Domestic economic activity exhibited improvement in Q4 2011, as U.S. GDP expanded by 2.8%. However, there is little in the fundamentals that gives us confidence that growth at this level will be sustained, certainly not until the housing and construction markets begin expanding and employment levels demonstrate more vigor. As well, the EU crisis, which appears already to have retarded the Eurozone recovery (and may well lead to a European “double-dip” in 2012) is likely to negatively impact the still-nascent U.S. recovery and to sustain the slowdown in China. We anticipate slow growth in the U.S. in 2012, weakness and financial market volatility in Europe and slowing — but still strong — growth in China in 2012. We believe our companies are well positioned to benefit from this economic environment, and further, that businesses weakened by the recession and with limited sources of capital will seek safe harbor through transactions, creating a continued flow of new business opportunities for Atlas.
Progress continued in safety performance in Q4 2011. The efforts of all members of the Atlas family resulted in an aggregate OSHA recordable incident rate (“RIR”) of 1.68 for the quarter — the lowest RIR since we began tracking aggregate performance in 2007. As performance continues to improve (six of the past eight quarters have resulted in best results to date), we recognize that further progress toward world-class safety becomes more challenging. Notably, Bridgewell Resources, Detroit Renewable Power, Detroit Thermal, Hamtramck Energy Services, Hartford City Paper, Ivex Specialty Packaging, Moncure Plywood, RedBuilt, Shillington Box Company and Strathcona Paper operated throughout Q4 2011 without a recordable incident.
Our annual meeting took place in mid-January in Naples, FL. Our development workshops, which focused on Cultural Change and Leadership, Safety and Continuous Improvement, and Managing Change, were great forums for our Operating Partners and Management Partners to explore and discuss best practices that can be implemented across our family of companies. With the input of the group, we introduced a new paradigm for Atlas’ values, which we termed our 4 ‘P’s. We have included the 4 ‘P’s at the end of this letter and would welcome any input to refine these values. Another output of the annual meeting is the launch of Atlas Lean, a resource led by Mark Young (the former operations manager at Boehmer Box Company) that is available to assist our businesses in driving lean techniques into their business process. We are excited that Mark has agreed to take on this challenge and are confident that we will see dramatic efficiency improvements resulting from Atlas Lean.
We are pleased to report that AGI completed its acquisition of the U.S. and International operations of the Shorewood Packaging business (“Shorewood”) of International Paper Company in Q4 2011. The combined enterprise is known as AGI‐Shorewood. The combination with Shorewood 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. As a combined enterprise, AGI-Shorewood operates from 33 locations across four continents. The addition of Shorewood provides AGI with instant diversification away from the home entertainment markets, which have negative long‐term demand characteristics, and into the more robust consumer and tobacco packaging markets. Shorewood has a significant presence in Asia and Latin America, where AGI, prior to the transaction, had no presence. Finally, the combination provides AGI’s plastics business with access to new markets through Shorewood’s consumer packaged goods customers. Shorewood previously had no plastics capabilities.
The rate of incoming new investment opportunities accelerated in Q4 2011 and into Q1 2012. A growing number of financially distressed small- and middle-market companies are seeking operational and financial solutions, including sales and restructurings. Underperforming businesses wounded by a sluggish economy are challenged to sustain their existing capital structures and are increasingly unable to access capital to refinance maturing debt and/or for liquidity. Traditional sources of debt capital to finance these companies declined rapidly in the second half of 2011 as volatility increased in the financial markets and investors moved capital into safer investments. In addition, increased government regulation of banking institutions further constricted capital availability to all but the strongest of credits. These dynamics are increasing the number of companies in need of a financial lifeline. The most compelling of these opportunities are those in which we can utilize the crisis of financial distress and operational stress to purchase the business at an attractive valuation and utilize our operational and industry expertise to enhance performance soon after closing.
Thank you for your continued support.
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Michael Ukropina, Chief Executive
AGI-Shorewood is a leading global creative services and packaging provider to the entertainment, video game, music, technology, telecom and personal care industries. Atlas formed AGI by acquiring the AGI media packaging business of MeadWestvaco Corporation. AGI acquired the U.S. and international operations of the Shorewood Packaging business of International Paper Company in Q4 2011. The combined enterprise is known as AGI-Shorewood.
Safety performance in 2011 was good for AGI. AGI’s European Operations had an RIR of 1.2, compared to 1.7 in 2010, and two of its printing plants won health and safety awards from the British Print Industries Federation. In the U.S., AGI achieved an RIR of 1.1, as compared to 1.3 in 2010, and did not record a single lost workday for the year. The addition of Shorewood brings a business that also has an excellent safety focus and strong record — Shorewood achieved an RIR of 0.6 in 2011. Safety improvement remains a key area of focus for AGI‐Shorewood and we look forward to even better safety results in the years ahead.
Q4 2011 performance was weaker than 2010 because of an earlier holiday shipping season in 2011 relative to the prior year. The impact of this factor was to “front load” some of 2011’s comparatively stronger annual profits into earlier quarters. Importantly, the weakness in Q4 2011 did not reflect any loss of AGI market position among its major customers.
AGI’s plastics business performance remained solid in Q4 2011. For AGI’s European plastics business, Amaray, volume was strong through November before tapering off somewhat in December. New products introduced by Amaray during the quarter, including a large plastic multi‐disc box known as the “Mega Pack” and a multi‐disc case for BluRay specifically for the Harry Potter release, sold out. Video game packaging sales also were strong during the pre‐Christmas period, driven by strong sales of games for the Nintendo Wii and titles such as Assassins Creed, FIFA 12, Battlefield 3 and Modern Warfare 3 for the PS3 and Xbox. In addition, prices for Amaray’s primary raw material input, resin, fell during Q4, which enabled Amaray to re‐capture margin it lost during the middle of 2011 when resin prices peaked. Amaray US, AGI’s U.S. plastics business, performed well in October and November but slowed in December as a result of inventory reductions among its customer base. One of the company’s smaller competitors announced its intention to exit the media packaging business, positioning Amaray US to capture additional market share. We expect the addition of Shorewood to add to the future profitability of AGI’s plastics business as it gains access to the many consumer products packaging accounts that are existing customers of Shorewood.
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 North Pacific Group out of a Federal receivership.
Bridgewell has continued the positive trajectory of recent quarters. While the fourth quarter traditionally is a seasonally slow period for the industries Bridgewell serves, Bridgewell exceeded expectations in Q4 2011, keeping pace with its Q3 performance. The strong performance in the quarter was driven by several large wind turbine transactions in Bridgewell’s Utility and Construction division, along with continued strength in the Mats division and the recently developed Contractor Direct division.
Bridgewell continues to invest heavily in its traders and related support infrastructure as a primary engine of its growth strategy. The Q4 additions included new traders for the rapidly growing Specialty Building Products division, which serves retailers, distributors, wholesalers and industrial users of building materials and specializes in liquidations, manufacturing seconds, excess inventory, and on- and off-grade building materials. Also, “Sales in Backlog,” a Key Performance Indicator used to track near-term revenue trajectory as well as trader activity, has remained positive, indicating the Company’s investment in its traders is fueling continued growth.
Detroit Renewable Energy LLC
Steve White, Chairman
Detroit Renewable Energy LLC owns a group of infrastructure assets providing Detroit, MI, and surrounding municipalities with safe, reliable and cost-effective solutions for renewable energy and waste disposal. The operating units of DRE are (i) Detroit Thermal, LLC (“DT”), a district heating business that provides efficient heat to most of the buildings in the Detroit central core; (ii) Detroit Renewable Power LLC (“DRP”), an 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 used to produce electricity that is sold to the local utility and steam that is sold to DT; and (iii) 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 for the second straight quarter, DRE achieved a 0.0 RIR (no recordables) and had a 1.5 RIR for the full year 2011. DRE also delivered its best quarter of operational performance in Q4 2011. In late November 2011, DRP completed a significant phase in its capital expenditure program, rebuilding and upgrading two of its three power boilers that convert the plant’s municipal solid waste into steam. In addition, DRP was awarded $4 million of Brownfield incentive tax credits by the State of Michigan and also signed a multi-year agreement with DTE Energy for the sale of its renewable energy credits.
DT continued to improve its operations and sales in Q4. During the fourth quarter, DT purchased 90% of its steam requirements from DRP as a result of improved reliability at DRP. DT also closed on two new customers, the Wayne State University Pharmacy Building and the Park Avenue Hotel.
Finch Paper LLC
Joseph F. Raccuia, President and Chief Executive
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 during Q4 2011. The RIR for the quarter was 1.89, and the Lost Time Day Away Rate (LTDA) was 0.47. Overall, 2011 ended with a RIR of 2.42 and a LTDA rate of 0.88. Finch remains confident in its ability to achieve its five-year plan for world-class safety performance.
The paper industry continues to be severely impacted by overcapacity in both the coated and uncoated markets, driven by declining demand. However, Finch volume remained strong in 2011, finishing the year higher than 2010. A decline in financial performance from 2010 was largely attributable to work system infrastructure investments made in 2011 and increased raw material, chemical and energy prices. Finch experienced some relief during Q4 in both energy and fiber costs.
As a result of Finch’s aggressive cost reduction initiatives, including a significant reduction in headcount during 2011 realized through work system redesign, the Company has begun to see improvement in both its fixed and variable costs. This work, combined with its efforts toward safety improvements, managing product mix and in strategic sourcing, is helping position the Company for better results in 2012 in what is expected to remain a very challenging marketplace.
Forest Resources LLC
Larry Richard, President and Chief Executive
Forest Resources LLC, inclusive of its now wholly owned Canadian subsidiaries, Boehmer Box Company and Strathcona Paper, had zero lost-time incidents and one recordable incident during Q4 2011. Forest’s RIR for the 12 months ended Q4 2011 was 2.5, compared to an industry average of 3.2.
Hartford City Paper maintained steady production levels during Q4 2011, despite the transition of higher-value kraft grades from its Joliet mill. Ivex Specialty Packaging’s mill in Peoria also produced well in the quarter. Shillington Box’s 2011 Continuous Improvement Program, including waste reduction initiatives and improved production efficiency initiatives, has been key in driving profits in a very price-competitive box market. Strathcona Paper and Boehmer Box remained strong, primarily due to lower selling and administrative costs.
In January 2012, Forest completed a $93 million refinancing. The proceeds were used to refinance existing debt, to provide ongoing working capital and to buy out a minority shareholder in CanAmPac (the parent of Strathcona Paper and Boehmer Box Company). As a result of the equity purchase, the two companies are now wholly owned subsidiaries of Forest. Prospectively, Forest is focused on maintaining profit margins through waste reduction, improved production efficiency and other lean manufacturing techniques.
The Pangborn Group
Henrik Krabsen Jensen, Chief Executive
The Pangborn Group designs and markets shotblast surface preparation equipment and provides aftermarket replacement parts and services internationally. In Q4 2011, market conditions in all major regions remained favorable. Equipment sales in Q4 2011 were ahead of plan, ahead of the prior quarter, and ahead of the same period last year. The Company’s activities in the BRIC countries, especially China, are resulting in many new equipment orders.
In 2012, the Company expects to double equipment sales in China and is increasing its focus on the aftermarket potential. Planned sales and marketing activities in India, Brazil and Russia are on track, and the Company is working on several projects that it expects will be realized in 2012. The $5 million equity financing of the Pangborn Group, which closed in December 2011, provided the Company with liquidity to fund expansion and the final payment of the 2009 purchase of the European operations.
Phoenix Services International LLC
Doug Lane, President and Chief Executive
Phoenix Services International LLC reported an OSHA recordable rate of 2.7 for the year ended December 2011, which compares favorably to the 2010 rate of 2.8 and the national slag industry standard of 5.0. Phoenix reported its most profitable quarter in its 5-year history, besting its budget for both sales and EBITDA.
In January 2012, Phoenix completed the acquisition of the largest mill services provider in France, Gagneraud Industrie (“GI”), now known as Phoenix Services France. GI began operations in the early 1900s and has a strong reputation for providing critical services to steel mills and for being a leading supplier of slag and slag cement to the construction and building materials industries in France. Contemporaneous with the acquisition, Phoenix closed on a new $250 million credit facility led by BNP Paribas. This credit facility was utilized to fund the transaction as well as refinance certain of the Company’s existing debt obligations. As a testament to the strength of the Company, Phoenix received a B+ rating from Standard and Poor’s and a B1 rating from Moody’s as a first-time issuer.
Including the four GI mill sites acquired, the Company now provides mill services at 24 sites around the world. In Q4 2011, the Company began operations at its two sites in South Africa and commenced operations at Burns Harbor, the largest steel complex in North America. Additionally, Phoenix consolidated its ownership in its Alabama site, buying out its joint venture partner.
The Company continues to focus on operational excellence and attractive growth opportunities, and has the capitalization needed to execute its plans. We remain extremely optimistic about the prospective performance and growth.
Kurt Liebich, Chief Executive
While the overall level of residential and commercial construction activity remains relatively weak, all of RedBuilt’s leading indicators continue to move in a positive direction. Quoting in the core commercial segment improved in Q4 2011 compared to the comparable period in 2010. Additionally, RedBuilt’s bookings (signed work) increased by 25% in Q4 2011. This improvement in overall construction activity continued through January 2012.
Sales in Q4 2011 increased compared to Q4 2010. RedBuilt continues to benefit from an improving economy, and its diversification efforts are starting to yield measurable results. Stronger volumes improved overall fixed cost absorption in Q4 2011 compared to 2010. The business achieved break-even performance in the second half of the year.
We are optimistic about RedBuilt’s prospects for 2012. RedBuilt’s plan forecasts sales growth in 2012, and recent quoting activity supports these growth assumptions. Business will continue to improve, particularly in the Southwest, as RedBuilt realizes the benefits of the acquisition of certain assets of Standard Structures, completed in August 2011.
Wood Resources LLC
Bill Corbin, Chairman
Richard Yarbrough, President and Chief Executive
Wood Resources LLC’s Q4 2011 results were improved over Q3. Although commodity plywood markets remained challenging, a major producer of southern plywood completed the curtailment of three plywood mills totaling approximately 1 billion square feet of capacity in Q4 2011. This reduction in supply helped plywood pricing move upward throughout Q4 and was a significant contributor to the improved results.
The safety of our associates is a top priority, and we are pleased to report that in 2011 the Company achieved its best annual safety performance with a RIR of 2.2, down from 2.8 in 2010 and 5.3 in 2009. The RIR in five of the past six quarters has been below 2.5. Although this reflects substantial improvement, we firmly believe we can continue this trend toward an accident-free workplace.
Chester Wood Products continued to operate well, generating improved labor productivity despite scheduled downtime in Q4 2011. Moncure Plywood also showed steady operational improvements in 2011. Moncure produced substantially more plywood and veneer in 2011 compared to 2010, and sales volume grew by 20%. Olympic Panel Products struggled with commercial and industrial market weakness, and was impacted by high fiber costs. Cost savings and improved efficiency are expected to return Olympic to positive performance in Q1 2012.