ZCL Composites Reports Second Quarter 2016 Financial Results

EDMONTON, Aug. 4, 2016 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the second quarter ended June 30, 2016.

"We enjoyed strong market conditions during the second quarter of 2016 for our Underground Fluid Containment operations, which represent the largest part of our business," said Ron Bachmeier, President and Chief Executive Officer.  "Unfortunately our smaller Aboveground Fluid Containment operations, conducted primarily through ZCL Dualam, continued to underperform.  As we see no turnaround in the foreseeable future, we have made the strategic decision to cease ZCL Dualam operations and exit the majority of the Aboveground Fluid Containment business effective August 4, 2016."

"Despite our efforts over the past two years, we have not been able to establish a sustained competitive advantage in the markets served by ZCL Dualam, a business acquired by ZCL in 2010.  Exiting the ZCL Dualam operations will allow management to concentrate efforts on growing our traditional Underground markets, where we have profitable and sustaining growth opportunities.  We expect the remaining Aboveground business will be less than 5% of total revenue going forward."

Pursuant to IFRS requirements, we are unable to segregate continuing operations from discontinued operations in our consolidated financial statements due to the timing of this decision; however for the majority of the discussion in this press release, we will be focusing on the results from what will be reported as continuing operations (i.e. excluding results from ZCL Dualam).  A break-down of continuing and discontinuing operations is included later in this press release and in the Non-IFRS Measures section of the Management's Discussion and Analysis ("MD&A") for the second quarter of 2016.

Q2 2016 compared with Q2 2015 (continuing operations)

• Revenue of $44.7 million, up $3.3 million or 8% from $41.5 million;
• Gross profit of $9.5 million (21% of revenue), up $0.8 million or 9% from $8.8 million (21% of revenue);
• Net income of $4.4 million or $0.14 per fully diluted share, up $0.5 million or 13% from $3.9 million or $0.13 per fully diluted share;
• Adjusted EBITDA of $7.4 million (17% of revenue), up $0.8 million or 12% from $6.6 million (16% of revenue);
• Backlog of $55.0 million, up $5.1 million or 10% from $49.9 million; and
• Declared a quarterly dividend of $0.08 per share.

First Half 2016 compared with First Half 2015 (continuing operations)

• Revenue of $79.6 million, up $14.7 million or 23% from $64.9 million;
• Gross profit of $17.2 million (22% of revenue), up $4.7 million or 37% from $12.5 million (19% of revenue);
• Net income of $6.5 million or $0.21 per fully diluted share, up $1.7 million or 35% from $4.8 million or $0.16 per fully diluted share; and
• Adjusted EBITDA of $11.4 million (14% of revenue), up $2.5 million or 28% from $8.9 million (14% of revenue).

Backlog (continuing operations)

The backlog increase from a year earlier resulted from substantial growth in Petroleum Products backlog partially offset by a $4.1 million decrease in the Western Canadian Corrosion backlog that is remaining in continuing operations. 

Petroleum Products backlog was up $8.6 million or 21% compared to a year earlier.  Water Products backlog was up $0.4 million or 9% compared to the quarter ended June 30, 2015. 

The US Underground operations saw an increase in backlog of $3.1 million or 9% prior to a positive impact of $2.9 million on the conversion of US dollar denominated backlog to Canadian dollars for reporting purposes.  Canadian Underground operations backlog was up $2.8 million or 70% compared to the same quarter of 2015. 

When compared to the first quarter of 2016, total backlog increased by $8.7 million or 19% from $46.4 million at March 31, 2016, also driven by Petroleum Products. 

Financial Position

At June 30, 2016, ZCL's balance sheet had working capital (current assets less current liabilities) of $60.3 million compared to $76.8 million at December 31, 2015, and a net cash balance of $19.7 million compared to $39.1 million at December 31, 2015.  The decrease in net cash and working capital relative to the year end is due primarily to the payment of $19.1 million in dividends in the first half of 2016.  We are keeping our balance sheet strong to maintain flexibility and preserve our ability to take advantage of future growth opportunities, both organic and through acquisition, that may occur.

Dividends

The Board has declared a quarterly dividend of $0.08 per share.  The dividend will be paid on October 17, 2016, to the shareholders of record as of September 30, 2016.

Outlook

We expect Petroleum Products growth will continue to be led by increasing volume from larger fuel retailers, particularly in the US.  These retailers are building increasing numbers of "new to industry" downstream retail fueling sites as they compete for market share.  Accelerating tank replacement programs due to the aging of the installed tank base also continue to support growth in this market.

We believe that our Water Products group is also poised for growth as increasing general construction activity over a broad cross section of markets, and growing awareness of water as the next scarce commodity, will lead to increased demand for our water storage solutions.

By exiting ZCL Dualam operations, we expect ZCL's gross margin and EBITDA margin to increase compared with what they would otherwise have been.  The break-down of the continuing operations and discontinuing ZCL Dualam operations disclosed later in this press release, supports the improved profitability expectations.  We expect to incur cash charges in the second half of 2016 related to the closure costs of the discontinued operations which we will mitigate to the extent possible through the divesture of assets. We will cease operations at these facilities upon the completion of orders currently in our backlog and proceed with the divestiture or closure of these operations as soon as possible.  We expect to essentially complete these activities by the end of 2016.

We are confident that we will be able to continue to grow revenue in 2016 compared to a year earlier in our Petroleum and Water markets as these product groups possess significant competitive advantages and strong value propositions to our customers. 

Over the longer term, we remain confident that we will be able to sustain organic compound annual growth rates of both revenue and earnings of 10% over the long term; however achievement of this growth in any individual year cannot be assured.

Summary Financial Results – Break-down of Continuing and Discontinuing Operations

		Three Months Ended June 30, 2016			Three Months Ended June 30, 2015
		Continuing Operations	ZCL Dualam Operations	Total	Continuing Operations	ZCL Dualam Operations	Total
(in thousands of dollars)		$	$	$	$	$	$
Revenue		44,719	1,321	46,040	41,469	5,195	46,664
Gross profit		9,523	(1,534)	7,989	8,763	(357)	8,406
	Gross margin	21%	(116%)	17%	21%	(7%)	18%
General and administration		2,290	5	2,295	2,250	126	2,376
Foreign exchange (gain) loss		(62)	10	(52)	31	84	115
Depreciation and amortization		836	132	968	812	141	953
Finance expense		71	-	71	74	-	74
(Gain) loss on disposal of assets		(5)	-	(5)	11	-	11
Impairment of assets		46	2,420	2,466	-	-	-
Income tax expense		1,951	(1,259)	692	1,702	(225)	1,477
Net income		4,396	(2,842)	1,554	3,883	(483)	3,400
Earnings per share		0.14	(0.09)	0.05	0.13	(0.02)	0.11
EBITDA		7,254	(3,969)	3,285	6,471	(567)	5,904
	Share-based compensation	92	-	92	137	-	137
	(Gain) loss on disposal of assets	(5)	-	(5)	11	-	11
	Impairment of assets	46	2,420	2,466	-	-	-
Adjusted EBITDA		7,387	(1,549)	5,838	6,619	(567)	6,052
	As % of revenue	17%	(117%)	13%	16%	(11%)	13%
	Adjusted EBITDA per share	0.24	(0.05)	0.19	0.22	(0.02)	0.20

		Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
		Continuing Operations	ZCL Dualam Operations	Total	Continuing Operations	ZCL Dualam Operations	Total
(in thousands of dollars)		$	$	$	$	$	$
Revenue		79,636	2,582	82,218	64,908	13,951	78,859
Gross profit		17,192	(2,773)	14,419	12,514	(1,093)	11,421
	Gross margin	22%	(107%)	18%	19%	(8%)	14%
General and administration		5,287	30	5,317	4,612	139	4,751
Foreign exchange loss (gain)		644	173	817	(779)	(172)	(951)
Depreciation and amortization		1,681	262	1,943	1,603	277	1,880
Finance expense		145	-	145	146	-	146
(Gain) loss on disposal of assets		(5)	6	1	11	-	11
Impairment of assets		46	2,420	2,466	-	-	-
Income tax expense		2,865	(1,727)	1,138	2,076	(401)	1,675
Net income		6,529	(3,937)	2,592	4,845	(936)	3,909
Earnings per share		0.21	(0.13)	0.08	0.16	(0.03)	0.13
EBITDA		11,220	(5,402)	5,818	8,760	(1,060)	7,610
	Share-based compensation	174	-	174	231	-	231
	(Gain) loss on disposal of assets	(5)	6	1	11	-	11
	Impairment of assets	46	2,420	2,466	-	-	-
Adjusted EBITDA		11,435	(2,976)	8,459	8,912	(1,060)	7,852
	As % of revenue	14%	(115%)	10%	14%	(8%)	10%
	Adjusted EBITDA per share	0.37	(0.09)	0.28	0.29	(0.03)	0.26

MD&A and Financial Statements

The Company's management's discussion and analysis ("MD&A") and unaudited interim condensed consolidated financial statements for the second quarter ended June 30, 2016 are available on SEDAR at www.sedar.com and the ZCL website at this link: http://www.zcl.com/investor-relations/financials.html.

Conference Call

ZCL Composites Inc. has scheduled an investor conference call for 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) on Friday August 5, 2016, to discuss its financial and operating results for the second quarter ended June 30, 2016.

The conference call will include prepared remarks by ZCL's President and Chief Executive Officer, Ron Bachmeier and by ZCL's Chief Financial Officer, Kathy Demuth.  After the prepared remarks, ZCL will accept questions from analysts and institutional investors. The public is invited to listen to the conference call in real time or by replay.

To access the conference call by telephone, please call [phone] from the greater Toronto area, or dial toll free 888-231-8191 from elsewhere in North America.  An audio webcast may be accessed through the Investor Events tab on the ZCL website at http://www.zcl.com/investor-relations/investor-events.html. Audio replays will be available on the ZCL website shortly after the conclusion of the conference call.

Note on Non-IFRS Measures:

ZCL uses both IFRS and non-IFRS measures to make strategic decisions and to set targets.  Backlog, adjusted EBITDA, adjusted EBITDA per diluted share, and net cash are non-IFRS measures that are used by ZCL and may not be comparable to similar measures used by other companies.

Backlog

Backlog is defined as the total value of orders that management has assessed as having a high certainty of being performed because of the existence of a contract or purchase order specifying the scope, value and timing of an order.

Adjusted EBITDA and adjusted EBITDA per diluted share

Adjusted EBITDA is defined as income from operations before finance expense, income taxes, share-based compensation, depreciation of property, plant and equipment, amortization of deferred development costs and intangible assets, gains or losses on sale of assets, and impairment of assets.  Adjusted EBITDA per diluted share is defined as adjusted EBITDA divided by weighted average diluted shares outstanding.

Net cash

Net cash is defined as cash and cash equivalents less long term debt, current portion of long term debt, finance lease, current portion of finance lease, and bank indebtedness.

About ZCL Composites Inc.
Our mission is to deliver Peace of Mind through corrosion resistant solutions that preserve and protect the environment.  More information about ZCL is available on our website at www.zcl.com.

Advisory Regarding Forward-Looking Statements

This document contains forward-looking statements under the heading "Outlook" and elsewhere concerning future events or the Company's future performance, including the Company's objectives or expectations for revenue and earnings growth, income taxes as a percentage of pre-tax income, business opportunities in the Petroleum Products, Water Products, Corrosion Products markets, efforts to reduce administrative and production costs, manage production levels, anticipated capital expenditure trends, activity in the petroleum and other industries and markets served by the Company and the sufficiency of cash flows and credit facilities available to cover normal operating and capital expenditures. Forward-looking statements are often, but not always, identified by the use of words such as "seek," "anticipate," "plan," "continue," "estimate," "expect," "may," "will," "project," "predict," "potential," "targeting," "intend," "could," "might," "should," "believe" and similar expressions. Actual events or results may differ materially from those reflected in the Company's forward-looking statements due to a number of known and unknown risks, uncertainties and other factors affecting the Company's business and the industries the Company serves generally.

These factors include, but are not limited to, fluctuations in the level of capital expenditures in the Petroleum Products, Water Products, and Corrosion Products markets, drilling activity and oil and natural gas prices, and other factors that affect demand for the Company's products and services, industry competition, the need to effectively integrate acquired businesses, uncertainties as to the Company's ability to implement its business strategy effectively, political and economic conditions, the Company's ability to attract and retain key personnel, raw material and labour costs, fluctuations in the US dollar, euro and Canadian dollar exchange rates, and other risks and uncertainties described under the heading "Risk Factors" in the Company's most recent Annual Information Form, and elsewhere in this document and other documents filed with Canadian provincial securities authorities. These documents are available to the public at www.sedar.com.  Unless otherwise indicated, the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and the reporting currency is in Canadian dollars.

In addition to the factors noted above, management cautions readers that the current economic environment could have a negative impact on the markets in which the Company operates and on the Company's ability to achieve its financial targets. Factors such as continuing global economic uncertainty, tighter lending standards, volatile capital markets, fluctuating commodity prices, and other factors could negatively impact the demand for the Company's products and the Company's ability to grow or sustain revenues and earnings. Fluctuations in conversion rates of the US dollar to Canadian dollar and euro to Canadian dollar also have the potential to impact the Company's revenues and earnings.

The Company believes that the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this report should not be unduly relied upon.

The forward-looking statements in this report speak only as of the date of this press release. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by the Company or on the Company's behalf, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws. The forward-looking statements contained in this document are expressly qualified by this cautionary statement.  For further information, please contact:

SOURCE ZCL Composites Inc.

Image with caption: "ZCL Composites Inc. (CNW Group/ZCL Composites Inc.)". Image available at: http://photos.newswire.ca/images/download/20160804_C8988_PHOTO_EN_747961.jpg

Ron Bachmeier, President & CEO, ZCL Composites Inc., [phone], [email protected]; Kathy Demuth, Chief Financial Officer, ZCL Composites Inc., [phone], [email protected]