ZCL Composites Reports Second Quarter 2013 Financial Results and Increases Dividend

EDMONTON, Aug. 8, 2013 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the second quarter and six months ended June 30, 2013.

Q2 2013 compared with Q2 2012

• Revenue of $47.3 million, up $4.4 million or 10% from $42.9 million;
• Record net income of $5.1 million, up $0.9 million or 21% from $4.2 million;
• Record earnings per share (fully diluted) of $0.17, up $0.02 or 13% from $0.15 per share (fully diluted); Q2 2012 net income included a positive impact of $1.4 million or $0.05 per share, relating to the redemption of the preferred shares and related transactions;
• EBITDA of $8.3 million (18% of revenue), up $2.6 million or 46% from $5.7 million (13% of revenue);
• Backlog of $35.1 million, down $26.7 million or 43% from $61.8 million; and
• Quarterly dividend of $0.03 per share, up from $0.025 previously.

First Half 2013 compared with First Half 2012

• Revenue of $80.1 million, up $4.6 million or 6% from $75.4 million; and
• Net income of $7.6 million or $0.26 per share (fully diluted), up $1.8 million or 31% from net income of $5.8 million or $0.20 per share (fully diluted).

"Our focus on increasing ZCL's profitability continued to reward our shareholders in the second quarter of 2013 as fully diluted earnings per share increased by 70% compared to the second quarter of 2012 after adjusting for the one-time gain of $0.05 per share associated with the preferred share settlement in the second quarter of 2012," said Ron Bachmeier, President and Chief Executive Officer. "Our second quarter gross profit increased to 22% of revenue, up from 16% in the second quarter of 2012, and our second quarter EBITDA margin increased to 18% of revenue, up from 13% in the second quarter of 2012.  Our strategic focus on increasing ZCL's profitability is working."

"Our operations group, led by Kapul Gill, is in the process of making some fundamental changes in how ZCL executes within our plants.  Built around the concepts of lean manufacturing and the elimination of waste, we have successfully made changes to lower our cost of doing business and positioned ZCL to be successful in both the good times and the lean times."

"In the face of what has been described by some as a tepid global and North American economic recovery, growth opportunities in 2013 have been hard to find.  Given this difficult growth environment, our focus continues to be on reinforcing and growing our position in markets where we are strong (our Petroleum Products group), broadening our customer base in markets where we can gain market share (our Water Products and Corrosion Products groups), and improving our profitability across all of our product groups."

Financial Results

Revenue for the second quarter ended June 30, 2013 was $47.3 million, up $4.4 million or 10% from $42.9 million in the second quarter of 2012. The increase was attributable to both the Underground and Aboveground operating segments and to US operations in particular.  Petroleum, Water and Corrosion Products all achieved higher revenue than the same quarter of 2012.

Gross profit for the second quarter ended June 30, 2013 was $10.5 million, up $3.6 million or 52% from $6.9 million a year earlier. Gross margin increased to 22% of revenue for the second quarter of 2013, up from 16% for the same quarter a year earlier, with the increase attributed to process improvements in operations, changes in customer mix, and increased sales volume without a corresponding increase in the fixed cost base as a percentage of revenue.

General and administration ("G&A") expense for the second quarter ended June 30, 2013 of $2.3 million was up $0.2 million compared to the same period a year earlier due to ongoing restructuring costs as well as inflationary pressures.

Net income for the second quarter ended June 30, 2013 was $5.1 million, up $0.9 million or 21% from $4.2 million a year earlier.  Earnings per share for the second quarter of 2013 was $0.17 (fully diluted), up $0.02 or 13% from $0.15 (fully diluted) a year earlier. Excluding a second quarter 2012 redemption of preferred shares and settlement of financial claims, which provided earnings per share of $0.05, the earnings per share increase over the second quarter of 2012 would have been $0.07 or 70%.

Backlog and Financial Position

As of June 30, 2013, backlog was $35.1 million, down $26.7 million or 43% from $61.8 million a year earlier.  As the Underground backlog is comparable to the prior year, the decrease resulted from a decline in the Aboveground backlog.  The Aboveground backlog decline reflects slower new order activity in all market segments, including Oil Sands, industrial chemicals and power generation.  In 2012, Aboveground backlog included very low margin work which was completed in 2012.  In 2013, these lower margin orders have been partially replaced by higher margin field service revenue.  It should be noted, certain of our current larger field service projects, which are delivered on a time and materials basis, are not included in our backlog as there is no specified purchase order value.

At June 30, 2013, ZCL's balance sheet had working capital (current assets less current liabilities) of $39.7 million, up $8.0 million or 25% from $31.7 million at December 31, 2012.  As at June 30, 2013, ZCL's net debt totalled $0.6 million, down from a net cash position of $0.1 million as at December 31, 2012.  Working capital requirements are traditionally the most significant during the second quarter of the year. Management expects the net cash/net debt position to continue to fluctuate due to the inherent seasonality and timing of working capital requirements of the business.

Dividends

As a result of the continued improvement in the financial results, the Board has elected to increase the quarterly dividend. The Board has declared a quarterly dividend of $0.03 per share for the second quarter of 2013.  The dividend will be paid on October 15, 2013, to the shareholders of record as of September 30, 2013.

Outlook and Priorities for 2013

For 2013, our strategic priorities are directly focused on improving profitability and maintaining a strong and flexible balance sheet while we pursue growth opportunities.  We remain committed to the five key aspects of ZCL's 2013 strategic plan

• Focus on quality
• Improve profitability
• Meet deliveries and reduce lead times
• Expand employee integration
• Continued focus on safety

We are pleased with the accomplishments we have achieved in the first half of 2013 regarding profitability, as our first half results exceeded all of the strategic profitability metrics that we have set for ZCL.  These metrics include our first half gross margin of 21% (exceeding our target of 20%) and our first half EBITDA margin of 16% of revenue (exceeding our target range of 13-15% of revenue).  We will work diligently to deliver similar results in the second half of 2013, but given the weaker Corrosion Products group backlog as we move into the second half of the year, we may see some leveling or even a softening of our profitability metrics over the last two quarters of 2013.  Given that, we now expect to deliver full year results that are at the upper end, or may even exceed the upper end, of both our EBITDA margin target range of 13-15% of revenue and our gross margin target of 20%.

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, 2013 and 2012, are available on Sedar at www.sedar.com and the ZCL Web site 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 9, 2013, to discuss its financial and operating results for the second quarter ended June 30, 2013.

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 Investor Events tab on the ZCL Web site at http://www.zcl.com/investor-relations/investor-events.html. Audio replays will be available on the ZCL Web site 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 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.

Note on EBITDA

EBITDA is defined as income from 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.

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.

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 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.