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Atlas Engineered Products: THE INVESTMENT CASE

Atlas Engineered Products to Move Quickly in Consolidating North American Truss Sector

Record Q1 earnings, recent financing bring Atlas the financial heft to make multiple acquisitions
Atlas Engineered Products to Move Quickly in Consolidating North American Truss Sector
INVESTMENT OVERVIEW: AEP The Big Picture
An Atlas truss positioned by crane during installation on a new home

Following a successful trading debut on the Toronto Venture Exchange last week, Atlas Engineered Products (CVE:AEP) is uniquely positioned to consolidate a highly fragmented segment of the North American construction industry, and to do so in rapid fashion.

Starting with its own base of $8 million in annual sales, the Vancouver Island maker of trusses for new home construction isn’t shy about stating its goal: $50 million in annual sales in 5 years.  That equates to an annual growth rate of nearly 45%.

Furthermore, acquiring already-profitable companies and applying the Atlas operations model should enable the expanding business to maintain performance metrics around current levels.

Of primary importance would be its operating profit margin, which runs at a very healthy 18.5%, according to the record quarterly earnings (adjusted EBITDA of $556,811 for Q1, ended August 31) the company announced Tuesday.

Trusses, for those of us unhandy with a hammer, are the pre-fabricated, triangular frameworks that support a house’s roof.  More engineering work goes into a truss than you might think, and it makes them incredibly strong, quick to install, plus their custom-designed nature means you can create cathedral ceilings or other interesting internal effects with ease.

The truss industry in North America is ripe for a company such as Atlas to consolidate, as many truss fabricators are local businesses run by owner-operators nearing retirement.  Oftentimes, there is no obvious successor to pass their business to, or to whom they can sell it, and therein lies a conundrum that Atlas can solve.

“It is not overstating things to say there is a succession crisis in the truss industry, and to us it was clear that creating a vehicle that allows consolidation of these companies into a much larger concern presents an excellent business opportunity,” says Guy Champagne, the company’s president.

“We’ll use Atlas as a core and as a model of how we want to transform these companies and take advantage of economies of scale with materials procurement, and collaboration for engineering and design. 

“Ultimately, we will take Atlas, which is already performing well, surround it with multiple companies with similar characteristics, and take this group to an entirely new level.”

To really get a feel for the strategic advantages Atlas enjoys, one needs to go back in time.  Champagne became involved with the company about six years ago when less-than-ideal economic conditions in western Canada were putting pressure on local construction outfits.

Atlas had a good reputation and tremendous sales ability, but needed a dose of operational rigor if it was to come out the other side of the economic slowdown intact.

“I provided guidance in terms of what the financial metrics needed to be, what the productivity metrics needed to look like, and how to track and influence daily performance to meet the month-end targets that would allow Atlas to keep its doors open, and the management team took these to heart and committed to implementing them,” explains Champagne.

“Gradually, the company became a really well-oiled machine as these processes became ingrained in day-to-day operations.  Over the years, we undertook an effort to focus everyone interacting with customers or production on what gross margin their products needed to have to pay the bills and generate profit.”

That dedication to scrupulous benchmarking now forms the base of the Atlas assessment process when considering potential acquisitions.  Its own performance metrics position Atlas as one of the truss industry’s strongest players, and it uses the same yardsticks when evaluating other companies.

 “We will want to transition any company we acquire into an operating model that reflects Atlas, but also take the best practices from those companies and incorporate their strengths into the Atlas business model, too,” Champagne says.

Champagne’s partner at the top of the Atlas management team is CEO Hadi Abassi, who founded the company about 20 years ago.

“Hadi is well connected in the truss industry and very personable – he is the consummate salesman and networker,” says Champagne.  “His skills enable him to knock on doors and engage owners in a conversation about retirement and their plans for the future.”

With Abassi and Champagne at the helm and Atlas having proven its ability to profit consistently in the truss industry, owner-managers considering the sale of their business can take comfort knowing the company they leave behind will be managed in a sound manner, with new systems and processes from Atlas further strengthening their business…and their legacy.

Now that it is a publicly traded company, Atlas also offers a platform that, at the option of the exiting owner, can provide a financial asset in the form of shares in Atlas Engineered Products that has the potential to grow significantly over time.  “Some owners are predisposed to considering that as part of a package, whereas others would prefer cash,” says Champagne.

Atlas had cash on its balance sheet before going public and grossed another $4.25 million at $0.40 per share as part of the transaction which saw it list by taking over issuer Archer Petroleum.

Champagne says bank lines may also be used to augment the cash position and allow acquisitions to continue at the pace he and Abassi foresee.  As acquired companies would be profitable, their cash flow would immediately be available to service the debt.

Once the number of companies under the umbrella grows large enough, Champagne says there are other products, such as I-joists and engineered beams, that Atlas can sell.

And critical mass also brings the potential to transfer skillsets across regions.  Engineers used to creating technically complex truss designs for a high-end market such as Vancouver, for example, can lend those talents to truss plants in other markets where access to such expertise is hard to come by.

Also, because construction work slows to a crawl in eastern provinces and some states during the winter, engineering teams in that part of the continent can be called upon to assist those out west during particularly busy times.

“The crossover and teamwork is going to make us even stronger than we are now,” says Champagne.  “We’ll pay fair market value for profitable businesses, preserve the legacy of their owners, and make the performance of each regional truss business better.  Everyone will win.”

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November 15 2017
Record Q1 earnings, recent financing bring Atlas the financial heft to make multiple acquisitions

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