ZCL Composites Reports Q3 2017 Financial Results

EDMONTON, Nov. 2, 2017 /CNW/ – ZCL Composites Inc. (TSX: ZCL) today announced financial results for the third quarter ended September 30, 2017. 

While we are disappointed with our results thus far in 2017, we are confident that the market for tank replacements and new construction by retail fuel marketers will return to growth in 2018.  During the third quarter of 2017, due in part to a deferral in spending by certain larger customers and the impact of a strengthening Canadian dollar, revenues have declined $5.5 million, compared with a year earlier. 

Gross profit and gross margins were impacted in the quarter by a number of factors.  These factors include the following:

• a decrease in revenue over a relatively fixed cost base,
• additional expenditures with regard to investments made in both manufacturing processes and sales and marketing initiatives,
• disruptions caused by hurricanes and flooding in the US Gulf Coast resulting in both resin price increases and a deferral of the shipment of certain orders, and
• costs relating to the decision to exit the industrial markets. 

Certain of the initiatives, particularly regarding manufacturing process improvements, are taking more time and capital to implement than originally planned. However, they are expected to start accruing benefits in 2018, once fully established throughout the organization.  These manufacturing initiatives, through the adoption of such things as the use of advanced materials and production automation, will increase plant efficiencies as well as allow for the increased scalability of our manufacturing operations as we grow. Regarding sales and marketing initiatives, we believe the changes we are making will help us identify additional opportunities and grow market share in all of our revenue segments. Although not fully offset due to a lagging effect between cost increases and revenue recognition, we are mitigating the impact of the resin price increase where possible, through the use of a resin surcharge.

Net income declined $2.4 million due to the after tax impact of the factors noted above, but also due to the non-cash impairment of assets charge of $1.0 million before taxes, associated with a decision to cease offering products to industrial markets, including aboveground chemical storage tanks used in Oil Sands applications.

Though the third quarter has been impacted by the market and weather factors noted above, resulting in lower revenues and backlog as at September 30, 2017, we are confident in a return to growth in 2018.

Q3 2017 compared with Q3 2016 (Continuing Operations)

• Revenue of $52.4 million, down $5.5 million or 9% from $57.9 million;
• Gross profit of $11.4 million (22% of revenue), down $3.1 million or 21% from $14.5 million (25% of revenue);
• Net income of $5.4 million or $0.17 per share (fully diluted), down $2.4 million or 31% from $7.7 million or $0.25 per share (fully diluted); and
• Adjusted EBITDA of $9.3 million (18% of revenue), down $2.8 million or 23% from $12.1 million (21% of revenue).

First nine months 2017 compared with first nine months 2016 (Continuing Operations)

• Revenue of $137.5 million, comparable to the prior year;
• Gross profit of $29.4 million (21% of revenue), down $2.2 million or 7% from $31.7 million (23% of revenue);
• Net income of $12.3 million or $0.40 per fully diluted share, down $2.0 million or 14% from $14.3 million or $0.46 per fully diluted share; and
• Adjusted EBITDA of $21.9 million (16% of revenue), down $1.6 million or 7% from $23.6 million (17% of revenue).

Dividends

The Board has declared a quarterly dividend of $0.12 per share, the same rate as the prior quarter and a 50% increase over the $0.08 declared at the same time last year.  The dividend will be paid on January 15, 2018, to the shareholders of record as of December 31, 2017.

Backlog

Backlog was $43.3 million as at September 30, 2017, down $3.1 million or 7%, from $46.5 million a year earlier. 

Fuel Markets backlog of $36.4 million was down $4.9 million or 12% compared to the third quarter of 2016.  We attribute this decline in large part to deferred investment decisions by certain large retail fuel marketers amid significant industry consolidation across North America.

Water & Wastewater Markets backlog of $5.3 million, was up $0.9 million or 20% compared to September 30, 2016.  Oil & Gas/Industrial Market backlog of $1.6 million was up $0.9 million or 116% from $0.7 million a year earlier.

Financial Position

Our balance sheet remained strong, with working capital of $54.8 million and a cash and cash equivalents balance of $24.7 million.  The strength of our balance sheet allows us to maintain flexibility and preserve our ability to take advantage of future profitable growth opportunities that may arise.

Outlook

Overall, we remain confident in our ability to achieve our 10% compound annual revenue growth objective over the longer term.  However, given the results through the third quarter of 2017, we do not believe it will be achieved this year.  We nevertheless continue to focus on our journey of profitable growth.

Our outlook for the North American Fuel Markets remains positive.  Over the longer term, the industry consolidation of retail fuel marketers is expected to be positive for ZCL as we are the only supplier that can economically serve these larger customers across North America from our broad manufacturing footprint.   

In early 2017, with the objective to focus on our emerging Water & Wastewater Markets, we launched a number of initiatives aimed at improving the effectiveness of our go to market strategies and increasing our market share.  We are now focused on executing specific initiatives such as searching out established Water Market agents and distributors to represent our product lines, refocusing account management and technical sales support, developing inside sales technical support resources to manage longer cycle opportunities, expanding existing processes to generate higher quality leads, and increasing the overall sales and marketing resources that support these markets. 

We believe the initiatives we are undertaking to bolster the marketing focus of the Company will enable sustainable future growth in these markets over the long term.

Summary Financial Results

The Company's management's discussion and analysis (“MD&A”) and unaudited interim condensed consolidated financial statements for the third quarter ended September 30, 2017, are available on SEDAR at www.sedar.com and the ZCL website at this link: https://www.zcl.com/en/investor-relations/financial.

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, November 3, 2017, to discuss its financial and operating results for the second quarter ended September 30, 2017.  To access the conference call by telephone, please call (647) 427-7450 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 Investors Webcasts tab on the ZCL website at https://www.zcl.com/en/investor-relations/webcasts. Audio replays will be available on the ZCL website shortly after the conclusion of the conference call.

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.

Note on Non-IFRS Measures:

ZCL uses both IFRS and non-IFRS measures to make strategic decisions and to set targets and believes that these non-IFRS measures are useful for providing securities analysts, investors, and other interested parties with additional information to assist them in understanding components of our financial results.  This includes a more complete understanding of factors and trends affecting our operating performance.  Adjusted EBITDA, adjusted EBITDA per diluted share and working capital are non-IFRS measures that are used by ZCL and may not be comparable to similar measures used by other companies.

Adjusted EBITDA and adjusted EBITDA per diluted share

Adjusted EBITDA is defined as income from continuing operations before finance expense, income taxes, share-based compensation, depreciation of property, plant and equipment, amortization of 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.

Working Capital

Working capital is defined as current assets less current liabilities.

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 press release contains forward-looking statements and forward-looking information as defined under applicable securities legislation (collectively, “forward-looking statements”) under the heading “Outlook” and elsewhere concerning future events or the Company's future performance.  All statements other than statements of historical fact are forward-looking statements 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 Fuel, Water & Wastewater, Oil & Gas and International markets, efforts to reduce administrative and production costs, manage production levels, anticipated capital expenditure trends, activity in the fuel 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. The use of any of the words such as “seek,” “anticipate,” “plan,” “contemplate,” “continue,” “estimate,” “expect,” “intend,” “propose,” “forecast,” “may,” “will,” “shall,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe” and similar expressions are intended to identify forward-looking statements.  These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.  No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this document should not be unduly relied upon.

These factors include, but are not limited to, fluctuations in the level of capital expenditures in the Fuel, Water & Wastewater, and Oil & Gas 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 press release and other documents filed with Canadian provincial securities authorities. These documents are available to the public at www.sedar.com.  The unaudited condensed consolidated interim 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, tight 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 press release 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 press release are expressly qualified by this cautionary statement. 

SOURCE ZCL Composites Inc.

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