HYR.L Regulatory News (HYR)

19 March 2013

Hydrodec Group plc

("Hydrodec", the "Company"or the "Group")

Results for the year ended 31 December 2012

The Board of Hydrodec Group plc, the cleantech industrial oil re-refining group (AIM:HYR), is pleased to announce the audited results for the year ended 31 December 2012.

Operational Highlights

·; SUPERFINETM sales volumes increased 11% to a record of 22.5 million litres (2011: 20.3 million litres)

·; Record feedstock volumes up 18% on prior year, with proportion of US feedstock procured directly from utilities up to 39% from 23% in 2011

·; Higher utilisation of productive capacity at 70% (2011: 63%) due to better access to feedstock and improved plant reliability

·; Commenced processing of first polychlorinated biphenyl ("PCB") contaminated oil in the US following the permit awarded by the US Environmental Protection Agency ("EPA")

·; Unit sales margin broadly unchanged at US$0.24 per litre (2011: US$0.25 per litre) despite market compression of US$0.10 per litre from product and feedstock benchmark indices across the year

·; New experienced management team under the leadership of Ian Smale 

Financial Highlights

·; Revenue up 17% to a record US$26.1 million (2011: US$22.4 million), the eighth consecutive year of growth

·; Both plants delivered positive operating cash-flow for first time and contributed to central overheads

·; Gross profit rose 8% to US$5.4 million (2011: US$5.0 million); margins at 21% (2011: 22%)

·; Cash outflow from underlying operations* reduced marginally to US$2.5 million (2011: US$2.6 million)

·; Underlying operating EBITDA** of US$3.0 million loss (2011: US$2.1 million loss), reflecting increased investment in management, technical and operating capability, partly offset by improved operating performance

·; £2 million debt financing redeemed and new £5 million debt financing on improved terms secured

Strategic Highlights

·; Signed heads of terms with industry participant for new strategic alliance in US to underpin major capacity expansion in key market

·; Achieved proof of concept in applying Hydrodec technology to used industrial and motor oils - opening up materially larger global markets

* adjusted for non-operating growth expenditure of US$2.2 million (2011: US$0.8 million)

** adjusted for growth costs (per * above) and share based payment costs of US$0.5 million (2011: US$0.3 million)

Commenting on the results, Ian Smale, Chief Executive Officer of Hydrodec, said: "We have focused our first year on operational performance in the business, and investing for the future. Revenues, plant utilisation, feedstock procurement and sales volumes all increased significantly to new record levels and both plants generated positive operating cash-flow for the first time. We have a clear strategy that will deliver a profitable transformer oil business based on the Group's world class industrial oil re-refining technology. As a key first step the management team is targeting positive operating cash flow at the Group level later this year while the US joint venture proposal, which is close to being finalised, will transform the scale of the business."

For further information please contact:

Notes to Editors:

Hydrodec's technology is a proven, highly efficient oil re-refining and chemical process which is being initially targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. The Group takes spent oil, including polychlorinated biphenyl ("PCB") contaminated oil, as the primary feedstock, which is then processed at its two plants enabling 99 per cent or greater recovery of oil for reuse while also eliminating PCBs, a toxic additive banned under international regulations, without environmentally harmful emissions.

Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia. The Group's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com.

Chairman's Statement

I am pleased to provide my first Chairman's Statement since joining the Company in October last year.

2012 was a year of considerable change in the Boardroom and at senior management level. The Company welcomed Ian Smale as Chief Executive in January and he brought with him to the new management team David Robertson (Chief Operating Officer) and Lee Taylor (Head of Corporate Development). Chris Ellis joined the Board as Chief Financial Officer in July and, on the non-executive side, the Board welcomed Alan Carruthers in August.

Neil Gaskell stood down as Chairman after three years in October and John Gunn (previously Chairman and then Deputy Chairman) resigned in January 2012 having been with the Company since its incorporation and listing in 2004. Paul Manchester stepped down as Finance Director in July. On behalf of the Board I would like to extend my thanks to all of them for their valued service to Hydrodec.

Operationally and financially 2012 was a year of further progress for the Group, especially in the US. Although the business continues to make a loss, at plant level both Canton and Young produced positive operating cash-flow and contributed to central overheads for the first time. Sales volumes, revenues, feedstock procurement and plant utilisation were all significantly higher in 2012 and established new annual records. The Company's funding position was enhanced with the securing of an additional £5 million of debt finance on attractive terms in December. Looking to the future, the Board supported material further investment in management, technical and operating capability and growth initiatives during the year.

I believe that your Company is in very sound and capable hands with its new senior management team now complete. This leadership team not only has considerable experience in the global oil industry but also in managing multinational growth businesses. Ian Smale has set out in his Chief Executive's Report the results of their strategic review in 2012 and how we expect this to begin to bear fruit in 2013 and beyond, beginning with the signing of the US joint venture. I have inherited the Chair of a Company with an exceptionally strong management team, a unique and proven technology, and substantial global market opportunities. I look forward to being a part of the next chapter in Hydrodec's future with good cause for optimism.

Lord Moynihan

Chairman

Chief Executive's Report

I am pleased to report that the new management team made good progress in their maiden year at the Group. The team focussed on delivering rapid operational gains by improving the performance of the existing business while also developing a coherent global strategy that will provide a platform for long term growth and profitability and monetise Hydrodec's proven cleantech sustainable oil re-refining process.

Both our refining plants achieved positive operating cash-flow for the first time in the Group's history, contributing to central overheads. We also successfully and significantly increased feedstock procurement, plant utilisation, sales volumes and revenues to record levels.

As determined by the Board at the start of the year, we have invested in building capability in personnel in existing operations and for growth and launched a number of strategic initiatives that will form the basis of Hydrodec's next phase of expansion.

Strategy

As I spelled out in September, Hydrodec's competitive advantage is as a cleantech oil company with a unique, proven technology and considerable global potential. In order to deliver profitable long term growth the Group needs to move away from a purely "own-and-operate" business model to one that leverages its technology-edge while minimising the requirement for additional capital. Although we must continue to own and operate at least one clean technology re-refining plant to ensure our competitive development, further expansion can be driven more rapidly through a licensing model.

This strategy targets two complementary revenue streams: process and marketing income from equity participation in operating companies, and a royalty stream through licencing to third party operations.

During 2012, we focused on developing three sources of value from the existing business:

- securing feedstock to support an expansion in our core US market;

- leveraging the Australian technology and research base to test a protectable extension of the unique technology into general used oil re-refining; and

- securing additional scale and geographical expansion through new market entry.

US strategic alliance

Consistent with the new strategy, in November we announced a heads of terms to establish a joint venture which provides for security of feedstock and an equity partner with whom to substantially grow capacity in the US. Once completed, this transaction will deliver a materially de-risked growth project in our core market and assist in achieving scale rapidly. It creates value from our invested capital and business, continued leadership and equity participation in the growth of our SUPERFINETM brand in the US and establishes a separate royalty income stream that will remunerate the unique Hydrodec clean-technology. I am pleased to confirm that this deal is progressing very well and we expect to be in a position to announce signing of the final agreements within the next month.

Diversification into industrial oils

In December, we announced proof of concept that extends Hydrodec's proven technology into used paraffinic feedstock - both industrial and used crank case motor oils. To put this opportunity into context, the global market for naphthenic transformer oil sales is estimated at approximately US$1.5 billion per annum; the markets for industrial oil and engine oil sales is estimated at approximately US$30 billion per annum.

The test results are extremely encouraging and will support a move to full pilot plant and testing in 2013. Critically, the key competitive attributes of the technology in its current application in transformer oil - namely high recovery rates, competitive operating costs, high quality products and the potential for carbon neutral oil - remain viable in the new target markets.

The technology offers the potential for new types of high quality, low carbon lubricant base oils that meet or exceed the higher-end specifications, being Group II, II+ and/or Group III. Market intelligence suggests that the ability to produce a Group III product in particular would mark a significant breakthrough for re-refined products. We are confident that we can develop the process chemistry and reaction process, as well as process equipment design, manufacturing routes and process control philosophy that will be internationally protectable through patent. We are seeking grant funding to support this development, and are in discussions with potential partners for future feedstock and product development.

New geographic market entry

We continued to invest in Japan market entry and have made progress in several ways. We are negotiating a new form of arrangement with Kobelco-Eco that will return the Hydrodec technology from the original partnership to Hydrodec control, as well as recover Hydrodec's unique regional development rights. Active discussions continue with Kobelco-Eco and other independent parties to consider new options for the Hydrodec technology with the deployment model more likely to be licence-based rather than equity-participation led. Other options for market entry outside of Japan are being actively considered with the focus on the UK and mainland Europe, collectively the second largest markets for used transformer oil.

Financial and operating review

2012 represented the eighth consecutive year of growth for the Company with revenues increasing a further 17 per cent to US$26.1 million (2011: US$22.4 million) driven by a solid performance in the US.

Sales volumes of our premium quality, environmentally friendly SUPERFINETM transformer oil and base oil advanced 11 per cent to a new record of 22.5 million litres (2011: 20.3 million litres). Overall utilisation of productive capacity in the period averaged 70 per cent, up from 63 per cent for 2011. Significantly improved access to feedstock was a major factor with procurement volumes up 18 per cent on the prior year.

Unit sales margins were broadly unchanged at US$0.24 per litre (2011: US$0.25 per litre) and lower in the second half than the first, reflecting price compression of the ICIS Pale 60 benchmark index from the summer and the increased proportion of sales in the US where margins are lower. Average sales prices in the US rose until the second quarter when they began to fall. Hydrodec continues to reduce the discount to ICIS Pale 60 at which it sells SUPERFINETM. Average feedstock costs in the US rose gradually until the fourth quarter when they reduced significantly. The margin was maintained despite market compression of US$0.10 per litre from the benchmark indices for procurement cost and sales prices (diesel and ICIS Pale 60 respectively) during the course of the year.

Hydrodec's performance was impacted by volatile market conditions during the second half of 2012 as feedstock availability diminished during the summer and the third quarter but materially increased in the fourth quarter. This higher availability at lowered costs allowed year-end inventory levels to be higher than for 2011 which in turn supported the higher plant utilisation.

The US performed particularly well with record sales volumes achieved in Canton, up 13 per cent on 2011 as the strengthened local management team continued to make greater inroads into the core electricity utility sector. The proportion of US feedstock procured directly from utilities increased significantly to 39 per cent from 23 per cent in 2011. At the same time the proportion secured under longer term pricing contracts, rather than in the spot market, increased from 32 per cent to 47 per cent.

The overall improvement in US feedstock procurement over the year is indicative of Hydrodec's significantly improved market profile and credibility due to its commercial momentum and endorsement of the Group's oil treatment and recovery process for PCB-contaminated waste oil by the EPA, from whom we obtained a permit to treat used oil contaminated with more than 50 parts per million of PCB in June. We commenced treatment of contaminated oil in September initially on small volumes but at very attractive margins and we expect these volumes to increase in 2013 and beyond.

Australian operations were more challenging due to constrained feedstock availability and market demand following a slowdown in the general economy. Supplies of Mexican feedstock have not yet been received, despite regulatory approvals from all appropriate countries, due to difficulties in procuring shipping but we continue to pursue alternative solutions.

Both plants generated a cash surplus for the first time and underlying cash outflow from operations, excluding growth costs, reduced marginally to US$2.5 million (2011: US$2.6 million) despite the additional investment in management and other key personnel. Investment in growth costs increased significantly in the period to US$2.2 million (2011: US$0.8 million) with US$1.75 million spent on market expansion development costs and the balance on new product development, reflecting the Board's strategic decision to invest for future growth at the beginning of the year.

Underlying operating EBITDA, adjusted for growth costs and share based payment costs, widened to a US$3.0 million loss (2011: US$2.1 million loss) with improved operating performance partly offsetting the increased investment in management, technical and operating capability. The overall loss for the period increased to US$14.2 million (2011: US$11.5 million) once the impact of the additional investment in growth initiatives, the increased interest charge (including the unsecured loan stock amortisation), depreciation and amortisation are included.

Balance sheet and funding

We passed a key milestone in October with the passing of the final date for conversion of the convertible unsecured loan stock ("CULS"). The outstanding £12.8 million reverted to unsecured debt with a two year maturity and an 8 per cent per annum coupon. The Board continues to monitor its options for the redemption or refinancing of this debt ahead of its maturity.

In December, the Company announced a redemption of £2 million of debt secured against the Canton facility in North America, replacing it with £5 million of debt on more favourable terms for the Company, underwritten by Andrew Black, a non-executive Director and significant shareholder.

The net cash balance at the year-end was US$1.1 million, following receipt of £2 million of the aforementioned debt funding, repayment of the previous debt and payment of the CULS interest in December. Since the year-end a further £2.5 million of the debt funding has been received and the Board expects that its projected improvement in cash-flow will provide it with sufficient cash resources for the year ahead, irrespective of the conclusion and funding from the US joint venture deal, although it will continue to consider sources of additional funding on suitable terms as it considers its balance sheet structure and future funding requirements.

Outlook

The new management team made considerable strides in improving the Group's operational performance in 2012, while also establishing a clear strategy to drive long term growth, closing the year with the announcement of a proposed major US joint venture and proof of concept to extend the technology into substantially larger global markets.

The Group's feedstock supplies in the US continue to strengthen, which is expected to contribute to a further increase in plant utilisation. In addition, the executive management team remains focused on driving further operational efficiencies to improve gross margins with a plan to achieve positive operating cash-flow (pre interest) from the fourth quarter of the year.

As we look further ahead in 2013, we expect the conclusion of the US joint venture should allow us to target 85 per cent plant utilisation at Canton and that we would commence the planning and permitting required for expansion at Canton or for new sites.

In Australia we are confident of receiving A$1.9 million in grant funding towards the development of a pilot plant in respect of the application of the technology to industrial and motor oils. We also plan to address the sub-scale operation in Young.

In respect of geographic expansion we expect to repatriate our technology and restructure the business opportunity in Japan with a bias towards licensing, while also targeting major European market entry through participation or licensing with the UK the most likely target.

As a result the management and the Board look forward to the future with considerable optimism.

Ian Smale

Chief Executive Officer

Consolidated statement of comprehensive income

For the year ended 31 December 2012

Consolidated statement of financial position

As at 31 December 2012

Consolidated statement of cash flows

For the year ended 31 December 2012

Consolidated statement of changes in equity

For the year ended 31 December 2012

Notes to financial statements

For the year ended 31 December 2012

1. Accounting policies

Basis of preparation

These financial statements have been prepared in accordance with the principal accounting policies adopted by the Group, International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations (IFRIC) as adopted by the EU and those parts of the Companies Act 2006 applicable to companies reporting under it and were approved by the Board on 18 March 2013. They are presented in US Dollars, which is the presentational currency of the Group. The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.

These results are audited, however the financial information set out in this announcement does not constitute the Group's statutory accounts, as defined in Section 435 of the Companies Act 2006, for the years ended December 31 2012, or December 31 2011, but is derived from the 2012 Annual Report. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified, however they included a reference to an emphasis of matter in 2011 (but not 2012) with regard to going concern, and the reports did not contain statements under section 498(2) or 498(3) of the Companies Act 2006.

The accounting policies used in completing this financial information have been consistently applied in all periods shown. These accounting policies are detailed in the Group's financial statements for the year ended 31 December 2011 which can be found on the Group's website.

Going concern

The financial statements have been prepared on the going concern basis, which assumes that the Group will have sufficient funds to continue in operational existence for the foreseeable future. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current available working capital and working capital facilities for the next 12 months. There are also a number of well advanced initiatives within the business that would have a positive impact on the expected cash-flows of the Group in that period. Additionally the Group has been provided with alternative offers of finance that in the view of the Board could reasonably be expected to be made available were the need to arise. Therefore the Directors consider the going concern basis appropriate.

2. Revenue and operating loss

2.1 Geographic Analysis

Revenue substantially comprises amounts earned on receivables from trade customers. During the year three customers in the USA each accounted for more than 10% of the Group's total revenue. Revenue recognised during the year and the amounts outstanding at the year-end in respect of those customers were as follows:

2.2 Loss on ordinary activities

The loss on ordinary activities before taxation is stated after charging/(crediting) the following amounts:

2.3 Underlying operating EBITDA

2.4 Growth costs

The business continues to invest in long term strategic growth initiates focused on geographic expansion and research and development. These costs are analysed as follows:

3. Finance Costs

4. Loss per share

The calculation of the basic loss per share is based on the loss attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year.

The weighted average number of shares used in the calculations are set out below:

In 2011 and 2012, the share options and warrants were anti-dilutive and diluted earnings per share is the same as basic. The calculation of the weighted average number of shares excludes shares which are now held by a member of the Group and in respect of which votes may not be cast at a general meeting (which are treated as treasury shares) and also shares held by the Employee Benefit Trust.

5. Non-current liabilities - borrowings

Unsecured loan stock

In November 2007, the Company issued £13,800,000 of convertible unsecured loan stock by private placement, convertible at the loan stock holder's option into ordinary share capital of the Company at a fixed price of 19p, subject to anti-dilutive conditions for subsequent share issues at below market price.

On 1 November 2012, these conversion rights lapsed with no conversions to share capital being made during the year (2011: USDnil). The loan stock is now an unsecured loan repayable, at the Company's determination, between 1 November 2012 and 31 October 2014. Redemption value of the loan stock is £12,790,000, payable in full no later than 31 October 2014.

Interest is charged at a fixed rate of 8 per cent per annum on the redemption value of the loan stock. Management recognise that the 8 per cent interest rate is below market rate for this type of financial instrument and the fair value of the liability is calculated using estimated interest rates for an equivalent non-convertible instrument, which has been assessed using comparable internal rates of return by the Group for other income streams.

The residual amount representing the original equity conversion option, is included in the equity reserve in shareholder's funds, and is being recognised over the remaining period of the loan to redemption as a transfer within reserves.

Fixed rate loan notes

On 14 June 2011, the Company issued £2,000,000 of fixed rate loan notes - 2014. The notes were secured by mortgage deed over Group assets. Interest was payable at 10 per cent per annum. The notes were repaid in December 2012. £1,400,000 of the principal (together with accrued interest and early prepayment fee) was repaid by way of the issue of 12,282,496 new ordinary shares in the Company at the prevailing market price of 11.88p per share to the holder (Andrew Black, a Director), and the balance of £600,000 of the principal (together with accrued interest and early prepayment fee) was repaid in cash.

On 19 December 2012, the Company created, and received a commitment from Andrew Black to subscribe for, £5,000,000 of fixed rate loan notes - 2015. At the year end the Company had received cash subscriptions for £2,000,000 of these notes. The notes are secured over Group assets. Interest is payable at 5 per cent per annum due in March and September of each year. The Notes have a three year term and are repayable at the Company's option at any time after six months from their date of issue, subject to a final repayment date of 19 December 2015.

Warrants to subscribe for ordinary shares were granted in connection with both series of fixed rate loan notes (see note 6).

6. Share Capital

During the period the Company issued 12,282,496 new ordinary shares at a price of 11.88p per share in consideration for the repayment of £1,400,000 of the principal (together with accrued interest and early prepayment fee) of £2,000,000 of fixed rate loan notes - 2014 (see note 5). These shares were issued on 21 December 2012 but only admitted to trading on AIM on 2 January 2013.

VIN Australia Pty Ltd, a member of the Group, holds 54,500,000 ordinary shares in Hydrodec Group plc pursuant to the acquisition of Virotec International plc in 2008. Votes in respect of these shares, and a further 2,173,333 shares issued pursuant to that acquisition, may not be cast in a general meeting of Hydrodec Group plc and as such they are treated as if they were treasury shares on consolidation.

Warrants

On 25 May 2011, the Company issued 10,750,000 warrants in connection with the issue of £2,000,000 of fixed rate loan notes - 2014. The warrants have an exercise price of 8p per share with an exercise window from 14 June 2013 to 14 June 2016.

On 24 December 2012, the Company issued an additional 10,000,000 warrants in connection with the subscription for £2,000,000 of the £5,000,000 fixed rate loan notes - 2015. A further 15,000,000 warrants will be issued in connection with the balance of £3,000,000 of the loan notes. The warrants have an exercise price of 16p per share with an exercise window from 19 June 2013 to 19 December 2017.

7. Post balance sheet events

In respect of the fixed rate loan notes - 2015 (described in note 5), the following cash subscriptions for notes have been received (bringing the total to £4.5 million of the £5 million commitment), and associated warrants to subscribe for ordinary shares (described in note 6) granted, since the year-end: