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ZCL Composites Inc.

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ZCL Composites Reports Second Quarter 2011 Financial Results

EDMONTON, Aug. 9, 2011 /CNW/ - ZCL Composites Inc. (TSX: ZCL) today announced financial results for the second quarter ended June 30, 2011.

Q2 2011 compared with Q2 2010

  • Revenue of $29.8 million, compared with $30.5 million;
  • Net income from continuing operations of $1.0 million or $0.03 per share (fully diluted), compared with a net loss of $0.4 million or $0.02 per share (fully diluted);
  • Net income of $0.8 million or $0.03 per share (fully diluted), compared with net loss of $0.4 million or $0.02 per share (fully diluted); and
  • Backlog of $49.3 million (quarterly record), compared with $33.2 million.

H1 2011 compared with H1 2010

  • Revenue of $53.0 million, compared with $54.2 million;
  • Net loss from continuing operations of $0.3 million or $0.01 per share (fully diluted), compared with a net loss of $3.1 million or $0.11 per share (fully diluted); and
  • Net loss of $0.4 million or $0.01 per share (fully diluted), compared with net loss of $3.3 million or $0.12 per share (fully diluted).

"We continue to execute on the key tenets of the 2011 Strategic Plan and believe that our simplify to grow strategy is starting to bear fruit." said Rod Graham, ZCL's President and Chief Executive Officer. "Our earnings of $0.03 per share represent the first profitable quarter in six quarters and we have taken a number of steps that should result in enhanced profitability in the latter half of 2011."

"We have worked hard to refine our customer mix.  We have undertaken a number of procurement initiatives to reduce our cost structure and have changed our corporate incentive compensation arrangement to align all employees with shareholder expectations of profitability."

"Although there are challenges ahead, we are encouraged by the record breaking backlog of $49.3 million achieved at the end of June 2011."

Financial Results

Revenue for the second quarter of 2011 was $29.8 million, down 2% from $30.5 million in the second quarter of 2010. A strong increase in revenue earned from Petroleum Products was offset by lower revenue in the Industrial Corrosion Products and Water Products groups as well as a lower US to Canadian dollar conversion rate.

The Petroleum Products group had revenue of $20.2 million, up 10% from $18.5 million in the same quarter of 2010. The gain was attributable to a significant increase in revenue for the US operations.  As in the first quarter of 2011, the combination of higher retail selling margins for fuel and more readily available financing, gave independent service station customers the confidence to increase demand for our tanks.  Sales to these customers were up 40% from the second quarter in 2010 before the impact of foreign exchange.

The Industrial Corrosion Products group had revenue of $6.0 million down from $7.1 million in the same quarter a year ago. The decrease reflected lower revenue from the ZCL Dualam operations which was down $0.8 million. Despite the drop in revenue from 2010, this is the first quarter that the ZCL Dualam operations have had positive gross profit since they were acquired by ZCL at the beginning of 2010.  The gross profit improvements reflect the continued focus on cost reduction and production efficiencies.

The Water Products group had revenue of $3.6 million, down from $5.0 million in the same quarter a year ago. Canadian Water Products revenue was consistent with the prior year, however continuing weakness in the US economy has contributed to the lower overall Water Products revenue when compared to the same quarter of 2010. US Water Products revenue declined $1.2 million or 24% from the prior year before a $0.3 million negative impact from foreign exchange. Even so, over the long term we expect this market will be a growing part of ZCL's business.  We continue to direct resources and marketing initiatives towards the Water Products market and we expect these investments to contribute to strong growth.

Gross profit totalled $5.4 million in the second quarter of 2011, up 51% from $3.5 million a year earlier.  Gross profit was 18% of revenue in the second quarter of 2011, up from 12% of revenue a year earlier. The increase in gross profit resulted from changes in sales mix, inventory production levels and pricing. Gross profit improved in both the Petroleum Products and Industrial Corrosion Products groups, but was down slightly in the Water Products group.  Although gross profit decreased in the Water Products group year over year, this was only a function of lower revenue.  As a percentage of revenue, gross profit increased from 16% of revenue in 2010 to 19% in the Water Products group.

General and administration expenses were $2.8 million, up 5% from $2.7 million a year earlier. The increase is primarily attributable to certain restructuring charges incurred in the second quarter of 2011 but not in the second quarter of 2010.  As a percentage of revenue, general and administration costs remained consistent from the prior year at 9%.

Divestiture of Non-Core Assets and Repayment of Debt

A key part of our simplification strategy was divestiture of non-core assets.  During the second quarter of 2011, ZCL divested certain assets of the steel tank division for cash proceeds of $0.8 million. Over the past few years, this division typically generated a loss in each quarter and was not a core competency for ZCL.

During the first quarter of 2011, ZCL repatriated proceeds of a note and loan ZCL received as part of its second quarter 2010 disposal of its Home Heating Oil Tank (HHOT) division.  The note and loan had a fair value of $1.3 million payable to the Company over a five year period.  ZCL received total proceeds of $1.6 million resulting in the gain on disposal of assets of $0.3 million.

ZCL will continue its efforts to sell additional non-core assets including the land and buildings in Waverley, Nova Scotia and certain real estate from the 2010 acquisition of Dualam.

Backlog and Financial Position

At June 30, 2011, the Company had a record backlog totalling $49.3 million, up 48% from $33.2 million a year earlier. Growth in the current quarter was attributed primarily to the Industrial Corrosion Products group with an increase of $16.4 million or 200% over the same quarter in 2010.  Timing of projects are subject to frequent changes by our customer base and make it more challenging to predict the timelines that surround quarter by quarter activity.

Outlook and Priorities for 2011

Although there are macro risks that cannot be predicted, we continue to have a positive outlook on all three lines of business and are comfortable that each line of business can be grown in a profitable manner.

We continue to focus on the strategic priorities for 2011, being:

  • Focus on core competencies;
  • Improve EBITDA as a percentage of revenue and debt;
  • Improve balance sheet returns;
  • Reinstitute a dividend payment by the end of 2011 or early 2012;
  • Improve internal operating and financial reporting with a suite of key performance indicators ("KPIs") with the implementation of the ERP system that occurred in 2010;
  • Reinforce a program of operational excellence and continuous improvement with a particular focus on cost controls; and
  • Maintain a strong safety culture.

We continue to drive towards greater manufacturing efficiencies under the auspices of one operations group. This effort has resulted in a number of organizational adjustments that are starting to pay positive results in our drive for greater infrastructure efficiencies.  We acknowledge that this initiative will take time for us to fully realize its benefits. However, our philosophy remains that certain plants will operate as specialty "craft" plants servicing one defined Product area because of a specialty skill-set, while other "flexible" plants will embrace a diversified product manufacturing approach to enhance their efficiency by building products for any of our three product groups—Petroleum, Industrial Corrosion or Water.

Summary Financial Results

For the three months
2011 2010 2009
  Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
(in thousands of dollars,
except per share amounts)
Revenue 29,820 23,158 35,029 32,340 30,521 23,685 28,609 28,645
Net income (loss)                
  Continuing operations 969 (1,247) (1,102) (12,487) (437) (2,676) 2,052 1,665
  Discontinued operations (181) 17 287 (232) 4 (207) (571) (177)
  Total 788 (1,230) (815) (12,719) (433) (2,883) 1,481 1,488
Basic and diluted earnings
(loss) per share
  Continuing operations 0.03 (0.04) (0.04) (0.44) (0.02) (0.09) 0.08 0.06
  Total 0.03 (0.04) (0.03) (0.45) (0.02) (0.10) 0.06 0.06

MDA and Financial Statements

The Company's management's discussion and analysis ("MDA") and unaudited interim consolidated financial statements for the three and six months ended June 30, 2011 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 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time) on Wednesday August 10, 2011, to discuss its financial and operating results for the second quarter of 2011.

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 President and Chief Executive Officer, Rod Graham, by ZCL's 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, Industrial 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 Industrial 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 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.  Unless otherwise indicated, the unaudited 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. 


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