Mr. Dirk Maritz reports
CEO & PRESIDENT LETTER TO SHAREHOLDERS - ATLAS ENGINEERED PRODUCTS REPORTS 14% REVENUE GROWTH AND A SOLID CASH POSITION IN Q1 2020 FINANCIAL AND OPERATING RESULTS
Dear Atlas Engineered Products Ltd. shareholders,
During these unprecedented times, we at Atlas trust that you and yours
stay safe and stay healthy.
Atlas has ended the first quarter of 2020 with
14-per-cent revenue growth
over Q1 2019. Throughout COVID-19, all of Atlas's companies were deemed essential businesses, and all of our locations across Canada were busy working to supply our customers. During this time, not all locations were impacted evenly. Our B.C. operations were minimally impacted and throughout Q1 and into second quarter 2020 continued to experience record-level growth. During this same time, Eastern Canada saw restrictions on construction permit approvals that contributed to revenues decreasing at one of our Ontario locations. We continue to closely monitor developments with this pandemic, and will continue to respond to provincial and federal updates with the urgency they deserve. We have developed and implemented a pro-active company-wide approach and response to how we navigate potential impacts to Atlas and maintain our social responsibilities, as well as minimize the spread of the coronavirus (COVID-19). We continue to have a solid business continuity and interruption plan, which we are diligently executing.
The company's revenue objective for 2020 is to reach an annualized revenue run rate of $40-million to $45-million with a normalized EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 10 to 15 per cent, excluding targeted acquisitive activity. The company will continue to assess these 2020 targets for achievability due to the economic conditions associated with the COVID-19 pandemic. As reported in our Q1 2020 financial and operating results (see press release dated June 30, 2020), the company exceeded its first quarter revenue targets when compared with this plan, and 14 per cent over its first quarter 2019 results.
Given the information available today, on a pro forma basis and taking seasonality into account, management believes a normalized EBITDA margin of 10 to 15 per cent may be achievable for 2020, despite the impact of COVID-19 on our industry, the country and internationally. Targeted acquisitions, the addition of new product lines and sales staff to specific regions, the focus on cost savings, and the continuing and lasting impacts of the COVID-19 pandemic will all be contributing factors to this target being achieved. We have entered Canada's peak building season, and economies are reopening in all the provinces we serve. Quoting and order activity has increased significantly, and we continue to land more and more medium- to large-sized jobs.
Atlas's B.C. operations continue to lead the group into a strong Q2, with record-level revenues. Quoting levels and project wins in Manitoba have been impressive as the regular construction season picks up in that province. The province of Ontario has started its reopening over the last number of weeks, and, as a result, we have seen considerable amounts of quoting taking place, over double what we saw in the weeks before their reopening phases started. Backlogs in construction permitting have been caught up, revenues are growing at a notable pace, and Atlas is hiring and calling back staff to keep up with demand.
Over all, we anticipate revenues for second quarter 2020 to improve significantly, and we expect to return to a strong, positive EBITDA margin. Over the last quarter, we have installed and commissioned a new wall-manufacturing line at our Nanaimo operations, and customer interest is very positive. In a booming construction market where finding skilled labour continues to be a challenge, this product line offers customers tremendous time savings, consistent quality and fewer people on construction sites. Although Atlas saw slight impacts in Eastern Canada for Q1 top-line revenues, we are witnessing a dramatic improvement in demand for this region, with some operations reporting over 100-per-cent quoting increases and healthy conversion rates. Our technical designers are back at work, and in some areas, we have had to increase our capacity to meet demand.
Business update -- Q1 2020
As we now are heading into Canada's peak building season and we are seeing COVID-19 curves flattening, I am both humbled and pleased to share with you that Atlas has met and, in some cases, exceeded our expectations during this quarter. Revenues were up 14 per cent, mainly attributable to organic growth, and our cash position remains strong.
Atlas is in its third year as a public company, and we believe it is an opportune and appropriate time to reflect briefly on our progress to date, comment on what we see as our path forward, and showcase to you some key messages for 2020 and beyond.
Despite the current challenges and unknown effects of COVID-19 as they relate to our business, Atlas is in a solid financial position.
Atlas has strong liquidity and entered 2020 with an improved position over the previous year. We continue to increase our order book on the back of an exceptional turnaround in 2019, and we closed an
oversubscribed private placement in Q1 2020.
In light of the developing global pandemic and surrounding uncertainty, we took a conservative and prudent approach, and completed a detailed evaluation of our balance sheet. The company instituted an aggressive cash preservation strategy, considering the economic conditions in both current and future markets. It is notable that we absorbed $263,016 in one-time costs for the quarter, which included continuing restructuring and severances, as we continue to combine functions and maximize synergies, and some necessary developmental and ramp-up organizational costs for the anticipated product launches and acquisitions in 2020.
Overall revenue for the three months ended March 31, 2020, was $7,097,979 compared with $6,216,908 for the three months ended March 31, 2019. This represents overall growth in revenue of 14 per cent in comparison with the three months ended March 31, 2019.
Gross margin for the three months ended March 31, 2020, was 16 per cent, which was down from a gross margin of 19 per cent for the three months ended March 31, 2019. Gross margin declined in first quarter 2020 mainly due to lumber price volatility at the beginning of 2020. At the beginning of 2020, the price of lumber rose sharply in anticipation of the 2020 summer and fall building season. The largest of these increases occurred in January and February, when most winter work being completed had already been quoted and ordered in 2019 at lower lumber prices. As lumber prices increased, inventories were purchased at higher pricing in the beginning of 2020 to meet demand. Lumber prices fell sharply from mid-February, 2020, as the COVID-19 pandemic hit North America. Atlas's vendor-managed inventory had to be depleted at the higher values during a time where the market was scrambling to get volumes at competitive prices. The company is also in the process of expanding product lines at some locations, including the expansion into prefabricated walls at the Atlas operation in Nanaimo, B.C. This has resulted in some increased upfront costs as the product lines and sales pipelines are established.
As of March 31, 2020, the company's cash balance increased to $3,244,684 from $83,005 (net of bank indebtedness) as of Dec. 31, 2019. Atlas is well positioned to facilitate production expansion and targeted 2020 strategic activities.
Short-term profitability versus cash preservation
As part of our response to COVID-19, we have implemented rigorous physical distancing initiatives in our operations (for example, creating safe physical distances between employees by expanding the areas between workstations and utilizing more surface area on equipment), promoted and implemented remote working, established clear hygienic protocols, employed new and advanced technology protocols, and scheduled maintenance activities typically scheduled in other times of the year. These critical and necessary activities resulted in some reduced productivity and/or efficiency, potentially causing a higher-cost profile and impacting product margins.
We also developed a comprehensive cash preservation strategy focused on cash-first priorities. In some instances, these activities compete with Atlas's short-term profitability. However, they are designed to preserve cash in the event of business interruptions, and they reinforce our strong financial position and our ability to weather future storms.
As part of this strategy, when COVID-19 increased its foothold, we assertively scaled the business to current revenue profiles, laid off non-essential positions and terminated non-essential contracts, including those filled to support strategic partnerships and potential acquisitions in early 2020. We evaluated all areas of the business and reduced hours to match any reductions in work and/or projects. The Atlas senior leadership team also took an interim salary sacrifice to support this strategy.
These short- to medium-term initiatives will have a major impact on how Atlas will operate in 2020. Cash is king, and our business continuity plan ensures that we maximize every dollar and cent.
Although COVID-19 and its effects are unprecedented, things are looking promising in the regions we serve. Atlas continues to plan and adapt. We are well capitalized, we have liquidity and fiscal discipline, and we continue to win significant new contracts -- all factors that allow us to thrive now and into the future.
From what we have seen during Q2 2020, we expect to achieve positive EBITDA margins close to or above double digits again in Q2. This is despite the fact that April was the hardest hit month during the pandemic.
Since the beginning, insiders have held significant ownership positions in Atlas, participating in multiple financings. I am proud that insiders and employees continue to hold approximately 35 per cent of our outstanding shares. I believe that speaks volumes, not only to our alignment with our shareholders, but also to the confidence that insiders have in the future and direction of Atlas. I am reassured by the fact that the individuals (board, leadership and employees) who have the most insight into Atlas are also the most vested in the outcome of decisions made.
Atlas has been strategic in its financing. Proceeds from our February, 2020, private placement are earmarked for our 2020 acquisition plans, capital needs and working capital. This financing was oversubscribed, and again insiders contributed significantly.
Based on our current financial position and assuming cash flows from existing operations remain steady, Atlas is well capitalized to execute on its strategic plan for organic and inorganic growth.
The Atlas overarching strategy
Our accelerated success in 2019 was achieved through internal operational improvements, solid integration practices and organic growth, which led to greater profitability. We also remained focused on the goal of identifying qualified, accretive acquisition targets. We believe that market trends remain in our favour, and under current conditions, as well as succession demographics, we continue to see attractively priced target companies. We will prudently and aggressively look to take advantage of acquisition opportunities. With shortages of skilled labour continuing to drive demand for assembled components and engineered products, as well as the inability of independently owned and operated companies to match required investments for latest technologies, Atlas finds itself in a very strong position to continue growing profitably.
I am often asked about acquisition structure, specifically deal mechanics and transaction size. As part of our smart acquisition criteria, we consider both small and large opportunities. Based on history, we have demonstrated our ability to find and complete multiple types of acquisitions. The advantage of operating in such a fragmented industry is the ability to increase the number of acquisitions in a given year, if circumstances warrant, or to consider larger transactions if the risk profile is appropriate. We will continue our acquisition drive in 2020, and will announce these as they are finalized.
We are living in an extraordinary world, during unprecedented times, where the spread of COVID-19 has impacted communities globally and created an immense amount of uncertainty. We saw most of Canada under lockdown and many regions with significant economic restrictions. Yet throughout, Atlas was, and remains, an
essential service business
in all the regions we serve.
Atlas is a healthy and fundamentally sound business. We have liquidity and a skilled management team, and
we have a strong amount of cash
paired with a well-defined and implemented cash preservation strategy. Our plan includes scaling down our costs and cash outflows to match with revenues changes, where and when applicable. We continue our journey of impressive growth, and we have made significant progress with margin expansion into Q2 2020. We believe that we are well positioned to weather a storm.
Looking forward, we are encouraged that monetary and fiscal stimuli, applied by governments worldwide, typically have positive effects on our industry. With winter passing, the economies are opening up in Ontario, Manitoba and Saskatchewan, and we are starting to see an increase in business activity. Our extensive geographic footprint, especially as we diversify our products, has proved to be a major asset to our business's resilience during this pandemic.
We remain customer-focused, providing quality solutions and products, achieved through operational excellence. I am both humble and proud of our amazing group of employees who continue to deliver extraordinary results through their dedication and commitment, and we have only just started!
Chief executive officer and president
We seek Safe Harbor.
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