ZCL Composites Reports Record Second Quarter 2012 Financial Results

EDMONTON, Aug. 6, 2012 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the second quarter ended June 30, 2012.

Record Q2 2012 compared with Q2 2011

• Revenue of $42.9 million, up $13.1 million or 44% from $29.8 million;
• Net income of $4.2 million or $0.15 per share (fully diluted), up $3.4 million or $0.12 per share from $0.8 million or $0.03 per share (fully diluted) - Q2 2012 net income includes a positive impact of $1.4 million or $0.05 per share, relating to the redemption of the preferred shares and related transactions;
• Backlog of $61.8 million, up $12.5 million or 25% from $49.3 million; and
• Increased the quarterly dividend to $0.015 per share.

Record H1 2012 compared with H1 2011

• Revenue of $75.4 million, up $22.4 million or 42% from $53.0 million; and
• Net income of $5.8 million or $0.20 per share (fully diluted), up $6.3 million from a net loss of $0.4 million or $0.01 per share (fully diluted).

ZCL is pleased to report the fifth consecutive profitable quarter in a row and continued strong revenue, earnings and backlog.  Historically, the first half of the year is slower due to the seasonal nature of our product offering. "Our strong performance in the first six months of 2012 demonstrates the execution of management's key objectives to continue to improve the 12 month efficiency of our North American plant infrastructure," said Rod Graham, President and Chief Executive Officer.

"Our sales team across all three product groups, Petroleum Products, Water Products and Corrosion Products has done an effective job of both generating record quarterly revenues while building a $62 million backlog," said Rod Graham.  "We are optimistic that the results for the remainder of 2012 will continue to exceed those achieved in 2011."

Redemption of Preferred Shares

Contributing to our strong second quarter was the redemption of all outstanding convertible preferred shares prior to maturity, the sale of land and buildings and the settlement of claims with the previous owner of Dualam Plastics Inc. ("DPI"). "We are pleased with the outcome of this agreement," said Rod Graham.  "This agreement eliminates the long term liability associated with the preferred shares, improves the corporate cost of capital, reduces management distraction and enables ZCL to continue its focus on core competencies."

Financial Results

Revenue for the second quarter of 2012 was $42.9 million, up $13.1 million or 44% from $29.8 million for the second quarter ended June 30, 2011.  The increase was attributable to both the Underground and Aboveground operating segments, all three product groups and Canadian and US operations.

Underground revenue of $30.0 million was $5.4 million or 22% higher than the second quarter of 2011 and included an increase of $3.9 million or 19% in the Petroleum Products and an increase of $1.4 million or 40% in Water Products.  Aboveground revenue of $12.8 million increased by $7.7 million or 149% over the second quarter of 2011 with contributions from both the US and Canadian operations.  The activity level for the Aboveground operating segment is very strong and continues to grow.

For the three months ended June 30, 2012, an increase in revenue resulted in a $1.5 million or 28% improvement in gross profit compared to the three months ended June 30, 2011.  Gross margin decreased from 18% of revenues a year earlier to 16%. This decrease was attributable to a change in customer mix coupled with costs incurred on lean manufacturing initiatives in certain of the plants grouped in the Underground operating segment. Gross margins in the Aboveground segment were up slightly, year over year.

In June of 2012, ZCL reached an agreement with the former owner of DPI, under which ZCL settled all financial claims with, and redeemed all of the outstanding convertible preferred shares of ZCL held by the former DPI owner.  The agreement resulted in a positive impact on net income of $1.4 million or $0.05 per share consisting of a redemption gain on the outstanding preferred shares, a gain on sale of land and buildings, and recoveries on the settlement of claims. This agreement also eliminated the $5.1 million long term liability associated with the preferred shares.

Net income for the second quarter of 2012 was $4.2 million, up 434% from $0.8 million a year earlier.  Net income per diluted share for the second quarter of 2012 was $0.15, up 400% from $0.03 per diluted share in the same quarter of 2011.  The improvement is attributable to a significant increase in revenue, increased gross profit, lower general and administration expenses, reduced finance expenses, and a positive impact resulting from the redemption of the preferred shares discussed above.  Excluding the impact from the preferred share redemption, net income of $2.8 million or $0.10 per share was up 256% as compared to the second quarter of 2011.

General and administration ("G&A") expense for the three months ended June 30, 2012, decreased $0.7 million or 25% over the same period in 2011.  The quarter over quarter reduction in G&A reflected the results of cost saving initiatives that were implemented in 2011. In the second quarter of 2011, G&A included $0.4 million in restructuring charges and other costs that were incurred as a result of a conscious decision to improve the future financial state of the Company.

Backlog and Financial Position

The June 30, 2012 backlog of $61.8 million is the highest quarter end backlog to date, up $8.9 million or 17% over the March 31, 2012 backlog and up $19.6 million or 46% from December 31, 2011.  The growth in backlog in the second quarter of 2012 was shared by both the Underground and Aboveground operating segments with respective increases of $4.2 million and $4.7 million over March 31, 2012.

At June 30, 2012, ZCL's balance sheet had working capital (current assets less current liabilities) of $24.7 million up $1.3 million or 6% from $23.4 million at December 31, 2011.  Net debt (long term debt, including current portion, plus bank indebtedness, less cash and cash equivalents) totalled $9.2 million, up from $4.6 million at December 31, 2011, but down from $15.2 million a year earlier.  The net debt increase in the first half of 2012 helped to finance the redemption of the preferred shares and an increase in work in progress and finished goods inventory.

Dividends

With the improving financial results, the Board elected to increase the quarterly dividend payment to $0.015 per share for the shareholders of record as of September 28, 2012.  The dividend will be paid on October 15, 2012. The dividend amount will continue to be revisited with a philosophical balance of fiscal prudence and a sharing of improved results.

CEO Succession

As previously disclosed, on August 8, 2012, Ron Bachmeier, ZCL's Chief Operating Officer, will become President and CEO.  Rod Graham, the current President and CEO, will step down from those positions, but will remain on the Board.  "The Board of Directors would like to thank Rod Graham for his leadership and success in guiding ZCL to its improved performance during his tenure as President and CEO," said Tony Franceschini, Chairman of the Board.  "The Board is pleased to welcome industry veteran and long-time ZCL employee, Ron Bachmeier into the President and CEO role.  The Board has also appointed Ron Bachmeier as a director of the Company."

Outlook and Priorities for 2012

The plan for 2012 is to continue with profitable growth.  We remain optimistic given:

• We have taken steps to ensure a strong group of brands within the ZCL corporate family with a single culture and mandate;
• We are focused on cost control and core assets;
• With a stronger focus on marketing and product groups, as opposed to operating groups, we have chosen to put forth a concerted effort to create a stronger customer value proposition;
• We continue to focus on safety; and
• We continue to drive toward targets of organic revenue growth of 10% - 20% in tandem with 12% - 15% EBITDA as a percentage of revenue.

Summary Financial Results

MD&A and Financial Statements

The Company's management's discussion and analysis ("MD&A") and unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2012, 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 Tuesday, August 7, 2012, to discuss its financial and operating results for the second quarter of 2012.

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 anywhere 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 current President and Chief Executive Officer, Rod Graham, by ZCL's current Chief Operating 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 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.

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 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 economic uncertainty in the US and Canada, 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 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.

SOURCE: ZCL Composites Inc.