Letter to Shareholders: Q2 2019

Name: Atlas Engineered Products
Price range: $

July 30, 2019

Dear Shareholders,

As we enter Canada’s peak building season, I am pleased to report that AEP has met, and in some areas, exceeded our Q2 financial targets for 2019. We are showing a profit well ahead of our projected budget, and despite a challenging Q1 2019, are on pace to hit our EBITDA goals 6 months ahead of schedule. Some financial highlights for our Q2 2019 are presented in this letter. Further details on our financial results are provided in our Management’s Discussion and Analysis (“MD&A”) and our financial statements for the period, copies of which are available on our website at www.atlasengineeredproducts.com and on SEDAR at www.sedar.com.

We were able to achieve these results through the hard work and commitment of everyone in our organization, from the Executive Team down to the shop floor. I want to first and foremost thank our dedicated group of employees for embracing our efforts to increase organic growth and achieve ever-improving operational efficiency. And secondly, a warm thanks to our talented leadership, and Board of Directors, for your selfless contributions.

Perhaps just as importantly, in Q2 2019 we announced significant nation-wide supply and service agreements that will result in long-term bottom line benefits to all our operations. We established a new, guaranteed lumber supply agreement and Vendor Managed Inventory (VMI) system that is expected to result in cost savings of up to 14.7% per facility depending on plant location, and potentially result in between $750,000 and $1,000,000 in additional cash flow this fiscal year for the Company due to the favourable consignment terms.

In late June 2019 we announced a strategic partnership with MiTek Canada Inc., a globally renowned technology and machinery supplier for the building industry. This partnership gives us access to cutting edge design and engineering technology, ensuring consistent quality standards at all our locations across Canada. Using MiTek’s technology platform, our designers will be able to collaborate and execute seamlessly using one shared technology platform.

Q2 2019 also saw us execute on our plan to expand product offerings at our facilities. For example, at South Central Building Systems in Manitoba, we saw the first customized wall panels roll off the line. At Satellite Building Components in Ontario, the installation of a fully automated roller gantry, customized cutter saw and expanded pressing system doubled production capacity and allowed for significant product line expansion. At Atlas Building Systems in British Columbia, we completed installation of a new MiTek saw blade, with sophisticated processing and board stretcher software, that is now optimizing lumber use and speeding up cutting speeds.

On the front lines we continue to grow our sales force, refining our client engagement and operational processes. Our expanded capacity allows us to compete for, and win, larger and more complex project bids. We have created a lean and nimble Executive Team that engages daily with Business Development, Operations, Administration and Finances.

While our accelerated success in Q2 2019 has been driven by our focus on internal improvements and organic growth, leading to greater profitability, we also remain focused on the goal of identifying good acquisition targets. The market trends remain very much in our favour with succession demographics resulting in advantageously priced targets, skilled labour shortages driving demand for assembled components and engineered products; and the inability of individual independent operations to match our investments in the latest technologies.

I also want to take this opportunity to recognize the deep and enduring commitment each of our companies has with their respective local communities. We were able to highlight a recent partnership with Habitat for Humanity by our teams on Vancouver Island, one of a number of projects they have contributed to over the years. The same AEP community involvement can be seen in Carmen, MB, and Ilderton, Merrickville, and Clinton, ON.

As AEP founder and Director, Hadi Abassi said, “It has always been part of our DNA to give back to the community, wherever possible. Community support is one of the shared values, of every current AEP company, across Canada, and will be for companies who become part of AEP in the future.”

A few Q2 2019 financial highlights:

Overall revenue for the three and six months ended June 30, 2019 was $9,067,334 and $15,284,242, respectively, up from $3,987,449 and 6,066,495 for the three and six months ended May 31, 2018, representing an overall growth in revenue from the prior period of 127% and 152%, respectively.

Compared to financial year ended December 31, 2018 (-4.9%), the Company has a positive adjusted EBITDA margin of 17.0% for the second quarter ended June 30, 2019 up from 3.2% in first quarter. For the six months ended June 30, 2019 adjusted EBITDA margin was 11.4%. (See below for an explanation of EBITDA, adjusted EBITDA and adjusted EBITDA margin.)

Operating Income before taxes has turned sharply positive at $782,013 for the three months, and $303,092 for the six months, ended June 2019. For the comparative three and six months ended May 31, 2018, we had operating losses before taxes of $543,575 and $792,990, respectively.

At $522,657, quarterly net income before tax, and $162,876 after tax, was positive for the first time since AEP went public in November 2017.

We restructured some of our debt to more favourable terms and strengthened our balance sheet to be more closely aligned to the seasonality of our business. Some term loans have been restructured to be interest-only payments from January to May, when the construction season is slower and retaining cash is important. From June to December, we will make principal and interest payments, when construction and building is at its peak.

We achieved strong organic growth through integrating and optimizing our operations. For example:
- Revenues at our Atlas operation in Nanaimo, BC for the three and six months ended June 30, 2019 were $3,319,638 and $5,628,355 compared to $2,767,884 and $4,809,849 for the three and six months ended May 31, 2018. This represents period-over-period organic growth in the Company’s Atlas operations of 19.9% and 17.0%.

Included in our results for the three and six months, ended June 30, 2019, are continued costs incurred to improve the following:
- Improved workflows to increase productivity and efficiencies;
Automation activities – upgrading and improving equipment and technology applications;
Equipment relocation and installation to maximize capacity and equipment usage; and
Product development to prepare for rapid sales growth through the busy construction season laying ahead.

At AEP, we remain focused on exceptional customer experience, while utilizing operational excellence, to create and deliver unbeatable products and services. Please don’t hesitate to contact me if you have any questions or concerns. And I hope you will invite your friends, family and colleagues to consider joining our AEP family of shareholders.

Sincerely,

Dirk Maritz, CEO & President

Forward Looking Information

Information set forth in this letter contains forward-looking statements. These statements reflect management’s current estimates, beliefs, intentions and expectations; they are not guarantees of future performance. Atlas Engineered Products Ltd. (“AEP” or the “Company”) cautions that all forward looking statements are inherently uncertain and that actual performance may be affected by a number of material factors, many of which are beyond the Company’s control. Such factors include, among other things: Risks and uncertainties relating to the Company, including those to be described in the Management’s Discussion and Analysis (“MD&A”) for the Company’s the three and six months ended June 30, 2019. Accordingly, actual and future events, conditions and results may differ materially from the estimates, beliefs, intentions and expectations expressed or implied in the forward-looking information. Except as required under applicable securities legislation, the Company undertakes no obligation to publicly update or revise forward-looking information.

Selected Financial Information

Except as noted below, the financial information provided in this news release is derived from the Company’s unaudited financial statements for the three and six month period ended June 30, 2019 and the related notes thereto as prepared in accordance with International Financial Reporting Standards (“IFRS”) and related IFRS Interpretations Committee (“IFRICs”) as issued by the International Accounting Standards Board (“IASB”). A copy of the Company’s unaudited financial statements for the three and six month period ended June 30, 2019 and the related Management’s Discussion and Analysis is available on the Company’s website at www.atlasengineeredproducts.com or on SEDAR at www.sedar.com.

Financial information for the Company’s acquisitions are included in the Company’s audited financial statements from the date of acquisition. Financial information for acquired businesses for periods prior to the date of acquisition were prepared by management and have not been reviewed or audited by independent auditors.

Non-GAAP / Non-IFRS Financial Measures

Certain financial measures in this news release do not have any standardized meaning under IFRS and, therefore are considered non-IFRS or non-GAAP measures. These non-IFRS measures are used by management to facilitate the analysis and comparison of period-to-period operating results for the Company and to assess whether the Company’s operations are generating sufficient operating cash flow to fund working capital needs and to fund capital expenditures. As these non-IFRS measures do not have any standardized meaning under IFRS, these measures may not be comparable to similar measures presented by other issuers. The non-IFRS measures used in this news release include “EBITDA”, “EBITDA margin”, “adjusted EBITDA”, and “adjusted EBITDA margin”. “EBITDA” is calculated as revenue less operating expenses before interest expense, interest income, amortization and depletion, impairment charges, and income taxes. “EBITDA margin” is EBITDA expressed as a percentage of revenues. “Adjusted EBITDA” is EBITDA after adjusting for share-based payments, foreign exchange gains or losses and non-recurring items. “Adjusted EBITDA margin” is adjusted EBITDA expressed as a percentage of revenues