CEO & President Letter to Shareholders - Atlas Engineered Products Reports 14% Revenue Growth and a Solid Cash Position in Q1 2020 Financial and Operating Results

NANAIMO, BC, June 30, 2020 /CNW/ -

Dear AEP Shareholders,

During these unprecedented times, we at AEP trust that you and yours STAY SAFE and STAY HEALTHY.

AEP has ended the first quarter of 2020 with 14% revenue growth over Q1 2019. Throughout COVID-19, all of AEP's family of 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 BC operations were minimally impacted and throughout Q1, and into Q2 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 proactive company-wide approach and response to how we navigate potential impacts to AEP, 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.

BUSINESS OUTLOOK
The Company's revenue objective for 2020 is to reach an annualized revenue run rate of $40 - $45 million with a normalized EBITDA margin of 10-15%, 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 to this plan, and 14% 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 10-15% 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 ongoing 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.

AEP's BC 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 their 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. Back-logs in construction permitting have been caught up, revenues are growing at a notable pace, and AEP is hiring and calling back staff to keep up with demand.

Overall, we anticipate revenues for Quarter 2 2020 to improve significantly, and we expect to be 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 AEP 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% 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 AEP has met, and in some cases exceeded our expectations during this quarter. Revenues were up 14%, mainly attributable to organic growth, and our cash position remains strong.

AEP is in its third year as a public company, and we believe it's 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 it relates to our business, AEP is in a solid financial position. AEP has strong liquidity and entered 2020 with an improved position over the previous year. We continue to grow our orderbook on the back of an exceptional turn-around in 2019, and we successfully 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 ongoing 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 to $6,216,908 for the three months ended March 31, 2019. This represents overall growth in revenue of 14% in comparison to the three months ended March 31, 2019.

Gross margin for the three months ended March 31, 2020 was 16%, which was down from a gross margin of 19% for the three months ended March 31, 2019. Gross margin declined in Quarter 1 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 as shown in the graph below. 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. AEP'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 pre-fabricated walls at the Atlas operation in Nanaimo, BC. This has resulted in some increased up-front costs as the product lines and sales pipelines are established.

As of March 31, 2020, the Company's cash balance increased to $3,244,684from $83,005 (net of bank indebtedness) as of December 31, 2019. AEP is well-positioned to facilitate production expansion and targeted 2020 strategic activities.

SHORT-TERM PROFITABILITY vs. CASH PRESERVATION
As part of our response to COVID-19, we have implemented rigorous physical distancing initiatives in our operations (e.g. 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 AEP'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 AEP 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 AEP 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. AEP continues to plan and adapt. We are well capitalized, we have liquidity, 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.

INSIDER OWNERSHIP
Since the beginning, insiders have held significant ownership positions in AEP, participating in multiple financings. I am proud that insiders and employees continue to hold approximately 35% of our outstanding shares. I believe that speaks volumes, not only to our alignment with our shareholders, but also the confidence that insiders have in the future and direction of AEP. I am reassured by the fact that the individuals (Board, Leadership and Employees) who have the most insight into AEP are also the most vested in the outcome of decisions made.

FINANCING
AEP 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, AEP is well capitalized to execute on its strategic plan for organic and inorganic growth.

THE AEP 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, AEP 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.

IN SUMMARY:
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 lock-down and many regions with significant economic restrictions. Yet throughout AEP was, and remains, an essential service business in all the regions we serve.

AEP is a healthy and fundamentally sound business. We have liquidity, a skilled management team, andwe 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 proven to be a major asset to our business' 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 that continue to deliver extraordinary results through their dedication and commitment – and we have only just started!

Regards,

Dirk Maritz,
CEO & President

Forward Looking Information
Information set forth in this news release contains forward-looking statements. These statements reflect management's current estimates, beliefs, intentions and expectations; they are not guarantees of future performance. Although AEP believes that the expectations reflected in the forward looking statements are reasonable, there is no assurance that such expectations will prove to be correct, or that such future events will occur in the disclosed time frames or at all. AEP cautions that all forward looking statements are inherently uncertain and that actual performance may be affected by a number of material factors, many of which are beyond AEP's control. Such factors include, among other things: Risks and uncertainties relating to AEP, including those to be described in the Management's Discussion and Analysis ("MD&A") for AEP's three months ended March 31, 2020. Accordingly, actual and future events, conditions and results may differ materially from the estimates, beliefs, intentions and expectations expressed or implied in the forward-looking information. Except as required under applicable securities legislation, AEP undertakes no obligation to publicly update or revise forward-looking information.

Selected Financial Information
Except as noted below, the financial information provided in this news release is derived from the AEP's unaudited interim financial statements for the three months ended March 31, 2020 and the related notes thereto as prepared in accordance with International Financial Reporting Standards ("IFRS") and related IFRS Interpretations Committee ("IFRICs") as issued by the International Accounting Standards Board ("IASB"). A copy of AEP's interim financial statements for the three months ended March 31, 2020 and the related Management's Discussion and Analysis is available on AEP's website at www.atlasengineeredproducts.com or on SEDAR at www.sedar.com.

Non-GAAP / Non-IFRS Financial Measures
Certain financial measures in this news release do not have any standardized meaning under IFRS and, therefore are considered non-IFRS or non-GAAP measures. These non-IFRS measures are used by management to facilitate the analysis and comparison of period-to-period operating results for AEP and to assess whether AEP's operations are generating sufficient operating cash flow to fund working capital needs and to fund capital expenditures. As these non-IFRS measures do not have any standardized meaning under IFRS, these measures may not be comparable to similar measures presented by other issuers. The non-IFRS measures used in this news release may include "EBITDA", "EBITDA margin", "adjusted EBITDA", "adjusted EBITDA margin", "normalized EBITDA" and "normalized EBITDA margin". "EBITDA" is calculated as revenue less operating expenses before interest expense, interest income, amortization and depletion, impairment charges, and income taxes. "EBITDA margin" is EBITDA expressed as a percentage of revenues. "Adjusted EBITDA" is EBITDA after adjusting for share-based payments, foreign exchange gains or losses and non-recurring items. "Adjusted EBITDA margin" is adjusted EBITDA expressed as a percentage of revenues. "Normalized EBITDA" is EBITDA adjusted for one-time items. "Normalized EBITDA margin" is normalized EBITDA expressed as a percentage of revenues.

NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN THE POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.

SOURCE Atlas Engineered Products Ltd.

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