The third quarter presented a continuation of the slow and uncertain “recovery” that we fear will be descriptive of the state of the economy for many quarters ahead, with the added spice of increased risk (and resultant marketplace volatility) attendant to the EU crisis. Our baseline assumption is that we are unlikely to fall into a “double dip” recession, but that there are no observable catalysts for a more pronounced recovery over the duration of our planning horizon. Risk, therefore, is skewed to the downside, given the exposure to exogenous shock, whether it emanates from the EU or elsewhere.
Generally, the trends we observed in our businesses in Q3 were similar to the experience of Q2. Our businesses that directly or indirectly serve the energy, automotive, capital goods and other durable goods markets, including the Pangborn Group, Phoenix Services, the industrial packaging units of Forest Resources and the Crane Mat and Utility Pole units of Bridgewell, continued to see steady demand for their products and services, driven by stable underlying fundamentals in these segments. Demand for building materials remained very weak in Q3, which continued to create challenges for Wood Resources, RedBuilt and the wood products divisions of Bridgewell. We did notice some pockets of increased activity regionally in commercial construction and in the multi-family segment of the housing market. Reports from the field suggested that the modest increase resulted from improvement in the availability of financing. While the increased activity was barely discernible in the financial performance of our business units, it does provide some evidence that as lending practices normalize, we should see some increase in construction activity.
Demand for entertainment packaging improved in Q3 in the U.S. and Europe, particularly for our plastics product lines, which resulted in solid performance for AGI. Fine paper consumption and food packaging demand for Finch Paper and CanAmPac were stable in Q3 versus Q2, supporting consistent performance. Detroit Renewable Energy is largely immunized from the impact of the economic cycle, given the fundamental nature of its services.
In this environment, our management teams and employees maintained a vigilant focus on operations. We are pleased to report that in Q3 2011, the Atlas family of companies achieved record safety performance with a total RIR of 1.74. Notably, AGI U.S. Print, Amaray U.S., Bridgewell, Chester Wood Products, Detroit Renewable Energy, Moncure Plywood, Pangborn Italy, Pangborn U.S. and Shillington Box operated throughout Q3 without a recordable incident. At the end of the third quarter, Amaray U.S.’s Elizabethtown, Ky., plant reached 457 days without a recordable incident and the Pittsfield, Mass., plant reached 712 days. We attribute much of our success in safety to improved employee engagement and empowerment. As we look forward to 2012, we expect to expand our focus on employee engagement and empowerment to aggressively drive Continuous Improvement Programs into our businesses. If we give our people tools and resources and provide a goal, we are confident that improving results will follow, as we have seen in safety.
As stated in our previous report, the current economic backdrop remains challenging for our operating companies and supportive (albeit, perversely so) for our investment activity. We continue to see attractive opportunities, both in the form of operationally challenged, financially distressed businesses and underperforming units of large corporations. There is nothing on the horizon that suggests this flow will be constrained over the next several quarters.
We made significant progress on three acquisitions during the third quarter. On August 20, we announced that AGI had entered into a definitive agreement to acquire Shorewood Packaging (“Shorewood”), the specialty packaging business of International Paper Company. Our confidence in the sustainability of the business and the strength of the AGI management team was central to our decision to move forward with this transformational transaction. This acquisition will more than double the size of AGI and the combination will create a truly global specialty packaging company, with 24 facilities in North America, Latin America, Europe and Southeast Asia.
Also in Q3, RedBuilt purchased certain assets of Standard Structures Inc. (“SSI”). SSI was RedBuilt’s largest competitor in the western U.S. SSI was facing extraordinary financial stress because of the long and deep recession in the regional commercial construction market. The transaction is very attractive for RedBuilt. It solidifies our market position in core markets and broadens our capabilities. In addition, a number of very talented SSI associates transferred to RedBuilt, complementing our already strong team.
Soon after the end of Q3, we announced that we had entered into exclusive negotiations to acquire the Everett, Wash., pulp and tissue complex (“Everett Tissue”) of Kimberly-Clark. The prospective acquisition of Everett Tissue requires working through many complexities that are typical of Atlas transactions, including environmental, labor and operational issues. However, the company is in a sector that we know well and where we have several Operating Partners with decades of operating experience. Further, tissue is one of the few paper grades that has attractive macro trends in the U.S., ultimately creating compelling valuation metrics for well-positioned assets. Finally, we believe that with hard work and focus, we can reposition Everett Tissue as an effective long-term tissue producer in the western U.S. Both the Shorewood acquisition and the prospective Everett Tissue transaction are consistent with one of our key investment strategies — serving as the buyer of choice for large corporations who seek to divest underperforming, non-core assets.
From a macro standpoint, it is hard to remember a period of greater economic uncertainty and more formidable obstacles to stability and sustained growth than we face today. While it appears that European leaders are finally making headway on a reform/bailout/funding package to address the massive structural problems in the EU financial markets, history suggests that any solution will be far from perfect and is likely to include unhealthy elements of “kicking the can down the road.” Even if and as the EU crisis is brought under control, the core economic and political weaknesses in the U.S. together with uncertainty regarding the trajectory of China's growth in the near term will continue to confound forecasters and maintain a veil of risk on investment decisions. As an aside, the growing sense of fundamental inequities in the U.S. economic allocation and political processes has already served up a level of social unrest that is concerning. As the partisan venom of the election cycle is soon upon us, we may well be in for a wild ride. Amid this uncertainty, we will continue to remain focused on safety, Continuous Improvement and innovation — things we control that can drive our businesses to world-class performance levels.
Thank you for your continued support.
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Tony Garnish, Chief Executive, AGI Europe
Mark Caines, Chief Executive, AGI North America
AGI is a leading global creative services and packaging provider to the entertainment, video game, music, technology, telecom and personal care industries. The Company operates through a network of seven print facilities, five plastics facilities and six Creative Service Division offices located throughout the U.S., Europe and Australia. Atlas formed AGI by acquiring the AGI Media packaging businesses of MeadWestvaco Corporation in September 2010.
Q3 2011 was a significant one for AGI. From a financial performance standpoint, AGI delivered solid performance in its European business units and its U.S. plastic packaging business (Amaray U.S.) as well as significant improvement in U.S. Print driven by that unit’s restructuring efforts. In addition, on August 20, AGI entered into a definitive agreement to acquire the Shorewood Packaging business of International Paper Company.
The Shorewood acquisition is a transformational event for AGI. Shorewood is a leading global printing and packaging solutions provider for the consumer products, electronic media and tobacco industries. The Company operates a global network of 13 print manufacturing facilities in the U.S., Canada, Mexico, Korea, China, England and Poland. AGI and Shorewood are in many ways a perfect fit for one another. The acquisition of Shorewood provides AGI with instant diversification away from the home entertainment markets which, while profitably served, have negative long-term trends, and into the growing consumer and tobacco packaging markets. Shorewood has a significant position in the rapidly expanding Asia and Latin America regions where AGI currently has no presence. Finally, the acquisition will provide AGI’s plastics businesses with access to new markets through Shorewood’s customers, particularly in the consumer packaged goods sector.
Bridgewell Resources LLC
James Toya, Chairman
Kyle Burdick, President
Bridgewell Resources LLC (“Bridgewell”) is our portfolio company that 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 out of a federal receivership.
We are pleased to report that Bridgewell is continuing the positive trajectory of recent quarters. Bridgewell reported its most profitable quarter since inception on substantially higher revenue. The improvement was driven by 1) the completion of several large wind turbine transactions, a new line of business for Bridgewell’s Utility and Construction division, 2) increased activity in the Crane Mats division, resulting from robust pipeline project activity and the introduction of a new composite mat and 3) rapid growth in the Contractor Direct division, which showed a 377% increase in revenue over Q2.
Bridgewell added nine traders during the quarter, bringing the total new traders hired in 2011 to 33. The Q3 additions included six in the newly formed and rapidly growing Contractor Direct division, which offers a one-stop shop for contractors and developers, providing supplies and materials for the multi-family, commercial and industrial construction industries, including framing lumber, panels, hardware and specialty products, siding, trim and cornice, engineered wood products and roofing products. Bridgewell ended Q3 with a significant backlog suggesting that Q4 performance may be less impacted by seasonality than historical experience would suggest.
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. Bridgewell continues to make significant investments in its growth, both in the form of new hires and expansion into new geographic and product markets.
As Bridgewell enters a new chapter under Atlas ownership, emerging from “triage” to outpatient care, it is focusing on the key elements that will drive success: risk management, gross margin optimization, working capital management, hiring of talent, new business development and cost control. These elements are the essential ingredients for building a Performance Organization that can deliver excellent returns on invested capital.
Capital Equipment Resources LLC
Henrik Krabsen Jensen, Chief Executive
Capital Equipment Resources LLC, d/b/a The Pangborn Group, had one lost-time injury in Q3 and has had two lost-time injuries YTD through September 2011. In Q3, the Pangborn Group continued its safety initiatives, improving its safety manuals and signage on its machines, as well as incorporating safety improvements into engineering designs.
Market conditions in all major regions are favorable. Equipment and aftermarket sales were well ahead of plan in Q3 and the same period last year. The Pangborn Group’s activities in the BRIC countries, especially China, are resulting in many new equipment orders. Sales and marketing activities in India, Brazil and Russia are on track and the company is working on several significant projects in these regions.
For the remaining part of the year, the Pangborn Group expects to continue to outpace its plan in terms of both equipment and aftermarket sales. Additionally, equipment backlog is building and the Pangborn Group expects to finish the year in a strong position for 2012.
Detroit Renewable Energy LLC
Steve White, Chairman
Detroit Renewable Energy LLC (“DRE”) owns a group of infrastructure assets providing Detroit, Mich., and surrounding municipalities with safe, reliable and cost-effective solutions for renewable energy and waste disposal. DRE consists of three operating units that were acquired through simultaneous transactions in November 2010: (1) Detroit Thermal, LLC (“DT”), a district heating business that provides efficient heat to most of the buildings in the Detroit central core; (2) Detroit Renewable Power LLC (“DRP”), an EFW (energy-from-waste) facility that processes up to 3,300 tons per day of municipal solid waste (including most of the solid waste generated in Detroit,) which is shredded and then burned, the heat value of which is used to produce electricity that is sold to Detroit Edison and steam that is sold to DT; and (3) Hamtramck Energy Services, which provides operating and maintenance services to several General Motors plants, primarily in the Detroit area.
We are pleased to report that DRE achieved a 0.0 recordable incident rate in Q3 as compared to a 2.7 RIR in Q2. We continue to strive for world-class safety performance across all of the DRE businesses. In Q3, our team of DRP managers and Operating Partners were focused on addressing major plant upgrades. DRP successfully completed the first of its three major boiler rebuilds in Q3. As a result, DRP averaged higher system boiler utilization for Q3 as compared to Q2. DRP will complete the second boiler rebuild in Q4. Ultimately, the completion of the third and final boiler overhaul, currently scheduled for 2012, will establish the foundation for sustained operational stability. We are also pleased to report that during the quarter, DT closed on its first new customer since our acquisition, signing the Cadillac Square Apartments to a multi-year steam sales services agreement. Nearing the first anniversary of Atlas ownership, we remain excited about the opportunities ahead for DRE.
Finch Paper LLC
Joseph F. Raccuia, President and Chief Executive
Finch Paper LLC (“Finch”) is a leading producer of premium uncoated printing papers. Finch operates an integrated paper mill utilizing on-site sustainable energy sources, including biomass and hydroelectric power. Finch also manages more than 160,000 acres of Adirondack forests for The Nature Conservancy.
Finch employees continued their focus on safety throughout Q3. Finch’s YTD RIR was 2.7 compared to a rolling 12-month RIR of 2.8. We remain confident in Finch’s ability to achieve its five-year plan for world-class safety performance.
Market conditions in uncoated free sheet remain challenging as evidenced by Finch competitor Mohawk’s recent announcement of the closing of its Beckett, Ohio, mill. Despite tepid market conditions, Finch volume was strong, running higher YTD year-over-year while the broader uncoated paper markets have shown a net deterioration in volumes. Finch’s continued efforts to manage its product mix and refine its go-to-market strategies have enabled Finch to outperform competitors in the marketplace. Input costs remained relatively high in Q3, which compressed margins. However, as key commodity costs are moderating in Q4, we expect margins to improve modestly.
As a result of continued cost reduction initiatives and Continuous Improvement initiatives, Finch began to see reductions in both its fixed and variable costs during the latter part of Q3. This work, combined with Finch’s efforts toward safety improvements, increased productivity, managing product mix and in strategic sourcing, will position the Company well for 2012.
Forest Resources LLC
Larry Richard, President and Chief Executive
Forest Resources LLC (“Forest”), which includes our majority interest in CanAmPac, had two lost-time incidents and five total recordable incidents during Q3. Forest’s RIR for the 12 months ended Q3 was 3.2, consistent with the 3.2 industry average.
In September, Shillington Box Co. was awarded membership into the Missouri Department of Labor’s Safety and Health Achievement Recognition Program (“SHARP”). In place since 1992, SHARP recognizes companies that proactively work with OSHA to implement effective safety programs. Shillington Box is the 36th of approximately 120,000 small businesses in Missouri to achieve this recognition and has achieved 28 consecutive months without a lost-time injury as of September 2011.
Forest’s U.S. business, which is comprised of Hartford City Paper, Ivex Packaging Paper (“Joliet”), Ivex Specialty Packaging (“Peoria”) and Shillington Box, operated effectively in Q3. Hartford City Paper maintained a production level of 352 tons per day notwithstanding production difficulties in its new kraft grades transferred from Joliet. Volume at Peoria (Forest’s specialty niche packaging paper mill) increased to 38 tons per day in Q3, compared to 37 tons per day in Q2. Forest ceased production at its Joliet facility in Q2 as part of the permanent closure plan announced in Q1 2011. Shillington Box’s 2011 Continuous Improvement Program, including waste reduction and improved production efficiency initiatives, has been key in maintaining strong profitability in a very price-competitive box market.
Fiber costs remain well above 2010 levels due to low domestic generation of wastepaper and strong overseas fiber demand. Unlike the coated board market in which Forest’s Strathcona Paper mill participates, containerboard producers like Hartford City Paper have not been able to implement price increases consistent with fiber cost increases that occurred in the first half of 2011. At the end of Q3, fiber costs began to decline rapidly, which should result in profit improvement in Q4 across Forest Resources.
Sales at CanAmPac (Strathcona Paper and Boehmer Box) remained strong in Q3. Notwithstanding high raw material costs and a strong Canadian dollar, which increases relative competitiveness of U.S. manufacturers, Strathcona Paper and Boehmer Box posted solid results because of operational excellence and production efficiency.
In aggregate, margins remained below “cycle average” levels during the first nine months of 2011 for Forest due to the challenges in its U.S operations. Consolidation and permanent mill closures in the containerboard segment should assist the U.S. units of Forest Resources in the medium-term.
Phoenix Services International LLC
Doug Lane, President and Chief Executive
Phoenix Services International LLC (“Phoenix Services” or the “Company”) reported an OSHA recordable incident rate of 2.5 for the 12 months ended September 2011, relative to the national slag industry standard of 5.0. Again, the Company reported its most profitable quarter in its 4+ year history, besting its budget for both sales and profits.
All mill sites are running well, and Phoenix Services continues to benefit from positive macroeconomic trends in the steel sector. In October 2011, The World Steel Association announced its projected steel demand for full-year 2011. The report indicated a 6.5% increase in global steel use relative to 2010, with an 11.6% increase in the U.S. These statistics are consistent with the Company’s experience at its mill sites and are corroborated by domestic capacity utilization rates, which were 74.8% for year-to-date October 8, 2011 (as compared to 70.8% for the same period in 2010).
The Company has completed the plant design for its South African operations, and has placed the equipment orders with a local manufacturer. Phoenix Services’ slag sales in Romania continue to show strength, and the Company experienced its second 100,000+ ton slag sales month of 2011. Slag sales are an incremental revenue base for the Company. Slag’s main application is as a roadbase substitute for gravel and sand.
The Company continues to focus on operational excellence and attractive growth opportunities, and has the capital needed to execute its plans. The Company is actively bidding work in the U.S., Spain, Poland and Belgium. With six new mill site bids currently outstanding, we remain extremely optimistic about the prospective performance and growth at Phoenix Services.
Kurt Liebich, Chief Executive
RedBuilt continues to have a strong safety record, having achieved a recordable incident rate of 1.8 during Q3, a slight improvement over the 2010 recordable incident rate of 2.0.
RedBuilt’s key performance indicators suggest that we may be in the early stages of some improvement in the market. Year-to-date quoting has increased 9%, and although the majority of the gain can be attributed to higher quoting activity in multi-family applications, RedBuilt’s quarterly core commercial quoting activity increased year-over-year, and its level of quoting activity is up over 2010, which is an encouraging sign. However, with high unemployment, low consumer confidence levels and difficult financing conditions, the construction market will continue to struggle for the foreseeable future.
In Q3, RedBuilt completed a number of strategic transactions, which will strengthen the Company’s competitive position. In August, it concluded the restructuring of its working capital revolver to increase liquidity. In late September, RedBuilt purchased its facilities’ property and simultaneously sold the assets in a sale/leaseback transaction. This transaction will ultimately reduce RedBuilt’s fixed costs.
Additionally, at the end of August, RedBuilt purchased certain assets of Standard Structures, RedBuilt’s largest competitor in the western U.S. We are very excited about this transaction; we are pleased with the associates that we have added to our team, and we are confident that this acquisition will provide exceptional long-term benefit to RedBuilt and our investors as market conditions improve.
Wood Resources LLC
Bill Corbin, Chairman
Richard Yarbrough, President and Chief Executive
Wood Resources LLC (the “Company”) Q3 results were slightly improved over Q2 but much reduced from last year. Demand for structural panels remained weak as U.S. domestic demand has remained essentially flat since the end of 2010.
The Company’s continued focus on improving safety expressed itself in its best-ever safety performance as measured by RIR. Q3 was the best quarterly performance (RIR of 0.5) achieved by the Company in its history and was the third consecutive quarter of improvement. The RIR for the trailing 12-month period is also the best so far achieved at 2.1.
Moncure Plywood continues to lead the Company’s financial performance in 2011. Mill operating performance has been excellent, leading to record production and operating efficiency with resultant lower costs. Chester Wood Products also operated very well for the quarter with significantly improved labor productivity and tight cost controls. The Company’s overlay specialty business, Olympic Panel Products, reduced crewing levels to balance capacity with market demand.
Although the markets remain challenging, a major producer of southern plywood announced in early September the curtailment of three plywood mills totaling approximately 1 billion square feet of capacity. This announcement combined with the rundown of inventory in the supply channel has caused plywood pricing to move upward in Q4 and has been cause for guarded optimism as we end 2011.
Michael L. Marziale
June 28, 1957 – October 24, 2011
Michael L. Marziale passed away on October 24, 2011. Mike was an Atlas Operating Partner and most importantly, a good friend to all of us at Atlas. He was an exceptional thinker and he brought great knowledge, experience and insight to many Atlas ventures. Mike was also focused on new ventures in process technologies and advised a number of small companies while serving as a board member. He had over 25 years of experience with large manufacturing corporations, including senior leadership roles and general management roles with Westvaco and NewPage. Mike played a major role in the consolidation of the coated paper industry as a leader in mergers, acquisitions, divestitures, and asset rationalization. He was a key driver in the Coated Paper Trade case currently in process at the Department of Commerce. Mike earned a Ph.D., M.S., and B.S. in Mechanical Engineering from Rensselaer Polytechnic Institute. We miss Mike, and we send our sympathies to his wife, Maggie, and his family.