Atlas Fourth Quarter 2012 Review

Report for the Quarter and Year Ended December 31, 2012

Our businesses continued to make both operational and financial progress in 2012; the two new platforms we acquired during the year are both off to good beginnings and the two “bolt-on” acquisitions we completed should prove to be meaningfully accretive to financial results in years ahead and were excellent strategic fits. Further, the broader environment seems to be cooperating as well. In the near term, we believe the construction market is entering a prolonged upturn which will serve as an added boost to domestic GDP — and will enhance the prospects for Bridgewell, Erickson, RedBuilt and Wood Resources. While we do believe the economy has very significant unresolved challenges and we remain more than concerned about the capacity of Washington to disrupt a brightening future, we are optimistic that the backdrop for 2013 and beyond has improved from where we were just one year ago.

There was a slight regression in safety performance in Q4 2012. The aggregate OSHA recordable incident rate (“RIR”) across the Atlas family was 1.88, compared to 1.89 in 2010 and 1.68 in 2011. Nonetheless, AGIShorewood Asia, Boehmer Box, Bridgewell Resources, Detroit Thermal, Hamtramck Energy Services, Hartford City Paper, Ivex Specialty Packaging, Pangborn Germany, Pangborn USA, Shillington Box, and Strathcona Paper all operated throughout Q4 2012 without a recordable incident.

Several notable events have occurred since our last report. One was the “bolt-on” acquisition of Putney Paper Company Inc. (“Putney”) on December 31. As we describe in the Soundview Paper Holdings LLC (“Soundview”) section below, Putney is a “hand-in-glove” fit with Soundview and we believe that the benefits of its strategic linkage and financially accretive performance will be visible in 2013. Detroit Renewable Energy LLC completed the last, key step in the refurbishment of its EFW facility as of this report. Phoenix Services continued its impressive growth with the awarding of several new contracts, while the Pangborn Group continued to make progress in its effort to expand into emerging markets, establishing a physical presence in China.

Erickson Framing Holdings LLC (“Erickson”), the most recent addition to the Atlas family, joined us early in the fourth quarter. The challenges facing Erickson are substantial. However, the actions immediately taken post-acquisition began to have an observable impact on Erickson’s performance by year end. As this report was being finalized, we concluded the sale of ASG’s tobacco packaging business to Amcor Ltd. (“Amcor”), a publicly traded, global packaging company based in Zurich. We believe the sale represents an important strategic milestone for ASG. In addition to receiving attractive consideration for the business, the sale enables the company to focus attention on its much larger global packaging business serving the consumer products and media and entertainment markets and to avoid future capital investments in the more capital intensive tobacco packaging business.

The past year also marked the establishment of the Atlas Foundation and the announcement of the first recipient of an Atlas Foundation Partnership Grant – Create Common Good (“CCG”). More information on this initiative and the exciting work of CCG is provided at the end of this report.

We look forward to reporting to you on our first quarter performance. Until then, thank you for your interest and continued support.

Regards,

Andrew Bursky
Managing Partner
To contact Andy by e-mail, please click here

Timothy Fazio
Managing Partner
To contact Tim by e-mail, please click here

 



ASG
Mike Ukropina
Chief Executive Officer

ASG is a leading global creative services and packaging provider to the consumer products, electronic media and tobacco industries. Atlas formed ASG by acquiring the AGI media packaging business of MeadWestvaco Corporation in September 2010 and combining it with the Shorewood Packaging business (“Shorewood”) purchased from International Paper Company (“IP”) in January 2012.

ASG achieved an RIR of 1.3 for the full year of 2012. While we are gratified that ASG has sustained excellent safety performance, a key objective in the year ahead is to drive safety performance to truly world-class levels. Safety performance remained very strong in the Global Gravure/Asia division (“GG&A”) in the fourth quarter and improved substantially in both North America and Shorewood de Mexico (“SdM”). Europe safety performance slipped in the fourth quarter, but Europe joined GG&A at world-class RIR performance levels of below 1.0 for the full year.

GG&A’s fourth quarter was strong, driven by its tobacco packaging business in Asia and its consumer business in both North America and Asia.

Fourth quarter results in North America showed declines from the prior quarter typical of the seasonality of both the media business and certain holiday season consumer packaging. Despite this, North America executed exceptionally well around a large set of critical initiatives. The Mexican division experienced a strong fourth quarter, driven primarily by solid performance in operations and higher than anticipated sales.

The divestiture of our tobacco business to Amcor, discussed in the introduction to this report, will significantly reduce the scale and profits of both GG&A and SdM. Nonetheless, we believe that our Asian and Mexican assets are well-positioned in rapidly growing markets and our management team is intensely focused on growing our business in these markets.

In Europe, highlights of the year included continued excellent performance by our efficient and low cost Poland operations and strong progress in our Lean/Continuous Improvement initiatives. While much work remains to be done, significant progress has been made so far and an excellent foundation for future performance has been established.

 



BRIDGEWELL RESOURCES LLC
James Toya
Chairman

Kyle Burdick
President

Bridgewell supplies a variety of construction products, utility supplies, wood products, food ingredients and crop inputs, together with logistics services, to suppliers and customers globally. Bridgewell commenced operations in March 2010, when it acquired certain assets of the Trading Division of North Pacific Group Inc. out of a Federal receivership.

During the fourth quarter of 2012, the company sustained its world-class Recordable Incident Rate (“RIR”) of 0.0, a record that the company has maintained since formation.

Management has worked hard throughout 2012 to develop enhanced risk management procedures and controls. As the company continues to grow, risk management will become an increasingly critical discipline necessary for success. Bridgewell also made great strides in managing its working capital utilization in 2012.

Bridgewell experienced margin compression in the fourth quarter, primarily the result of OSB cost increases in its Contractor Direct division and inventory writedowns in International Wood Products. Nonetheless, the company experienced rapid growth in EBITDA and revenue over 2011. Especially noteworthy was the performance of the Utility & Construction division, which had a very strong quarter and year as it supported the needs of its many utility customers in the Hurricane Sandy-battered Northeast.

In the fourth quarter, the company added two additional traders. Management’s focus on risk management and absorbing the new business lines and talent acquired in prior quarters slowed the pace of hiring in the second half of 2012. Given that new trader acquisition is a core component of our growth plan, the company will refocus its efforts on this activity in 2013.

Bridgewell will continue to make significant investments to grow its business, both in the form of new traders and expansion into new geographic and product markets. We have also begun to explore strategic acquisitions as a means of leveraging the company’s infrastructure and capabilities, accelerating growth and further diversifying Bridgewell’s end markets. We remain excited by the potential of Bridgewell and believe the company is well-positioned to take advantage of the growth prospects available to it in both domestic and international markets.

 



DETROIT RENEWABLE ENERGY LLC
Steve White
Chairman and Chief Executive Officer

Detroit Renewable Energy (“DRE”) owns a group of infrastructure assets providing Detroit, MI with safe, reliable and cost-effective solutions for clean energy and waste disposal.

The company experienced two recordable incidents during the fourth quarter across the DRE business units. For all of 2012, we had four recordable incidents and posted a 1.4 RIR, which is exemplary by industry standards. Our managers continue to emphasize the Atlas safety culture and are committed to driving further improvement in 2013.

With the completion of the rehabilitation of DRP’s three boilers and the successful execution of the cold iron outage, the last step in the company’s capital turnaround plan is the overhaul of DRP’s turbine generator (“T/G”) scheduled for the first quarter of 2013. We anticipate that once the T/G work is done, DRP finally will have the capacity to perform at the levels of reliability that drive profitability.

In December, DT began providing steam service to a former customer ahead of schedule and under budget. In addition, DT began serving a major new customer.

In terms of our growth initiatives, the company continued to make significant progress in these endeavors in the fourth quarter. DRE anticipates entering into a long term steam requirements agreement with a major Detroit manufacturer during the first quarter of 2013.

Also during the fourth quarter, DRE’s newly established subsidiary, Detroit Renewable Cooling (“DRC”), began negotiations to provide cooling services to two “anchor tenants” who have sufficient demand to justify DRC’s initial capital investment. Similar to the district heating services provided by DT, district cooling is a low-cost and environmentally preferred solution for providing chilled air from a central source in dense urban environments. Importantly, DRC leverages DT’s existing infrastructure, creating a “win-win” for customers as well as the company.

 



ERICKSON FRAMING HOLDINGS LLC
James Chamberlin
Chief Executive Officer

Erickson Framing Holdings LLC (“Erickson”) is a leading construction services and pre-fabricated building products company that provides turnkey framing services, framing packages, trusses and other products to builders and developers. Erickson’s primary geographic markets include Arizona, Northern California and the greater Reno, NV area.

Atlas formed Erickson to acquire Erickson’s assets from Masco Corporation in October 2012.

Erickson reported an RIR of 9.0 in the fourth quarter and an RIR of 16.6 for 2012 (including the three quarters prior to the Fund’s acquisition). Erickson’s safety performance remains a major concern which the company must work hard to improve. A new safety manager has been hired to spearhead this effort and a number of robust safety initiatives are underway.

Our plan for Erickson anticipated a meaningful shrinkage in operating losses soon after acquisition as a result of aggressive actions related to pricing, costs and productivity, the plans for which were formulated in concert with the new Erickson leadership team prior to closing. We are gratified by the early impact we are seeing from these initiatives as financial performance improved in the fourth quarter relative to pre-acquisition results. Erickson’s Arizona operation (“AZ Framing”) is showing rapidly improving results. Undeniably assisting the efforts in Arizona is the nascent but increasingly robust recovery in the Arizona housing market, with Moody’s reporting single-family housing starts up 53% from 2011 to 2012.

Erickson’s California/Reno operation (“CA Framing”) is also showing signs of improvement. Similar to AZ Framing, we are seeing the beginnings of recovery in CA Framing’s key markets. Moody’s reported a 61% increase in combined Sacramento and Bay Area single-family starts from 2011 to 2012.

Erickson’s door molding and millwork business (“DSI”) is co-located with AZ Framing. DSI services many of the same homebuilder customers as AZ Framing; however, due to less competition in the door business, many major homebuilders use DSI even if AZ Framing does not service their framing business.

While still early in the Erickson investment, we believe that the turnaround plan is already showing its impact. This is a testament to management and their commitment to return Erickson to its historical levels of performance and beyond by focusing on several key initiatives: Safety, Profitability, and Operational Efficiency.

Despite what has been accomplished so far, much work remains to be done as we look forward to continued progress at Erickson.

 



FINCH PAPER LLC
Joseph Raccuia
President and Chief Executive Officer

Finch, located in upstate New York, is a leading producer of premium uncoated printing papers. Finch operates an integrated paper mill utilizing on-site sustainable energy resources, including biomass and hydroelectric power and also manages more than 160,000 acres of Adirondack forests for the Nature Conservancy.

We are pleased to report that continued progress toward achieving world class safety performance was made in Q4 2012. Our 2012 recordable incident rate (RIR) was 1.84 compared to a year end 2011 rate of 2.42. The Lost Time Days Away rate (LTDA) for 2012 improved 48% to 0.46 vs. a 2011 rate of 0.88.

Improved financial performance in the quarter was driven by reduced labor and maintenance costs coupled with reduced usage of chemicals and energy as a result of continuous improvement initiatives.

According to a January 2013 report by the American Forest & Paper Association, Q4 2012 shipments of uncoated free sheet declined by 2% from the prior year’s quarter, with annual purchases down 4% compared to 2011. Despite these headwinds, Finch’s shipments for the quarter remained flat over the same quarter of the prior year, aided by growth in our digital products.

Our continuous improvement initiatives and performance metrics implemented during the past year have contributed significantly to our second consecutive quarter of improved financial performance. We officially kicked off our 5S journey in Q4 and have identified high impact individuals to lead our implementation. Combined with our continued efforts in selling higher value specialty papers, we remain optimistic about our financial performance heading into 2013.

 



FOREST RESOURCES LLC
Larry Richard
President and Chief Executive Officer

Forest Resources LLC (“Forest”) experienced no lost time accidents or recordable incidents during Q4 2012. Forest’s consolidated RIR for Q4 2012 was zero compared to the 3.2 industry average.

Forest’s financial results were bolstered by increased medium prices combined with lower fiber and energy input costs. Hartford City Paper (“HCP”) increased its production level during the quarter, relative to the fourth quarter of 2011. Orders and pricing remain firm in HCP’s end markets. Production at Ivex Specialty Paper (“Peoria”), our specialty grade mill, increased compared to the fourth quarter of 2011. Peoria continues to focus on new product development. Shillington Box saw increased volumes and realization of a box price increase in Q4 2012.

The North American folding carton market remained weak in the fourth quarter of 2012. This impacted Strathcona Paper, which produces clay-coated-recycled board (“CRB”) for folding carton converters. Nonetheless, Strathcona’s profitability improved significantly in Q4 2012 relative to 2011. Reflecting the softness in the folding carton market, Q4 sales volumes at Boehmer Box were down slightly year-over-year. However, 2012 saw high levels of quoting and customer development at Boehmer. This has resulted in Boehmer being awarded a significant amount of annualized new business.

Containerboard markets are stable and fiber prices are expected to increase during the first quarter. Continued discipline by major U.S. containerboard producers is expected to maintain production/demand balance.

 



THE PANGBORN GROUP
Henrik Krabsen Jensen
President and Chief Executive Officer

The Pangborn Group designs and markets shotblast surface preparation equipment and provides aftermarket replacement parts and services internationally. In Q4 2012, the Pangborn Group had one lost time injury and two lost time injuries for all of 2012. In Q4, we continued safety training with updated internal and governmental requirements and we passed various official safety inspections. Overall, we made progress and improved our safety performance considerably in 2012, reducing our recordable incident rate to 1.11, down from 2.28 in 2011.

The implementation of Continuous Improvement/Lean projects gained further traction in Q4 2012. We expect to see the first operational and financial results of these initiatives by the end of Q1 2013.

In Q4 2012, financial performance improved compared to Q4 2011. In Q4, we experienced a weakening European market with postponed equipment projects and lower spare part orders. Despite weaker market conditions in Europe, globally we had record equipment shipments. We were able to realize better margins in Q4 2012 as a result of our implemented cost reductions.

In order to expand our future market opportunities and general competitiveness, we initiated a number of product portfolio projects in Q4 2012. The projects include portfolio expansion activities and re-engineering of potential high volume standard equipment.

Our opportunities in the BRIC countries, especially China and Russia, are very good and we expect this trend to continue in 2013. Our activities regarding our new subsidiary in China are on track and we expect that our Chinese manufacturing facility will be operational by the latter part of 2013. In Russia, our representative will increase his Pangborn-focused sales force significantly in 2013.

 



PHOENIX SERVICES INTERNATIONAL LLC
R. Douglas Lane
President and Chief Executive Officer

Phoenix Services International LLC (“Phoenix Services” or the “Company”) reported an OSHA recordable rate of 1.9 for the year ended December 2012, which compares favorably to the rate of 2.7 for the year ended December 2011 and the national slag industry standard of 5.0.

In Q4 2012, Phoenix was awarded contracts at the Galati Scrap Yard in Romania, AM Gent in Belgium, Ferrochrome recovery in Poland and Scaw Metals in South Africa.

The Company faced several challenges in 2012. The slag plants at a handful of Phoenix Services’ new sites were installed behind schedule, which resulted in costly contract crushing to fulfill customer needs. The Company’s first major acquisition, Gagneraud Industrie, also posed complications for the Company. The Company is working through operational challenges and cultural barriers created by the international acquisition.

At this point, Phoenix Services’ sites are running well and continue to benefit from positive macro-economic trends in the steel sector. The Company continues to focus on operational excellence and attractive growth opportunities, and has the capitalization needed to execute its plans. The Company is actively bidding work and we remain extremely optimistic about the prospective performance and growth at Phoenix Services.

 



REDBUILT LLC
Kurt Liebich
President and Chief Executive Officer

RedBuilt is a leading national provider of structural roof and floor system solutions for commercial buildings and an innovator of patented engineered wood products.

RedBuilt associates continue to work safely. Our recordable incident rate (“RIR”) for the year was 1.8. Safety continues to be our top priority and the culture that we are striving to build will yield benefits in our broader continuous improvement efforts.

In 2012, RedBuilt’s associates proved that we could achieve positive cash flow in a difficult and competitive environment. We shifted the mindset from survival to one that is focused on thriving in any environment.

In Q4, core commercial quoting activity was flat year over year, but bookings increased. The Standard Structures acquisition that we completed in 2011 has resulted in improved close ratios and an increase in market share.

The housing recovery has clearly started, and generally speaking, light commercial construction activity should benefit from this positive trend. Typically, commercial activity lags improvement in the residential market by 18 months. From an overall sales activity perspective, we believe that RedBuilt will continue to see gradual improvement Over the next four to five years.

Our biggest challenge will be managing the inevitable volatility in the raw material markets that will result from an improving economy. Maintaining margins in this chaotic environment is the top priority for the coming year. We remain optimistic about the opportunities in 2013.

 



SOUNDVIEW PAPER COMPANY LLC
George Wurtz
President and Chief Executive Officer

Soundview Paper Company LLC (“Soundview”) is our portfolio company headquartered in Elmwood Park, New Jersey that manufactures and distributes bath tissue, towel, napkin and facial products made from recycled and virgin materials to retailers such as grocery stores, drug stores, office supply and dollar store chains, as well as to wholesale distributors, food service and janitorial supply companies. Soundview commenced operations in April 2012 when it acquired Marcal Paper Mills, LLC.

Year-to-date December 31, 2012, the company experienced a RIR of 1.8. Management has focused on a number of initiatives to improve safety performance, including a weekly Safety Blitz, a Safe Employee Development Program and a STOP Program to create safety training, peer examples and awareness. The company has also initiated its Lean, Orderly and Clean program to address housekeeping and unsafe conditions as well as to begin to address the basic foundations of Lean manufacturing, Continuous Improvement and performance excellence.

Soundview’s performance in the fourth quarter was robust. Management has implemented a process of “rapid transformation,” focused on each of the core functions of the business. In terms of market-facing activities, the company began shipping its new “Eminence” and “Essentials” product lines aimed at the “Away From Home” market, which encompasses a range of office supply, janitorial, hotel, motel and institutional tissue products. Soundview’s Private Label offering experienced continued success, and during the third and fourth quarters, added several key accounts, significantly expanding its Private Label presence. Furthermore, Soundview has made great strides in its “At Home” retail offering, including significant improvements in product quality and performance in our recycled bath tissue product.

In October, the company was faced with an unexpected operational challenge in the form of Hurricane Sandy. A severe weather action plan was implemented, scheduled conference call updates were regularly provided during the storm and dedicated leadership teams were established to provide around the clock coverage at the New Jersey facility. In addition, the management team sought to provide employee and community assistance wherever it could, supplying gas to over 200 Soundview employees and donating tissue products to the Red Cross for relief efforts.

To further enhance Soundview’s competitive position, on December 31, 2012 Soundview purchased the operating assets of Putney Paper Company, Inc. (“Putney”). Putney was a family-owned, regional manufacturer of recycled tissue paper serving the “Away From Home” market. Putney converts recycled paper into finished tissue products including towels, napkins and sheeted tissue. Its products are sold primarily to wholesale paper product distributors in the northeastern United States. We believe that Putney is a strong, complementary asset, filling out Soundview’s product line and enabling the company to service prospective customers with a full line of “Away From Home” products and capabilities.

Soundview continues to operate in an environment in which energy and raw material costs remain at relatively low levels. Nonetheless, in preparation for less favorable environments, we have continued exploration of projects that can significantly reduce Soundview’s energy and fiber costs.

We are excited by the growth and operational improvements already in evidence at Soundview as well as the long-term prospects for the company. With our experienced management partners and with motivated employees, the company is well-positioned to take further advantage of its strengthening market position. The addition of Putney bolsters our standing as one of the key suppliers to the most densely populated market in North America.

 



WOOD RESOURCES LLC
Richard Yarbrough
Chairman

Kurt Liebich
President and Chief Executive Officer

Wood Resources LLC (“Wood”) is a producer and distributor of engineered wood panels for industrial and commercial customers, operating manufacturing and distribution facilities in Washington, the Carolinas and Florida.

Wood’s safety performance during the fourth fiscal quarter had a disappointing recordable incident rate (RIR) of 3.2, compared to a 2.1 RIR for the same period in 2011. The overall RIR for the full year 2012 was unchanged from 2011 at 2.2.

Financial results for Q4 2012 were significantly improved from the same period last year. These improved results were driven by pricing strength on commodity products while in the Southeast, pricing pressure on fiber costs remained low. Commodity panel demand remained steady while producers kept supply constrained, resulting in upward price pressure throughout most of 2012.

On a consolidated basis, Wood Resources Southeast, which includes Chester Wood Products and Moncure Plywood, concluded 2012 with record results. The year over year improved performance was aided by tight cost controls as the price for some materials trended upward. Increased production volumes allowed our mills to run unconstrained throughout the year. Chester Wood Products’ financial performance for the fourth quarter was the highest under Wood Resources’ ownership. When compared to the same period in 2011, results were impacted favorably by an increase in plywood and veneer production, better panel pricing and improved labor productivity.

Similarly, Moncure Plywood’s financial performance for the fourth quarter was the second best under Wood Resources’ ownership. When compared to the same period in 2011, results showed a significant improvement due to an increase in plywood and veneer production, better sales returns, improved fiber recovery and better labor utilization.

The specialty panel markets in which Olympic participates showed the typical fourth quarter slowdown in demand. Olympic’s fourth quarter financial results were negatively affected by this seasonal slowdown. However, the results were better than expected due primarily to improved net wood costs.

 



INTRODUCTION TO THE ATLAS FOUNDATION

We are excited to introduce the Atlas Foundation, which was established in 2012. The Atlas Foundation helps social entrepreneurs build sustainable social enterprises of meaningful impact. The Foundation leverages the global footprint, management experience and energy of Atlas Holdings and its business leaders and associates to mentor and support social entrepreneurs based in the home communities of Atlas companies. Through its Atlas Foundation Partner program, the Foundation provides both human and financial capital to worthy not-for-profits that are welcomed into the Atlas network. Our hope is that the work of the Atlas Foundation will inspire broad and direct engagement with social enterprises in every Atlas community.

The first recipient of an Atlas Foundation Partnership grant is Create Common Good (“CCG”), a social enterprise based in Boise, Idaho that provides job training and employment to refugees by offering healthy food products and services. We are pleased to enclose a report from Tara Russell, the founder of CCG, on her organization’s progress in the last months of 2012. Going forward, each Atlas Quarterly Report will include a section for Atlas Foundation Partner organizations to provide an update on their performance and progress in the period, similar to those provided by our portfolio companies.

 



CREATE COMMON GOOD
Tara Russell
Founder and CEO

Create Common Good (“CCG”) is a non-profit social enterprise based in Boise, Idaho. We provide job training and employment to refugees and at-risk populations by offering healthy food products and services. We differ from other nonprofits in that our goal is to build a sustainable business model over the next three to five years that does not rely solely on grants and donations to support our mission of preparing at-risk populations for self-sufficiency. CCG operates small farms, provides value-added food product creation, catering services and production foodservice.

CCG experienced no recordable safety incidents during 2012.

In 2012, CCG trained more than one-third of the adult refugees resettling in Idaho and placed 95% of our job-training graduates into jobs. CCG began new product sales to local retailers and corporations, including Micron (Eurest Foodservice), the Boise Co-Op, Flatbread Pizzeria, Boise Fry Company, and local coffee shops. Whole Foods is “on deck” for February 2013.

The demand for CCG’s quality, fresh food products continues to grow through our school lunch contract pipeline, along with our corporate and retail production food offerings.

Looking to 2013, we have aggressive growth targets for food product and service revenues. Due to the very limited space in our current kitchen, our primary focus has been on increasing capacity through the construction of an expanded production kitchen and operations facility. We’ve been busy raising the needed funds for the expansion, and are now closing in on the remaining funds necessary to complete the project. The new facility will expand job training, employment capacity, and production capacity significantly.