Gren Schoch - CEO Lisa Swartzman - President Daniel Gagnon - CFO Chris Bitsakakis - COO

Scott Fromson - CIBC Shawn Levine - TD Securities Neil Linsdell - Industrial Alliance Ben Jekic - GMP Securities Maggie MacDougall - Cormark

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

Here with me are Lisa Swartzman, President; Daniel Gagnon, CFO; Chris Bitsakakis, COO, and I would like to introduce for the first time Chris [indiscernible] who has recently joined us as [indiscernible]. 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 2018, 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 annual MD&A, which is available on our corporate website and in our filings with the SEDAR. I'll now turn this over to Lisa, who is our President, for the highlights of the quarter and after she is done, we will open up for questions.

Thanks, Gren. Good morning everyone and thank you for joining us.

During the fourth quarter we largely resume the momentum we had started to build in the first half of 2017 with the significant improvement over our performance in the fourth quarter of 2016. On a consolidated basis, EBITDA in the fourth quarter improved 59% over Q4, 2016 to 6.8 million and EPS improved to $0.16 versus $0.06 last year.

On a year-to-date basis, consolidated EBITDA was 27.7 million a 6.7% decrease versus the full year in 2016 and EPS was $0.54 versus $0.59. Included in these results is in approximately $950,000 pickup as the result of the changes in December to the U.S Tax Act, which reduced U.S corporate tax rate.

We’re very pleased to have entered into 2018 with strong pipelines and opportunities in most of our businesses, combined with a strengthened senior management team across all of our businesses and an experienced workforce, both of which are committed to growth, quality, customer satisfaction and profitability. In Rubber Solutions volume increased approximately 15% in the fourth quarter and about 7% of the full year versus the respective periods in 2016.

For the year, these improvements were driven primarily by improvement in our off-the-road infrastructure track and mining sectors along with the pickup in the fourth quarter and conveyor belting and were partially offset by softness in the chemicals and solid tire sector. As a result, in the fourth quarter gross profit dollars improved 11% to $5 million and EBITDA dollars improved 5% to $4 million.

For the full year, however, both gross profit dollars and EBITDA dollars declined marginally to 19.6 million and 16.6 million respectively. The environment remains highly competitive and the volatility in raw material prices we've been experiencing throughout the year continued.

We do not see either of these phenomenons dissipating and have and will continue to develop proactive programs and responses to protect our market position and profitability. Last quarter, I mentioned that while our business development pipeline is the most robust and diversified in our history, moving these opportunities through the various developments trial and ramp up stages, have strained some of our resources.

Highlighting certain areas and processes that require attention and some adjustments to how we do things to improve our efficiency. We've started to make good progress on this and with Chris Bitsakakis' feet firmly on the ground now, we expect this to continue.

In Engineered Products, on a year-over-year basis, net sales in the fourth quarter increased approximately 12% to 43 million and were essentially flat on a year-to-date basis at 164.4 million, driven by increases in the defense business which offset declines in the automotive business. For the fourth quarter, gross profit improved to approximately 45% and EBITDA more than doubled with strong gains in the defense business more than offsetting declines in the automotive business.

On a full year basis however gross profit and EBITDA declined 5 .7% and 10% respectively versus 2016. In automotive net sales continue to be negatively impacted by the previously disclosed completion of the larger muffler hanger program in the second half of 2016 as well as specification changes in certain of our bushing and boot program.

These declines continue to be partially offset by increased demand in dampers and induction bonding applications. In the fourth quarter, we could not achieve the improvements we have targeted and have instituted several of our medial action plans, focusing on operations and driving a concentrated effort to ensure rapid response engineering and manufacturing to meet escalating industry standards and improve our profitability.

We expect to see incremental improvements from this as the year progresses. And with the new talent we have added in the areas of market business development, engineering and operations, we’re focused on developing pro active strategies to win new multiyear contract to replace programs that have expired or nearing the end of the platform lifecycle.

Defense had a very strong quarter with net sales more than doubling and even more significant improvements in gross margin and gross profit and EBITDA dollars versus 2016, driven by increases by across all of our major product line. And for the full year, net sales increased approximately 45% again with even more significant improvements in gross profit and EBITDA dollars.

We are now at full rate production volumes and delivery schedule on a previously delay filter contract and have received additional albeit small volume orders from a large foreign military for our low burden gas mask. Global defense tender activity as well as inbounding inquiries has accelerated in recent months as part of an apparent increase emphasis on military preparedness by both the U.S.

and their allies. Looking forward, our pipeline remains strong and the business is positioned to deliver strong growth this year.

In 2018, our focus is to maximize top line growth and optimize capacity utilization particularly in Rubber Solution and in the defense business within Engineered Products, and an operational execution and efficiencies to ensure we have the platform in place to pursue the opportunities before us. The addition of Chris Bitsakakis in the COO role will enable us to implement consistent best practice processes across our manufacturing facilities and enhance our ability to execute our strategic initiatives at the operational level.

Our financial condition remained strong and we’re well positioned to continue making the required investments in resources, technology and capital expenditure to support innovation, improve operational efficiencies while maintaining the capacity to execute on potential acquisition. I’ll now turn it back to Gren.

Thank you, Lisa. I will now open it up to the floor for questions.

Melanie?

Just wondering if you can give some more detail on the operations improvements initiatives at Flexible Products, please?

I’ll let Chris answer that.

Sure. There is a few initiatives that we’re rolling out and we have started rolling out since last December at AFP.

We’re rolling out the implementation of what we’re calling the AirBoss Operating System, which is an operating based on the Toyota production system. And we’re making sure that we have senior leadership disability on the plant floor, bringing problems to the surface and accelerating the action plans to take care of each of these issues as they arise.

In addition to that, we developed and are executing on a standardized and formal continuous improvement program where we are identifying through, a pareto analysis to top issues that are negatively effecting the financial performance as flexible. And we are identifying and going after those issues expeditiously through team process.

And with those two initiatives, we have already started to see some significant labor improvements, the labor efficiency improvement and we believe that those will continue on going throughout the year.

Can you talk about what personal changes involved? And can you talk about some of the fix cost please?

I can tell you that prior to my arrival, we had already put in new talent in both the engineering group and in the sales apartment, and those individuals are doing quite well in terms of developing a longer term view as to how we start to bring flexible to sort of a higher end product lines, so that we can command new better margin. In addition to that, we made a change in December with our VP of Operations in that business.

And we have now brought on an experienced VP of Operations who knows the product line and the process categories quite well. He's hit the ground running and he's made a good addition to help execute on the initiatives to reduce scrap improve efficiency and all the key items that we are working on.

A couple of questions here. First, I was just wondering if you can comment on the dynamics in the raw materials market and AirBoss' ability to pass on changes in raw material prices to customers.

We are seeing definitely an upward trend in the lot of the raw materials that we are buying for, for the Rubber Solutions side, oil carbon black and polymers, and some small chemicals as well. We have a process where these increases are passed on to our customers.

And so we do a review of what the increases are and then our sales team brings those price increases to our customers to make sure that we are not absorbing the brunt of the raw material increases.

I think last quarter Lisa highlighted some of the perhaps non-recurring or non-persistence factors that accounted for the change in raw material prices, I’m just wondering if you are seeing any of those kind of headwinds abate?

I think what you are talking about in the last quarter was, if I’m not mistaken is a couple of issues that happened as the results for some interruptions in supply chain, not just the AirBoss, but to the entire industry that resulted from a couple of things. One is the hurricane that was in Texas which impacted the supply of carbon black briefly.

And then also there were some instances in China, one was the fire at a factory, but the other thing that was impacting things were the -- was more of a crackdown on the environmental issues been China related to chemical production. And some of major suppliers, they're setting up shop in Mongolia and other Asian countries.

And so I’d say, carbon black is no longer affected by weather, but there is obviously with the economy picking up there is increased demand for us. And Chris can probably speak a little bit better on where things are going with chemicals.

I don’t think we are having an issue, but there is some transition as some of the suppliers set up shop in other locations.

I think the issues that Lisa mentioned were one-time things have happened in the last quarter and the quarter before, but the what we’re seeing now is pretty significant sustained commodity price inflation, and raw material costs are probably up close to 20% year-over-year, and it doesn’t look like it's that trend is stopping, only one which somewhat volatile is oil but everything else particularly carbon black and rubber seem to be experiencing pretty good inflation.

The defense pipeline was characterized as I think robust and momentum continues to grow there. I am just was wondering, if there is any particular geographies or product lines that are seeing the bulk of that tendering activity?

We’re I mean obviously a bit sense of that just given the confidential nature of the lot of these things. If you recent use though and you take a look at who is meeting who in the next little while and what going on in Europe, there is number of tension that are growing over there.

So what we’re seeing is continued obviously demand for our regular products, our boots, our gloves and a pickup in our extreme cold weather boots given the terrain there. And given some of the other I guess concerns about chemical use on civilians, we’re seeing a pickup in our shelter business as well and a lot of interest on that side.

And another question here on the cash flow priorities over the kind of near to medium term, how do you guys way organic growth versus growth by acquisition? And then assuming there aren't any organic acquisition growth opportunities, how would you weigh dividend growth versus the buyback?

Obviously, we had a preference we would do organic growth but our history of making strategic acquisitions are relatively small and growing the organically fairly dramatically once we buy them. So, we’re aggressively looking for acquisition as always, and you have to be patient and you have to diligent and you must not pay too much.

But if you make the right ones, they can pay off. I mean I think I told the market when we bought IRT three years ago all that it was 2015, we bought it I thought by that this was not an instant success story that we’re buying at, but we were buying it to position ourselves for the future and we struggled for the first two year with that.

And I think we’re just now starting to see how that is going to pay off. And if things continue as they look like they will, that will be a very good acquisition for us.

Flexible products, was probably a little more successful immediately, but we’re not going through the travel that you have to go through the set it up for large organic growth in the future. In terms of share buyback versus dividends, we have done a bit of both, we’ve had constant dividend growth over the last 10 years and significant dividend growth, the share buyback that is been a little more sporadic this shares are relatively a liquid.

It’s there to provide a mechanism for us to make acquisitions of shares that the market conditions result in a big block of stock coming available so that so there is so other buyer for us. I hope that answer your question.

Yes, yes, that’s helpful. And finally just a housekeeping question, given the changes in the U.S.

tax rates, what would be a good effective tax rate to use for 2018 and going forward?

So, Shawn, for our modeling purposes we’re using 26.5% for consolidated effective tax rate.

Just on the, you mentioned with your balance sheet strength, you do have the option to or the capacity to do some acquisitions. Could you -- as always the first question I realize, but do you have specific areas maybe in the ancillary market that you’ve talked about before or geographically your product lines where you could see either the most value to the entire platform or where you’re seeing opportunities?

We have areas that we are focusing on that we would like to make acquisitions in if they, if they come around. I don’t want to say specifically anything that we’re working on right now, but we are looking -- as I have said in the past, we’re looking for acquisitions which will be complementary to flexible business and also the rubber compounding business is becoming a much broader business than it ever has in the past and we’re getting into the new polymers and new product lines.

And it is the strongest that we’ve seen for a while now. So, we need to start looking at our capacity in the future so.

That could be organic through the additional of new acquisition -- new equipment or that could be through strategic acquisitions that fit geographically or product wise with us.

And within the capacity on the rubber side of the business, I think last quarter you were talking about some trials that you are doing with at least one of your large customers had, I think the word was enormous potential, if you want to full volumes. Can you give any kind of update on how these types of discussions or trials are going?

I’ll let Chris answer that.

The conversation with this customer is going quite well. We are in the approval process in two of our facilities, one in Canada and one in the U.S.

And as this process continues on, we think there is some upside potential this year, but it depends a lot on the approval process at this time manufacturer. And it takes a quite long to get everything approved.

But so far, we are pretty pleased with the progress that we are making.

And I think under full capacity, you would actually be running up to the high end of your capacity to -- capacity utilization with the new facilities, right?

Well, I think that’s why we are looking at putting it through and this is sort of just a further the integration strategy that we did with previous our rubber compounding and industrial product businesses, where utilizing the various facilities and geographies that we have. It will still pick up an enormous amount of capacity, but at least spreading it over a month the two or three of them will help mitigate some of that.

And then of course some of the other work that Chris is doing that’s realigning the way that we move things through the facility to create efficiencies and shorten our mix and time will help us get with that. And if necessary its one of those things that we would look whether there is capital expenditures require to expand our capacity.

On the auto program, so I know you have talked about ramping up some activity at the end of 2018 for 2019, 2020 model years under programs that you are in discussion with now. Are these contracts programs that are you've got a full lock on?

And is there any kind of additional I guess startup costs or expenses that we should be thinking about it as far as -- sorry…

I think I understand your question. We do have the ramp up of the DT program which is the new ramp truck.

It's starting -- the started production is April of '18, but course of production will ramp up quite significantly towards the end of 2018. So depending on how that truck is received in the market, there could be some good outside potential from now.

Should we expect it to increase expenses between now and then on ramp up or margin pressure anything like that?

Anytime you launch a program, there are certainly launch costs involved that we have anticipated, and at this point and time, it looks like we are close to what those anticipated launch costs should be. And so as we get into Q3 we will know better if anything arises that was unexpected but at this point and time it looks like we are on track to the launch cost we expected.

And then finally on the defense side, obviously there is -- it sounds like the pipeline is up significantly. Can you talk about the difference between the pipeline that you're looking at the opportunities you are in discussion with and the deliveries that you're expecting through this calendar year?

If don't get any more orders for this year, we will probably have the second best year in defense. We’re I think it’s very likely that we will get more orders for existing products this year.

Of course our two big gas contracts still have awarded and they will be for next year, some of the new business which has come in for some of our historical products that we haven’t sold too much in the last couple of year is multiyear business so the pipeline for next year is quite a bit strong then it was for this year at this time last year. So that business is has defiantly turned and has accelerating.

In 2009, you see even more potential than the growth that we’ve seen in 2017 and this is for deliveries?

There are number of large scale tenders that are expected to come out at the end of this year. So, a lot of the products and sort of deliveries that we’re working on this year will continue into 2019 as well.

And then should those tenders be awarded at the timeline on time on their timeline then production for those and delivery for those would also start in 2019.

Good morning I have two relatively housekeeping questions and then one more conceptual. So the one first question is, could you remind us the delayed defense contract that's now shipping, what is that referring to?

Not really because it's confidential.

I think well this is also the filter one -- the filter is was the one that was delayed by a year that we started producing in September. So, we had a large multi-year filter contract that if you recall was supposed to start two years ago.

You had testing, retesting.

We had to redesign it, yes.

Redesign it, yes.

So that just started first production in September and is still ramping up as running at pretty fast right now.

All right, and the second question is on CapEx. What should we model for the coming two years, should it be higher significant higher than 2017?

I would anticipate, yes. So 2017 was slightly above 2016.

I think for a couple of reasons. Number one, we’re putting in new ERP system, which I will be kicking off later this year in sort of more earnings.

So there will be some on that front. But then I think as well with some of the both organic and growth that we’re talking about in the area that we’re focused where we've been doing some mixing in, but in terms of hiring polymers and different color drivers and things like that, we in the essence of finding an appropriate target to acquire, I think that we will get to a point where we need to add in more specialized equipment that have a little bit better than our current equipment does.

Okay. That’s great.

And then the third question is. I just want to make sure I put it sort of succinctly.

With regards to the automotive business, I mean when you bought this businesses as Gren said, it really started quite strong off the back. But you always, I think gave an impression that your vision was for something a lot of better and with the lot higher margin.

And I think that the theme on trying to kind of spurs up that operation has been ongoing for several years. Now, it seems like that you are at the point where that is really accelerating.

So, I guess my first question in this -- on this topic is. Is it the question of what the operation was lacking?

Or is it the question of the growth in 2019 is so strong that we have to sort of prepare?

No, I think it to be blunt about what happen, Ben is that before we bought it, they focused very, very heavily on sales, and they had grown quit massively. They had grown from $50 million of sales to about $107 million or $108 million when we bought them.

They had a pretty good pipeline. And they very soon after we bought them, the sales grew to $140 million I think at the peak.

The problem was as they were so stretch internally and trying to launch and deal with all those sales that they stop selling. And the processes and systems that need to be in placed around a $140 million business just wanted there, they were there was run basically as a suit of your pants.

So, as a $50 million business, the right discipline in manufacturing that’s required to grow from $140 million was not there and that is what Chris is struggling to put in place. Additionally, because they -- that the engineers stop selling for a few years, just trying to deal what the rapid growth that they had experienced.

As you know in automotive, its two to four years from sales to getting business awarded. So, we’re now experiencing that trough, if you want to do business that couple of plus have with the fact there haven't been a lot of new models introducing last year has resulted in the top line not growing.

So, we are fixing all those problems, as Chris mentioned, we’ve got a new sales team in there. We have a strong new VP of Engineering.

And they’ve been -- I think that part of the business is much stronger than it’s ever been. The manufacturing part of the business still is not close to where we wanted to be.

And although, we are now with a new people involved and we’ve Chris here, we’re already seeing some improvements. So, I think don’t expect any top line growth there really for 2018, maybe some in ’19 but not for ‘18.

Hopefully, operational efficiencies will improve the EBITDA for this year there.

And then are you -- we have been there not so long ago and your R&D pipeline seems very encouraging. Is there any effort to accelerate that?

Or is that part of the operation something that you are pleased with?

In which business?

In the automotive.

Okay, directionally I’ll let Chris talk little more about this, but directionally we want to move the business from more of the load track studentship products to more complex value added engineering products. And I’ll let Chris say few words about.

Yes, what we are trying to do is we put together fairly aggressive product development strategy that looks at taking our lower and product that are more susceptible to commodity type pressure and bringing them upscale to more highly engineered type product. So moving away from let’s say muffler hangers and more into steering gears machines and that sort of thing is the direction that we are taking.

We have had some very good success with several partners, talking to them about our unique design ideas. And as Greg mentioned on the automotive cycle, it doesn’t happen overnight but I think we have a good strategy and so far the customer that we've been talking to about some of these ideas and we are very receptive.

So I think we are on the right track to taking that product line and over the next few years, moving of that curve in terms of little bit more higher technical development required versus just shoot and ship.

Most of my questions have been answered, just one housekeeping item. So just on the tax in Q4 as the rate was really low and do you mean have something to do with measurement of your tax liabilities, is that the case?

Yes, that is correct. The 950,000 that we disclosed is a one-time adjustment because of that U.S.

tax reform.

And do you know what your earnings per share what has been in Q4 just a background?

It had about $0.04 impact overall.

Just a follow-up on the working capital. So you've saw quite an increase in cash use to support working capital over the year.

Does that any changes in a way that you're managing receivables or payables?

No, not really, the big increase that we have seen in working capital was couple of things. One is with the increase in raw material prices that had an impact on both the receivables and the inventory going up as well as the increase in sales for AR.

And then in the defense business as we saw the business picking up for the year, we were ramping up for delivery, so again that another impact on volume for the inventory. So, nothing anything different, we haven’t changed anything in our collection practice or our terms with payables.

It's really the effect of the raw material prices and the increase in volume.

Thank you all for attending. If there are no further questions, we will talk to you I guess pretty shortly after the Q1 results are out.

Thank you.