ZCL Composites Reports Q4 and Fiscal 2018 Financial Results

EDMONTON, March 7, 2019 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the fourth quarter and year ended December 31, 2018. 

Fiscal year 2018 compared with 2017

• Revenue of $175.9 million, down $12.3 million or 7% from $188.2 million;
• Gross profit of $31.5 million (18% of revenue), down $9.9 million or 24% from $41.4 million (22% of revenue);
• Net income of $12.8 million or $0.42 per share (fully diluted), down $5.1 million or 29% from $18.0 million or $0.58 per share (fully diluted);
• Adjusted EBITDA of $23.0 million (13% of revenue), down $8.3 million or 27% from $31.4 million (17% of revenue); and
• Backlog of $41.4 million, up $10.4 million or 33% from $31.0 million.

Q4 2018 compared with Q4 2017

• Revenue of $47.5 million, down $3.2 million or 6% from $50.7 million;
• Gross profit of $8.6 million (18% of revenue), down $3.3 million or 28% from $11.9 million (24% of revenue);
• Net income of $3.2 million or $0.11 per share (fully diluted), down $2.9 million or $0.09 per share from $6.1 million or $0.20 per share (fully diluted); and
• Adjusted EBITDA of $6.8 million (14% of revenue), down $2.5 million or 27% from $9.4 million (19% of revenue).

"Revenue in 2018 was lower than 2017, primarily due to customer delays in tank shipments in most regions of the US that persisted throughout the year", said Ted Redmond, President and CEO.  "Several factors contributed to the customer delays, and resulting lower 2018 revenue, including inclement weather, contractor availability and permitting delays." 

"Despite the reduction in revenue, order entry in 2018 remained consistent with 2016 and 2017 levels resulting in record year end backlog from continuing operations, which was a 33% increase over December 31, 2017. The backlog increase came from both Fuel and Water and Wastewater Markets and is almost equivalent to the shortfall in 2018 revenue compared with 2017," said Mr. Redmond.

Profit Improvement Plan

We have developed and are implementing a comprehensive Profit Improvement Plan that focuses on the following areas:

• Turnover reduction – to reduce turnover we have improved working conditions, reacted to gaps in wage competitiveness, and have cancelled 3^rd shifts in all manufacturing facilities,
• Financial discipline – controlling costs and limiting non-essential expenditures,
• Productivity improvement – accelerate productivity improvement initiatives, particularly those involving low cost or capital requirements and those with faster payback periods, such as moving shift leads from less than 50% direct to 85% direct work,
• Cost reductions – we have developed and are implementing a detailed list of specific profit improvement items, for example, improving component sourcing, re-focusing plant management on managing their production margins, reducing salaried staffing through attrition, and delaying or scaling back non-essential outside services, and
• Pricing – offset input cost increases with price increases on our products, this includes a 6% list price increase implemented in the beginning of January, 2019.

ZCL's Profit Improvement Plan is straightforward and achievable and we are making good progress on the implementation.

Sale of ZCL to Shawcor

On January 20, 2019, the ZCL Board of Directors entered into an Arrangement Agreement ("Arrangement") with Shawcor Ltd. ("Shawcor"), pursuant to which Shawcor has agreed, subject to satisfaction of customary conditions including regulatory, Shareholder and Securityholder approval, to acquire all of the issued and outstanding common shares of ZCL for $10.00 per common share in cash, by way of a statutory plan of arrangement under the CBCA.

The price represents a significant premium of 46% to the 20-day volume weighted average trading price of ZCL's common shares on the TSX as of January 18, 2019. A special meeting of Shareholders and Securityholders is set to occur on March 26, 2019, in order for Shareholders and Securityholders to vote on the Arrangement.  The ZCL Board of Directors recommends that Shareholders and Securityholders vote in favour of the Arrangement.

Dividends

In accordance with the Arrangement, ZCL is not permitted to declare, or pay, any dividends in respect of the common shares of the Company. 

Backlog

Backlog was $41.4 million as at December 31, 2018, up $10.4 million or 33% from $31.0 million a year earlier, and was a record year end backlog from continuing operations. 

Fuel backlog of $36.5 million was a year end record and up $9.8 million or 37% compared to a year earlier driven by increases in both US and Canadian Fuel Markets as well as a positive conversion of US dollar denominated backlog to Canadian dollars for reporting purposes.  On a source currency basis, overall Fuel backlog was up $6.1 million or 29% compared to the prior year. 

Water & Wastewater backlog of $4.3 million was up $0.6 million or 17% compared with a year earlier, due to an increase is US Water & Wastewater backlog and a positive impact on the translation of US dollar denominated backlog into Canadian dollars for reporting purposes.

Oil & Gas/Industrial backlog of $0.6 million was down $0.1 million from $0.7 million a year earlier.  ZCL ceased offering products to Industrial & Oil Sands Markets in 2017, resulting in a $0.3 million reduction in Oil & Gas/Industrial backlog. 

The total year end backlog decreased by $9.7 million or 19% from $51.1 million at September 30, 2018.  On a source currency basis, overall backlog decreased $9.1 million or 22% from the prior quarter.  This decline was less than recent years and was primarily due to the normal seasonal nature of the business.

Financial Position

As at December 31, 2018, working capital (current assets less current liabilities) of $38.2 million was down $14.7 million from $52.9 million as at December 31, 2017.  The majority of the decrease was a result of a decrease in cash and cash equivalents and accounts receivable, partially offset by an increase in inventories. The decrease in cash since December 31, 2017, was primarily due to the payment of dividends of $28.5 million and utilization of the Normal Course Issuer Bid ("NCIB") of $3.6 million.

2019 Outlook

We expect ZCL's revenue in 2019 to improve over 2018 but might not reach 2017 levels.  Margins are expected to improve in 2019 over 2018 levels as the Profit Improvement Plan continues to gain traction.  We are targeting to get Adjusted EBITDA as a percentage of revenue halfway back to 2017 results.

Results from our US operations may be negatively affected by a significant additional tariff on fibreglass imported from China. If the additional tariff comes into effect, it remains to be seen if we can pass the entire impact on to our customers.  The USTR imposed a 10% tariff which took effect on September 24, 2018.  A further tariff increase to 25% was to have taken effect on March 2, 2019, but that increase has been deferred indefinitely, pending the outcome of US/China trade negotiations.

Summary Financial Results

The Company's management's discussion and analysis ("MD&A") and consolidated financial statements for the years ended December 31, 2018 and 2017, are available on SEDAR at www.sedar.com and the ZCL website at this link: https://www.zcl.com/en/investor-relations/financial.

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 do not have a standardized meaning under IFRSand 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, impairment of assets and certain non-recurring costs including CEO transition costs and transaction costs.  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 "2019 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, the level of success achievable by the Profit Improvement Plan 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 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, 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 revenue 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.