Atlas continued last quarter’s progress building on pillars 1 and 4. The core Nanaimo operations delivered another quarter of double-digit organic growth. And M&A drove a near double from last year – and rock-solid sequential growth close to 50%.
But the biggest story this quarter – BY FAR – was pillar 2: lowering costs through scale and shared resources. Through this strategy, Atlas increased gross margins from ~20% historically to 28% this quarter. And EBITDA margins swung from single digits to 17% – above the top-end of their previous 10-15% EBITDA margin guidance for 2019.
And with $163,000 in net income, it was the first profitable quarter AEP reported since coming public in November 2017.
How did they do it?
The biggest driver management cites is the previously announced new lumber supply agreement which was expected to deliver 15% in cost savings per facility, and be worth $750,000 - $1,000,000 in annual cash flow. We knew this deal was significant. But we didn’t think we’d see it drive results like this so soon.
And on top of that, managements notes “integration activity focused on improving workflows, efficiencies and productivity” driving margins higher. You’ll recall last quarter AEP reported the core Nanaimo operations delivered a 37% gross margin (unheard of in this industry) but their acquired businesses operated at just an 8% margin.
We take this quarter as evidence AEP was able to take best practices from Nanaimo and apply them to improve margins across the board in their acquired businesses. This is an important proof point to consider if/when AEP accelerates their M&A activity again.
And all that leads us to the most important part of this quarter’s MD&A, the outlook:
“The Company’s revenue objective for 2019 is to reach an annualized revenue run rate of $40-50 million with an EBITDA margin of 10-15%.
On a pro-forma basis, taking seasonality into account, management believes the acquisitions the Company has completed, the addition of new product lines and sales staff to specific regions, and the focus on improved costs, should enable those targets to be achievable, and now believes an EBITDA margin in the range of 15-20% may be achievable this year.”
Guidance has been raised. And we now have more outcomes – and more upside – to consider if we want to properly value the company: | 
