Atlas Third Quarter 2012 Review

A report to our Partners, Investors, Employees and Friends

We and our portfolio companies made steady progress in the third quarter, although the domestic economy continued a softening trend established in the prior quarter. The “downshifting” in the economy that occurred toward the end of the second quarter continued in the third, as evidenced by a body of economic data as well as weak third quarter earnings reports by a growing number of public companies. The result is that we remain stuck in a period of slow and unsteady growth for the foreseeable future.

Nonetheless, the prevailing environment has its compensating benefits. First, in our experience, “Performance Organizations” of the sort we are building in each of our portfolio companies tend to exceed the mean performance of peers by a wider margin in tougher times. Second, the environment continues to encourage the creation of stress and distress in underperforming companies and also persuades large corporations to divest of their laggards. As in the first half of 2012, Atlas companies continued to experience improved financial results relative to the prior year. Our companies achieved important milestones in the quarter which set the stage for continued advances in performance in quarters ahead.

The trend of strong safety performance continued in Q3 2012. The efforts of all members of the Atlas family resulted in an aggregate OSHA recordable incident rate (“RIR”) of 1.32 for the quarter. For comparison, the average RIR was 2.24 in 2010 and 1.94 in 2011. AGI-Shorewood Asia, Boehmer Box, Bridgewell Resources, Chester Wood Products, Detroit Thermal, Hamtramck Energy Services, Ivex Specialty Packaging, Moncure Plywood, Pangborn Germany, and Pangborn USA operated throughout Q3 2012 without a recordable incident.

Several notable events took place during the third quarter of 2012. Soundview Paper Company LLC completed its first full quarter under Atlas ownership and has begun to show evidence of a bright future. Detroit Renewable Energy LLC reached an important operational milestone at the end of the quarter. The completion of the major capital projects which were designed to make DRE’s energy-from-waste facility more reliable occurred in September. Phoenix Services International continued its outstanding growth with new, high-speed slag processing plants at numerous sites. Finch Paper completed a refinancing which gives it greater flexibility going forward.

Just after the close of the quarter, we announced our acquisition of Masco Framing Corp. from Masco Corporation, creating a new platform which has been named Erickson Framing Holdings LLC. While we believe the economy remains fragile with very significant unresolved challenges, we have gained conviction about the sustainability of the recovery in the construction market, particularly residential construction. The acquisition of Masco Framing provides us with further exposure to this recovery.

Finally, we want to express our appreciation to our many friends who shared their concerns about our well-being as Sandy attacked. We are very thankful that the Atlas Family experienced no loss of life or serious injuries as the devastating storm blew through. For those less fortunate, our collective best wishes go out to them.

Thank you for your interest and continued support.

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



Special Section:
Erickson Framing Holdings LLC

On October 19, we closed the purchase of the operating assets of Masco Framing Corp. (“MFC”) creating Erickson Framing Holdings LLC (“Erickson”). 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. Erickson offers a unique value proposition, operating its own lumber and panelization yards, in which wall panels and trusses are pre-fabricated, in Chandler, AZ and Roseville, CA.

In 1975, Phil Erickson founded MFC’s predecessor as a framer for major homebuilders in Phoenix, AZ. In 1986, he acquired a Phoenix truss facility to complement his framing operations. In 1996, he started the Northern California operation, offering the same wall panel and truss capabilities as Arizona. As Phil Erickson’s company grew through the 1990’s, it transitioned from traditional stick-framing – a process whereby framers construct walls from lumber delivered to the construction site – to panelized framing, the current process utilized by MFC whereby wall panels are constructed in a factory setting and transported to the construction site for installation. The benefits of factory pre-construction of framed panel components are (i) lower total cost resulting from less waste and tighter management of labor inputs, (ii) higher and more consistent quality and (iii) quicker cycle-time for home builders.

The investment thesis which supports the Erickson transaction is comprised of the following:

Attractive Market Fundamentals. While the downturn in construction activity has persisted for five years, recent data suggests that these markets are beginning to recover. Residential construction permits in Phoenix are up 100% year-over-year through July 2012 and Northern California has seen similar improvement, pointing to improving market conditions.

Attractive Purchase Price. Due to its decline in profitability post-crisis, we are acquiring MFC for an attractive valuation relative to the company’s historical performance. Although the company generated cash losses in recent periods, Erickson’s new management is executing a plan that will result in expanded profitability as the markets recover.

Competitive Asset Base. Erickson operates lumber yards in Arizona and Northern California, allowing the company to control its supply chain and purchase wood directly from lumber mills. This mill-direct strategy assures superior wood pricing relative to framers who must buy their lumber from local lumber yards.

Experienced and Capable Team Assembled. Atlas has assembled an excellent team to lead Erickson to profitability, composed of certain historic MFC managers and two Atlas Operating Partners, Jim Chamberlin as CEO and Rich Driggs on the Board of Directors. By empowering the historic MFC managers, reinstating an incentive system, promoting key performers and controlling their business, the management team will put the company back on the path to profitability and world-class performance.

Executable Restructuring Plan. Atlas and management have crafted the plan to immediately reduce the cash burn rate of Erickson and ultimately, to achieve breakeven results without any market related improvement in pricing or sales volumes. In addition, we believe that deploying the Atlas Safety Program will have a major, positive impact on safety and ultimately on the cost of workers’ compensation and other adverse safety-related expenses.



AGI-Shorewood Group
Mike Ukropina
Chief Executive Officer

AGI-Shorewood Group (“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 in January 2012.

ASG achieved an RIR of 1.2 in the third quarter, continuing excellent performance on this mission-critical metric. Safety performance was improved in the third quarter relative to the second in the Global Gravure/Asia division. The division had no lost work days during the quarter and recorded an RIR of 0.3. The trends were disappointing in the company’s other three divisions. The North America division had two more recordable incidents in the third quarter relative to the second and an RIR of 1.8. Europe logged one more recordable in this most recent quarter which brought its RIR to 0.7, and Shorewood de Mexico had an unacceptable RIR of 2.7. Improving safety performance in Mexico and the other ASG divisions remains a high priority for the management team.

Financial results improved during the third quarter relative to the first half, particularly in North America, as the seasonal increase in volume ran through a much leaner manufacturing base. The quarter saw stronger performance in the Asian tobacco and consumer businesses. Despite lower sales volume, the Mexican division accomplished a number of important objectives during the quarter including the continued reduction of operating costs. The North American division experienced its most dramatic improvement since the combination of AGI and Shorewood. The improved performance is attributable to excellent leadership by the North America management team. During the third quarter, in addition to the expense reduction, the equally important process of hiring new sales reps was completed.

Benefits from the implementation of cost savings and synergies that had been the primary focus of our management team throughout 2012 became apparent during the third quarter, particularly in the North America division. While there is much work still to be done, the progress the team has made is significant and has established an excellent foundation for future performance.



Bridgewell Resources LLC
James Toya

Kyle Burdick

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 third quarter of 2012, Bridgewell sustained its 0.0 RIR, a record that the company has maintained since formation.

This has been a year characterized by rapid growth, and a resolve to apply the lessons that we have learned during that growth. Bridgewell has made great strides in managing working capital utilization, a result of significant focus by the management team. 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, accelerate growth and further diversify 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 and surrounding municipalities with safe, reliable and costeffective solutions for  clean energy and waste disposal. The company experienced one recordable incident during the third quarter across all of its business units. On a trailing twelve month basis, we have had two recordable incidents and have recorded an RIR of 0.9, which remains exemplary by industry standards.

Third quarter 2012 marks a significant turning point at DRE as our team completed significant planned investments at Detroit Renewable Power (“DRP”). The completion of these investments is a necessary precondition to sustainable improvement in operational performance at DRP. In the third quarter the company also made significant progress on its growth initiatives.

After many months of planning, DRE established a new subsidiary, Detroit Renewable Cooling (“DRC”), to pursue opportunities in the district cooling market. Comparable to district heating services provided by Detroit Thermal (“DT”), district cooling is a low-cost and environmentally preferred solution for providing central cooling in dense urban environments. Importantly, DRC leverages DT’s existing infrastructure, creating a “win-win” for customers as well as the company. DT has earned a significant new customer and entered into the final stage of negotiations with others. In addition, HES completed the extension of a long term contract at an existing customer facility.



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. Our YTD RIR was 1.83.

Finch showed significant growth compared to the same quarter a year ago. Improved financial performance was driven by reduced labor and maintenance costs coupled with usage reductions of chemicals and energy resulting from continuous improvement initiatives.

According to a September 2012 report by the American Forest & Paper Association, Q3 shipments of uncoated free sheet declined by 4% from 2011. Despite these headwinds, Finch’s shipments for the quarter increased over the same quarter of the prior year, driven by growth in our digital products. Paper production remained strong throughout the period.

Our continuous improvement initiatives and performance metrics implemented during the past year have contributed significantly to our second consecutive quarter of improved financial performance. Combined with our continued efforts in selling higher value specialty papers, we remain optimistic about our performance for the remainder of 2012.



Larry Richard
President and Chief Executive Officer

Forest Resources LLC (“Forest”) experienced no lost time accidents, but did incur three recordable incidents during Q3 2012. Forest’s consolidated RIR for Q3 2012 was 1.9 compared to the 3.2 industry average.

Forest’s financial results have benefited from favorable fiber and energy prices. Hartford City Paper increased its production level compared to the third quarter of 2011. Orders and pricing remain strong in HCP’s end markets. Production at Ivex Specialty Paper (“Peoria”), our specialty grade mill, increased compared to the third quarter of 2011. Peoria continues to focus on new product development. Sales margin pressure in a continuing weak folding carton environment was partially offset by reduced manufacturing costs driven by the use of lighter weight corrugated sheets and improved operating efficiencies.

The North American folding carton market remained soft in the third quarter of 2012. Despite this, Strathcona Paper’s profitability improved in Q3 2012 relative to Q3 2011, a result of lower fiber and energy input costs. Reflecting the softness in the folding carton market, Q3 sales volumes at Boehmer Box were down year-over-year. The first nine months of 2012 saw high levels of quoting and customer development at Boehmer Box. This has resulted in Boehmer being awarded a substantial amount of annualized new business that will be transitioning to Boehmer during the upcoming quarters.

Containerboard markets are stable and fiber prices are expected to remain close to current levels for the fourth quarter. Continued discipline by major producers is expected to maintain production/demand balance. Containerboard producers have announced a price increase for Q4, the first increase in almost 30 months. The folding carton and CRB markets are expected to modestly improve in the fourth quarter.



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 Q3 2012, The Pangborn Group had one lost time injury, the only one for the period year-to-date September 2012. In the quarter, we continued our practice of safety audits and safety training. We are implementing our CI/Lean strategies and have conducted training for our employees worldwide.

Our employees have embraced the CI/Lean concepts and the projects are progressing well, with first recordable results in operational performance and reduction of working capital ratios. Profitability was impacted compared to the same quarter in the previous year. This is primarily the result of customer requests to delay equipment shipments from Q3 to Q4. Market conditions in North America and China are still favorable. In Europe, while quoting activity remains robust, our customers are hesitating to commit to purchase orders. We expect, however, that a number of equipment orders will be placed in Q4 for delivery in 2013. Our activities in the BRIC countries, especially China and Russia, continue to result in new project opportunities and orders. Our focus on Russia is starting to create business. We have experienced increasing parts orders and are negotiating significant equipment orders.



Phoenix Services International LLC
R. Douglas Lane
President and Chief Executive Officer

Phoenix Services International LLC (“Phoenix”) reported an OSHA recordable rate of 1.9 for the twelve month period ended September 30, 2012, which compares favorably to the steel industry standard of 5.0. Phoenix continues to report profitable results and has seen a material jump in revenue.

Throughout the third quarter, Phoenix installed new, high-speed slag processing plants at numerous sites. At Burns Harbor, Phoenix installed the highest capacity slag processing plant in the world, which we believe will begin to show its impact on future operating and financial results. Both Phoenix sites in South Africa have their new plants operational and both plants are achieving their projected nameplate capacity. At our Galati, Romania site, we installed an additional slag processing plant to accommodate the mill’s needs.

At Galati, Phoenix is now providing scrap upgrading to increase the iron content of the scrap returned to the blast furnace. Based on Phoenix’s performance in its slag processing and scrap upgrading operations, Galati has awarded Phoenix the service contract for its scrap yard. Separately, ArcelorMittal has awarded Phoenix the slag processing contract at its Ghent facility in Belgium.

We remain focused on working hard every day at our existing business. The Company continues to focus on operational excellence. We remain extremely optimistic about the prospective performance and growth.



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. For the nine months ended September 30, 2012, Redbuilt had one recordable safety incident and experienced an RIR of 0.5. While we are pleased with this world class performance as it is an indication of the dedication of our associates to the principles of safety and continuous improvement, we continue to strive for our objective of zero recordable incidents.

The core commercial construction market continues to show marginal improvement. The consensus view in the industry is that the construction markets are starting to recover, led by improved conditions in the residential market. Most experts believe that residential construction will improve by 15%-20% in 2013 relative to an estimated 750,000 housing starts for 2012. This level of activity is still well below historical averages, but it appears that the industry will gradually recover to levels that can be supported by long-term demographic trends (1.3 million to 1.5 million housing starts). This trend is positive news for RedBuilt since the light commercial construction markets tends to lag the residential market by 18 months. Given this trend, we expect our market to continue to improve over the next 12-24 months.

We continue to make gains in our diversification efforts. We have experienced growth in our Private Label, Industrial and International market segments. All of these segments were developed since we purchased the business in 2009, and we expect that over time, this diversification will offset the inevitable cyclicality in the commercial construction industry. The addition of the new Residential Business segment will provide further diversification to the business portfolio. Business conditions should remain strong in the 4th quarter and we expect to continue to improve our financial performance in 2013.



Soundview Paper
George Wurtz
President and Chief Executive Officer

Soundview Paper Company LLC (“Soundview”) is our portfolio company based 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, foodservice and janitorial supply companies. Soundview commenced operations in April 2012, when it acquired Marcal Paper Mills, LLC.

On a year-to-date basis through September 30, 2012, Soundview experienced an RIR of 1.7. Management has focused on a number of initiatives to improve safety performance, including a Safe Employee Development Program and a STOP Program to create safety training, peer examples and awareness. Soundview has also initiated its Lean, Orderly and Clean program to address housekeeping and unsafe conditions and to introduce the foundational elements of lean manufacturing, continuous improvement and performance excellence.

Soundview performed robustly in the third quarter; showing the immediate benefits of management’s implementation of a process of “rapid transformation”, focused on each of the core functions of the business. Led by its able management team, Soundview is already seeing the beginnings of a transformation in safety performance, sales effectiveness and operational results.

On the sales front, Soundview launched 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. Among Soundview’s product initiatives are significant improvements in product quality and performance in its recycled bath tissue that tested at parity in terms of key consumer attributes with other popular branded bath tissue in the core East Coast region.

On the operations front, management has taken actions to drive improvements in productivity, efficiency, yields, and consistency. Papermaking at Soundview’s predecessor could be described as an “art”; papermaking at Soundview is rapidly becoming a “science”. Management anticipates that continued improvements in training, standard operating procedures and equipment maintenance will establish a foundation for dramatic improvements in productivity and production capacity in future quarters.

We are in an environment in which energy and raw material costs remain at historically low levels. Given that 75% of our costs are composed of energy, labor and materials, we are laying plans to deploy the capital available to us through the Grow NJ program to decrease our energy and material costs.

We are excited about the potential of Soundview and the rapid improvements that have been accomplished in a very short period of time.



Wood Resources LLC
Bill Corbin

Richard Yarbrough
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. Safety performance during the third quarter was much improved, with a recordable incident rate of 0.9, compared to a second quarter 2012 RIR of 1.9. Both Chester and Moncure had no recordable incidents in the quarter. Third quarter 2012 financial results were significantly improved from the same period last year. These improved results were driven by commodity products pricing strength and moderate fiber cost. Commodity panel demand remained steady and in balance with supply levels.

Chester Wood Products’ profitability for the first nine months of 2012 was the highest ever under Wood Resources ownership. These results demonstrate Chester’s growing strength as a well-situated mill within a supply constrained marketplace. Significant capital project work was accomplished during the quarter, on time and on budget, that will provide added reliability to Chester’s operations. Moncure Plywood’s third quarter financial results also set a record. The specialty panel market demand for Olympic gradually improved through the third quarter, allowing order files to grow. The Company has proactively embraced Lean manufacturing concepts and is well along in implementing meaningful initiatives.

Looking to the fourth quarter, we expect some shift downward in demand during the holiday season and a corresponding decline in volumes shipped. Overall, however, the industry seems prepared to maintain balanced supply. Many early indicators of a meaningful expansion in housing and commercial construction sectors are also positive predictors of future financial performance.