HYR.L Regulatory News (HYR)

9 June 2015

Hydrodec Group plc

("Hydrodec" or the "Company")

AGM Statement

Hydrodec Group plc (AIM: HYR), the clean-tech industrial oil re-refining group, will be holding its Annual General Meeting at 10am today at the offices of Norton Rose Fulbright LLP, 3 More London Riverside, London SE1 2AQ. At the meeting, Lord Moynihan, Chairman of the Company, will make the following statement:

"In the last three months, Hydrodec has commissioned the rebuilt, improved and expanded facility in Canton, Ohio, commenced tolling under outsourcing arrangements with Southern Oil in Australia and has consolidated feedstock collection for its proposed lubricant re-refinery in the UK through the acquisition of Eco-Oil. The Company has also taken the next steps to register technology patents and is close to agreement for a lease for the proposed re-refinery in the North West of England, subject to the Nationally Significant Infrastructure Projects (NSIP) regime with formal application expected before year end.

This is all consistent with your Company re-emerging stronger from a necessary period of re-building, re-investment and preparation to resume delivery of the strategy originally proposed by management in 2013; updated, reviewed and endorsed by the Board. Our goal remains to deliver significant growth, profitability and long term shareholder value through re-refining used oil sustainably and fit for its original purpose.

The Company's priorities are clear, and the Board endorses a focused and comprehensive six point plan, the key elements of which are already in train. The Board firmly believe the delivery of this plan will drive the Company to profitability:

(1) Delivering the rebuild and expansion of our US market position through our Canton re-refinery. The US business is expected to be cash generative by the end of 2015 and to process c.19 million litres of transformer oil by the year end. The plant has the potential to operate at least 10% more efficiently per unit of capacity and to produce the best quality transformer oil available in the US.

(2) Embedding the outsourcing relationship with Southern Oil in Australia. The Australian business is expected to be cash generative by the end of 2015. Our product has achieved '500hr' oil status within a week of start-up, certifying the oil to be high quality transformer oil.

(3) Delivering the leading oil and associated waste management business in the UK. Realising significant efficiencies through the transition of the OSS and Eco-Oil businesses under a combined Hydrodec (UK) operating structure and brand; the combined business is expected to effectively underpin supply into the proposed 75 million litre first phase re-refinery whilst delivering a positive cash run-rate by the end of 2015 as a stand-alone business (excluding transaction costs and costs of restructuring). Early indications are that revenue, scale and efficiency savings will amount to more than £1.5 million on an annualised basis.

(4) Securing the technology. The Company has recently filed the European Regional Phase of an International (PCT) application to protect the know-how and operating developments in the transformer oil technology for a further 20 years as well as the potential technology innovations which we have developed to upgrade yield and quality in re-refining lubricant oils. The merits of re-locating the technology programme to the UK are under consideration with suitable locations and partners being sought. The formation of the Safety and Technology Committee last year also demonstrates Hydrodec's on-going commitment to safety and good governance. Under Dame Mary's leadership, the Committee provides rigorous oversight of health, safety, environmental and quality matters and a robust challenge for Hydrodec's technology programme.

 (5) Building out into the large lubricant oil re-refining market to be value accretive to Hydrodec shareholders. The Board remain focused on developing the UK's first purpose built used lubricant oil re-refinery producing Group II/II+ base oils by the end of 2017. The exclusive CEP technology licence de-risks the re-refining project and has been developed into a detailed front-end engineering design for a re-refinery complex in three phases: a 75 million litre lubricant oil re-refinery (2017); a 15 million litre transformer oil re-refinery (2018); and a second 75 million litre lubricant re-refinery expansion (2019). Associated technology and growth costs will be reviewed and managed as part of the project with a detailed business case, risk management and financing plan being developed with a significant portion of any financing of the project likely to be through external debt financing and/or third party participation. The Board will be reviewing detailed financing options during the next two quarters, which we will update shareholders on at the appropriate time. 

(6) The Company continues to review a number of other growth options in the core transformer oil business. This includes adopting the Australian business model in Europe or the US and continuing to de-risk any expansion through partnership, collaboration or integration along the value chain.

To achieve this strategy, the Board will continue to structure and run the group with a clear focus on:

Maintaining good governance through a strong and appropriate Board. I regard high quality governance as a key distinctive factor in the Hydrodec story and as such I am keen to ensure that it is always improving. In that light, I can announce today several changes that seek to deliver the best possible oversight of the business for shareholders. Mark McNamara will be stepping down as Senior Executive Director at today's AGM to enable him to focus exclusively on managing our Australian operations. I would like to take this opportunity to thank Mark for his commitment and contribution to the Board over the past 10 years; he has been integral to the development of Hydrodec over that time. We are committed to ongoing Board refreshment and in this regard executive search firm, Cripps Sears, has been engaged to identify our next Chair of the Audit Committee. In addition, reflecting on this year's ISS proxy advisory report, I am today stepping down as Chairman of the Remuneration Committee and Nomination Committee; with Alan Carruthers, as an independent Non-Executive Director, undertaking to chair both these committees going forward. We will maintain this process of refreshment.

Driving performance, efficiency and growth whilst maintaining responsible balance sheet management, through a relentless focus on EBITDA. We are focused on a significant cost reduction in central overheads and will realise approximately £500,000 in annualised savings through relocating the head office and by Lee Taylor and David Robertson stepping down from the executive leadership team at the end of July. We have reallocated their responsibilities and have no intention of replacing them in the short term. I do hereby want to take his opportunity to acknowledge publicly, and thank them both, for their valuable contribution to the development of Hydrodec over the past three years.

Engaging with our partners to de-risk implementation. In particular, it is worth noting that close co-operation with partners G&S Technologies in the US has ensured a material supply of feedstock. Hydrodec re-enters the US market with an encouragingly strong order book, initially for base oil and, once appropriate certification has been achieved, for transformer oil. 

Developing executive remuneration structures which promote the long term success of the Company.  As you are aware, our current long term incentive plan for executive management expired in January 2015 without vesting. Following a thorough review of executive remuneration arrangements by the Remuneration Committee in conjunction with remuneration consultants, New Bridge Street, shareholders have been asked to approve the rules of a new long term incentive plan. It simplifies the existing incentive arrangements by reducing the size of the potential award, reducing the number of beneficiaries, focusing on retaining and incentivising Ian Smale and Chris Ellis, and aligning them with both the interests of shareholders and the Company's business strategy.

Engaging with our employees. At this AGM, the Company is seeking shareholder approval to implement an all-employee share plan. The Board believes strongly in the importance of enabling employees to have an interest in the Company for which they work to promote both employee shareholder ownership and participation.

This plan is comprehensive and consistent with the Board's recurring theme of growing a profitable Company whilst also managing risk within the business. We will do this with transparency and accountability in our engagement with investors and the market and as we continue to deliver on our clear investor-engagement strategy begun earlier this year. We believe this strategy is robust and will deliver value for shareholders in the long term."

At the meeting, Ian Smale, Chief Executive of the Company, will also make the following statement:

"18 months since a fire halted production in the Company's principal manufacturing facility, we are poised to re-emerge stronger; better equipped, bigger, with more options at lower risk to deliver growth, profitability and create long term shareholder value.

We have two well established business models - independent re-refining at scale and subordinated production deriving scale through association with complementary partners. Both leverage proprietary technology and benefit from an integrated feedstock and supply-chain. The business strategy is focused on managing risk through partnership, acquisition and collaboration. In our core, regulated markets these businesses will generate returns [IRR] in excess of 25%.

The UK base oil project represents a significant extension of our strategy and is a serious, large scale undertaking for the Company; as such we are approaching the planning and development process with a great deal of care. The basic business premise is attractive: the UK operates a waste oil protocol that collects and treats used oils through minimal process to a defined end of waste product only fit for burning; this is high intensity, complex, competitive business with low barriers to entry and low margins generally offering less than 10% returns. There are clear regulatory drivers for this opportunity: the EU Waste Framework Directive establishes a legal preference for re-use, or in our case re-refining, of waste oil; in the UK, DEFRA have independently published a strategy for hazardous waste which recognises a need for compliance with Europe and creates a strategic requirement for an 80 million litre re-refinery.

The UK is fundamentally short of base oil with demand estimated (by the UK Government) at 750-800 million litres per annum, substantially in excess of domestic production; There is potential for up to 350 million litres per annum of waste oil, although regulated industry experience would put the available supply of compliant oil at 210-235 million litres; the rest is lost to poor enforcement of regulation and an active grey or informal market. Competition for collected used oil is increasingly from European re-refining with pricing reflecting a net-back to European base oil prices less an export/transport cost of 1-1.5 pence per litre. Finished baseoil is priced on an import parity basis providing a similar 1-1.5 pence per litre transport advantage. The combined location advantage for a UK re-refinery can be worth up to three pence per litre (ca. $40 per tonne) in margin support. As a consequence, high quality base oil offers a significant margin advantage over fuel alternatives and supports investment in re-refining. Gross margins of circa 3 pence per litre in PFO compare with 16-23 pence per litre subject to base oil grade and quality; current assessment suggests that an appropriate base oil investment can attract returns in excess of 30% assuming leverage at typical levels for an investment of this type.

The envisaged re-refinery project is subject to consideration as a nationally significant infrastructure project (NSIP), a statutory process with defined process and timelines. Current plans are a Phase 1, 75 million litre waste oil re-refinery (end 2017); a Phase 2, 15 million litre transformer oil re-refinery (end 2018); and a further Phase 3 75 million litre re-refinery (end 2019). Key issues and risks will be planning consent and financing. Both are being developed with the expectation that financing will come principally from debt/asset financing.

In assessing options for financing, we are actively developing the key criteria for risk-based lending: feedstock (supply) - secured by acquisition and consolidation in the UK market; proven technology with a successful global footprint; an advantaged location, subject to a defined planning process that results in a statutory development consent order within a pre-determined timeline; and, defined sales channels for finished product subject to product quality and benefitting from a clear commercial location advantage into a short market. These components form the basis of the business case for investment and will be reviewed by the Board in 3Q this year prior to final planning submission in 4Q.

Hydrodec has committed about £1 million to date in preparing this business and planning case, including the UK licence and basic engineering package from CEP, the front end engineering design by PROjEN as well as project, planning and specialist reports to support the planning submission. Completing the planning process is likely to cost a further £1 million; we continue to plan the project based on a first phase re-refinery cost of $45-50 million (£30-35m), with the transformer oil option assessed at a further $10 million (£6.5m).

Finally, I must give a quick update on progress at Canton. I announced that the plant was fully commissioned at the beginning of last week. Bringing the first trains to full operation has taken a little longer than expected mostly due to instrument and control calibration of the systems primarily designed to ensure safe and efficient operation. We do not expect this slightly delayed start to change the projected outcome for the year and stand by our expectation of 19 million litres for the year as things stand today."

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Notes to Editors:

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process initially targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. Spent oil is currently processed at two commercial plants with distinct competitive advantage delivered through very high recoveries (near 100%), producing 'as new' high quality oils at competitive cost and without environmentally harmful emissions. The process also completely eliminates PCBs, a toxic additive banned under international regulations. Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia. In 2013, Hydrodec acquired the business and assets of OSS Group, the UK's largest collector, consolidator and processor of used lubricant oil and seller of processed fuel oil, with a national network of oil storage and transfer stations. Used oil is converted into processed fuel oil at OSS's plant at Stourport and principally sold on to the UK quarry and power industry. In April 2015, Hydrodec further acquired the business and assets of Eco Oil, a leading UK waste oil collector and supplier of recycled industrial fuel oil into the power and road stone industries. It is also one of four significant providers of waste management services to the marine industry in the UK, specifically oily-water slops or marine pollutant (MARPOL). In line with our stated intention to develop a base oil re-refinery in the UK, we have an exclusive licence agreement with California-based Chemical Engineering Partners (CEP) to develop the CEP wiped-film evaporation and hydrogenation technology in the UK as well as the basic engineering for a 75 million litre per annum capacity base oil re-refinery.

Hydrodec's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com.