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Edited Transcript of BOS.TO earnings conference call or presentation 13-Mar-19 1:00pm GMT

Q4 2018 AirBoss of America Corp Earnings Call

NEWMARKET Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Airboss of America Corp earnings conference call or presentation Wednesday, March 13, 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 & President of Rubber Solutions Division

* Daniel Gagnon

AirBoss of America Corp. - CFO

* Lisa R. Swartzman

AirBoss of America Corp. - President

* 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

* 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

* Shawn Levine

TD Securities Equity Research - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the AirBoss of America Q4 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, sir.

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

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Good morning, everyone, and 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; and Chris Figel, VP of Legal and Compliance.

I will give a summary of results, and then 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 2018, anticipated financial and operating results, our plans and objectives and our answers your questions will contain forward-looking information within the meanings of the applicable securities laws.

This forward-looking information represents our expectations as of today and accordingly, is 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 corporate website and in our filings with the Canadian Securities Administrators on the SEDAR at www.sedar.com.

I'll now turn this over to Lisa for highlights of the quarterly report.

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

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Thanks, Gren, and good morning, everybody. I hope everyone can hear. We are actually very pleased with the full year 2018 performances of Rubber Solutions and the Defense business within the Engineered Products segment.

However, on a consolidated basis, the challenges experienced by the Automotive business more than offset that progress. For the fourth quarter, consolidated EBITDA was $5.7 million versus $6.8 million in Q4 2017, and EPS was $0.06 versus $0.16.

On a consolidated basis, EBITDA for the year was $25.7 million, a 7% decrease versus 2017, and EPS was $0.37 versus $0.54.

Just as a reminder that 2017 EPS reflects an approximately $0.95 million one-time tax pick-up as a result of the U.S. tax act.

Rubber Solutions had a very strong 2018. EBITDA of $19.7 million was within shouting distance of the record-high achieved in 2015. For both the quarter and the full year, volume increased approximately 15% with improvements across the majority of sectors and in particular, conveyor belting, mining, tolling, track and off-the-road. On a full year basis, these were partially offset by softness in the infrastructure third-party automotive and chemical sectors.

Gross profit dollars for the fourth quarter improved 20% to $6.1 million, and EBITDA dollars improved 39% to $5.6 million. For the full year, gross profit dollars of $22.4 million and EBITDA dollars of $19.7 million were approximately 14% and 18% higher, respectively, versus 2017.

Rubber Solutions has entered 2019 with the strongest volume momentum in history. This demand forms the basis of the recently announced expansion, adding a dedicated white and color mixing line and significantly upgrading the R&D and laboratory capabilities in our Kitchener, Ontario facilities -- facility and the addition of a second mixing line in our Scotland Neck, North Carolina facility. The addition in Scotland Neck is both prudent business practice, providing redundancy and minimizing customer impact in the event of disruptions on the existing lines, as well as supporting the growth experienced there. While the immediate impact will be a reduction in capacity utilization there, management is confident that our volume days are sustainable. And as new tire facility growth comes online in the area in the coming years, we will be well positioned to grow our market share.

As I've mentioned before, the team has done a really good job of building a white and color compound book of business over the past 3 years. However, our existing equipment is less than ideal to mix this optimally. The addition of a dedicated line is expected to materially improve the quality and efficiency on this portfolio.

In Engineered Products, net sales in the fourth quarter declined approximately 5% to $40.9 million versus Q4 2017, where a marginal increase in net sales in the Automotive business was offset by lower sales in the Defense business. For the full year, net sales increased approximately 4% to $171.3 million versus 2017, driven by an approximately 29% increase in the Defense business, offset by a small decline in the Automotive business.

For the quarter, gross profit and EBITDA declined to $4.2 million and $1.6 million, respectively, versus the comparable period in 2017. And for the fiscal year, gross profit declined approximately 9% to $22.6 million and EBITDA to $11.4 million.

For the fourth quarter, this was primarily related to the Defense business as a result of accelerated filter deliveries in Q4 2017 to accommodate the delayed start in customer requirements of the award and timing related to the end of the glove award in 2017 and the start of the replacement program this year.

For the full year, improvements in the Defense business were more than offset by challenges in the Automotive business. We continue to be focused on 3 primary areas in the Automotive business: mitigating the impact of increased raw material prices, particularly, with respect to rubber, steel and silicone, which accelerated in the second half of 2018 and are further exacerbated by the tariff environment. We have had some success as a result of conversations initiated with our customers to obtain relief from these negative effects. However, it is an ongoing process.

Tight labor market conditions are resulting in production inefficiencies, as we're experiencing higher turnover than historically and difficulty replacing and supplementing with the caliber of talent we're seeking.

And nonautomotive sales. We received our first nonautomotive award in the fourth quarter and are in the testing phase of the second product. While this won't have a material impact on the top line, it is an encouraging step and a high-priority area of focus for us.

I'll reiterate what I said last quarter. There has and continues to be an enormous amount of work being done by our team. And although 2018 was very challenging, we expect to start seeing improved results from these efforts in the second half of 2019.

Net sales in Defense for the year were approximately 29% higher than 2017, driven by increases across the majority of the suite -- our suite of products but particularly, in powered air purifying respirators, filters, masks and shelter systems. We started delivering on the recently announced cold-weather, a.k.a. bunny boots and glove awards, with the majority of the Low Burden Mask deliveries on the remaining 2 major awards to begin later this year.

We are encouraged that these awards and our sales, in general, are spanning a substantial portion of our product suite. Sales lift for the Defense business remains strong for the foreseeable future. Although as always, there is some level of uncertainty as to the timing and size of orders under existing contracts and new tenders.

We are fortunate to have dedicated and experienced teams in all of our businesses, who are committed to executing on the growth path we've set. We are not satisfied with these results, but we are moving in the right direction and are confident that our ongoing efforts to expand and diversify our product lines, customer base and target market segments is positioning us to take advantage of growth opportunities and adapt well to any further market volatility.

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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Thank you, Lisa. So just to summarize, we are very happy with what is going on in our Rubber Solutions and Defense business. The -- we're very unhappy with what's going on with Flexible. Chris Bitsakakis, who joined us in November of 2017 -- sorry, 2018...

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Daniel Gagnon, AirBoss of America Corp. - CFO [5]

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'17.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [6]

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Sorry, '17. Last year, was his full year with -- first full year with us, and his first focus last year was on setting the stage for growth in our Rubber Solutions business. I think it's pretty obvious that he's done a good job at that. The addition of the new colored mixing line, which should be on within the next month, it's a whole new line of business for us, and we're optimistic that, that will generate good growth. We're doubling the size of Scotland Neck. And by June, we will have a state-of-the-art center of excellence for new product development in Kitchener.

I'm going to ask him to address the elephant in the room, which is the Flexible situation. Flexible will be his main focus this year. And I'm just going to let him tell you what is wrong there and how we plan to fix it.

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [7]

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Thank you, Gren. Appreciate the opportunity to give a little bit more color on what's happening at Flexible. We did have an excellent year at both Rubber Solutions and at Defense as well. Unfortunately, the duration of Flexible took away some of that momentum on a consolidated basis, and Lisa did a good job explaining the key areas. But I think it's worthwhile to go into a little bit more color on exactly what we plan to do there.

If you look at Flexible and last year in particular, in 2018, there was 3, I'd say, areas of concern that we need to be very aggressive to drive improvements in. The first one was the material side, the input costs. We saw an unprecedented spike in steel costs last year, both from a tariff standpoint and from a regular steel price commodity standpoint. What happened was, when the tariffs were announced from the Trump administration, there was quite a run to bring steel from overseas into local markets, which then created a pretty significant supply/demand crunch, which we saw our steel price increase approximately 20%. And just to give a little bit of color, steel is the single biggest community that we are affected by at Flexible. So we also saw increases in silicon and rubber, but they were significantly smaller compared to the steel costs. So I'll talk a little bit about the steel costs in a couple of minutes.

The second area that we're driving improvements in is the top line. Even though it was a fairly marginal reduction in sales, we're looking at needing to continue to increase our sales year-over-year because through customer givebacks and other situations like that, if you're not aggressively growing the top line, it's very difficult to see improvements in the bottom line. So that's the second area.

And the third area was labor inefficiencies and utilization. So between material input costs, sales declines and labor inefficiencies, those are the 3 areas that we're going to be focusing on in 2018.

In terms of material cost, I mentioned what was the driving force already behind the significant spike in steel cost. What we've done in the meantime is we immediately started negotiating with our customers for relief on those steel costs. We also applied for waivers with the U.S. government to exempt us from those tariffs.

Unfortunately, the waiver system that was set up in the United States got backlogged very quickly. Only 2% of the waivers are being granted. And it's approximately, at this point, looking like a 2-year waiting period before we even get a hearing on it. So really that's not -- although we're in the queue, it's not really a great option for us. So we immediately started negotiating with each and every one of our customers on steel price commodity increase relief.

We have been successful with one of our customers, a very key customer, in getting some relief from that. We were successful with another customer to get put on a steel price index so that we're protected from future fluctuations in this commodity. And then the remaining of the customers -- and there's 2 more customers that should be completed by March 16. The remainder of the customers are continuing to negotiate with us. And of course, as you can imagine, it's an uncomfortable situation for them and not that easy for them to just apply increases based on this. But we're not slowing down. We're continuing to relent with them to make sure that we get what we expect from these negotiations.

The good news is in this scenario that the 20% approximate spike that we saw in steel prices last year, we are now looking into Q2 and looking at steel prices that we're going to be getting in Q2, and about half of that increase is coming down. It appears that with the delay in the second round of tariffs for the additional 90-day delay from March to June has created a little bit more optimism with an agreement with China. And so we are also seeing the steel mills in the U.S. improve their efficiencies. And although, they're not bringing on brand-new capacity, they're bringing on older capacity. They're improving the efficiencies on the existing capacity. And we're seeing a drop in steel pricing that will take about half of this problem away coming Q2. And we're hoping that we see that continue on. And between that steel drop and our negotiating with the customers, we should be able to see quite a relief from what we saw in steel pricing last year.

We are, in addition to that, driving very hard improvements in our silicon and rubber, because even though they were smaller in comparison to the steel issue, we are very -- we're in a very good position because of our compound development team in Kitchener being able to work with the team at Flexible to find ways to reduce the cost of our formulations. And we are -- we have put a task force together to look at every single formulation, to try and drive out any unnecessary cost without affecting quality or performance. These are all ongoing. Those are probably a little bit longer, maybe in the 6-month range because any changes that we make to our formulations need to be validated our customers. And between that testing, sometimes that takes a few months to do that. So we are driving costs, both on the relief side from our customers and also on the product development side to make sure that we reduce our material costs.

The second area I talked about was the sales decline. And even though it was a marginal sales decline, it's a sales decline nonetheless. And if you're not growing, it's very difficult to continue to find the efficiencies that flow down to the bottom line.

The sales decline that we saw last year, we have been awarded new Automotive programs for the out years. Unfortunately, as most of you know, in the automotive industry, it's not a quick cycle. You're awarded a program several years in advance. And we are seeing success in being awarded good, new programs, both for replacement and incremental work in the out years.

In the short term or midterm, however, we have put a very, very strong focus on nonautomotive sales for a couple of reasons. One, because it's a quicker cycle. We can get product development to sales dollars much quicker than we can on the Automotive side. Its higher-margin, although the volumes are normally a little bit lower. And it also diversifies us from being simply an automotive company.

And so I'm very pleased to let everyone know that we were just awarded our first major nonautomotive award in the industrial segment. And we are in design stages right now. And we should see towards the latter half of this year, a launch in that area. There's additional synergy there because that particular industrial product also requires quite a bit of rubber that we also produce in our Kitchener plant in AirBoss Rubber solutions.

We are also in a later testing on a military application inside of Flexible that's a rubber-to-metal bonded product that is in testing right now that we believe, at least, in the laboratory test, it significantly outperforms what's out in the market. And it's now on testing at the military establishments that we're working with. And although, the testing is in its early phases, so far, the results look quite encouraging. So as we look at driving the long-term growth through our regular automotive cycle, we are now focusing on short- and midterm growth on the nonauto side. And we've -- we're building a team inside of Flexible between sales and engineering and dedicating people for that that are simply going to be focused on both product development and sales on nonautomotive contracts, where we're going to be targeting construction, industrial, military and other applications of products that fit quite well within our capabilities at Flexible. For example, every tractor and every skid steer use a motor mount, but we don't. We have the technology to make these products, but we don't supply any of these industries. So by -- we've just hired a very experienced engineer that's experienced on the construction and industrial side of motor mounts, as an example. And we've hired a dedicated salesperson, and we've supplemented some more sales and engineering help around them to create this team. So I'm very confident that going forward, we're going to see some significant improvement in diversifying our business and bringing in sales online a little bit quicker and at healthier margins than what we are seeing on the Automotive side.

The third area that we're targeting is labor inefficiencies. Now this is probably the one area in Flexible that has improved quite dramatically in 2018. If we look at the labor efficiency charts that we track every single day in our facility, we have seen a significant improvement in labor efficiency throughout the year, in great part, thanks to the AirBoss Operating System and the team that we have at Flexible that is focused on the day-to-day operations getting these improvements in place.

We are -- in addition to taking that momentum from the labor efficiency improvements on the direct labor side, we also made the decision to consolidate our 3 factories in Detroit into 2 factories. We have the floor space and the capability to take our 2 factories and get the same amount of sales out of there as we do in -- currently in the 3 factories. That will represent a fairly significant reduction in fixed costs for us towards the latter half of this year. We're going to be able to consolidate some indirect labor overhead that is required when you have an additional facility. And in addition, we'll be able to, towards the end of the year, be alleviated of any extra rent or utility cost or anything else related to it. So along with improving our sales and dropping our fixed costs, we should be able to [search --] improve our overall margin there.

In addition to the labor efficiency side, we've designed a new robotic work cell for molding technology similar to what we're doing there. We -- this is really cutting-edge. And we're working with a specialized company that has done this before. And we are seeing excellent results on -- at least, on paper for now. And we plan to install our first robotic work cell by the end of this year and see if that is one of the areas that we can improve throughput, efficiency and minimize the impact of labor. These are the things that are going on in Flexible. There's many more things than that, a significant number of projects to improve that we're going to focus on this year. But I wanted to give you a little bit color on those 3 categories, being the material input cost drive to drop that down, improving our top line through short-, medium- and long-term efforts, and a continual drop to our -- or increase to our labor efficiency that we've already seen some significant improvements already in Flexible.

Those are the 3 areas that we're focusing on. It's a very strong plan, and we have a very strong team in Flexible. We have supplemented that team. We have brought people in that are very experienced, and they're doing an excellent job putting this together. None of us are happy with the progress that we've seen so far. But we're very optimistic that with this drive going forward, we're going to see significant improvements in Flexible as we get later on throughout this year.

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [8]

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Thanks, Chris. Just a couple of other things I'd add about future growth. We've -- we are aggressively working on new higher-margin products in all of our businesses. The -- in the Rubber Solutions business, we have introduced new compounds, which significantly outperform the competition in the off-road tire market.

Flexible, we have developed our first significant new higher-margin, more complex product for the automotive industry. It's now at the prototype stage. It works. And we're aggressively going to be marketing that. We are optimistic that we will get continued new Defense business, hopefully, in the next quarter but certainly by the end of June. And on top of that, we are continuing to be active in the non-organic -- or inorganic growth areas that we're looking at, numerous other acquisition opportunities.

So with that, I'd like to turn it back to the operator and take any questions.

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Questions and Answers

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Operator [1]

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

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

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I just want to first ask on the Automotive side. Just trying to get a sense of -- maybe you could give me a sense of why it takes so long in terms of getting price increases pushed through? Like can you just maybe give me a sense of that competitive environment? Like are you worried about competition or losing business or -- it just seems like it's an obvious thing on your part in the sense of rising raw material costs and you think that the customers will recognize that and it would be an easier process to push through some price increasing -- price increases. So maybe if you could just give me -- elaborate on why the process takes so long.

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [3]

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Well, I think you can appreciate that for the big automotive customers, it's a very small group of customers. Ford, GM, Chrysler, Honda, Toyota, you can count them on one hand. And when all the supply base is coming to them for price increases, they're competing with each other and are not that interested in applying price increases down -- further down the chain. So over the years, they've become very sophisticated through a series of delay tactics, a series of threats with -- withholding new business awards in order to convince and make suppliers capitulate and absorb the raw material increases themselves. I can assure you that we're fighting hard on that. We are working through all the delay tactics. We are working through those threats of being put on new business hold, and we're balancing as best we can with getting the short-term relief without affecting our long-term relationship with our key customers. And so that takes some diplomacy and some time. And in the end of it, we will see some success. And where we can't get price relief, we will try and negotiate other things, like new business awards or other things that can help us in the future. So they are very sophisticated at making this extremely painful. But we are committed to making sure that we are treated fairly in the process.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [4]

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Okay. Is there any business right now that you would say is running at a loss? Like would you be -- would you walk away from some business if you don't get the price increases or the margins that you want?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [5]

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Actually, I'm glad you brought that up, Nav. One of the things that when we're looking at improving the top line, within the automotive industry, when a product goes out of regular production and goes into service, you're still required to build that product for X number of years as cars get -- require replacement parts. For the first 3 years, after a part go -- if their part goes from full production into service, you are obligated to keep that pricing intact that you had on that last sort of day that it was in production. However, they allow you after 3 years to reprice your service parts. And that's something that in the past, at Flexible, we have not had a very consistent process to do. So we are going through right now any of the products that are in service. And we are looking at repricing them. And you're also -- you also have the capability of putting up setup charges and other things like that. And these are real costs. It's not just an opportunity to raise price for no reason. When something is out of production, you have to take tools out of storage, build a short run, and you can imagine the costs accelerate, but you're running in the first 3 years at the production price, when you're running every single day and you have those labor and the material efficiencies. So we are also going through a process right now looking at all our parts that don't make money, all our parts that are in service and have not had a price adjustment or a setup charge attached. And we're rolling all those out as we speak as well.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [6]

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Okay, great. And then kind of on the -- in terms of new -- potential new wins, new program wins, I know you did provide some color there. But -- so in terms of having an impact, while, I guess, is there -- I mean, it sounded to me that the impact from any new programs would be towards the latter part of this year and into 2020. Is that kind of where you're -- what you're thinking? Like is there any more near term than that? Or is that what you're timing would be?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [7]

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Well, on the nonautomotive side, we think that as we get aggressive towards getting nonautomotive business, there's going to be a very short -- a shorter cycle than that. On the Auto side, unfortunately, we get awarded years in advance, and there's a lot of development that has to happen for that particular vehicle. So it's not that short term. So in the nonauto side, we have some short-term opportunities. On the Auto side, it's a little bit longer term, but we have also gone to each of our customers during these negotiations on pricing, and we've asked them, are there any quick takeover opportunities? There are quite often suppliers that are finding themselves in financial difficulties. And so we've met with each and every one of our customers to see if there are any takeover opportunities with a supplier that's in maybe a financial problem or a supply chain issue that we can jump in and quickly develop launch and jump in there. So we have not had one of these hit yet, but we are in conversations with our customers, and they're very aware that in the case of a supplier that is having some trouble, we're willing to jump in and make that a quick launch versus a long-term launch. So we're looking at both short, medium and long term in those ways.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [8]

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Okay. I just have one more question on the -- I just moved to the Defense side. So it was down 20% revenue this quarter. I know you mentioned some timing of the contract last year. But I guess, have you started to see some impact from some of the new contract wins that you announced late last year? Like have those started to come through? Or...

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Lisa R. Swartzman, AirBoss of America Corp. - President [9]

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Yes. Yes. As we said, the glove contract, we started delivering on last quarter, which was recently announced in October. And then the cold-weather boot, which we call the bunny boot, the Vapor Barrier Boot, which is a material contract for us, up to $50 million over the next couple of years. We've -- we're in full-throttle production on that as well.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [10]

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Okay. So you should start to see some growth again. I mean, so the -- in the quarter, the 20% decline really was a function of the difficult comp period in 2017? Or was there -- is there anything else you want to elaborate on there? Or...

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Lisa R. Swartzman, AirBoss of America Corp. - President [11]

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No, I don't think there's anything. I really do think it was just the timing issue of when contracts were coming off and when they're coming back on. I mean there are certain of our products within the suite there that are much more subject to environment and things like that, particularly, with the shelters. But in general, we are -- right now, we are performing on a number of contracts and more contracts than we've had in the history of that business. And so I don't see any slowdown in the growth projections there.

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Operator [12]

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Our next question is from Scott Fromson with CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [13]

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Just wondering if you have a sense of the potential dollar impacts if tariffs are relieved?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [14]

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Well, the -- if you break down the steel pricing from last year, it was about approximately a 20% increase. 10% of that was tariffs, and 10% was supply/demand economics. The supply/demand economics, that 10% we're seeing now is starting to drop come Q2. The tariffs represent about a 10% hit for anything that comes out of China. Now not our entire supply base is out of China. So we are seeing a fairly material and significant improvement in our bottom line if the tariffs disappear.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [15]

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Okay. That's helpful. And...

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [16]

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Scott, just a -- I think the order of magnitude, we bought approximately -- close to $20 million of steel last year.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [17]

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Okay. That's helpful. Just turning to the Rubber Solutions. Can you give a little bit more color on the Rubber -- on the revenue outlook? Are you seeing any signs of a slowdown in the North American Auto sales? Or is this -- is that part of the strategy to -- is that a big part of the strategy to diversify away from Auto-related sales?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [18]

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We're already very well diversified across all segments in Rubber Solutions. So not one single segment really drives to the extent, especially, on the Automotive side. And so we're aren't concerned. We have not seen a slowdown. If anything, we're scrambling to find capacity and ways to improve. We've worked with some key customers on some very interesting efficiency improvements where they've gained a little bit on price, and we've gained quite a bit on efficiency. And it's been a win-win. But at the end of it, it's allowed us to open up some capacity for more work. But we have not seen a slowdown in demand as of yet.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [19]

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So just on that issue of capacity, what is the current utilization rate at Rubber Solutions? And I know it's a moving target but depending on the -- on mix?

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [20]

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Scott, that's an interesting -- it's a hard question to answer because capacity depends on your product mix. And it also depends on whether you're operating 7 days a week, 24/7 or whether you're operating 5 days a week, et cetera et cetera. But our capacity utilization is up significantly from last year. It will, obviously, drop immediately when we put the 2 new mixers online. But we are optimistic that we will have new business to fill those mixers. Like for example, the colored mixer, when it comes on, we have a lot of customers that are indicating that they want to buy from us. However, they cannot give us an order until we actually have the mixer in place, until we've run trials for them, until -- and it's been tested. So when that comes on, it's going to be relatively empty for the first month or 2. And then we'll quickly start to ramp up. Does that answer your question?

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [21]

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Yes, it does. I know it's a tricky question. So just one more on Defense, if I could, please. Can you give a bit of color on the Defense margins as you ramp into kind of -- as you transition into sort of run rate production? You see the margins improving?

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

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I -- yes. I think that in general, our -- the Defense business has the highest margin of any of our business segments. And so I think on the gloves, those are -- the gloves and when we make overboots, those are products that we are typically in production all the time on. So I don't think you'll see a material impact or pick-up on the margins there because I think we're pretty efficient at them. Chris can talk more specifically on the bunny boot, but we are already seeing -- we've made some changes on the bunny boot production process as we got this award, just given the volume of it. And we're starting to see some good pick-up in that and some material improvements in the efficiency and lowering of scrap. And then the Mask is still -- that's still a new product for us. So we're not up in full rate of production with that. We'll start delivering on those 2 contracts towards the end of the year. And I would anticipate -- and again, I don't want to put words in Chris' mouth and -- but there are -- it's a new product for us. So as we move into full-rate production on that, I think there'll be a ramp up to margin improvement.

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [23]

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I can add a little bit to that as well. And Lisa's right. But we are driving an aggressive, continuous improvement plan on every single one of our product lines. And we've seen significant improvements in efficiency in the bunny boot line with some changes that we've made. We have seen efficiency improvements in the glove lines. Not so much on the molding side, which is what Lisa was referring to, but on the packaging and finishing side, we've been able to take quite a bit of labor out and drive efficiencies improvements on that end. And then on the glove -- on the Mask side, by far, we have seen the greatest amount of efficiency improvements. When we launched this product, it was running at very high scrap rates, very low output because it was a new product. As we're getting into ramping up for the Canadian Gas Mask program, our scrap rates are down at the levels that we, at -- probably at this point last year, we didn't expect we could get to. So we're running very, very low scrap, very good output, and we have improvements on that Mask that we think can continue to improve the efficiency going forward into that launch. So we're not slowing down on driving efficiency improvements in the Defense products as well and then continuing to improve that margin.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [24]

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So -- and this is a tough question, if you have to give kind of arm wave on how much margin you think you can capture through these efficiencies over time, what -- do you have a sense of what kind of -- what -- how many points that would be?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [25]

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I think that's a difficult one because every product has a different amount of labor content. The ones with the highest labor content, small efficiency improvements make a big difference to the margin. The ones that are mostly material cost then we have to be looking with our chemist, is there a way to optimize the formula to get more out of there. So I think it would be irresponsible and inaccurate for me to give you a number. But depending on what the CI initiative is, we will definitely see improvement on our margins. It's just what's the magnitude and what is the -- what is driving the cost of that product in that particular case.

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Operator [26]

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(Operator Instructions) Our next question comes from Shawn Levine with TD Securities.

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Shawn Levine, TD Securities Equity Research - Associate [27]

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Just a quick question here on the nonautomotive opportunities. Do you see those kind of mitigating maybe some of the declines in the Auto business? Or could you actually see those deliver revenue in 2019, such that Automotive revenue as a whole would be up year-over-year?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [28]

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I think we'll probably see some revenue towards the end of 2019 coming from the nonautomotive. But keep in mind, it's still an early program. It's one product launch. And so really, this is -- although we will see revenue start to come up, it won't necessarily drive the overall revenue as much as we would like it to. But we think that in a few years from now, we're going to be much better diversified, and some of those fluctuations will go away. Now having said that, we are also growing the Automotive side of our business. It is our key, core competency, and we're driving that as well. So we don't expect to see declines in our Automotive industry -- in our Automotive portfolio going forward either. We're driving growth at all of our customers. For example, we have certain products that we make for one customer, but we don't make that exact product in another customer. So we're driving into customers that we're already dealing with and broadening the products that we give to them so that we can grow that way as well. In general, our customers are happy with us. We're doing a good job for them. So we have lots of positive encouragement on the Automotive side that we will be able to grow our business on that as well. The nonauto will take a little bit of time to kick in. But we are dedicating time, effort and resources to it in order to diversify and get a quicker turnaround on sales growth.

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Shawn Levine, TD Securities Equity Research - Associate [29]

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Okay, great. And then on some of those new Automotive programs that you said are a little bit longer-cycled, are we looking at 2020, 2021 before those start to kick in?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [30]

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Yes. It's usually depending on if it's a complete redesign of a vehicle or if it's a refresh. If it's a refresh and there's a change, usually, it's maybe a 2-year cycle. If it's a complete redesign of vehicle, sometimes that cycle gets closer to 3 years.

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Lisa R. Swartzman, AirBoss of America Corp. - President [31]

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And Shawn, part of this is what we've been talking about over the last 2 years, which is we're working on and have a much higher focus now as well on what I call, platform lifecycle management. Some of which is in our control and some of which is, obviously, is not. So from our perspective, we're trying to make sure that when we look at the portfolio of platforms that we're on that we're tracking when they're going to be up for refresh and when they're going to be up for -- and when complete new builds will be. So that we can make sure that we sort of don't have too much that's coming off the pipe because, as Chris was talking about before, you get customer givebacks as you start getting towards the end of model cycles, volumes start going down. So we're trying to manage that part as well. But then that's, obviously, also impacted pretty, obviously, heavily, by the customers that we serve and the types of platforms that we're on and how frequently those come up.

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [32]

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And I think that's a good point, Lisa in that as an example for exactly what Lisa just stated, we targeted aggressively a replacement program for a key program at Flexible that's coming due in a couple of years. And we were not only awarded the replacement, but because of our discussions with our engineering team, we were given more parts for the same vehicle. So the replacement business is replacement and then some, about a 20% increase over what the replacement value is. So as we're getting in -- even if it's only a replacement, we're talking to them about bundling other products that aren't necessarily in that particular product line. So we're looking at the refreshes. We're looking at the redesigns. We're getting into engineering early now, talking to them about what we can do for them. And we're driving it a lot earlier in the decision-making process, which of course we think long term, that will be a big benefit for us. But like I said earlier, on the short-term side, we need to drive either takeover business, efficiency improvements or nonauto.

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Shawn Levine, TD Securities Equity Research - Associate [33]

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Okay, that's helpful, sounds promising. Just sticking with Automotive here, on the expense side, you mentioned closing the third factory in Detroit. Just wondering of any onetime costs and then ongoing kind of cost takeouts associated with that.

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [34]

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We are looking at the one-time costs right now. There will be some moving costs as we move equipment. The people, they're easy to move over. And the lease on that building is up in October. So although there will be some costs associated with it, we don't think they're going to be overly dramatic.

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Shawn Levine, TD Securities Equity Research - Associate [35]

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Okay. And like what kind of expense savings should we expect from the closure of that facility, kind of going forward after October, I would say?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [36]

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After October, we should be at a run rate of about $750,000 a year improvement.

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Shawn Levine, TD Securities Equity Research - Associate [37]

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Okay, great. Thanks. And then just a quick clarification here. Did the bunny boot contract, were there any deliveries in Q4? Or is that in full-throttle production in Q1 '19?

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

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There were deliveries in Q4 as well.

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [39]

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There were deliveries in Q4. And it was almost full throttle. But now, Q1 is full throttle.

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Operator [40]

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Our next question is 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 [41]

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Most of the questions have been asked. Just have one for Chris. So on one hand, my sense is that you will spend much of the year kind of remaking the Automotive side of the business, yet, there is an addition of capacity in the Scotland Neck and Kitchener. There will probably be some kind of early issues until you ramp up production there. Are you going to be able to make it on all sides? Or how do you expect to account for that?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [42]

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Thanks, Ben, for the question. I appreciate it. The -- I did spend a lot of time in Rubber Solutions last year and quite a bit in Defense also but also in Flexible. So I was not ignoring any one, single segment. However, really my emphasis last year was really driving improvements at Rubber Solutions, both on the top line and the efficiency side. However, in that process, the thing that was really key to me was to build a team there that we felt really comfortable could move forward. And I have to tell you that the team we have at Rubber Solutions, is very strong, very capable. Any areas of weakness that we had, we've replaced or strengthened in some other way. They're under great leadership. They are completely committed to the cause. And I'm not going to be walking away from supporting them in any way. So I feel comfortable that the team is so strong that it's going to allow me some more flexibility to spend a little bit more time on the Auto side. But I don't see Rubber Solutions going backwards at all. In fact, I think the team that we have in there now will continue to drive it forward.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [43]

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That's great. And I do have one more question. I don't know who will answer. But there was quite a bit of free cash bump in the fourth quarter. And if I'm not mistaken, it's coming from an increase in the accounts payable. Is there -- can you elaborate on that a little bit? Or is that -- and should we expect kind of a decline in -- early in 2019? Or what's going on there?

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Daniel Gagnon, AirBoss of America Corp. - CFO [44]

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Yes. Ben, so there's a couple of things in the accounts payable. Timing is always one item that comes every year. But one of the aspects of the increase was the increased purchasing of raw materials for anticipation of the volume that Q1 was going to bring. So we did go out and buy more of raw materials from -- it's a big piece of it, and then there's timing -- the rest is all timing of expenses and payments.

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Operator [45]

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Our next question is from [Jacquair Del Choy], a private investor.

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Unidentified Participant, [46]

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I was just wondering what's the opportunity for you guys in regards to electric cars in the Automotive segment?

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Chris Bitsakakis, AirBoss of America Corp. - COO & President of Rubber Solutions Division [47]

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So we have been studying this quite a bit. And so let me say, firstly, that we don't expect any serious impact to our business, negatively that is, as the electrification begins to occur. But what we are doing now is we're tearing down electric vehicles and looking for opportunities for molded products that fit into our space. And when you look strategically where we're going, we're currently doing a lot of rubber molding, but there's also a lot of thermoplastic balkanized molding that goes into electrified vehicles that we are looking at different products that we can develop for the vehicles. A lot of the products that we make shift over nicely to electric vehicles. Some of the products that are in electric vehicles, we don't produce right now. But we are tearing them down and looking at opportunities to provide them. And as more of our customers get into electric vehicles, then we're in the right position to be able to get more opportunities there. And we currently are a supplier to Tesla. And we continue to work with them on other opportunities that we can provide for them.

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Operator [48]

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

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Peter Grenville Schoch, AirBoss of America Corp. - Chairman & CEO [49]

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Thank you all for attending. And I know it was a disappointing year last year. But I am confident that we're doing all the right things to provide strong growth in the future. 2019 will be significantly better than last year. And with the management teams we have in place, I'm confident that we will see good growth for the foreseeable future. And we will talk to you, I guess, pretty shortly after Q1 comes out. Thank you.

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Operator [50]

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