ZCL Composites Reports Second Quarter Financial Results

EDMONTON, Aug. 10 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the second quarter and first half ended June 30, 2010.

Q2 2010 compared to Q2 2009

    
    -   Revenue of $31.0 million, compared to $28.1 million
    -   Net loss from continuing operations of $0.6 million or $0.02 per
        share, compared to net income from continuing operations of
        $0.6 million or $0.02 per share
    -   Net income from discontinued operations of $0.2 million, compared to
        a net loss from discontinued operations of $0.1 million
    -   Net loss of $0.4 million or $0.02 per share, compared to net income
        of $0.6 million or $0.02 per share
    -   Backlog of $33.2 million, compared to $21.1 million
    

H1 2010 compared with H1 2009

    
    -   Revenue of $55.5 million, compared to $47.2 million
    -   Net loss from continuing operations of $3.4 million or $0.12 per
        share, compared to $0.7 million or $0.03 per share
    -   Net income from discontinued operations of $0.2 million, compared to
        a net loss from discontinued operations of $0.1 million
    -   Net loss of $3.2 million or $0.12 per share, compared to net loss of
        $0.8 million or $0.03 per share
    

"The loss in the second quarter of 2010 was attributable to our new Dualam operations," said Ven Côté, ZCL's President and Chief Executive Officer. "A lull in the development of major US projects, including the construction of scrubber systems for coal-fired power plants, has temporarily reduced business for Dualam and others in the corrosion industry. The loss also reflected continued weakness in sales to independent retail service station customers in the US due to the ongoing economic uncertainty."

"For the second half of 2010, with a strong and improving backlog in other sectors of our business, we are cautiously optimistic we will see a significant improvement in financial performance," added Mr. Côté.

"We continue to have a very positive long-term outlook for the new ZCL-Dualam operations and believe growth will be driven by a regulatory push to reduce sulphur dioxide and other emissions. As the economy gains strength, we expect ZCL to return to strong annual revenue and earnings growth."

The discontinued operations are the Home Heating Oil Tank division, which ZCL sold during the second quarter of 2010. This division was sold because it was deemed not to be part of ZCL's core business.

Financial Results

Revenue increased 10% in the second quarter from a year earlier, reflecting a strong increase in water and wastewater revenue and the inclusion of the Dualam operations effective January 4, 2010, when ZCL completed the acquisition of Dualam Plastics Inc. These gains were partially offset by a significantly lower US to Canadian dollar conversion rate.

The net loss for the second quarter of 2010 reflected additional amortization and interest expense resulting from the acquisition of Dualam as well as an operating loss generated by Dualam. The second quarter loss was also due to lower revenue from independent retail service station customers in the US as well as additional costs associated with a corporate wide integration program and the initial implementation of ZCL's new enterprise resource planning ("ERP") system. Excluding these factors, the financial results achieved by the Company's traditional Canadian and US operations for the second quarter of 2010 were similar to those achieved in the second quarter of 2009.

For the first six months of 2010, changes to revenue and the net loss from a year earlier reflected the same factors as noted above for the second quarter. The change in net loss for the first six months also reflected the impact of a lower US foreign exchange rate and a cautious decision by management to reduce inventory production levels in the first quarter due to continued economic uncertainty. The lower production levels increased the first quarter 2010 loss by approximately $1.3 million (before income taxes) due to a reduction in the amount of fixed manufacturing costs typically absorbed into inventory in the seasonally slower first quarter. The earnings impact of the decision to reduce inventory levels is expected to reverse in the latter part of 2010.

Backlog

ZCL's backlog totalled $33.2 million at June 30, 2010, up 6% from $31.2 million at March 31, 2010 and up 57% from $21.1 million at June 30, 2009. The $12.1 million increase from a year earlier reflects approximately $5.1 million for the new Dualam operations and strong growth of $7.0 million or 34% from ZCL's traditional operations. There was growth in both Canada and the US and across all three major market segments, which includes downstream petroleum, corrosion and water and wastewater.

Outlook

For the second half of 2010, ZCL expects revenue from traditional markets to improve. In addition, management expects revenue from the new ZCL-Dualam operations will improve modestly relative to the first half of 2010. However, revenue from ZCL-Dualam will be well below the historical levels achieved by Dualam, due to the temporary lull in major projects.

ZCL is focused on achieving integration across all entities in 2010, including the successful on-time implementation of a new ERP system. The new system went live at the beginning of the year in the Company's US operations and in July in Canada, with the Dualam operations expected to come on-line in early 2011.

ZCL continues to expect higher revenue overall for 2010 compared with 2009. However, given the slow second quarter and the still sluggish US economy, ZCL now expects that 2010 earnings may be similar to or possibly lower than 2009. For 2011 and beyond, management's confidence regarding strong annual revenue and earnings growth is based upon on a number of key factors.

For downstream petroleum, these factors include expectations of continued market share growth, particularly in the US, due to the superior corrosion resistant properties of fibreglass tanks; further advances in the use of biofuels which over the long-term may accelerate the replacement of existing tanks, some of which are not compatible with ethanol blends beyond E10 (10% ethanol and 90% gasoline); and continued growth from international license arrangements.

For corrosion, these factors include a recovery from the lull in projects involving the manufacture and installation of components for scrubber systems that reduce sulphur dioxide (SO(2)) and other emissions at coal-fired power plants; new rules proposed in July 2010 by the US Environmental Protection Agency that would require faster and larger cuts in SO(2) and other emissions; strong bidding activity over the past few months by the ZCL-Dualam operations, which may further accelerate; and increasing activity in the Western Canadian oil sands.

For water and wastewater, these factors include a 35% increase in revenue (55% before the effects of foreign exchange) for this segment in the first half of 2010 compared with a year earlier, which is a return to the compound annual double-digit growth path in this market that ZCL experienced prior to the 2009 recession; and ZCL's plan to continue to direct additional resources and marketing initiatives to this sector.

With strong revenue growth, management's objective over the next couple of years is to improve EBITDA margin to meet or exceed the 15% achieved in 2008. A key driver in EBITDA margin improvement is that ZCL can increase output with relatively small increases in fixed costs.

Summary Financial Results

    
                                       Second Quarter         First Half
                                   ------------------------------------------
    (in thousands, except            2010       2009       2010       2009
     per share amounts)                $          $          $          $
    -------------------------------------------------------------------------
    Total revenue                    31,047     28,099     55,510     47,246
    Net income (loss) from
     continuing operations             (623)       613     (3,389)      (651)
    Net income (loss) from
     discontinued operations            179        (54)       176       (146)
    Net income (loss)                  (444)       559     (3,213)      (797)
    Diluted income (loss) per
     share from continuing operations (0.02)      0.02      (0.12)     (0.02)
    Diluted net income (loss)
     per share                        (0.02)      0.02      (0.12)     (0.03)
    -------------------------------------------------------------------------
    

MD&A and Financial Statements

The Company's management's discussion and analysis ("MD&A") and unaudited consolidated financial statements for the three months and first half ended June 30, 2010 are available on Sedar at www.sedar.com and the ZCL website at this link: www.zcl.com/investors/corpdisclosure.html.

Conference Call

ZCL Composites Inc. has scheduled an investor conference call for 9:30 a.m. Mountain Time (11:30 a.m. Eastern Time) on Wednesday, August 11, 2010, to discuss its financial and operating results for the second quarter of 2010.

To access the conference call by telephone, please call [phone] from the greater Toronto area, or dial toll free 1-888-231-8191 from elsewhere in North America. An audio webcast may be accessed through the investor events tab on the ZCL Composites website. Audio replays will be available on the ZCL Composites website shortly after the conclusion of the conference call.

The conference call will include prepared remarks by ZCL's President and Chief Executive Officer, Ven Côté, and by ZCL's Chief Financial Officer, Darin Coutu. 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.

Note on Backlog and EBITDA

The Company uses both GAAP (Canadian "Generally Accepted Accounting Principles") and non-GAAP measures to make strategic decisions and set targets and believes that these non-GAAP measures provide useful supplemental information to investors. Backlog and EBITDA do not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures used by other companies.

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. EBITDA is defined as income from continuing operations before interest, income taxes, stock based compensation and amortization on property, plant and equipment, deferred development costs and intangible assets, gains or losses on sale of property, plant and equipment, and costs not expected to recur on a regular basis. Readers are cautioned that EBITDA should not be construed as an alternative to net income as determined in accordance with GAAP. For additional information on Non-GAAP measures used by the Company see the MD&A for the three and six months ended June 30, 2010 available on SEDAR at www.sedar.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, water and wastewater, corrosion, international and other 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, water and wastewater and corrosion 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 in Canada and the United States, political and economic conditions, the Company's ability to attract and retain key personnel, raw material and labour costs, fluctuations in the US 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.

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 economic weakness in the US and Canada, tighter lending standards, volatile capital markets, lower commodity prices, the US housing crisis 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 the US to Canadian dollar conversion rate 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 report. 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: Ven Côté, President & CEO, ZCL Composites Inc., [phone], [email protected]; Darin Coutu, Chief Financial Officer, ZCL Composites Inc., [phone], [email protected]