ZCL Composites Reports Q3 2018 Financial Results Edmonton, Alberta, November 1, 2018 ZCL Composites Inc. (TSX: ZCL) today announced financial results for the third quarter ended September 30, 2018 and appointment of Ted Redmond to the ZCL Board of Directors. Third quarter 2018 revenue of $49.7 million came in below the same quarter prior year, primarily due to unforeseen customer delays in tank shipments in most regions of the US. However, order entry in the third quarter remained consistent with 2016 and 2017 levels resulting in an 18% increase in quarter end backlog compared with the same quarter a year earlier. The backlog increase came from the Fuel Markets and the Water and Wastewater Markets. The reduction in revenue compared to the same quarter a year earlier resulted in a drop in gross profit due to lower revenues spread over the fixed manufacturing cost base. In addition, gross margin and net earnings continue to be negatively impacted by increased resin costs, increased labor costs, on going investments in manufacturing and plant safety improvements, and a reduction in production efficiencies due to staff turnover. Financial Results: Q3 2018 compared with Q3 2017 (Continuing Operations) Revenue of $49.7 million, down $2.7 million or 5% from $52.4 million; Gross profit of $9.9 million (20% of revenue), down $1.6 million or 14% from $11.4 million (22% of revenue); Net income of $5.2 million or $0.17 per share (fully diluted), compared to $5.4 million or $0.17 per share (fully diluted); and Adjusted EBITDA of $8.1 million (16% of revenue), down $1.2 million or 13% from $9.3 million (18% of revenue). Financial Results: First nine months of 2018 compared with first nine months 2017 (Continuing Operations) Revenue of $128.4 million, down $9.1 million or 7% from $137.5 million; Gross profit of $22.9 million (18% of revenue), down $6.5 million or 22% from $29.4 million (21% of revenue); Net income of $9.6 million or $0.31 per fully diluted share, down $2.7 million or 22% from $12.3 million or $0.40 per fully diluted share; and Adjusted EBITDA of $15.8 million (12% of revenue), down $6.2 million or 28% from $21.9 million (16% of revenue). Mr. Ted Redmond, CEO of ZCL remarked, While revenue for the quarter was down, this was primarily from deliveries being delayed by customers, orders remained consistent with prior years and our order backlog has increased so it is only a matter of time before those orders will translate into revenue. The fundamental issue facing ZCL is declining margins. We are committed to reversing this decline and over the last two months, the ZCL management team has conducted a detailed assessment of the reasons for declining gross profit and EBITDA margins and we have developed and are now implementing a detailed Profit Improvement Plan, continued Mr. Redmond. We are confident that by 2020, the plan will restore our margins back to the historically strong levels of 2014 through 2017. 1
Profit Improvement Plan The Profit Improvement Plan is our top priority and is outlined in more detail in the President s Message and MD&A. The key elements of the Plan are: Limiting non essential expenditures, Improving manufacturing processes and thereby reducing labor and material costs, Improving employee productivity by reducing turnover and streamlining scheduling, and As possible, offsetting resin and labor cost increases with price increases for ZCL products. Dividends The Board has declared a quarterly dividend of $0.135 per share, the same rate as the prior quarter and a 13% increase over the $0.12 declared at the same time last year. The dividend will be paid on January 15, 2019, to the shareholders of record as of December 31, 2018. Backlog Backlog was $51.1 million as at September 30, 2018, up $7.8 million or 18%, from $43.3 million a year earlier. Fuel Markets backlog of $43.2 million was up $6.8 million or 19% compared to the third quarter of 2017. We attribute this increase in large part to major delays in tank acceptances by customers during the third quarter of 2018. Customers delayed shipment of tanks due to weather, permitting and contactor related delays resulting in a decrease in third quarter 2018 revenues when compared to a year earlier. Water & Wastewater Markets backlog of $7.5 million, was up $2.2 million or 40% compared to September 30, 2017 with the increase attributable to US Water & Wastewater Markets. Oil & Gas/Industrial Market backlog of $0.4 million was down $1.2 million or 72% from $1.6 million a year earlier due primarily to the decision to cease offering products to industrial and Oil Sands markets. Financial Position Our balance sheet remained strong, with working capital of $36.3 million and bank indebtedness net of cash of $3.8 million. The credit facility was increased from $20.0 million to $25.0 million in October, 2018 as $14.8 million of the operating line had been utilized as at September 30, 2018. Management believes that internally generated cash flows, along with the available revolving operating credit facility, will be sufficient to cover the Company s normal operating and capital expenditures for the foreseeable future. Outlook Despite the increased backlog, we anticipate the factors that impacted revenue in the third quarter will continue to persist into the fourth quarter of 2018. Therefore, we expect fourth quarter revenue to be lower than the fourth quarter of 2017, and may be similar to the revenue earned in the fourth quarter 2016. Looking ahead, we expect ZCL s revenue in 2019 to improve over 2018 with margins in 2019 gradually improving, as the Profit Improvement Plan gains traction. Results from our US operations may be negatively affected by a significant tariff on fibreglass imported from China. The USTR imposed a 10% tariff which took effect on September 24 nd and this tariff is scheduled to increase to 25% on January 1, 2019. It remains to be seen if we can pass the entire impact of the tariff on to our customers. In Fuel Markets, our largest market segment, we believe contractor shortages and other negative factors that diminished revenue recognition in the third quarter, will continue to persist into the fourth quarter of 2018. Further, in the fourth quarter we anticipate the usual negative seasonal impact of winter weather in the northern portion of North America. Winter weather hampers the ability of our customers to prepare their sites for our underground fuel storage tanks, which translates into a lower volume of tank shipments. In Water & Wastewater Markets, improvements in revenue in the second half of 2018 will probably not be sufficient to overcome the slow start to the year. 2
While we continue to work on our long term profitability improvement and growth initiatives, we expect lower profit margins in Q4 of 2018 compared to Q4 of 2017 due to a combination of increased resin, glass and labor costs, limits on our ability to raise prices and the temporary reduction in production efficiencies. Due in part to tightening labour markets, we also expect continued challenges in implementing certain productivity improvement initiatives until we are able to reduce our employee turnover and get our new plant managers up to speed. We have developed and are implementing a comprehensive Profit Improvement Plan to address these issues and restore our profit margins. Summary Financial Results For the three months ended 2018 2017 2016 (in thousands of dollars, Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 except per share amounts) $ $ $ $ $ $ $ $ Total Revenue 49,700 46,812 31,882 50,701 52,421 53,306 31,741 46,602 Net income Continuing operations 5,195 3,921 485 6,114 5,357 6,031 919 5,749 Discontinued operations (note 1) 26 (52) (374) (37) 146 Total net income 5,195 3,921 485 6,140 5,305 5,657 882 5,895 Adjusted EBITDA (note 2) 8,126 6,189 1,479 9,241 9,305 9,467 3,172 9,418 Basic and diluted earnings per share Continuing operations 0.17 0.13 0.02 0.20 0.17 0.19 0.03 0.19 Total 0.17 0.13 0.02 0.20 0.17 0.18 0.03 0.19 Adjusted EBITDA per diluted share (note 2) 0.27 0.20 0.05 0.30 0.30 0.30 0.10 0.30 Dividends declared per share 0.135 0.535 0.135 0.12 0.12 0.12 0.77 0.08 Note 1: The discontinued operations are the ZCL Dualam operations which were exited in the third quarter of 2016, due to continued and expected future operating losses. Note 2: Adjusted EBITDA and adjusted EBITDA per diluted share are non IFRS measures and are defined later in this Press Release under "Non IFRS Measures." The Company s management s discussion and analysis ( MD&A ) and unaudited interim condensed consolidated financial statements for the third quarter ended September 30, 2018, are available on SEDAR at www.sedar.com and the ZCL website at this link: https://www.zcl.com/en/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, November 2, 2018, to discuss its financial and operating results for the third quarter ended September 30, 2018. To access the conference call by telephone, please call (587) 880 2171 from the greater Calgary area, (416) 764 8688 from the greater Toronto area, or dial toll free 888 390 0546 from elsewhere in North America. An audio webcast may be accessed through the Investor Events tab on the ZCL website at https://www.zcl.com/en/investorrelations/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, Ted Redmond 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 3
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 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 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. 4
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. For further information, please contact: Ted Redmond Kathy Demuth President & CEO Chief Financial Officer ZCL Composites Inc. ZCL Composites Inc. (780) 466 6648 (780) 466 6648 Ted.Redmond @ zcl.com Kathy.Demuth @ zcl.com 5