Peter Schoch - Chairman and CEO Lisa Swartzman - President

Scott Fromson - CIBC Capital Markets Maggie MacDougall - Cormark Securities Shawn Levine - TD Securities Ben Jekic - GMP Securities

Thank you. Good morning, everybody.

And thank you for joining this conference call. My name is Gren Schoch.

I'm the Chairman and CEO of AirBoss. Here with me are Lisa Swartzman, President; Daniel Gagnon, CFO; Darren Wasylucha, Senior EVP; and joining us by phone is Chris Bitsakakis, our new COO, Corporate.

We will give a summary of results and then the conference lines will be opened up for questions. Before we begin, I would like to remind you today's remarks, including management's outlook for fiscal 2017, 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 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 website and in our filings with the SEDAR at www.sedar.com.

I'll now turn this over to Lisa, our President, for the highlights of the quarter. And following that, we will turn it back to the operator for questions.

Thanks, Gren. And good morning, everyone.

Thank you for joining us. First, as we both seen and now been introduced, I'd like to welcome Chris Bitsakakis to our - our new COO to our executive team.

Chris has over 25 years of manufacturing experience; 20 of them in rubber and rubber-related businesses and a very strong track record of improving operational efficiencies and performance. We're at an important stage in AirBoss' evolution.

We need to focus on the successful and consistent execution across all of our businesses of the required operational initiatives to support our strategic plan. And we expect Chris to be instrumental with this.

The third quarter was a challenging one, marked by continued highly competitive and volatile raw material environment and further impacted by unusually severe weather condition. Despite our results, we're encouraged by the progress we've made in many of our behind-the-scenes activities, which while not clearly demonstrating earnings improvements yet, are establishing a more solid platform for us to start aggressively pursuing our growth initiatives.

And while we sincerely wish we could accelerate some of these activities and the impact we're confident that will have, we recognize that what's more critical is to ensure they're implemented appropriately, so that we don't incur avoidable issues in the future or cause unnecessary disruption in our business. This is another reason why we felt we were ready to add a COO to our team.

On a consolidated basis, EBITDA on the third quarter was $6.4 million, 12% lower than Q3 2016. On a year-to-date basis, EBITDA of $20.8 million was approximately 18% lower versus 2016.

EPS of $0.12 in the quarter was $0.01 below Q3 2016. And on a year-to-date basis, EPS of $0.38 is 28% lower than the year-to-date period in 2016, where the first half of the year represented the strongest results in our company's history.

The third quarter can be a challenging one. With summer shutdowns and vacations of varying length at certain of our customers.

However, we're not pleased with the quarter's performance and have identified certain key areas, particularly in Rubber Solutions to address some inefficiencies that we experienced. In Rubber Solutions, overall volume in the quarter was essentially flat to Q3 2016, and approximately 5% higher on a year-to-date basis.

However, continued raw material volatility was further compounded by disruptions, particularly related to Hurricane Harvey, a fire at one of our Asian chemical suppliers and the enforcement of more stringent environmental regulations in that region. The impact of these events were not isolated to our business.

While we have multiple suppliers globally, some of our customers don't, with only single sources approved by them, and consequently servicing their requirements was affected. As a result, in the quarter, both gross profit dollars and EBITDA dollars declined by $1.5 million versus Q3 2016.

On a year-to-date basis, both gross profit dollars and EBITDA dollars are approximately 7% lower versus the same period in 2016. Overall volume remained quite healthy with strength continuing across several sectors, including in the off the road, oil and gas, mining and track sectors, partially offset by softness in our chemical distribution business.

For the quarter, conventional tolling was flat versus Q3 2016 and was lower on a year-to-date basis as a result of the weakness experienced in Q1 of this year. As mentioned in Q2 though, this quarter we ramped up to commercialized volumes on another niche tolling program.

Also encouraging is that we're working with one of our large customers in this space on several other programs. These are still in the early stages of development and not expected to be material volume at this time, but fits with our overall strategy of elevating AirBoss as a solution provider and not just a supplier.

We're also in the trial stage with another large long-standing customer on what could be a material volume program that would start in the second half of 2018. Our business development pipeline is the most robust and diversified in our history.

This is good news. However, the volume moving through the various development trial and ramp-up stages have strained some of our resources.

Highlighting certain areas that require attention and some adjustments to how we do things. We've established several action groups tasked with addressing these issues and implementing improvements.

In Engineered Products, on a year-over-year basis, net sales in the third quarter increased marginally to $41.4 million and on a year-to-date basis were approximately 3% lower at $121.5 million versus the same period in 2016, driven by increases in defense, which offset declines in the automotive business. Gross profit and EBITDA dollars were essentially flat in the third quarter, but on a year-to-date basis, were lower versus the comparable periods in 2016, as improvements in defense were insufficient to offset declines in the automotive business.

Automotive sales continue to be 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. These declines were partially offset by increased demand in dampers and induction bonding applications.

The recent additions to the automotive leadership team across several functional areas are starting to gain traction. We're acutely focused on improving operational efficiencies and are starting to see stabilization in key areas.

As well, we're in the advanced stages of developing a longer-term strategy to renew our top line position and ensure a strong sales pipeline into the future. We're also more focused on the increased interaction between our automotive and Rubber Solutions businesses to leverage our in-house material appliance expertise as a differentiating factor for our current and future customers.

Net sales in defense continued their positive trend, increasing approximately 22% for both the third quarter and on a year-to-date basis versus the same period in 2016. These were driven primarily by increases in our glove, cold weather boots and shelter product lines.

During the quarter, we began the ramp-up to full-rate production volumes on a previously delayed shelter contract and have recently started shipments. Based on feedback from our customer, we anticipate we will be delivering on this program through the next 3 years to the maximum quantity of the award.

Last quarter, I also mentioned that we have received our first firm order from a large foreign military for our new Low Burden Mask. While the first quarter volume is quite small, we will be delivering on a portion of this in the fourth quarter with the remainder to be delivered in Q1 2018.

Global defense activity as well as inbound inquiries remain robust, and we're encouraged that current momentum appears to be carrying forward into 2018 as part of an apparent increased emphasis on military preparedness by both the U.S. and their allies.

So, as we look forward to the remainder of the year and into 2018, our focus is firmly on operational execution and efficiencies to ensure we have the platform in place to pursue the opportunities before us. We believe our recent investments in key leadership resources will accelerate our ability in this regard.

I'd like to turn it back to Gren now to open it up to questions from people on the line.

Thanks, Lisa. Operator, we'll take questions now, if you can open up.

Just a quick question. Just wonder if you can talk about opportunities for new platform, redesign launch in automotive, please?

In what respect, Scott?

Well, just wondering how the pipeline is looking. You talk about the good opportunities, but wondered if you could give a good more detail?

So, I think as we spoke about last quarter, while we're working on is - the last couple of years have had fewer platform renewals or changes in the customers and the product lines that we're on. So, what we're working through now is, there is a couple of reasonable size or quite large size actually launch programs that are scheduled for the end of next year, so sort of the second half of 2018.

Some of which is replacement business, some platforms that we were already on, some of which is new. And what we're working with now with our customers is on new product development and working on the new platforms that will be coming through, but it's reasonably early stages because we're still looking 3 years out.

Just wondering if you could perhaps elaborate a bit on your comments around the raw material dynamics you saw in your Rubber Compounding division during the quarter? Specifically, I suppose just providing some detail around whether it was largely related to lack of supply, a price spike or some combination of the two?

And how you see that playing out over the next couple of quarters? Just with regards to where supply is now for you.

We don't have a problem necessarily getting supply. I think there was a time period there were a few weeks as a result of Hurricane Harvey, which hit obviously Texas, where our carbon black pumps run, there was an impact there.

Most of the time, they were buying 6 weeks. We've locked in prices for about a quarter forward, and we have 6 weeks supply on that.

So, with short-term list in supply coming in isn't a huge issue for us, but it did make the pricing very volatile. The other thing that's happening is, in natural rubber, there's a divergence right now along the indexes, if you follow the indexes in Malaysia and Japan, Tokyo.

And so, the rubber pricing from different places is becoming quite disconnected, if you will, which is rather unusual. So, we're working on is a couple of things.

So, we're working on tightening up what our forecasts are, and tightening up sort of our conversations with our customers, so that we can go out and buy on a more frequent basis as opposed to necessarily going quite as long term without impacting the price and taking on additional risk for ourselves. On the chemicals side, that was obviously unforeseen, I mean there was an explosion at a plant, which impacted everyone.

And the other thing that's been going on in those regions is a lot of the factories, because of the way their environmental regulations are sometimes executed on and sometimes not, they are looking to relocate and to establish secondary operations in places like Mongolia. And it will just take a little bit of time because we have to requalify the new locations.

So, I would say that we don't see right now the volatility. I don't see any signs of that really diminishing.

What we are trying to do is manage that better and also have a better understanding of what our competitors are doing, so that we can at least address that.

So just to get this straight then, the carbon black price spike from Hurricane Harvey, has that moderated, gone back down or is it still elevated?

Most of that is returned, so I'd say, it's now compounded by where oil is, because it's a byproduct of the oil and it's great. So, I think the weather-related volatility and spike has come off.

But it is now impacted by other factors.

Okay. And correct me if I'm wrong, but would rising raw material prices over time have any positive impact on your business assuming you're able to pass through price increases?

Or does it really not matter to you at all?

In theory what we're trying to do and there is a timing impact, of course. It wouldn't have an impact on dollars.

It will have had an impact on the margin percentages. But we try very hard not to - or to minimize what our commodity risk is.

So, there's not a whole lot of effective and efficient derivatives that you can execute on. And so, we try and pass through the price increases and decreases so that we can minimize our exposure there.

So, net-net, it should be a flat on the bottom line.

Okay. So, if you were to look at the period like a short period such as 3 months in a quarter, you may see some volatility.

But over sort of a 12-month period, it should be smoother, is that the idea?

It should be smoother outside of the - with the caveats being that there is a timing issue of when we experience price increases and when we can pass them on to customers. And particularly, in the current environment and where we've got certain - I'd say, whether some competition that's coming out of places like Mexico from businesses that's typically mixed for themselves and produce finished products that have excess capacity and are now sort of fire selling that out to the market.

So, it does get impacted as well by sort of what the competitive environment in various sectors is.

Okay. So, it sounds like there's a lot of moving parts here.

But I guess, just to sort of summarize, it sounds as though you guys would expect some spillover of the dynamics in Q3 into Q4 and perhaps even Q1 in Rubber Compounding?

Correct.

Okay. And then just a follow-up question on the auto division.

So, I believe last time we spoke, you were chatting about how you've added some people in that division recently and you're looking at all your processes there, where you can have some improvements. And I was just wondering if there is an update around that?

And how all those things are going in terms of new people sort of getting up-to-speed and starting to move forward with some of that strategy around efficiencies?

So, the new people are working out great. So, we've now - that being said, they've been there for 3 months.

Where we're making a lot of progress and where our focus has been is on a couple of things. Number one is really the entire coating process.

So, the way that it worked before under previous management was a little ad hoc, if you will. So, what we've put together now is a much more disciplined and formalized program, so that when packages come in, when RSUs come in, we've got a cross-functional team that's going to take - that's going to really run the process through all the way, so engineering, manufacturing, finance, purchasing and sales.

And so, we've got a stage-gated process now, which means that we'll be much more stringent in the way we're doing it and make sure that we get the appropriate buy-in and so that no one is sort of designing something that is unmanufacturable, if you will. So that in and of itself should do a couple of things.

It should make sure that our pricing is tighter, our margins are tighter, but much more importantly, it will make sure that our product launch processes will be a lot smoother. And so, what's happened over the last couple of years is, because of the way some of this was done prior to the acquisition on platforms that were still going to be coming in and starting, we spent a lot more time and been less efficient than we'd like to be in our product launch process.

So that sort of absorbs resources and means that they're not available to go out and do what they should be doing, which is developing a pipeline. So that sort of on that side.

And the other thing that we spent a lot of time doing is, I mentioned last time that couple of key areas that we added in was really in a new sort of leadership team in the operations area. So, we had spent a lot of time now reviewing that, making a lot of changes, particularly in sort of what I call areas that don't need to happen and just sort of we were leaking some money out.

So, things like materials handling, production scheduling, all of those things have been improved, and then focusing on what our scrap rates are and what freight things - our freight levels are, because again, those are levels that were being exasper - or higher than where we'd like and being exasperated by the product launch process that I just described. And so those are starting to gain traction, and we're starting to see stabilization in our contribution margin.

And then as I just mentioned, the other key member that we added was in our marketing and business development group. When I say group, these are group of one.

But he is in the final stages of putting together a plan for us that will outline and have a road map for us as we move forward over the next couple of years.

Just a couple here. One, can you provide a bit of an outlook for the Rubber Solutions volumes heading into 2018?

And maybe what are some of the puts and takes are and some of the larger opportunities you're pursuing?

Forecasting volumes in Rubber Solutions is always rather difficult, especially beyond a quarter. It's not a contractual business in the same way as our defense or automotive businesses.

So, I've put it into sort of 3 categories when I look at the business. There is a baseline of solid returning, dependable, reliable customers.

And assuming that nothing changes in the economy and their end-use markets, they will be stable. Then we've got the secondary, which are our niche programs in tolling.

The niche programs are a lot more stable in terms of what we think the volume would be. And so, where we're running at now is probably, I'd say, in the third quarter, is probably close to where we should be because those programs are now ramped up to commercialized stages.

It might be a couple of percentage above that. And conventional tolling is, of course, very, very difficult for us to tell, because it really depends on what goes on at predominantly the large tire makers and whether they need outside supply.

And then the third category is, obviously, the new developments that we're working on. And that depends a little bit on how the trial stages go and where the approvals go.

There are a couple of things. There is 1 program, in particular, with one of our large customers that we are looking at.

So, we're working on trialing it now - sorry we're in trial stages now. They typically take about 9 to 12 months to approve things.

And so, we've started this a while ago. That is anticipated to ramp up in the second half of next year.

We don't know final volumes, but when we look at what the maximum volume or the total volume could potentially be, it's enormous. And so, if that came to fruition at the levels that are being discussed, and once it's fully ramped up that would come pretty close to filling us.

Very well. Okay.

So pretty sizeable opportunity there.

Yes, but I caution on that, because it is not a firm thing. And so, while we work on it, it obviously depends on a little bit of what goes on in their business.

And - but it's an exciting program and it's a customer that we've got a very good relationship with, and that we're looking to make a stronger relationship with. And so, we do a number of different things for them.

And looking to expand on all of those levels.

Okay. And then maybe if you can just provide a bit of an update on some of the headway you've made or some of the opportunities still before you in penetrating the nonautomotive antivibration market.

I know that's a market that you guys have - has in the past has - had pretty sizable potential opportunity, but just wondering what you're seeing here in the near term? And if we can see some of these opportunities come to fruition over the next 12 months?

There are areas that we're working on, but we don't have anything that, I think, will be in fruition in the next sort of 6 to 12 months. So, these are - it takes a bit of time to break into the market and become known and work with the customers to have your products shown to them and approved by them.

So, we're sort of still in the early stages of attacking and developing our strategy for that market. But we don't have things that will make any impact that I can see in the near term.

I do have a question on the defense. You mentioned it and I don't know if I heard correctly, but the 3 year deliveries over the next 3 years from contract, is that the one that was previously held back and now it's resuming with shipments?

Yes.

Yes.

Okay. And then on the defense, I guess, inbounds would probably be - maybe you can give us some more color on how do they work?

Like you said, that every time that sort of crisis springs up, you start getting inbounds? Or is it more tied to the early in the year kind of budgets?

Or how do we - how should we think about opportunities in the defense?

I think the inbound side is, I mean, I wouldn't say it's necessarily tied to a budgetary, because there tends to be things that they need now in short term as opposed to having to have large amounts of our money allocated for longer term award. Where we're seeing an awful lot of that and much more than we historically is in the shelters.

And so that tends to be a little bit, I call it, sort of current environment, so not necessarily crisis. But if you take a look at what's going on with sort of Russia and China and North Korea in that sort of part of the region of the world plus the Middle East, there is a lot of concern about what's going on there.

And so that's predominantly what we're getting inbound calls on. And then there are a few other - some of our other product lines that they tend to be smaller things that just wouldn't be big enough to go for a full budgetary award or program tender.

And to the extent that you can say it, of course, like are some of those inbounds from sort of regional players or more global players kind of...

So, what tends to happen and - so I'll talk more specifically about [indiscernible] that we're seeing a lot of this coming through, but in some of our other product lines as well, but in the over-boots and gloves as well. And so, the U.S.

- most of the time, they're coming through one of the U.S. agencies.

And so, the U.S. has agencies that has pockets of money that go out in sort of assist and subsidize, what some of the global players are doing and what their defense needs are.

So, I think last quarter or maybe it was the first quarter, when we talked about some of the money that India had spent where they had come through the FMS program and they had acquired goods out of the U.S. and so that sort of goes out of inventory and then there inventory gets replenished.

But that's where most of it's coming from. So, it's coming through U.S.

agency on behalf of another foreign country.

Ben, we're also getting a lot of inquiries from major customers about how big our capacity is and products that they are currently not buying anywhere near our capacity and they're asking us how many can you make? How fast can you make?

But these are not anywhere in order, but...

And to differentiate, those inquiries are more - would be more associated with a longer-term award, because the quantities that they're talking about are large where some of the other inbound stuff tends to be smaller quantities for smaller pieces. The noise in the tender activity is still pretty active.

I just have another question very, very sort of high level. I guess, it's fair to say that all of the initiatives throughout the company that you've undertaken over the last few years in terms of how you do things in efficiencies and pricing and procurement.

I'm guessing the idea there is to reduce your sensitivity as much as possible, obviously, to swings in the raw materials cost. So, sort of whereas maybe 5 years ago, you would have been at a certain level.

And now 5 years later, I guess, the goal is to be at a higher margin compared to some years back. Is that a fair assessment?

And do you feel that next year or 2019, you will as an operation be more able to withstand swings in the raw materials price?

So, I'm going to answer that in a couple of different ways. I wouldn't necessarily say that what we're trying to do is insulate ourselves from swings, because it's sort of like saying, oil was at $50, now it's [Technical Difficulty] still buy it at $50, and that's nice, but it's not going to happen.

So, what we're trying to do is, yes, mitigate and lessen the swings and the impact on our financials and our performance. And so, what that means really though is being able to absorb where the swings are and what's going on in the market to anticipate it a little bit better and to reevaluate the way we do our purchasing and the way we work with our customers, so that we can tighten that up.

Because part of the issue that we have is not just the, a passive - not absolute price, there is obviously the timing of being able to pass that on to customers and what customers see in the market. So, I think it's working on a little bit more of a relationship basis with our customers, so that there is more of an understanding and sort of a tighter relationship with - where using less of a focus versus a known as we go forward, and we buy.

Now in general, we've spoken about this over the last 3 or 4 years, when we put together our sort of centralized purchasing and supply chain group, was obviously to make sure that we leveraged and optimize what's going on across the business and take the volume, optimize that and ensure that we were purchasing as efficiently as possible. And in the early years when we were first putting that together, you can obviously save quite a bit of money.

That part becomes a diminishing return, because there's only so much you can pull it together when you sort of optimized and improved your processes. So internally, now we're working on sort of how we actually look out [indiscernible] and sort of try and tighten up that type of things.

Thank you. If there are no further questions, we will talk to you after year-end.

Thank you for joining us.