Atlas Second Quarter 2009 Review

A Report to our Partners, Investors, Employees and Friends

The businesses of Atlas Holdings LLC vary in size and reach, range across industries and borders, and embrace widely different management styles and systems. But our people are united by a common culture and a common set of values:

  • An insistence on safe workplaces.
  • An expectation of employee development, empowerment and engagement.
  • A commitment to integrity.
  • A tenacious focus on solving problems.
  • And a passion for continuous improvement.

Adhering to these values and culture has helped us maintain a steady course while weathering the global economic storm.

For several Atlas businesses, Q2 saw substantial growth. Capital Equipment Resources (CER) completed a major strategic acquisition that expanded its operations throughout Europe. With the acquisition of Wheelabrator’s Othello Group in Italy and Germany, Atlas’ CER is now the third largest wheel blast equipment company in the world. In another significant Q2 achievement, Atlas Industrial Services (AIS) secured a $50-million investment that will finance several new customer contracts with major steel complexes and set the next phase of its rapid expansion plans in motion.

Nevertheless, macroeconomic conditions have continued to suppress market demand across all of our businesses. Our managers and employees responded by taking action — cutting costs, improving efficiencies, and strengthening customer relationships. Some of these actions, including layoffs and reduced operating schedules, have been painful. We are grateful for the diligent efforts of all of our employees and managers, who have worked hard and in many cases made personal sacrifices to ensure the success of our businesses.

Continuous improvement initiatives remained a focus in Q2 and are at various stages of implementation. As we have seen in the more mature programs, these efforts take time and commitment, but the payoff is significant. Continually increasing efficiency, reliability and productivity through our businesses are critical to our survival and will position our companies for long-term profitability as customer demand improves.

New investment opportunities continue to emerge as businesses in many industries struggle through this prolonged economic downturn. We are closely evaluating a growing number of opportunities where financial distress and operating stress create buying opportunities. We will pursue acquisitions in sectors where we have operating expertise and where the target has a viable long-term business model. If you see any such opportunities, please let us know.

In this era of global economic uncertainty and upheaval, it is more critical than ever for our businesses to establish, disseminate and model a clear set of values and expectations. Our values, codified in partnership with our managers at our January annual meeting, are presented here as a “Statement of Principles.” These are the values that we will hold our businesses accountable to, and to which we expect our businesses to be held accountable by our employees co-workers, customers, investors, and partners, as well as our suppliers, competitors, our elected officials, regulators, the news media and the public.

At Atlas, we believe that great businesses are built on sound and enduring values that are widely and consistently shared and practiced so that they become ingrained in the DNA of every employee at every level. A great business is one that inspires the trust, confidence and admiration of every person it touches. That’s the standard we want our businesses to achieve.

Thank you for your continued support.

Andrew Bursky
Managing Partner

Timothy Fazio
Managing Partner

What Really Matters: The Values of Atlas

Our people are our Number 1 asset

  • Safety is our first priority at all times for all employees
  • Our employees will have the tools and training needed to be successful
  • We value diversity and will not tolerate any form of discrimination
  • Every employee is responsible for producing results
  • We attract and reward people who embrace our values and achieve success

Integrity is critical and will not be compromised

  • We believe moral judgment has a place in business
  • Timely, open, honest and transparent reporting must always be practiced
  • We will clearly communicate our business objectives, expectations and performance
  • All business relationships shall be conducted in a lawful and ethical manner

Results matter

  • Customer satisfaction is paramount
  • Our employees’ goal at all times is to meet or exceed expectations
  • We believe results are ultimately measured by sustainable cash-on-cash returns
  • All Atlas companies are committed to continuous improvement every day in every activity

Tenacity and innovation

  • We believe challenges are opportunities for creative solutions
  • Non-traditional and contrarian thinking are valued and encouraged
  • Success is rarely easy; there must be persistence in problem solving
  • We recognize and reward innovation

Atlas Industrial Services LLC

d/b/a Phoenix Services LLC (“Phoenix”)
Phoenix Services LLC
Doug Lane, President and Chief Executive
Market conditions for Phoenix customers continued to be challenging in Q2 with steel mills observing no material improvement in demand from the automotive, commercial construction, infrastructure and energy sectors. Steel production rates in North America were approximately 43% of capacity, the lowest level since 1994. We expect continued weak demand for steel as the impact of the Chrysler, GM and other manufacturers’ bankruptcies continue to ratchet through the supply chain.

Fortunately, Phoenix’s steel mill customers operated at reasonable production levels that, in combination with aggressive cost management and certain minimum revenue components in its contracts, allowed the company to generate substantial profits in Q2. In addition, Phoenix took over service responsibility for the Sparrows Point scrap yard and secured a $147 million contract with ArcelorMittal to provide services to its Indiana Harbor West mill.

The next phase of Phoenix’s aggressive growth plan will be supported by a $50-million investment from our friends at Olympus Partners, a Stamford, CT-based private equity investor. Olympus Partners, with approximately $3.1 billion under management, invests in market-leading companies with opportunities for growth. Olympus Partners’ investment underscores the growth and market success AIS has achieved to date.

With its strong balance sheet, weakened competitors and strong service record, the company is negotiating several new contracts to expand its North American operations. In addition, Phoenix opened an office in Krakow, Poland, to bring its industry-leading service model to steel mills in Europe.

Capital Equipment Resources LLC
Ken Dickson, President and Chief Executive
The North American and European markets for new shotblast equipment and aftermarket parts remained very soft as a result of low operating rates in the foundry, forge, automotive, trucking and infrastructure sectors. The cautionary good news is that the market appears to have bottomed out as evidenced by a slight improvement in aftermarket parts orders and quoting activity for new equipment that was noticeable toward the end of Q2.

Capital Equipment Resources (CER) announced a major strategic acquisition in Q2 with the purchase of the Othello Group. With this acquisition, CER is now the third largest wheel blast producer in the world.

The acquired Othello Group companies are V+S - Vogel & Schemmann Maschinen GmbH, Berger Strahltechnik GmbH and WG Technology S.r.l. (now renamed Pangborn Europe). CER acquired the companies from Wheelabrator Group as a result of a forced divestiture under an order from the German government’s antitrust department.

The Othello Group acquisition — complex and executed under a tight time frame — is Atlas at its best: It follows our strategy of purchasing businesses at a compelling valuation in industries where we have deep experience. It leverages our strong management team and builds on our solid record of purchasing divisions of large corporate parents and successfully transitioning them into viable stand-alone entities.

We welcome to the Atlas family the 117 people employed at Berger, V + S and Pangborn Europe, in particular Renzo Boarino, General Manager of Pangborn Europe, and Hubert Prokopp, Managing Director of V + S and Berger. In conjunction with the acquisition, Joe Camerata was promoted from CFO of Pangborn to President of Pangborn, and Urban Svensson was promoted to President of the European operations. Joe and Urban will continue to report to Ken Dickson, CEO of Capital Equipment Resources, who has skillfully guided the business through this significant expansion.

Pangborn also continued to drive innovation, releasing the second generation of its high-tech Genesis family of wheels, providing customers with easier maintenance, key safety features and improved equipment longevity. Despite business conditions and the tight credit market, Pangborn’s financial strength was confirmed when Bank of America agreed to renew the company’s revolving line of credit in Q2.

Northern Pulp Nova Scotia Corporation
Wayne Gosse, Chief Operating Officer
Q2 was one of the most difficult periods in the global pulp market on record. North American list prices of Northern Bleached Softwood Kraft (NBSK) fell to $635 per ton from its August 2008 peak of $885 per ton. The price collapse was exacerbated in Q2 by the rapidly appreciating Canadian dollar. Market conditions have remained so challenging that operations at approximately 50 percent of Canadian NBSK mills were temporarily or permanently curtailed, an unprecedented level of supply reduction.

While Northern Pulp had its share of reliability issues in Q2, it continued to persevere under the steady leadership of Wayne Gosse, Bob Bagdon, Don Breen and Steve Rutledge, reducing raw material usage, staffing levels and harvesting costs. These difficult actions were necessary for survival. Nonetheless, this quarter was painful for our employees, suppliers, and partners.

Notwithstanding the harsh environment, Northern Pulp has invested significantly in its mill operations to ensure its future as many competitors have been forced to retreat. With the help of the Province of Nova Scotia in the form of a CAD $15-million loan, Northern Pulp invested $3 million in a critical, new effluent line and conducted its annual maintenance outage. The old fiberglass effluent pipeline that had developed leaks was replaced with a high-density polyethylene line that was installed under budget and more quickly than originally estimated.

Toward the end of Q2, we saw a modest tightening of the pulp market, driven by
Chinese demand. While we anticipate some price improvements in the short-term, we remain concerned about the sustainability of the market strength because of the unpredictable behavior of Chinese buyers and the volume of excess pulpmaking capacity that has been curtailed, but not all permanently shut. Therefore, in the months to come, Northern Pulp will continue to examine how “to do more with less” in every aspect of the business and to continue to improve its operating reliability.

Finch Paper LLC
Joseph F. Raccuia, President and Chief Executive
While demand for printing and writing papers in North America has declined by nearly 25% year over year, Finch Paper has continued to outperform its competitors, with year-to-date shipments off just slightly— a testament to the company’s reputation for exceptional customer service, large stocking program and quick delivery.

Finch pressed ahead in Q2 with improvements in its cost structure. The Finch Continuous Improvement program has reduced costs by $8.4 million annualized in six months. The savings include $2.4 million in energy costs from improved detection of energy leaks and other inefficiencies; $4.5 million in improved production and manning efficiencies and reduced production losses; and $1.5 million by improving maintenance productivity, thereby reducing outside contracting costs.

As part of a continuing commitment to improve communication and build partnerships with employees, Finch established a Joint Steering Committee (JSC) consisting of representatives from each of the company’s seven local unions and six members of the management team. The JSC works collaboratively on matters of mutual interest that are essential to the long-term viability of the company. The committee meets regularly and is working on two priority items at this time: a plan to improve communications mill-wide and an initiative encouraging employees to take a more active role in maintaining and improving workplace safety.

The company added a new revenue line, building on its century-long commitment to sustainable forestry practices, by launching a new consulting forestry service to help private and public forest owners manage their lands and maintain healthy forests. Finch’s forestry practices have been certified by both the Forest Stewardship Council and the Sustainable Forestry Initiative.

When Finch Paper sold its 160,000 acres of forestland to The Nature Conservancy in 2007, The Nature Conservancy paid Finch the highest professional compliment — asking Finch to continue to manage those forests. Finch now provides consulting services to The Nature Conservancy and several other private landowners and will seek to expand its customer base.

During Q2, the greater Glens Falls, NY, community gathered to pay tribute to Finch’s long-time President, CEO and Chairman, Richard J. Carota, who retired from his role as President and CEO in February. Mr. Carota was feted for 53 years of service to the company and the community at a community-wide gala in his honor. He continues to contribute his experience as Chairman of the Board of Finch Paper LLC.

Wood Resources LLC
Richard Yarbrough, President and Chief Executive
Despite an extraordinarily difficult market, with total housing starts in April at their lowest level since 1959 and an equally depressed market for industrial plywood, Wood Resources LLC’s businesses — Olympic Panel Products LLC, Moncure Plywood LLC, and Chester Wood Products LLC — have positioned themselves to manage through the historic downturn.

Olympic Panel Products returned to modest profitability at the end of Q2 after aggressive cost-cutting measures were implemented by its management team. This achievement is extraordinary, given that Olympic is operating at approximately 50 percent of its production capacity, and it is a testament to the strong leadership of Jim Zmudka and our management team. Olympic Panel’s largest competitor announced it will suspend production in the face of the difficult market, which creates an opportunity for Olympic to increase its market share.

Moncure Plywood and the International Association of Machinists and Aerospace Workers reached a contract agreement after an eight-month strike. The contract provides for employees to share in the cost of their health insurance premiums and for greater operational flexibility to meet customer demands. Responding to the negative outlook for the upholstered furniture industry, Moncure Plywood is diversifying into other specialty plywood segments to offset the shortfall in demand from local furniture producers.

Chester Wood Products continues to distinguish itself as a center of manufacturing excellence within the Atlas family of companies, resulting from its dedication to continuous improvement. Chester set new records in its per-unit production costs, managing to generate only modest losses in a period of historically low panel prices. We expect that, whenever the housing market turns, Chester will be well positioned to generate substantial profits that will more than make up for the challenges of the last several years.

Forest Resources LLC
Larry Richard, President and Chief Executive
Forest Resources’ businesses posted strong results in Q2, benefiting from lower raw materials costs and improved manufacturing efficiencies.

Forest Resources’ Hartford City Paper, Shillington Box, Ivex Packaging Paper and Ivex Specialty Paper units in the U.S., which supply packaging materials primarily to industrial markets, experienced very soft demand in Q2, forcing the company to reduce production and idle manufacturing capacity. Throughout the quarter, margins at most locations (with the exception of Shillington) narrowed as product prices declined. While the U.S. operations were profitable in Q2, we are anticipating a more difficult second half of the year, as rising wastepaper prices are likely to further compress margins.

Notwithstanding a more difficult environment, the U.S. businesses continued to make strides operationally. Ivex Paper in Peoria, IL developed higher-value paper grades to expand its product offerings while improving productivity by more than a third through increased paper machine speeds. Hartford City Paper’s installation of a new headbox in late 2008 led to record-high quality and operating efficiencies in Q2.

Demand for food packaging cartons — a specialty of Forest Resources’ CanAmPac’s businesses — remained strong through the first half of 2009, as more consumers chose to eat pre-packaged foods at home rather than go to restaurants. CanAmPac’s performance in the first six months of 2009 has outpaced any other period since it joined the Atlas family in 2006. We anticipate that business conditions will remain strong for the balance of the year, barring dramatic appreciation in the Canadian dollar, and we are considering several investment opportunities within the business, including purchasing a new printing press at Boehmer Box to meet growing customer demand.

Ontario-based Strathcona Paper set record speeds on its recycled boxboard production machines for lighter basis weights, and has begun engineering work to increase speeds for heavier basis weight papers.

On a sad note for our Forest Resources business, George (Mike) McClure, our partner and the longtime CFO of Hartford City Paper and a senior financial manager for Forest Resources, died in April at the age of 63. Mike helped Atlas found the Forest Resources business in 1999 and was instrumental in its success. The Forest Resources family will miss his wise insight, excellent judgment and impeccable character. We extend our sincere condolences to his wife, children and colleagues.