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Edited Transcript of BOS.TO earnings conference call or presentation 9-May-19 1:00pm GMT

Q1 2019 AirBoss of America Corp Earnings Call

NEWMARKET May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Airboss of America Corp earnings conference call or presentation Thursday, May 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Bitsakakis

AirBoss of America Corp. - COO

* Daniel Gagnon

AirBoss of America Corp. - CFO

* Lisa R. Swartzman

AirBoss of America Corp. - President

* Patrick Callahan

* Peter Grenville Schoch

AirBoss of America Corp. - Chairman & CEO

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Conference Call Participants

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* Ben Jekic

GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Navdeep Malik

Industrial Alliance Securities Inc., Research Division - Research Analyst

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

* Tim James

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the AirBoss of America Q1 Results. With us, we have Mr. Gren Schoch, Chief Executive Officer of AirBoss of America; Ms. Lisa Swartzman, President; Mr. Chris Bitsakakis, Chief Operations Officer; and Mr. Daniel Gagnon, Chief Financial Officer.

I would now like to turn the meeting over to Mr. Gren Schoch. Please go ahead.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [2]

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Good morning, everybody. Thank you for joining this conference call. My name is Gren Schoch, and I'm the Chairman and CEO of AirBoss. Here with me are Lisa Swartzman, President; Daniel Gagnon, CFO; Chris Bitsakakis, COO; Chris Figel, VP, Legal and Compliance; and Patrick Callahan, CEO of AirBoss Defense Group.

I will give a summary of results and then discuss this morning's announcements regarding the AirBoss Defense Group, 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 fiscal 2019, anticipated financial and operating results, plans and objectives and our answers to your questions will contain forward-looking information within the meaning of applicable securities laws. This forward-looking information represents our expectations as of today and accordingly are subject to change. Such information is based on current assumptions that may not materialize and is subject to a number of important risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on this forward-looking information. A description of the risks that may affect future results is contained in AirBoss' annual MD&A, which is available on our website and our filings with Canadian Securities Administrators on SEDAR at www.sedar.com.

We will have a full presentation on operations and on our AirBoss Defense Group at 4:30 today at our Annual General Meeting. I invite you to attend in person or to follow the presentation on our website and participate in questions on the conference call.

Now I'll hand this over to Lisa for the highlights of the quarterly report and a discussion regarding this morning's announcement.

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Lisa R. Swartzman, AirBoss of America Corp. - President [3]

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Thanks, Gren. Good morning, and thank you all for joining us. I recognize that many on the line will be interested in hearing details about the AirBoss Defense Group merger we announced, so I'll just provide a brief overview of our Q1 2019 results before moving on to a discussion about that.

Our first quarter results for 2019 include a number of encouraging developments and the continuation of the positive trends that we experienced through much of 2018 in Rubber Solutions and the defense business within Engineered Products. We also continued to see headwinds in the antivibration business within Engineered Products.

Compared with Q4 2018, net sales increased 8% and more importantly, EBITDA increased approximately 38% to $7.9 million and EPS doubled to $0.12. Compared with the first quarter of 2018, net sales increased 2.5% and EBITDA was up about 0.5%.

Rubber Solutions had a very strong first quarter, particularly in light of the fire that affected our Scotland Neck, North Carolina facility and resulted in approximately 5 weeks of downtime at the facility and a $250,000 provision in the quarter. There was an exceptional effort undertaken by the team to mitigate the impact to our customers and to our business. We're very proud of the manner in which they managed the incident and minimized the disruption to the business.

Volume for the quarter increased approximately 7% on a year-over-year basis, with improvements primarily in the conveyor belts, mining, track and tolling sectors. These were partially offset by volume softness in the oil and gas, off-the-road and chemical sectors. Compared to Q1 2018, gross profit dollars improved approximately 26% to $6.8 million and EBITDA dollars improved approximately 16% to $5.5 million.

To date, we remain focused on completing the previously announced mixing line and R&D laboratory expansions at the Scotland Neck, North Carolina and Kitchener, Ontario facilities, respectively. These investments will further support the increased volumes, enhance product mix and operational efficiencies in the segment as well as our ability to maximize our technical capabilities and deliver new product development over the longer term.

In Engineered Products, net sales in the first quarter declined marginally to $43.5 million versus the first quarter of 2018, with higher net sales in the defense business more than offset by softness in net sales in the antivibration business. For the quarter, gross profit and EBITDA declined to $5.6 million and $3 million, respectively, versus Q1 2018.

In the antivibration business, we remain focused on the areas we outlined in our Q4 call: mitigating the impact of increased raw material prices, particularly with respect to rubber, steel and silicone; and managing the impact of the current tariff environment that seems to be changing daily, watch the tweets; the tight labor market conditions and generating nonautomotive sales.

In conjunction with this, there are a large number of continuous improvement initiatives underway, which management expects to start generating more tangible profit in the second half of 2019. While the defense business had another strong quarter with net sales increasing approximately 14% versus Q1 2018, given this morning's announcement, I'm going to change tracks right now and talk a little bit more about the transaction.

Structurally, we're merging AirBoss Defense and our Acton Vale Quebec operations with a U.S.-based privately owned business called Critical Solutions International or CSI. CSI is a leading global supplier of route clearance vehicles, countermine capability and survivability products to the U.S. and foreign military forces. On closing, AirBoss will own 55% of the newly formed AirBoss Defense Group, while CSI's current owners will own the remaining 45%, allowing us to maintain a meaningful stake in a larger, more-focused defense business with significant growth prospects while also supporting accelerated additional investment in our other wholly owned lines of business.

AirBoss will also receive $60 million in cash, likely in the form of a vendor take-back note at closing that we subsequently expect to be refinanced by third-party debt. The transaction values the AirBoss and CSI contributed portions at enterprise values of $100 million and $32.7 million, respectively.

Following closing, AirBoss Defense Group will be led by an integrated team of CSI and AirBoss executives. This team will be charged with integrating the businesses and acting on the range of growth opportunities, both already identified and those that we believe will be available to a larger, dedicated defense player. Patrick Callahan, who's here with us today, is the current CEO of CSI; and Heather Miller, CSI's Chief Strategy Officer, will become the CEO and Chief Strategy Officer, respectively, of AirBoss Defense Group; while Chris Bitsakakis, our COO, will also serve as the new group COO.

Closing of the transaction is subject to regulatory approval from the Committee on Foreign Investment in the United States or CFIUS and other customary closing conditions. We expect closing to take place in the second half of this year. The reason we're so excited about this transaction is we feel the merger is highly complementary on a number of levels, including core competencies and capabilities, where we're combining 2 groups of capabilities that neatly dovetail with little duplication as well as product offerings and customers and relationships where we expect minimal overlap once the groups are combined.

AirBoss has a reputation for engineering, prototyping, R&D and manufacturing, while CSI has real strength in sales and business development, field maintenance and service support, training and integrated logistics and sustainment planning. Combined, we will be able to leverage each other's strengths and as a result, be better positioned to take advantage of global opportunities.

The enhanced suite of products that AirBoss Defense Group will provide better positions the new business to act on a greater range of emerging opportunities while also permitting revenue and cash flow diversification, which should help smooth out some of the variability inherent in the defense business over the longer term.

As many of you know, bidding on the government contracts requires a longer sales cycle but that these can also deliver commensurately large multiyear contract awards. A larger organization with a broader product portfolio is simply better positioned to manage any associated variability.

So why is now the right time for AirBoss to enter into this transaction? We continue to see a very complex landscape with respect to chemical, biological, radiological and nuclear hazards. This includes both the specter of chemical and biological stockpiling by certain groups, including ISIS as well as the recent instances of use of agents like sarin and chlorine gas by Syria. Ongoing regional tensions and conflicts in the Middle East suggest there are meaningful opportunities in that theater, and CSI has a number of well-established relationships and a strong reputation in that region that we could leverage. And in recent years, we have seen potential combat environment shift and correspondingly, changes in global military priority. Examples of this are the U.S. military's efforts to improve cold-weather capabilities, evidenced by the bunny boot award we announced towards the end of 2018, Russia allocating significant resources to building Arctic forces and an increasing number of conflicts entering urban areas.

Overall, and in the face of persistent and even rising global geopolitical tension, we feel there is a steady and increasingly broad array of growth opportunities facing AirBoss Defense Group in both the near and longer term.

I just want to reiterate some of the key elements of the transaction. In addition to combining 2 groups with complementary product lines, core competencies and customer bases, we feel there is strong alignment in the corporate strategies and operating cultures, which will help support integration post closing. Together, our increased scale will allow us to better compete in the marketplace, and offering a broader suite of products will help diversify revenue and cash flow. We also expect that as a larger, more-diversified company capable of levering the breadth and strength of CSI's customer relationships, export and commercial pricing strategies, it will be better able to drive a range of initiatives on a global scale, including new product introductions that will support growth over the longer term.

We also expect that as a larger-focused defense business, we will be better positioned to take advantage of further acquisition opportunities in the industry. We continue to operate against the backdrop of global and regional geopolitical tension, which is expected to support additional opportunities in both the near and longer term. Leveraging CSI's sales channels to drive cross-selling, particularly outside of the North American market and in the Middle East will be key to our future success.

And finally, we feel this transaction realizes some of the value in our defense business while retaining AirBoss' potential to meaningfully participate in the future upside of the business and drive improved returns to shareholders in the future. The $60 million we received through the transaction will provide us with financial flexibility to focus on our core rubber businesses and continue investing in CapEx, target acquisition and repaying debt.

In short, we feel this is a very positive step in the evolution of AirBoss and one we look forward to updating you on as the transaction moves through to completion. I'd also invite everyone on the line, sorry, for taking so long, to join us for the AGM this afternoon, where Patrick will spend a little bit more time going through and giving some more detail on the CSI business.

Thank you, and I'll turn it back to Gren now.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [4]

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Thanks, Lisa. So in summary, our Rubber Solutions group continues to provide very good results. Our antivibration business is starting to head in the right directions, and we hope that this will show up in financial improvement before year-end. And we're very excited about the growth opportunities of the AirBoss Defense Group.

I will now turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Nav Malik with Industrial Alliance.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [2]

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Just on the transaction, I just wanted to ask what sort of if you could provide any financial metrics in terms of what that valuation represents, say, on a multiple of EBITDA?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [3]

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Go ahead.

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Lisa R. Swartzman, AirBoss of America Corp. - President [4]

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So it represents for us about an 8x multiple on our EBITDA.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [5]

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Okay. So on the EBITDA that you're contributing to the -- or that -- you're basically selling your business for $100 million valuation and for that $100 million, it is an 8x multiple?

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Lisa R. Swartzman, AirBoss of America Corp. - President [6]

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Correct.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [7]

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Trailing.

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Lisa R. Swartzman, AirBoss of America Corp. - President [8]

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Trailing.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [9]

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Trailing. Okay. And also just wanted to know in terms of, I guess, trying to get a sense of what the pro forma business would look like in terms of how we model it out. What sort of -- is there any guidance you can provide there?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [10]

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As you know, we don't provide forward guidance. And it depends exactly when it closes. So there's a big difference when closing.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [11]

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Yes. But even just on a run-rate basis type?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [12]

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The run rate -- our business has been growing very rapidly and is forecast to continue to grow rapidly. The CSI business is much more variable, depending on how many Huskies they sell and if it's a year that they're actually being delivered or not. And those vehicles are up to $2 million each. So obviously -- and a very high margin. So obviously, in a year that they sell 20, that's a huge number. In a year that they sell 0, it's lower. So we will give you more guidance on that after the transaction closes.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [13]

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Okay. Okay. Fair enough. And then the $60 million. What's the timing there in terms of that being refinanced? Like is that -- I'm just kind of curious as to when you would receive the cash.

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Lisa R. Swartzman, AirBoss of America Corp. - President [14]

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So...

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [15]

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We haven't gone out to attempt to refinance it yet. And obviously, it can't be refinanced until the transaction closes. But we anticipate at least part of it would be refinanced fairly soon after closing.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [16]

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Okay. And then just maybe moving to the results in the quarter, just on the antivibration business. Can you maybe elaborate in terms of what the -- well, I guess, maybe 2-part. What was the event was it sort of margin contraction not being able to offset higher costs? Just a general lower product -- lower-margin product mix? Maybe just highlight more detail what happened in the quarter. And then also if you wouldn't mind just giving an update. I think last call, there were some initiatives that you had underway for that segment, maybe how that's progressing?

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Chris Bitsakakis, AirBoss of America Corp. - COO [17]

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Nav, it's Chris. The volume mix played the biggest role in what your question was related to. And so because of that, we're working diligently on reducing breakeven points in general. So at the end of this month, we will have closed our third factory down and combined it into the 2 that we have. So the 3 factories are going to be combined into 2, which will allow us to run a little bit leaner that way. We have some additional continuous improvement suggestions that have been placed into the queue, and we're very aggressively going after them. We're working diligently with our customers to ensure that we have mechanisms in place to pass on the raw material increases because many of those mechanisms were not in place before, but we're making very good progress on that. So a combination of an aggressive growth strategy, which takes a little bit longer, particularly in the automotive, but we have now formed a new group there that's focusing on sales of nonautomotive products. And in fact, you'll hear later on this afternoon that we were awarded our first nonauto award a few weeks ago. So looking at increasing the top line, reducing our breakeven points and working with our customers for mechanisms to pass volatile price increases through whenever we can, I think those 3 in combination will start to accumulate as we go later into the second half of the year. And you will start seeing some better results.

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Operator [18]

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The next question comes from Maggie MacDougall with Cormark.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [19]

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So I wanted to talk about the transaction a bit more. Just first thing, a point of clarity. So you're selling your defense business into this new entity, but then elsewhere in the press release there are comments that you're contributing all of the shares of Engineered Products, which also includes your Automotive or antivibration business. So can you just clarify exactly what is going into the new entity?

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Lisa R. Swartzman, AirBoss of America Corp. - President [20]

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No. Sorry, Maggie. The pieces of the business that we're contributing in, so merging with our defense business are not the Engineered Products reporting segments, which has anti-vibration and Defence? It's really just the operating facility in Acton Vale, Quebec, which does the rubber production and molding for our rubber-based products with the Defense business and also has some mixing and transformation process operations. And that will be going with the transaction as well.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [21]

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Okay. So that's helpful. And so then when I look at your trailing EBITDA in Engineered Products, which now I understand you're not selling the whole division into at, and then try to square it with the multiple valuation you provided of around 8x. It's just difficult to see how that math works because your trailing EBITDA is 10.2 for that entire division. So is there also some EBITDA from that rubber business?

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Lisa R. Swartzman, AirBoss of America Corp. - President [22]

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Yes.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [23]

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Okay. So you're taking a portion of your Rubber Solutions EBITDA and your Engineered Products EBITDA, which gets you to the 8x multiple on a $100 million valuation?

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Lisa R. Swartzman, AirBoss of America Corp. - President [24]

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Correct.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [25]

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Okay. Are you able to provide us some guidance, just for modeling purposes, around the proportion of EBITDA coming from each division?

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Lisa R. Swartzman, AirBoss of America Corp. - President [26]

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Yes. It was about twice as much coming from the defense portion as from the (inaudible) portion.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [27]

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Okay. Yes. And wondering if you can provide us with a bit more information on critical solutions, not necessarily with regard to the product or operations but on the financial side. Gren, you mentioned that it sounds like the revenue can be lumpy just based on selling these big-ticket items. Can you talk a bit to their historical track record? Do they have a 5-year number or even a trailing number where you can offer up some valuation multiple on perhaps what they're getting for their contribution?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [28]

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Maggie, yes, I can give it to you, but it doesn't really -- it's not meaningful in terms of making future projections. They sold close to $2 billion of Huskies over the last, what, [15 years or so]. So a very large number. And most of that was to the U.S. They have the exclusive rights to that vehicle worldwide, and they're just in the process of marketing that outside of the U.S. But there aren't any other billion-dollar customers hanging around like the U.S. has. So they had some very, very big years that we're not expecting to recur. No one and I'm talking $40 million and $50 million EBITDA plus years. So I mean that would be misleading to give you those numbers.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [29]

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Okay. Could you then perhaps walk us through rationale on their valuation just so that we can understand what you've purchased?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [30]

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So I think if you just look at the ratio of the ownership of the entity, after we take USD 60 million out of it, you can get our -- you can get what we agreed on anyway in terms of percentage contributions. So obviously, it's more or less -- it's less than 45% because we're taking $60 million out of it.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [31]

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So the other thing, wondering is if they've had such high sales and EBITDA, why they don't have $60 million to give to you? Why the vendor take-back structure?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [32]

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Because the company was owned by private equity, and they've stripped the cash out of it.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [33]

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Okay. And so what's the leverage profile -- pro forma of that entity?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [34]

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Well, there's no leverage in that entity. But if you're asking what the leverage performance of AirBoss Defense Group will look like...

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [35]

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No. Yes.

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Lisa R. Swartzman, AirBoss of America Corp. - President [36]

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Yes. Maggie, it will start probably at about 3x. So not dissimilar to what we've done our other transactions, but sort of where AirBoss hit to when we acquired Flexible and when we acquired IRT to begin with. The cash flow profile of the business, notwithstanding the fact that both our -- they're both defense businesses so they have volatility in them, the cash flow profile is very, very strong. So we expect that to come down pretty quickly.

Just to clarify a little bit and further the point on the cash flow, CSI's main strength is their sales and business development. They're not like us in terms of manufacturing. They don't manufacture the actual vehicle. So from a working capital perspective, they're efficient.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [37]

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Okay. So who is the manufacturer?

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Lisa R. Swartzman, AirBoss of America Corp. - President [38]

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They have a supplier for it. So they've got an exclusive arrangement right now with the manufacturer of the Husky. It's a (inaudible) vehicle.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [39]

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So they own the prototype essentially, and they have someone else do the building for them?

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Lisa R. Swartzman, AirBoss of America Corp. - President [40]

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They -- no. They tack on. And what I'd encourage you to do because I don't think we're going to ask Patrick to go through all of this, but it's probably better for Patrick to answer this question. Because the way that they built their model is a little bit similar to how we've described things when we talk about our Low Burden Mask. It's a razor, razor blade on this.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [41]

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Okay. So they sell add-ons to the vehicles.

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Lisa R. Swartzman, AirBoss of America Corp. - President [42]

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Yes. Yes. So the Husky happens to be an enormous razor.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [43]

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Right. Okay. And what's the profile of the consumable portion like that would represent some revenue -- follow-on revenue profile once the vehicle is sold, so...

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Patrick Callahan, [44]

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Yes. This is Patrick Callahan. So just to clarify the answer to that question. One, we treat our partners in the vehicle business as an outsourced manufacturer. So we own the rights for all sales, marketing, contracting, aftermarket service support, spares, program management and the marriage of not dissimilar to you what you're seeing in the merger with AirBoss. We fill that value chain together with their manufacturing. It's a partnership not an agreement, not a joint venture. So that's how we treat the agreement. And to Gren's point, we've made over $2 billion in 15 years. On our financials, we are a route clearance company, but the Husky has been our premier product. And one of the reasons that we were very excited about this merger was it diversifies our business. So to Gren's point about being a little bit lumpy, we have years that are very exciting and multiple years that are very exciting because of the timing of orders. And then you can have years that come down because orders are spread out and your EBITDA may come down and you're not seeing that growth up and that curve that you want to see. So having a diversification of products allows you to have multiple product curves instead of one. But to answer your question on sort of the annuity side of the business, there is a little bit of that because the Husky has spares. And I'm not going to give you the actual coverage, but every year the sparing both for the U.S. and globally is a big part of our business. Speaking for them, Husky is the most survivable platform in the world. It's designed to find IEDs in mines and get blown up and they do. And the operator survives. And we then fix the vehicles, and they go back into action. And with fixing those vehicles, we are providing a lot of spares and service and training. That's a big part of our business.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [45]

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Okay. I understand. So could you perhaps quantify sort of the baseline of revenue that you get from that replacement and service piece?

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Patrick Callahan, [46]

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Yes. I can give you a percentage. I mean, generally, on an annual basis, we're probably looking at close to 25% of our business.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [47]

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(inaudible)

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Patrick Callahan, [48]

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Yes. And so what we've tried to do since I came on to run CSI several years ago was open the aperture of the business, right, to move away from being a single-product business. But we wanted to stay within our focus on route clearance (inaudible). So on the Husky itself, you made this point, we became an integrator where we went out and we partnered with everybody else that would put a sensor or some sort of tool on the Husky to make it more effective on the battlefield. And we have replicated our model, and we have exclusive partnerships for ground penetrating radars, interrogation arms, defense and weapon systems, you name it. I have the exclusive rights to integrate and sell that with the platform. So to Gren's point, when he says we sell a Husky for close to $2 million, that's correct. I mean, the Husky is sold for about $1 million. But once you put a ground penetrating radar and other sensors, it's getting close to $2 million. And that's not a common model. A lot of OEMs simply sell their platform and then there's other integrators that come along and put their accoutrement on the vehicles. And we have done that to diversify ourselves and grow the business. In addition to that, we have tried, and we are now working in the consumable business with a new company that supplies a sensor package for dismounted soldiers that monitors blast wave exposure. It's a consumable product. It has nothing to do with the Husky. We got our first order this year. I believe that will grow into -- essentially, that would, hopefully, change the way we fight today but also be placed on the (inaudible) soldier or Marine. So -- and that's necessary to (inaudible) AirBoss today. The consumable wearable business, which again, takes the confluence that we see with AirBoss.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [49]

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Okay. And then just a last question on this and I'll get back in the queue. Wondering what is going to be involved in the integration process.

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Patrick Callahan, [50]

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As far as -- that's a big question.

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Lisa R. Swartzman, AirBoss of America Corp. - President [51]

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Do you mean...

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [52]

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Yes. So I'm curious what needs to happen. Is there a rationalization of support services? Is there facility overlap? Can AirBoss manufacture some of what you're outsourcing? All of those things.

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Patrick Callahan, [53]

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Look, so right now our plan, and this has been a good news, is we have no need to do anything immediately to change the business. I think what we have is an opportunity to use some of the value of both companies to enhance the year -- this year and the following year for both AirBoss Defense and for CSI. But I'm not going to do anything that's going to disrupt either of the business because they're having good years. But Chris, myself, Heather, the management team, we need to get it and look at organizationally the best way to streamline this and move forward.

As far as manufacturing goes and what AirBoss could do, I mean, certainly, AirBoss of America has an incredible manufacturing background. And there could be some things down the road that we could look at that could be helpful for the business. But we're not there yet. I mean right now it's really like getting the business together, organizing the folks that we're going in the same direction and maximizing the sales opportunities that we have because we have a lot of good people around the world that are selling separate product lines we want to bring together, give them this full dossier of products and go after those opportunities.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [54]

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So I think the biggest immediate synergy will be on the sales and marketing side.

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Patrick Callahan, [55]

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Correct. Right.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [56]

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Yes. CSI has people all over the world. We don't. And...

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Patrick Callahan, [57]

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Yes. We currently have that resource in the Middle East, for example, because we are under U.S. contracts in a number of countries delivering Huskies, and we're under multiple-year contracts to do training on route clearance. So I'm in the Middle East all the time, we have agents. We're working with ambassadors. We're working with the embassies. And now that we have a full -- a completely different product offering, they're excited. They often ask us, "What else can we do? We love working with you." And now we have an incredible partner now with AirBoss with a ridiculously exciting new portfolio to bring to them. So I think that's the immediate exciting thing. But as far as the work in changing the business, that's going to be over time that we're going to look at.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [58]

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Okay. Just -- sorry, one more thing. What multiple of EBITDA did CSI get for their contribution?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [59]

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It was -- it depends if you're looking forward or backwards. It was a much lower multiple than ours looking backwards. It was a higher multiple looking forward.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [60]

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Okay. So what was the forward-looking multiple?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [61]

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I'm not going to tell you that.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [62]

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Okay. So maybe we'll take it off-line. But without that kind of information, it's almost un-model-able.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [63]

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I don't think you have -- what you'll have to -- I guess what we would tell you is that we don't think -- with 55% of the results in AirBoss Defense Group, we still think that we will be able -- we will consolidate 100% of the EBITDA and then minority interest, so the percentage that we don't own. On top of that, until that is refinanced, we will get a very good coupon on the debt. So I think net to AirBoss, you will still see growth over last year and pickup.

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Operator [64]

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The next question comes from Ben Jekic with GMP Securities.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [65]

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I will have a few questions. Some are unrelated and some could be even repetitive so I apologize for that. Just wanted to make sure I understand this vendor take-back. So you are -- so AirBoss is contributing $100 million in value. CSI is contributing $32.7 million. AirBoss is getting $60 million. So who is giving that? And what can you do with that cash in the short term?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [66]

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So on closing, AirBoss will receive a $60 million vendor take-back note from AirBoss Defense Group, which is all the entities that are being merged to create this group. Shortly after closing or possibly right at closing, we expect at least a portion of that debt to be refinanced, at which stage we will get cash. We'll give them back the note and we'll take cash. But we obviously can't get refinancing before the deal is closed, but we have strong indications already.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [67]

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Okay. And then obviously, you can use that cash for just regular corporate purposes or strategy, whether it be CapEx or further M&A or things of that sort.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [68]

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CEO salary. Yes, we can use that for whatever we want. I mean, as Lisa said, it will be for CapEx, the debt repayment and anything with acquisitions.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [69]

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Okay. And then my second question is what happens -- I didn't understand what happens with the anti-vibration group. Is it going to be taken out of the equation?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [70]

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It never was in the equation. What's -- it's being left alone. The -- what's going with this transaction is the Acton Vale facility.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [71]

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Okay. And what happens to Auburn Hills?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [72]

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Nothing.

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Lisa R. Swartzman, AirBoss of America Corp. - President [73]

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Flexible is not part of this at all, Ben. So it's the difference -- I think, when you read those -- just to clarify for everyone, this has been an ongoing sort of, I'm going to call it, kind of lack of clarity for us. The Engineered Products division that we have is a reporting segment, is a reporting segment's name that has Flexible in it and defense in it. We also do have a legal entity that's called AirBoss Engineered Products, and that really is related to our Acton Vale, Québec facility and those operations. And that's what's going in this transaction, is the legal entity side of it, not the way that we do our financial report. So going forward, you'll still see Rubber Solutions but it no longer will include the Québec operation. There will be anti-vibration. And then because of our ownership level in AirBoss Defense Group, we'll have an AirBoss Defense Group.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [74]

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Okay. So anti-vibration will be separate at some point, separate reporting segment?

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Lisa R. Swartzman, AirBoss of America Corp. - President [75]

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Yes. Correct. Post closing.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [76]

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Okay. Okay. And then my next question is maybe for Daniel. It's just on modeling. So the debt has increased in the quarter. What, if any, was the impact of IFRS 16 in the increase of net debt?

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Daniel Gagnon, AirBoss of America Corp. - CFO [77]

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Yes. Ben, there's $8.3 million of increase in net debt as a result of the introduction of this new lease standard. So if you strip that out, it -- you'll see the total debt goes down by about $1 million, which is consistent with our scheduled repayment by quarter.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [78]

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Okay. So $8.3 million goes to -- is a portion by which net debt went higher due to IFRS 16?

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Daniel Gagnon, AirBoss of America Corp. - CFO [79]

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That's correct.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [80]

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And how much of the IFRS 16 impact is inherent in your $7.9 million EBITDA? Like if you were using last year's rules, like what would the EBITDA be?

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Daniel Gagnon, AirBoss of America Corp. - CFO [81]

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Pretax, it's only about $100,000 for the quarter.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [82]

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Okay. And then just a question on CSI. Is kind of the U.S. Army, Marine Corps, sort of the U.S. side of things like a vast majority of business? Or is there any momentum happening in the non-U. S. business?

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Patrick Callahan, [83]

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Yes. So I think for most defense companies, the U.S. represents over the last 15 years the gorilla of customers. So they had been our largest customer for probably 10 years, delivering over 1000 Huskies to the Army and Marine Corps. They have fulfilled their requirements as far as new vehicles, but we continue obviously to have spare contracts, training contracts, logistics contracts for manuals, updating contracts, robotic contracts. .

But we have a huge focus internationally now. A majority of my time and the sales team time is spent overseas, but still working a lot with the U.S. government as a partner. Working through 4 military sales channels with the Middle East, Eastern Europe; but also commercial channels, going direct-to-customers around the world. But we have a good mix. It used to be, if you looked at the P&L for CSI, it was 100% U.S. And I think now it's a nice mix of diversification in customers.

So there's a lot of momentum. And I think the good news for investors and shareholders is, although we've been selling internationally for 3 to 4 years with the Husky, that's not a long time, and it's a long process when countries are going to invest that kind of capital in a new vehicle and a new capability. And we're just starting to get these beachheads of orders internationally that represent the beginning of requirements. They're never going to be 1,000 vehicle requirements as Gren talked about before, but they could be sizable. That would still move the needle quite a bit.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [84]

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And in terms of just sort of -- I apologize if it's a trivial question, but how much pounding can this Husky get? Like it drives and then hits a landmine and explodes. You repair it. How many times can it do until you say this is now unusable?

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Patrick Callahan, [85]

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Yes. So look, if I was in an elevator and I was with the Joint Chief of Staff of the U.S. DoD, I would say these 2 things. The Husky has been subjected to over 8,000 direct IED and landmine detonations over the last 15 to 18 years of combat in Iraq and Afghanistan. We have never lost a soldier or Marine to blast in a vehicle. No other vehicle in the world can say that. It is the most survivable vehicle on the planet, hands down. There's no competition for the Husky. When we get orders for Huskies internationally, it's a sole-sourced order because there is no competition. We have now delivered again, call it, probably 1,500 Huskies both to the U.S. and internationally. Of those, 200 and so probably saw combat. Only 1 of those 200 was ever taken out of service, and it's because it experienced over 30 direct IED and mine explosions. And honestly, the vehicle is still operating, but the operators said, "You know what, it might be time for this vehicle to retire." So I can't give you actual, like, data as far as like cracks in the hole of a Husky. All I can say is that we never lost anybody to a blast and we really never lost a vehicle.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [86]

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That's admirable. I hope that continues.

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Patrick Callahan, [87]

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Me too, me too.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [88]

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Ben, just to -- I mean, I think you maybe ahead of that like, "If they don't replace them, the business eventually dies."

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Patrick Callahan, [89]

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Yes. I can see that.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [90]

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But when you get hit by a 1,000-pound bomb in the Husky is not just like going to change oil.

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Patrick Callahan, [91]

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Yes. Let me explain that. So the vehicle is designed -- the reason it's so survivable is not just because it's just this miracle vehicle. It's designed to be blown up. And what I mean by that is the capsule of the vehicle has the sharpest V-shaped hull in the world, which means the bottom of the vehicle is literally a knife that cuts through a blast wave. And the wheel module, so it looks kind of like a road raider if you've ever seen what a Husky looks like, but the front and rear wheel modules are designed to be frangible to actually -- to blow off a vehicle so all of that force that comes from a blast is not captured by the vehicle and the operator. In the U.S. program of record, the standard is that you can repair that vehicle, no matter what the blast, in under 3 hours. And I've seen vehicles that had been decimated repaired by our operators under an hour and back on the road. But to Gren's point, that wheel module that you were putting back on the vehicle is a $300,000 end item that you're putting back on the vehicle. So although the Husky survives and the hull survives, the sparing of that vehicle is still a business that should go on.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [92]

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Right. And maybe the last question, just for my own personal interest. Have you ever done any work in the Balkans?

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Patrick Callahan, [93]

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We are just starting now.

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Operator [94]

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The next question from Scott Fromson with CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [95]

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Just a couple of questions on the ownership structure of the new defense entity. Who are the remaining CSI shareholders?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [96]

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The CSI is going to be owned 100% by AirBoss Defense Group. I think you're asking who the other shareholders of CSI's parent is, and I'm not at liberty to give you that information. But...

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Lisa R. Swartzman, AirBoss of America Corp. - President [97]

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They are privately-held business.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [98]

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They're private equity.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [99]

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Okay. I was just wondering if there's a path to 100% ownership.

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Lisa R. Swartzman, AirBoss of America Corp. - President [100]

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There's mechanisms to 100% ownership, yes. And really what it does for us though is it furthers the strategy that we've been talking about, at least since we acquired IRT. And that's turning our defense business into something that gives us option. So it's something that we can either grow the business and the suite of products that we've got and expand it so that it's meaningful. But really, as it grows, we've said all along that what's coming along into that business is less rubber-focused. So our goal for that business is to make it into a business that is standalone, that we could either own 100%, we could sell 100%, or we would be able to be in a position to spin it off into its own IPO. And that's the direction that we're taking.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [101]

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Okay. That makes sense. The rest of my questions have been addressed.

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Operator [102]

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The next question is from Tim James with TD Securities.

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Tim James, TD Securities Equity Research - Research Analyst [103]

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Just want to talk again further about the transaction. Maybe just first, I want to just confirm, in terms of providing -- and I don't think the question has been asked directly, sort of trailing 4-quarter revenue or trailing 4-quarter EBITDA for CSI. Is that available? Or you're just not disclosing that at this point?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [104]

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Well, I certainly have it, but I mean, we're not disclosing it for a number of reasons. I mean it won't -- but it's mainly not -- I mean, it's not necessarily going to be the same with us owning it. And the numbers are very, very high for some of the recent history, which we're not necessarily forecasting for this year. So I don't want you take the $20 million in EBITDA and use that as a forecast for next year.

So we all sit down -- obviously, it will be a separate reporting entity for AirBoss, and you will get a lot more disclosure on that after closing. But we will consolidate the results from that and then minority interest, the part that we don't own. But there's lots of complications in putting a model together right now depending on a number of things, not the least of which is are we holding the note or we refinanced the note.

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Tim James, TD Securities Equity Research - Research Analyst [105]

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Okay. And am I correct in interpreting -- sort of just thinking about high historical revenue growth rate from CSI. Am I correct that because of sort of the volatility of that business, the natural lumpiness, there's no value in that either? Is that correct?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [106]

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Well, yes. Tim, they had a major contract with the U.S. government. They sold them 1,000 vehicles. So that -- and that, well, as we've talked about, those vehicles are anywhere from $1 million to $2 million depending on what's on them. So to look forward, assuming they're going to sell another 1,000 vehicles, I don't think it's a very -- you're just going to be disappointed, Chris (sic) [Tim] .

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Tim James, TD Securities Equity Research - Research Analyst [107]

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Okay. Okay. Then I'm just wondering next, how long is the contract or -- I'm not sure if it's an actual contract, that CSI has with the supplier of the Husky to be, I believe, it's sort of the sole distributor of that product? And maybe the question should extend to the other suppliers of sensors and what have you that are used on the vehicle.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [108]

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They're all long-term contracts. What was it, 10-year or 15-year?

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Patrick Callahan, [109]

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10-year.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [110]

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It was a 10-year. So the Husky was a 10-year contract. I think it's still got at least 2 years to go.

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Patrick Callahan, [111]

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Close 2 years, and we're in discussions to extend another 3 to 5 years.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [112]

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But there has never been a Husky vehicle sold in the world to anybody that hasn't been sold by CSI. And all of the attachments, and then I should be letting Patrick speak here but I got to pretend I know something, all of the attachments like the ground-penetrating radar, things like that, which are very expensive attachments, which almost double the cost of the vehicle, are manufactured by different people. And CSI has exclusive rights on them as well. And the manufacturer of the Husky is not involved in the outfitting of the Husky, if you want. So it would be very difficult -- it wouldn't make much business sense for them to go with somebody else.

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Patrick Callahan, [113]

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In addition to that, we also own the contracts. So one of the reasons that relationship is working so well is that they have focused on engineering and manufacturing while we have focused on being the front. So having a long-term contract with the U.S. government, where I own all FMS sales internationally for any Husky that comes in, it just wouldn't make any business sense not to continue the relationship the way it currently sits. So...

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Tim James, TD Securities Equity Research - Research Analyst [114]

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So that's a good point. So you mentioned the FMS sales. So you -- CSI effectively, as part of this contract, does control any foreign military sales. Is that right?

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Patrick Callahan, [115]

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We are the prime contractor. Yes.

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Tim James, TD Securities Equity Research - Research Analyst [116]

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Okay. Okay. Then what -- just going back to the business itself. What are the actual kind of assets in CSI, the hard assets? What should we think about, and maybe employees, what sort of equipment it owns? What are the hard assets like that are in Charleston?

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Patrick Callahan, [117]

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Well, besides me, which is very exciting, we don't hold a whole lot of inventory. Obviously, we do own a little bit of intellectual property for some other products. We do -- 2 pieces of intellectual property that are -- will be important for the future of the business. But as far as assets, I mean, really, there's not a whole lot. Yes. I mean, obviously, we are a sales organization. We have incredible people. We have onboard a group of partnering consultants that we've worked with now for close to 10 years, both flag officer level and the state department -- high-level state department folks, that allow us to compete and beat folks like General Dynamics and B/E and Lockheed Martin. And last year, we competed and won the first competitive autonomy competition for U.S. Army ground vehicles, which happened to be on the route clearance vehicles, not the Husky. It was for the JCB HMEE, which is basically a tractor. And we, along with our partners, put together a competitive bid and beat General Dynamics Robotics and Lockheed Martin, I mean, sizable competitors. And we do that because of our partnerships, our aggressiveness, our speed and obviously our focus on route clearance and being experts in that realm.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [118]

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And 30 employees, yes?

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Patrick Callahan, [119]

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30 employees. Most sit in Charleston. We do have a couple of folks that sit at Fort Leonard Wood, Missouri, which is a lovely place, if you haven't visited, which is the home of the combat engineer and the home of the folks that we will be working with AirBoss for seabird operations. The military police, NBC and combat engineers all reside at Fort Leonard Wood. So again, a nice -- just a nice story of coming together. Our current customer base in the U.S. military sit right next to each other at Fort Leonard Wood, and we have a constant presence out there.

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Operator [120]

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(Operator Instructions) The next question is from Nav Malik with Industrial Alliance.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [121]

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Just another follow-up here that I had. One is on the combined AirBoss Defense business now. What would be the incentive structure for that business? And kind of what I'm thinking is that if you have 45% still held by private equity or private corporation, how do you ensure that the profitability of that business gets allocated correctly?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [122]

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Well, we control it. There will be a 7-man board, and we will have 4 of the 7 people on it. So are you thinking about distribution of profits? Or are you talking about...

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [123]

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Yes. I mean, I guess, it's just in terms of oversight and -- well, I mean, distribution of profits, obviously you have your ownership interest and your proportion at stake. But yes, I guess, in terms of oversight of the actual business given that you're not in full -- you're not -- it's not a wholly owned subsidiary.

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Chris Bitsakakis, AirBoss of America Corp. - COO [124]

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Well, everything will be consolidated and incorporated here by us at AirBoss. So all the systems will be fitting into our mainframes.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [125]

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Okay. Okay. Fair enough. Okay. And then last question I had is -- I mean, you're selling your portion of your business 8x trailing multiple on a forward multiple. That's probably, given the growth that you had in that business, probably less than 8x. I mean what was the process to extract full value for that business? Like, I mean, as you know, a lot of the defense businesses are trading at higher multiples than that. What was the impetus to do this transaction? And what other item or what other sort of scenario did you evaluate?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [126]

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The multiple really isn't that relative -- that relevant because we're -- it was -- effectively, we are just coming up to a relative valuation with CSI. We weren't selling the thing for cash to a third-party. So I mean, if we've done at that 15x multiple, we still probably would have come up with the same relative percentage ownership of the surviving entity. And the only thing that would change is that cash. But I mean we -- I don't think that our defense business -- if you -- USD 60 million is approximately CAD 80 million. We think that what we've got left over is worth more than what we sold. I'm pretty sure that our defense business wasn't valued at CAD 160 million in the marketplace because that would have been about -- we only got 22 million shares, so it would have been $8 a share.

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Operator [127]

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This concludes the question-and-answer session. I would like to turn the conference back over to Gren Schoch for any closing remarks.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [128]

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Okay. Thank you, everybody, for participating. I know this is a complicated transaction, and it's a business that up until now, you probably have not -- never heard of. There will be a full presentation this afternoon at our AGM including a video of some of the stuff that CSI does. You'll get a chance to listen and meet Patrick. If you can't attend in person, it will be available on the website live, and there will be a conference call line open to ask questions afterwards. So thank you, and we'll talk to you this afternoon.

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Operator [129]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.