Gren Schoch - Chairman and CEO Lisa Swartzman - President

Tim James - TD Securities Maggie MacDougall - Cormark Securities Neil Linsdell - Industrial Alliance Securities Ben Jekic - GMP Securities

Good morning everybody and thank you for joining the conference call. I am Gren Schoch and I am the Chairman and CEO of AirBoss.

Here with me are Lisa Swartzman, President; Daniel Gagnon, CFO; and Darren Wasylucha, Senior EVP, Corporate. First, I'd like to apologize if there was any confusion about the timing for this call, but I can see from the attendance that most of you figured it out.

We will give you a summary of results and then the conference lines will be opened up for questions. Before we begin, I'd like to remind you that today's remarks, including management's outlook for the remainder of this year, anticipated financial and operating results, our plans and objectives, and our answers to your questions, will contain forward-looking statements within the meaning of applicable securities laws.

These forward-looking statements represent our expectations as of today and accordingly are subject to change. Such statements are based on current assumptions that may not materialize and are subject to a number of important risks and uncertainties.

Actual results may differ materially and listeners are cautioned not to place any undue reliance on these forward-looking statements. A description of the risks that may affect future results is contained in AirBoss' annual MD&A, which is available on our corporate Web-site and in our filings with SEDAR at www.sedar.com.

I will now turn over to Lisa Swartzman, our President, for the highlights.

Thanks, Gren, and good morning everyone. Thank you for joining us.

We are happy to report that our second quarter results for 2017 continued to build on the encouraging trends we experienced in the first quarter of the year, particularly from a volume perspective in Rubber Solutions as well as positive developments in defense. On a consolidated basis, our EBITDA of $7.4 million in the second quarter is 16% lower than Q2 2016, but was approximately 6% higher than our first quarter.

On a year-to-date basis, EBITDA of $14.4 million is approximately 20% lower versus 2016, where the first half of the year represented the strongest results in our history, levels we are working diligently to again achieve and supersede. An EPS of $0.14 was approximately 17% improvement over the first quarter of this year.

And just a reminder, that that's an unadjusted EPS number and beginning in the first quarter of the year we stopped reporting EPS on an adjusted basis because it was no longer required. In Rubber Solutions, while we continue to operate in a highly competitive business environment and raw material price volatility remains higher and more pronounced than we've seen over the past several years, we saw our second consecutive quarter of year-over-year volume increases.

This environment did impact our timing and ability though to fully align these input cost increases with customer price increases, and as a result, in the quarter both gross profit dollars and EBITDA dollars were essentially flat versus Q2 2016. On a year-to-date basis, gross profit dollars are approximately 3% higher and EBITDA dollars are approximately 5% higher versus the first half of 2016.

For the quarter, overall volume shipped increased 18% versus Q2 2016 and is 8% higher on a year-to-date basis. The strength occurred in several sectors, including traditional sectors such as OTR, re-tread and third-party automotive, as well as relatively new business development areas for us such as infrastructure and oil and gas.

While pleased with these advances, we are cognizant that particularly in the OTR re-tread market, it's experiencing elevated pricing pressure as a result of inexpensive virgin tires imported from China. Conventional tolling remains somewhat unpredictable, but proportionately it's similar to historical levels at 10% to 15% of overall volume mix.

Our niche tolling programs are progressing according to plan and we'll be ramping up to commercialized volumes on another niche program in the second half of this year. Our focus on business development under the integrated Rubber Solutions umbrella is producing the most robust and diversified development pipeline we've ever had, and we remain encouraged by our progress in moving these from trial stage towards commercialization as well as our focus and success on developing new opportunities.

In Engineered Products, net sales in the second quarter were flat at $41.4 million, and on a year-to-date basis were approximately 5% lower to $80.4 million over the same period in 2016. This was driven by improvements in defense, which largely offset declines in the automotive business.

Gross profit and EBITDA dollars both declined versus the comparable periods in 2016 though, as improvements in defense were insufficient to offset declines in the automotive business. Automotive sales were again negatively impacted by the previously disclosed completion of a large muffler hanger program in the second half of 2016 as well as specification changes in certain of our bushing and boot programs, including input component changes to plastics.

These declines were partially offset by increased demand in dampers and induction bonding applications. We recently made several people additions in key areas of the automotive business, specifically operations, sales and business development and marketing.

We are confident that the addition of these colleagues will enhance and increase our pace of change, driving operational improvement in both the near and long term. Net sales in defense improved significantly in the second quarter, improving 64% versus Q2 2016, and on a year-to-date basis are 21% higher, driven primarily by increases in our glove and extreme cold weather boot product lines.

These are encouraging signs and we continue to see elevated interest across our portfolio of products. As previously anticipated in Q1, we received the commencement order for production under a previously delayed filter contract and are ramping up to full rate production volumes.

We also received our first firm order from a large foreign military for our new Low Burden Mask. We feel this bodes very well in light of the current mask tenders outstanding on which we fit.

An existing customer has also given notice that they'd like to issue a sole-source contract for an additional glove award. While there is a notice period that enables others to come forward as being capable of satisfying the contract, we are the incumbents and are not aware of anyone else with a compliant product.

If we are awarded this contract, we would be producing gloves through 2020. So, as we look forward for the remainder of the year, we are encouraged with our progress, but we believe there is more to be done and we are aggressively pursuing the opportunities before us.

We continue to invest in key leadership resources to further improve productivity and build best practices across the organization. With this, combined with management's ongoing efforts to expand and diversify our product line, customer base, and target market segments, we believe we will be in a strong position to take advantage of growth opportunities and we'll be able to adapt to any further market volatility.

Thank you and I'd like to turn it back to Gren who will open it up for questions.

Sylvie, we will take questions at this time.

What's causing the inflow of lower cost products from offshore China, I guess you mentioned in the OTR market?

Actually it wasn't from China, Tim, or some of it was from China, but some of it was from Mexico. But I'm not sure what's causing it, but likely a weakness in their market.

And is it something you have any sense on sort of how long it could last for or is it difficult to gauge?

It's pretty difficult to gauge. I think over the last couple of years there's been several areas, whether it's in finished product or whether it's just general dumping of product from China that's coming in, and there's a number of cases where – I wouldn't say cases because that sounds legal, but there are customers down in the U.S.

that are starting to make noise about anti-dumping. But I don't think we are in a position to say why it's happening or how long it will continue for.

Just can you give just a sense, it can be very round numbers, in terms of what percentage of volume would be from OTR markets?

In our volume?

Yes, yes.

In our mix, I mean it fluctuates obviously, but it's about 20%.

Okay. Now you indicated that you expect overall compounding volume to be similar in the second half of the year to the first half.

Can you talk about what the moving parts are there? I'm assuming within that there is a mix of some products increasing, some decreasing.

Could you just kind of talk about what gets to relatively unchanged volume for the second half of the year?

I think that the tos and fros are a little bit more on a per customer basis as opposed to necessarily on the product line. With the exception of OTR right now, I would say is the one that is most up in the air in terms of where volume will come from and whether it will be the same.

But otherwise, I think it should be pretty much in the same. We would see niche tolling program picking up, but I would expect that if anything, that would offset some of the conventional tolling.

Okay. Okay, so not necessarily market, some markets increasing, some decreasing, very customer specific.

And the increase in niche tolling in the second half of 2017, should we sort of interpret that to mean that it would bias gross margins higher as well relative to the first half?

Yes, except that it's not like an enormous amount in terms of the mix, but they are important programs for us. And the reason that they are important is sort of what I said before, one, because their margins tend to be higher than our sort of standard mix is.

They are much more complicated to make. So, on a sales pound basis, we've talked before about sale pounds are what we ship out, the turn pounds are internally what sort of absorbs costs and drives the business.

And on a turn pound basis, there are more turns in that. So it absorbs more of the cost in the business.

Good. Okay, that's helpful.

Now this is good news on a contract here for the new Low Burden Mask. I'm just wondering if you presumably have mentioned who the customer is or the value of that, is there any other details you could provide on that, even maybe kind of the expected timing for revenue recognition?

I can't speak to the customer and I can't speak to what it's related to, although I mean it's a standalone order but it is from someone who got a tender that's out there. This particular order is not enormously material.

I think it's more significant from what it signals, which we'd like to think as the arrival of our mask on the market. And being that it's a well-recognized and respected country, I think it bodes very well for the other tenders that are out there.

In terms of timing, like I said, it's not an enormously material dollar amount. We'll recognize a portion of that in the fourth quarter of this year and the remainder in Q1 2018.

That should correspond with what the current timing expectation is of some of the awards on those tenders.

Okay, great. Thank you.

And then just finally, looking at the Company's overall sort of boot revenue, I know there was some strength from extreme cold weather boots and that was offset by the completion of the contract in the first quarter of 2016. Is it possible to say, with overall boot revenue when you kind of combine all these things, was it higher or lower than last year, I mean the overall business?

The overall boot revenue? The overall boot revenue was higher this year than last year if you add them all up.

Okay, great. Thank you very much.

Just wondering, on the raw material side in Rubber Solutions, it sounds like there was a few different dynamics that impacted the Q2, wondering if you can give a little color on what those were and how you view that situation shaping up for the remainder of this year.

So the volatility, so we existed for about five years with rubber prices in particular being at decade-long lows, sitting in sort of US$0.60 to US$0.65 a pound. Between about October, November of last year and March of this year, we went from $0.65 to $1.

Between March and June this year, we went from $1 to $0.80. Between June and now, we've gone down $0.05.

So it's a little bit difficult to tell. There is some seasonality in that.

I mean, there was a rainy season and that does impact because rubber is grown in sort of equatorial countries. The forecasters that we look at are looking at the volatility to come down somewhat.

We haven't recognized that. And so, what that translated into for customers were a couple of things.

As people look for the volatility, they were holding off on orders as much as they could. Customers like OTR and re-tread, where they are particularly price sensitive, there were other factors that sort of influenced it.

There were the Chinese imported tires that sort of impacted things. There's also a couple of other predominantly Mexican companies that traditionally would make end product for the market, where their tickets are down.

And so, they were essentially bombing the market with cheap pricing to give off their capacity. The other thing that influenced it was that there were certain products and certain raw materials that had disruptive supply chains.

So, a lot of the raw materials that we purchase come from Asia, but there were certain chemicals that were difficult to get. There's one primary supplier that kind of has a lock on the North American market and they had a fire at their factory and took it down for three weeks.

So, that impacted everybody in North America, not just us. But it was a bit of a scramble obviously than to get whatever supply was coming out.

So, our expectation, and we've reviewed the way that we do our purchasing and sort of supply chain management from end to end, and we do believe that things will settle down in the back half of the year. But if I really knew that answer, then I wouldn't be sitting here [indiscernible].

Right, yes. Okay.

Just following up on the import situation in OTR, are you able to give us a sense as to the price differential between what they are selling at and what sort of the rest of the market, the domestic market is at?

It's north of 20%.

Okay. And is that a market with a large number of U.S.

suppliers?

It's a tight market with too many suppliers. It depends what you think large is, but no, not enormous.

I mean, the big tire OE companies do their own as well. They just tend to do it inside.

And so, of the independents, there's probably less than 20%.

Okay, good. And then following up on previous questions on volume growth in Rubber Solutions, I'm curious, it sounds like you had strength across a number of end markets, so wondering if you're seeing the volume growth attributed to strength in the underlying markets or market share gains, or perhaps a combination of both?

It's really both.

Okay, and is there any market in particular that is surprising you in terms of its strength?

I wouldn't necessarily say surprising us, but infrastructure is a segment that we're very focused on because we believe that it's – particularly in the areas that we're looking at, it really speaks well to what we think our core capabilities are, which is really our ability to develop compounds for what I call hazardous and demanding environment. So, there are kind of funky and neat applications that we're working on and quite different from sort of if you look back seven years ago into our – not that our underground mining conveyor belts aren't quite technologically advanced, but these are a lot more advanced than sort of the other products that we do.

So, we're very pleased that that's proceeding more or less according to plan, and it's of course always nice to see some of the oil and gas come back.

For sure, yes. And so, then on the automotive business, I know you guys have been working on staffing there, like you have a new President in place, curious if some of the other recent hires are for that division or if they are for other divisions.

We have made some hires in that division. So in the first two quarters we did a little bit of additions into their engineering group.

We made three strong additions just after the quarter end. And we've added someone into manufacturing, we've added someone into sales, and we've added a new business development and marketing person.

And so frankly, they've only got a month in the world, our world, but I think really, really speaks positively to what we're trying to do there and will really help us accelerate and move our initiatives forward.

Okay. And curious how the focus on lean manufacturing and all of that is going in that division with your new President in place now for basically seven months?

I think for various reasons we've stubbed our toe a little bit this year and that's part of the reason why we've added in some of the extra strength, so that we can sort of put that back on track again.

Okay. So, then the outlook for auto this year would continue to be sort of...

Yes, I mean the top line is – in automotive, it's very difficult to impact your top line in the current year that you operate in. So, our real focus now is on the forward-looking stuff that we've been working on, which is really for the 2019 and 2020 model years, and within that, to focus on the operational performance of the business and improve that.

So that's kind of where we are now. So in terms of where I think it will be, I think their second half will probably look an awful lot like the first half.

Okay, thanks Lisa. And just one final question and I'll jump off.

I just wanted to circle back on that raw material gross margin stuff in Rubber Compounding, just for clarity. So, the impact from sort of the volatility in raw material cost sounds like somewhat in the past.

Because prices have come down, you've likely implemented price increases, or prices have come down so the price increases were not really all that necessary, and that chemical factory is back up and running. Is that accurate?

That's accurate, except that what does happen though particularly in cases of extreme volatility like this, is a couple of things, right. So, one is, like I said, the customer demand gets impacted if they think that the prices are coming down and they hold off as long as they possibly can to order.

And then the other thing is, when you take a look at what our competitors are and how their buying patterns are, and who's got extra capacity, there's that pressure that comes from having excess capacity and having raw material at either a higher or lower price relative to market. And so, there is some movement that's going on there where people or competitors are either willing to take margin compression to get business or where customers are expecting to have a much lower price decrease, because obviously it's human nature.

When input prices go up and you go to your customers to pass them on, you get a little bit of pushback. When prices come down though, every customer is calling you to tell you that you need to drop your prices [indiscernible].

[Indiscernible], just in case. And so, I don't want to underplay that it is a bit of a balancing act to make sure that we can offset everything.

Okay, perfect. Thank you so much for your time.

Do you have any kind of major programs like the muffler hanger which you're dropping off in say 2018, and when can you start to see some of the benefit of some of the larger programs that you've been bidding on or winning for the 2019 and 2020 model years?

So, most of the 2019 model years, there's a couple of OEs that will start production in late summer of 2018, and then the others sort of start further along into Q4.

Okay. And is there any major programs we should know about which are kind of falling off before that time period?

There aren't any major ones. I mean obviously things start working towards further along in their platform lives, but there aren't any major ones in a similar way to the large muffler hanger one that fell off.

That's a fairly sizable program for us.

Okay. Right, that's what I was really looking for there.

And then in the defense side, can you talk about, in the second half of the year now, the breakdown of revenue between some of your major products, can you talk about which ones are really moving the needle or which ones are making up the size of the revenue there?

From an award – so the defense business is made up of a combination of formal contract awards and deliveries thereon and then also spot orders that come in, and that largely comes in from funding agencies from the U.S. that are basically providing dollars to foreign nations for their products.

And so, the majority will come from or the three biggest pieces where it will come from is the combination of our extreme cold weather boots program, so we have really two styles of boots that are in that; the continuation of our gloves; and then of course the filter contract that we're going to start delivering on. The other area that we see a lot of interest and have orders in that are not on firm contracts on continual basis is on the shelter side.

Right. And that kind of feeds into – if we are looking at, you've talked about the tender for the gloves, which could satisfy deliveries through 2020.

Are you seeing any difference in the pipeline? The discussions you've had, you had mentioned there is a lot more bidding activity.

Is it going more towards the filters, the shelters, the bio type stuff?

Yes. I think that the gloves and the boots are sort of a relatively consistent thing on the overboot.

The cold weather is a slightly different beast. We are seeing interest in shelters just because there's a lot of – obviously with the activity that's going on in the Middle East and North Korea.

Where I think things will start moving though and what the noise seems to be, and a lot of the interest is more on the filter and on the PAPR side, so the powered air purifier, and there's a number of things that we're working on there.

Okay, now that's great. And then just on – it looks like you've been making a lot of efforts on right-sizing some of the businesses with moving some of the defense side.

Can you give us any kind of ideas or guidelines on further cost-saving activities in different divisions, any timelines, costs and just maybe cost savings?

Don't expect any massive or major restructuring to pull expenses out. What we are trying to do is reposition and repurpose expenses, if you will.

And so, some of this you'll actually see going up. I mean, the work that we're doing to implement a new ERP system is obviously going to increase expenses over the next 18 months as we refocus on that, what we are intending to do though by adding any expenses.

So, for the most part I think you'll see expenses largely flat. A number of the changes that we made, I know we're up in the quarter and up year-to-date, but a number of the people that we brought on in shared services started in the back half of last year, so year-over-year you'll start seeing things normalize out.

What we're expecting to see from this though are operational improvements. And so, I don't think you'll see G&A materially go down, but what you should see is gross margin dollars going up and EBITDA.

Okay, that's good, all right. And I just wanted to check on one comment you had in the quarter.

You talked about sales have been reduced, or was it deferred, based on customer specification changes? Can you provide more color on that?

Fine. In automotive, you mean?

Yes.

Yes, there were a couple of programs that we were working on that were actually in mid platform I think, or nearing the end of platform. And when they did the redesign, they changed the inserts.

Instead of being metal or aluminum, they changed the inserts into plastics and sourced them from very low-cost countries. And so, that's a business that went away.

Okay, fair enough. Okay, that's it for me.

Thanks.

I have just a couple of questions, mostly around defense. First question is, I wanted to ask on the filter contract and its commencement.

What are sort of the terms of its commencement, how long is it going to last, and is it for the same amount that you originally contracted to do, or is it going to go in kind of stages?

At the moment, the contract is the contract, and there haven't been amendments to it. So the commencement is right now.

And we've had the base order amount for quite some time. Just to remind everyone in case you've forgotten the history of this program, this is an award that we received actually a couple of years ago that was supposed to start last year.

And in the process of first article testing and getting ready to do the first commercial build or the first full rate build, we were notified by the customer that they wanted to change the specifications. They didn't go back out to market, they left it with us because we had been awarded, and they asked us to make the changes and do the R&D, which we completed and then we went through a six-month first article testing process with them.

So, that first, like most defense orders, it's IDIQ, indefinite demand indefinite quantity, but it has option dates and it runs for the next three years. And so the noise that we hear or the conversations that we have are that they need everything that they originally needed.

The existing contract though is for the original amount, and we just expect it to be exercised fully and then amended, if necessary.

Okay. And the shipments will go on for three, four quarters, how long do you…?

No, the shipments should go on. I mean it's a three-year contract.

So assuming that they do exercise all the options, which we think they will. They've never not done that in the past.

This is a customer, and it's a new filter, but it's something that we've done many times before. So they've never not exercised all of the options on their contract.

So, it should go for the next three years. And so the amount that we delivered this year in the back half of the year, our expectation is that that's about a quarter or a third of what next year's deliveries should be.

Okay, very good. And then my second question is on your foreign order, and congratulations on that by the way, I know you've worked very hard on that front, you said, Lisa, that it's not material, but would you consider that a spot order or something that maybe with that particular customer would kind of escalate into something more meaningful down the road?

As I said, this is a spot order, but it is from a customer that's got a larger tender that's out there, which we've bid on. So we think it bodes very well, if you sort of want to connect those dots.

Okay, very good. And then finally, just wanted to ask, I mean I'm sure it was asked in a different way, but on – so the client that you said you are the incumbent with one client who might place an order, they would keep you busy until 2020?

Yes, so that's an existing customer. It's with our gloves, our CBRN gloves, and what they've issued or they'd like to issue a tender, that's a sole-source tender.

They are required to give a notice period for other people to come forth and say that they could do the product and make it then a bidding process as opposed to a sole-source award, but we're not aware of anybody else that can make a compliant product for them. So yes, if that came through – so I don't exactly know when the start date is.

We currently have business and orders and awards that would take us through to the end of 2018 with gloves, and we could extend that beyond that into 2020.

Wonderful. Thank you so much.

Just one quick follow-up question here, excluding what I assume was a pretty significant benefit to the IRT business from the start of the filter contract, could you just comment on revenue from other products at IRT, just in total, obviously including shelters in that, and whether revenue was actually up across those other products at IRT?

Yes. So revenue in the quarter at IRT was up marginally, as I take a look strictly at their products.

And on a year-to-date basis, it is pretty much flat. The majority of their stuff is – and the reason for that is because last year they had the National Guard PAPR program in the beginning, the PAPR upgrade program at the beginning of the year, and so that's why they had the sales then.

I do expect though that going forward they'll have a material increase in their sales as a result of this, primarily as a result of the filters. But there are also some PAPR things that we're working on and shelters look good for the last half of the year.

So sorry, just to make sure I understand, so including the benefit, the year-over-year benefit from the filter revenue that would have come through in the second quarter, so including that, IRT revenue was flat, meaning there was – or it is excluding that impact you're saying it was relatively flat?

No. We haven't started delivering yet on the filter contract.

So, we've just started to ramp up to production [indiscernible] production. Deliveries, as we stated before, it took us until the end of June pretty much to finalize our first article testing and get approval from the government on it.

So, we'll start delivering on those this quarter, third quarter.

Okay, that's helpful. Thanks Lisa.

Thank you all for attending and we will talk to you after the end of the next quarter.