasizing ARS' ability to act as a core driver for margin expansion, sustainable growth and productivity."

With its "narrowed focus and more predictable business operations," ARS will comprise the former rubber solutions segment as well as compounding operations in Acton Vale, Quebec, which had been under ADG.

In turn, AMP will comprise all operations which manufacture or distribute finished products to the automotive, non-automotive and defense markets—including the former ADG and AEP.

"We will also undertake an in-depth strategic review of all individual product lines AMP currently manufactures and sells, in order to assess their overall alignment with the new strategic direction of AirBoss," Bitsakakis said.

Bitskakis highlighted the $41 million in cash generated from operations in 2023 against $31 million in cash consumption in 2022.

"2022 was a record year from a sales and EBITDA perspective, and 2023 also was solid, from a sales and EBITDA perspective," Bitsakakis said. "We are pleased with the significant positive swing in cash generation as well.

"Despite the improvement, 2023 was a challenging year for AirBoss as economic headwinds impacted each segment to varying degrees, from the UAW strike ... to customers reducing inventory at the end of the year and a general higher interest rate climate that affected demand. There were no shortages of tactical challenges."

While overall group net sales were down by 10.7 percent for 2023 at about $426 million compared to net sales of $477.2 million in 2022 (a loss of $41.7 million), the drop in net sales for Q4 was more pronounced.

Net sales dropped 21.5 percent to $92.7 million for the three-month period, compared to $117.5 million in Q4 net sales for AirBoss year-over-year.

Adjusted EBITDA for Q4 2023 decreased by 71.1 percent against Q4 2022, and by 41 percent for the full year, at $26.8 million in 2023 against $45.3 million in 2022.

For both Q4 and the full year, decreases were seen across ADG; in ARS "across a majority of sectors;" and in AMP, mainly due to the delayed sourcing of nitrile gloves to the U.S. Department of Health and Human Services and other logistical hurdles.

"Our businesses and the markets in which we operate continue to experience significant change, and we believe our shift in strategic focus will help prioritize investments, drive long-term shareholder value, growth and be accretive to the company," said Gren Schoch, chairman and co-CEO of AirBoss. "We have focused on fortifying our balance sheet from cash generated in 2023 and continue to explore implementing further cost reduction initiatives within our business units in 2024."

The Board of Directors recently approved a quarterly dividend of 7 cents per common share, to be paid on April 15 to shareholders of record as of March 29.

Both ARS and AMP experienced residual softness in Q4 2023.

"The rubber molded products operations at AMP were impacted by the tail-end of the union strike related to the OEMs, which was settled in the quarter," Bitsakakis said. "The ability to recover in volumes in 2024 for each segment will remain subject to the ongoing challenges related to continued inflation pressure and the ongoing global geopolitical challenges, and successful conversion of key opportunities."

Net sales in ARS for the full year totaled $248.4 million, a 12-percent decrease against 2022 net sales for the segment.

The 21.1-percent drop for Q4 2023 for ARS mirrored the same percentage decrease for Q4 for the group (year-over-year), with net sales for ARS for Q4 totaling $54.5 million against about $69 million in net sales for ARS in Q4 2022.

"The decrease in net sales for Q4 2023 was primarily due to softness across most sectors and for 2023 was across most sectors driven by economic headwinds," Chief Financial Officer Frank Ientile said.

For the quarter and 2023, volume was down 17.5 percent in ARS, with decreases witnessed across a majority of sectors.

At AMP, net sales in Q4 2023 dropped by 19.9 percent to $44 million against Q4 2022 net sales of $55 million, and by 7.4 percent to $202.3 million for the full year against 2022 net sales, Ientile said.

"For the quarter, the decrease was the result of lower volumes in the defense product lines and across the rubber molding product lines, in particular the muffler hangers, bushings and spring isolator product lines," he told investors. "For the year, the decrease was primarily due to a decrease in the defense products lines from the delivery of nitrile gloves to HHS."

Despite these headwinds, the ARS segment—the core driver for AirBoss of America—remains focused on executing on its narrower, more efficient strategy.

AirBoss began cost-cutting measures last year with layoffs.

"Our strategy ... is to deliver strong results with specialized products, expanded production of a broader array of compounds (white and color) and enhanced flexibility in attracting and fulfilling new business through identified synergies and margin expansion," Bitsakakis said.

AMP experienced "strong traction" in the rubber molded product lines, despite challenges toward the latter part of the year (mainly due to the UAW labor disruptions with the OEMs).

The defense product lines experienced softness across the product portfolio throughout the entire year, as mentioned.

"And although the West African Husky order has been completed, execution on the balance of previously announced awards for Husky 2G vehicles has been delayed further due to ongoing delays in funding, creating a lack of certainty to the scope, timing, and the terms and conditions of these awards, which cannot reasonably be determined," Bitsakakis said.

Bitsakakis said AirBoss will look to the future under the new, two-segment look, growing ARS, especially, by focusing on custom compounding.

The company produces approximately 500 million turn pounds of rubber per year and has more than 2,000 proprietary compounds.

"We will focus on innovation in custom rubber compounding while aiming to expand market share through organic and inorganic means, while striving to achieve enhanced diversification by a broadening of product breadth through technological advancements and investments in specialty compound niches," Bitsakakis said.

The strategy at AMP will place priority on "diversifying and expanding its range of non-automotive rubber molded products while simultaneously narrowing the range of defense products through a renewed focus on core competencies," Bitsakakis said.

As AirBoss looks to expand outside of automotive, the company also will look to further its growth via acquisitions like Ace Elastomer Inc., a custom compounder that AirBoss acquired in 2021.

As well, the company will look to restructure "certain supplier and customer agreements to improve flexibility and profitability."