CEO & President Letter to Shareholders AEP leaps to Profit in Q2 2020 - Amidst height of COVID-19 Pandemic

TSX.V: AEP
OTC: APEUF

NANAIMO, BC, Aug. 4, 2020 /CNW/ -

Dear AEP Shareholder,

During these extraordinary times, we at Atlas Engineered Products Ltd. ("AEP" or the "Company") hope that you and yours continues to STAY SAFE and STAY HEALTHY.

AEP ended Q2 2020 with an 11% revenue growth over Q1 2020. Although Q2 2020 resulted in lower revenues than in Q2 2019, the growth for 2020 to date is impressive amidst the global impacts the COVID-19 pandemic. For example, we saw large portions of the construction industry in Ontario pause as new building permits were not issued for weeks. As provinces across Canada proceeded with their phased opening, the construction markets recovered quickly and AEP has seen the strongest quoting activity in years for this time of the construction season. Increased housing starts and permitting as well as low interest rates have been significant factors in the increased demand.

Normalized EBITDA margin was 14% for Q2 2020, with positive operating profit and net income. This was achieved through our comprehensive cost saving and cash preservation strategy implemented at the end Q1 2020, as well as disciplined sales activities, increased focus on improving operational efficiencies, and margin expansion throughout Q1 and Q2 2020.

All of our operations across Canada were deemed essential businesses and throughout 2020 AEP has been busy supplying our customers with top quality services and products. Our national sales team worked incredibly hard to ensure we secured sufficient volumes. As we have mentioned, not all of our locations were impacted equally. Our operations in BC were, and continue to be, extremely busy. In contrast, permit and construction restrictions in Eastern Canada resulted in some revenues decreases, mainly at one location. We continue to closely monitor developments around this pandemic and respond to provincial and federal updates with the urgency required. We have developed a proactive company-wide approach and response to how we navigate potential impacts to AEP, maintain our social responsibilities, and minimize the spread of COVID-19. We have a solid business continuity and interruption plan, which we are diligently executing.

BUSINESS OUTLOOK
The Company continues to assess our 2020 targets for achievability due to the economic conditions associated with the COVID-19 pandemic. As mentioned in prior releases, we exceeded our revenue targets for the first quarter of 2020. In addition, revenues grew 11% quarter over quarter from Q1 2020 to Q2 2020. Moving Into Q3 2020, we see tremendous demand, quoting activity and project wins.

Based on current information, we believe that the Company is conservatively positioned to reach an annualized revenue run rate of $35 million to $42 million, with an EBITDA margin of 10-15%, excluding targeted acquisitive activity.

Through the lens of the information available today, on a pro-forma basis, and taking seasonality into account, our management believes that, with targeted acquisitions, additional new product lines, salespeople assigned to specific regions and a focus on lowering costs, our larger revenue and EBITDA margin targets should be achievable this year.

We have entered Canada's peak building season in Q3 2020, and the economy is in full swing across Canada. Our BC operations continue to experience record-level revenues and our Manitoba operations are ahead of target. In Ontario, our quoting activity and conversion rates are at all-time highs - we continue to land more and more jobs of all sizes. AEP is hiring additional design and production staff to keep up with demand.

Overall, revenues for the Q3 2020 are expected to continue to improve significantly, and we expect a very strong Q3 2020 and beyond. During the last quarter we installed and commissioned a new wall-manufacturing line at our Nanaimo operations. Customer interest is significant for this new product, and we have confirmed our first orders. In this resilient, skilled-labour deprived market, this product line offers tremendous time savings, quality, and reduced labour requirements for our customers.

During July 2020, AEP announced the acquisition of assets from Trusstem Industries Inc. ("Trusstem") and entered the Lower Mainland BC with our new subsidiary Novum Building Components Ltd. ("Novum"). We have been evaluating several opportunities in Western Canada, and with this acquisition we not only expanded our overall geographic footprint, but we have entered the thriving Lower Mainland BC market. AEP can serve this market with pre-manufactured wall-panels, manufactured floor trusses, I-joists, LVL options, open web floors, roof trusses, and other engineered wood products.

Novum, meaning 'new and innovative' is located in Abbotsford, British Columbia and began operations immediately after the transaction was completed.

AEP has identified under-utilized manufacturing assets across the group, and will be refurbishing and upgrading them for installation at Novum in addition to the assets acquired from Trusstem. Once completed, the revamped plant, with its upgraded equipment, will be able to supply similar volumes to AEP's flagship Nanaimo operations. The first phase of upgrades is scheduled to start in a few weeks and is expected to be completed over the coming months.

AEP has assigned industry veteran Doug Paterson, ex-Director, Sales & Branch Operations British Columbia at Ply Gem Canada Inc., to oversee business development for the Lower Mainland BC market. Mr. Paterson has deep roots in the building and construction industry across Canada and North America. With Mr. Paterson's industry contacts, combined with AEP's deep and respected relationships, AEP believes Novum will transform into a significant market player.

BUSINESS UPDATE – Q2 2020
As we now are in Canada's peak building season with the economy reopening, 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 with 11% quarter over quarter, mainly attributable to organic growth. We are positive on both the operating profit and net income line for Q2 2020, have over $3m cash on hand, our available credit line is undrawn, and around $3.5m in working capital.

AEP has taken significant steps to grow our revenue position while firstly protecting our cash resources and growing our profitability. Team AEP has been exceptional in its response and pace to ensure that the company remains a fundamentally a strong and healthy business, even in the harshest realities of the global pandemic.

The housing market came back strongly in the last 4-6 weeks of Q2 2020, far exceeding market expectations. For example:

• BCREA figures show in BC a 16.9 per cent increase in residential unit sales in June 2020 over the same month last year — and the average price was $748,155, or a 9.1 per cent increase1;
• CREA figures indicate2:
• National home sales rose 63% on a month-over-month (m-o-m) basis in June;
• Actual (not seasonally adjusted) activity was up 15.2% year-over-year (y-o-y);
• The number of newly listed properties nationally climbed 49.5% from May to June;
• Actual (not seasonally adjusted) new supply stood 4.8% above June 2019;
• The MLS® Home Price Index (HPI) rose 0.5% m-o-m and was up 5.4% y-o-y;
• The actual (not seasonally adjusted) national average sale price posted a 6.5% y-o-y gain.
• Homebuying activity nationally showcased a V-shaped recovery. Homebuyer demand rebounded significantly in May and into June as stay-at-home orders eased and local economies began to reopen:
• Over 50% of buyers citing Covid-19 as a reason to buy a new home;
• Homebuyers attracted by historically low mortgage rates;
• Limited existing re-sale inventory;
• COVID-19 is also causing renters to increasingly consider homeownership due deurbanization and densification;
• WFH habits becoming ingrained. The unprecedented disruption caused by the outbreak of COVID-19 has led to a massive shift by employers and employees to remote working situations. This creates altered housing demand;
• Young family demand as millennials move into the suburbs;
• Resale inventory shortage accelerating – may onwards projections shows a resumption and acceleration of pre-COVID trends, highlighting the need for more new home developments;
• Rent collections are much better than initially feared, marking spec building opportunities;
• Single-Family Rental Index Indicate Robust Leasing Demand;
• Median housing affordability improved substantially in 2020 thanks to low mortgage rates.
• Lower Rates Driving Mix Shift To "Entry Level";
• Housing starts at pre-COVID levels and forecasted now above 2019/2018 new start data (see chart below).

In short, despite the current challenges and unknown effects of COVID-19 as it relates to our business, AEP is in an enviable position. We have liquidity and started 2020 on an improved financial position. Our geographical footprint has proven to be a significant asset, have a fast growing and strong orderbook, and backed by what is now a very busy construction season 2020. The housing start outlook looks extremely buoyant, and that in our target markets.

Being conservative and prudent, we took a long and hard look at our balance sheet, especially in the light of a global pandemic, and the potential uncertainty around that. The Company instituted an aggressive cash preservation strategy, especially with respect to the economic conditions in markets during Q2 2020.

One-off costs included ongoing restructuring and severances as we continue to combine functions and maximize synergies, some developmental costs, and a small ramp-up in organizational costs for anticipated product launches and targeted acquisitions in 2020. One-time non-recurring costs were $263,016 in Q1 2020, and $134,480 in Q2 2020. It is critically important that we continue our drive to be a low cost, high quality producer, and we have further plans to drive our cost structures down.

REVENUE
Although our overall results are down from the same period in 2019, we believe that a comparison of our quarter over quarter results in 2020 is more relevant to assessing our performance due to the effects of the COVID-19 pandemic. Comparative information for the three and six months ended June 30, 2019 can be found in our Management's Discussion and Analysis for the period ended June 30, 2020 and in our news release dated August 4th, 2020, both of which can be found on www.sedar.com.

Overall revenue for the three months ended June 30, 2020 was $7,900,805 compared to revenue of $7,097,979 for the three months ended March 31, 2020. This represents overall growth in revenue of 11% in comparison to the three months ended March 31, 2020. Q1 2020 was already 14% ahead of Q1 2019, and although seasonality had some effect on these results, we believe that this was offset by the effects of COVID-19 on the housing industry.

GROSS MARGIN
Gross margin increased to 24% for the three months ended June 30, 2020 from 16% for the three months ended March 31, 2020. This represents a 51% increase.

Gross margins declined in Q1 2020 due to implementation and startup of new product lines, temporary sick leave policies, lumber price volatility and some efficiency loss due to new physical distancing and cleaning requirements. The following also affected gross margins in Q1 and Q2 2020:

• The Company experienced some initial production and design inefficiencies as adjustments were made for physical distancing and work-from-home alternatives;
  
  
• The Company had a temporary sick leave policy implemented at the beginning of the pandemic that resulted in supporting our employees at a higher cost to the Company until the Canadian government implemented support;
  
  
• The Company is also in the process of expanding product lines at some of the locations. This has resulted in an initial higher cost of sales as the product lines are established and efficiencies maximized;
  
  
• The Company is lowering cost of sales again and increase gross margins as new protocols become part of the regular routine and efficiencies are maximized during the COVID-19 pandemic. As well as new product lines become a regular part of all operations and efficiencies are maximized.

EBITDA, Adjusted EBITDA & Normalized EBITDA Margin:
EBITDA margin and Non-IFRS measures adjusted EBITDA margin and normalized EBITDA margin all improved from the three months ended March 31, 2020 to the three months ended June 30, 2020.

During the three and six months ended June 30, 2020, the Company absorbed $134,480 and $263,016 respectively in one-time costs related to severance, recruiting an SLT position, the private placement completed in the first quarter, and marketing and website development.

G&A EXPENSES
At the end of fiscal 2019 and the beginning of 2020, the Company had increased overhead capacity due to targeted 2020 activities. By the end of March 31, 2020, the COVID-19 pandemic had resulted in significant economic shutdowns which caused delays in the Company's 2020 targeted M&A and product diversification activities. The Company scaled back significantly as part of our cost cutting and cash preservation strategy which led to a net income for the three months ended June 30, 2020.

Our team has saved $358,255 in overhead & operating costs between Q2 2020 and Q1 2020. At almost 20% this is impressive. This does not stop here however – we continue our cost reduction activities. See Operating Expense line in table below:

OPERATING PROFIT & NET INCOME
Due to the excellent execution of our team, AEP turned sharply into profit in Q2 2020 vs Q1 2020.

Most significantly, we had an operating profit of $248,675 in Q2 2020, compared to an operating loss of ($866,084) in Q1 2020. In addition, we earned net income of $220,601 in Q2 2020, compared to a net loss of ($762,961) in Q1 2020.

Looking forward, our management sees an exceptional Q3 2020 based on the revenue increases and work-on-hand that we see to date, and significant improvements from these levels for the rest of the year. Many companies in the small cap environment struggle to commercialize their idea and battle with revenue growth and profit delivery. The AEP team has now again demonstrated their ability to deliver all three in Q2 2020, and that amidst the height of the COVID-19 pandemic. We have proven our concept in consolidation for this industry, and demonstrated revenue growth and profit generation amidst the harshest conditions.

CASH
The Company's cash balance has increased to $3,033,576 as at June 30, 2020 from $83,005 (net of bank indebtedness) as at December 31, 2019. Our available credit line is undrawn, and we closed Q2 2020 with working capital of $3,498,083.

INSIDER OWNERSHIP
Since the beginning, insiders have held significant ownership positions in AEP, participating in multiple financings. I am proud to recap that insiders and employees continue to hold approximately 35% of shares outstanding, and I believe that speaks volumes not only to the 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, also assumes significant risk in the outcome of decisions made.

FINANCING
AEP has been strategic in its financing. Proceeds from our 2018 private placement partially financed our Pacer and the South-Central acquisitions, both which added significant revenues to the AEP. Proceeds from our February 2020 private placement are earmarked for our 2020 acquisition plan, 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 OVERACHING STRATEGY
Our accelerated success to date was achieved through internal operational improvements, solid integration practices and organic growth, which led to greater profitability. We also remain focused on the goal of identifying qualified, accretive acquisition targets. We believe that market trends remain in our favour, and under current conditions and 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 labor 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, the 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 live in an extraordinary world, during unprecedented times, where the spread of COVID-19 has impacted communities globally and created immense uncertainties. AEP demonstrated during Q2 2020 the strength and character of its leadership. Not only did we navigate broad economic challenges, the team has excelled in the most trying of times to focus on the basics and ensure our shareholders have a solid investment in AEP. With the best of 2020 to still come, we are confident that we can deliver on the expectations of our stakeholders.

AEP is a healthy and fundamentally sound business. We continue our journey of impressive growth, and we have made significant progress with margin expansion into Q2 relative to Q1. We have a healthy amount of cash, and a well-defined and implemented cash preservation strategy as a part of our business continuity and/or interruption plans, in this uncertain period. We believe that we are well positioned to weather a storm. We have liquidity, fundamentally sound business practices, a skilled management team, and we have a healthy amount of cash and access to cash paired with a well-defined and implemented cash preservation strategy.

Our plan includes scaling our costs and cash outflows to match with revenues changes where and when applicable.

AEP is well positioned compared to its peers and industry. Looking forward, we are encouraged that monetary and fiscal stimuli applied by governments world-wide and the unexpected boldness of the housing market will assist us in delivering our targeted performance.

We remain customer-focused, providing quality solutions and products, achieved through operational excellence. I am both humbled 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! Onwards and upwards!

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 and six months ended Jun e30, 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.

This news release also includes future oriented financial information and financial outlooks (collectively, "FOFI") with respect to expected future revenues, profitability and cost reductions. The FOFI contained in this news release is subject to the same assumptions, risk factors, limitations and qualifications relating to other forward-looking statements contained in this news release. The FOFI contained in this news release is provided for the purpose of providing information regarding management's assessment of the Company's anticipated business operations, and may not be appropriate for other purposes.

Except as required under applicable securities legislation, AEP undertakes no obligation to publicly update or revise forward-looking information, including FOFI.

SELECTED FINANICAL 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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