Release Date: August 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AirBoss of America Corp (ABSSF, Financial) focused on operational execution and aggressive deleveraging activities despite economic slowdown.
- The company announced Bandolier awards, which have begun shipping in Q3, and increased momentum in CBRN defense product lines.
- AirBoss Rubber Solutions improved gross margin percentage year-over-year through higher-end niche products and operational cost improvements.
- Onboarding of new customers helped offset downturn in legacy volumes and is expected to drive additional growth as the economy recovers.
- The company is committed to long-term strategic imperatives, including newly launched automation initiatives and diversification of product lines.
Negative Points
- Consolidated net sales for Q2 2024 were $95.4 million, a decrease of 16.4% from the prior year.
- Gross profit for Q2 2024 decreased by $9.1 million to $8.5 million compared with Q2 2023.
- Manufactured products experienced continued softness in Q2 2024, particularly in the defense business and rubber molded products.
- The company faced a $6 million inventory write-down related to nitrile gloves and medical gowns.
- Net debt balance increased to $92.6 million by the end of Q2 2024, up from $88.2 million at the end of Q4 2023.
Q & A Highlights
Q: On the ARS volumes, you mentioned in your remarks that 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?
A: No, in fact, if I'm understanding the question correctly, it's kind of the opposite. What we're seeing now is with the softness in the industrial base in the US, our key legacy customers that were ordering truckloads of material are now ordering significantly smaller quantities and turning them over quicker. As the economy turns and interest rates come down, we expect our customers to start building up their inventories again. The timing of that is uncertain, but it should happen fairly quickly once the economy gains traction.
Q: 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 segment?
A: We have a very aggressive continuous improvement plan. We have installed new automation in one of our facilities, which hasn't started to generate improvement yet. We see that as upside on the margin side. Product mix will also have a significant impact. We have additional improvements coming in Q3 and Q4, which will continue reducing our conversion costs.
Q: Should we think about the Bandolier order to be equally divided over the 18 months? Or is it all going to come in one quarter versus the other?
A: 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. By late Q4 and early Q1, we will be at that steady state.
Q: Do you guys still have any inventory write-downs relating to the gloves and gowns?
A: 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.
Q: What caused the margin strength in ARS? Was it mostly mix or are they being more disciplined on contracts?
A: It’s a combination of things. Product mix certainly plays a role. We’ve made a conscious effort to drive more into specialty higher-end compounding. As tolling volumes have decreased, we’ve been able to fill some of that volume with higher-margin products.
Q: Do you see any early signs of recovery in ARS volumes?
A: We anticipate recovery in ARS volumes to be closely linked to the overall improvement in the US industrial base. 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.
Q: You note in your inventory note that you have an agreement to sell the remaining inventory of nitrile gloves at book value. What does that imply for margins in AMP?
A: We have a steady flow of sales now and we estimate the consumption to occur between now through Q1 of 2025. It will be more of a cash flow infusion on the conversion, but obviously not realizing margin from that perspective.
Q: What does the challenging macro environment mean for the M&A pipeline?
A: We are seeing more opportunities, particularly in some of the smaller players. We are keeping a close eye on our long-term strategy and are poised to take advantage of the right opportunity if it comes around.
Q: Tolling volumes are down almost 83%, non-tolling down 12%. How much of this is macro headwinds versus share shift?
A: It’s more of a general macro issue. When the big tire companies have open capacity, they in-source everything. When the economy is strong, they outsource more. We are still doing a good job driving our strategy towards higher-end, more specialty compounding, which is more stable.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
