HYR.L Regulatory News (HYR)

23 September 2015

Hydrodec Group plc

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

Unaudited Interim Results

Hydrodec Group plc (AIM: HYR), the clean-tech industrial oil re-refining group, today announces unaudited results for the six months ended 30 June 2015.

Financial highlights

· 2015 has been, and continues to be, challenging, but the Company does not expect short term issues to impact 2016 expectations.

· The ramp up of key projects has been slower than expected. In the UK, the Company continues to face, and react to, oil price volatility and difficult market conditions.

· Total revenue and other income of US$21.3 million (H1 2014: US$29.4 million) includes business interruption income of US$1.5 million from the Canton insurance settlement but limited revenues from the plant as ramp-up is ongoing; it is also impacted by lost production during re-location of operations in Australia, whilst revenues in the UK are adversely impacted as a result of the lower price of oil.

· Total sales volumes increased to 33.2 million litres (H1 2014: 25.5 million litres), with the acquisition of the business and assets of Eco Oil Limited ("Eco-Oil") in April 2015.

· Gross profit of US$2.8 million (H1 2014: US$7.9 million); reflects limited revenues from the Canton facility, lost production in Australia, and the adverse impact of the lower price of oil in the UK.

· Operating EBITDA1 loss of US$3.2 million (H1 2014: US$1.6 million profit); reflecting production delays in the US, the costs associated with relocation of operations in Australia and the effects of the decline in the price of oil and changing market conditions on margins in the UK Recycling business.

· Overall loss for the period of US$7.5 million (H1 2014: US$3.0 million) included transaction costs and one-off restructuring costs incurred in relation to the integration of the Eco-Oil business, the re-commissioning of the rebuilt and expanded plant in Canton and the relocation of Australian operations.

1 EBITDA adjusted for growth expenditure of US$1.2 million (H1 2014: US$1.1 million), including acquisition costs of US$0.4m and restructuring costs of US$0.5 million (H1 2014: US$nil)

Operational and strategic highlights

· The rebuilt and expanded facility in Canton, Ohio was fully installed largely as expected but has experienced performance issues with plant and contractors slowing ramp up of production. The pace and continuing execution of the Canton ramp-up is the key performance imperative. At the time of this announcement, four Trains (out of six) are in production at a reduced rate producing approximately 38,000 litres of SUPERfineTM base oil per day. The previously announced issues with heat exchangers have been resolved; repaired units are now fitted to four Trains. Plans are in place to bring Trains 5 and 6 into production and we expect to switch production to transformer oil shortly. The business benefits from secure feedstock supply and ample stock. We have now revised our production projections for Canton for the year to 10 million litres assuming building to full production during October.

· The acquisition of the business and assets of Eco-Oil has consolidated feedstock collection for the proposed lubricant oil re-refinery in the UK. A full restructure of the consolidated UK recycling business is nearing completion, with an approximate 36% reduction in headcount as well as site consolidation benefits expected to generate annualised synergies of c.US$2.5 million.

· The Company has entered into an agreement for lease with The Manchester Ship Canal Company Limited (a member of the Peel Ports Group) for the proposed long term lease of a nine acre site near Eastham Locks, Port Wirral, Merseyside in North West England, for the first phase development of a used oil re-refinery in the UK. The Company continues to ensure that it delivers on all aspects of the consultation and engagement process required by the NSIP regime, to work on the design and value engineering of the project and to develop the planning submission for the proposed re-refinery to be submitted later this year.

· Commenced tolling under the outsourcing arrangement with Southern Oil in Australia; product achieving '500hr' oil status with encouraging market response.

Market outlook

· In the US, despite slower than expected ramp up to full production, we remain confident that the rebuilt and expanded plant has a unique market proposition and is well placed in 2016 to leverage the production of the highest quality transformer oil produced in the US, meeting all US and international standards.

· In the UK, lower oil prices have created a significant market dislocation in supply and demand for used oil and used oil products. Hydrodec UK has responded, and continues to react to, and operate in, a tough trading environment, with a second phase of restructuring underway. The security of feedstock supply delivered by the combined business underpins the rationale and longer term strategy for a UK re-refinery where base oil margins are less volatile and continue to trade at a significant premium to fuel oil.

Commenting on the results, Ian Smale, Chief Executive of Hydrodec, said: "We remain focused on managing the resources of the Company and on delivering the comprehensive six point plan set out at this year's Annual General Meeting against a backdrop of very difficult underlying market conditions and performance issues with plant and contractors in key projects. We remain confident that the key elements of our comprehensive strategy are in place and believe that the delivery of this strategy and plan will drive the Company to profitability."

The Company also announces today that Gillian Leates, Non-Executive Director and Chair of the Audit Committee, has retired from the Board and as Chair of the Audit Committee with effect from the close of yesterday's Board meeting, in order to focus on her other business interests, including as Non-Executive Chairman of React Group plc. Lord Moynihan, Chairman, commented: 'On behalf of the Board I would like to express our deep appreciation to Gill for her exceptional contribution and commitment to Hydrodec over the last six years. As a long standing member of the Board, she has been integral to the development of Hydrodec over the past six years. We all wish her well for the future.'

For further information please contact:

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.

Chief Executive's Report

Operations

At the Company's Annual General Meeting on 9 June 2015, we set out a clear, focused and comprehensive six point plan to drive the Company to profitability. The first half of 2015 has been challenging, but has delivered progress in terms of the Company's strategic plan despite a backdrop of difficult underlying market conditions as well as performance issues with contractors and equipment in key projects.

The interim results reflect the re-commissioning of the rebuilt and expanded plant in Canton and the relocation of Australian operations as well as the impact of lower oil prices disproportionately affecting the UK collections business. In addition, they reflect the transaction costs and one-off restructuring costs incurred in relation to the integration of the Eco-Oil business, without the benefit of cuts in growth and overhead costs which arise in the second half of the year.

In the United States, we have commissioned the rebuilt and expanded facility in Canton, Ohio including the necessary remedial action on plant and equipment that slowed production ramp-up over the summer. We have achieved design specification production from individual processing trains and remain confident that noted efficiency improvements will be attainable with full production from the plant in due course. At the time of this announcement, four Trains (out of six) are in production at a reduced rate producing approximately 38,000 litres of SUPERfineTM base oil per day. Previously announced issues with heat exchangers have been resolved with repaired units now fitted to four Trains which will allow us to plan for Trains 5 and 6 to be in production. We expect to switch production to transformer oil shortly. Given the delay to the ramp up of Trains 3 to 6 and based on revised internal forecasts, we have now revised our production projections for Canton for the year to 10 million litres assuming building to full production during October.

In Australia, tolling has commenced under the outsourcing arrangements with Southern Oil, with all transition and residual operating cost savings now delivered. Our product has achieved '500hr' oil status, certifying the oil to be high quality transformer oil and efforts to further develop market penetration of our SUPERfineTM product are underway. We expect the Australian operation to be cash flow positive by the year end supported by better margin structures compensating for some lost production during transition.

In the UK, our objective remains to deploy world leading technology that delivers a European hub for re-refining, producing high quality new oils from used oils for use in their original purpose. We have consolidated feedstock collection for the proposed lubricant re-refinery through the acquisition of the business and assets of Eco-Oil and are realising significant efficiencies through the transition of the OSS and Eco-Oil businesses under a combined Hydrodec (UK) operating structure and brand; revenue, scale and efficiency savings are estimated to deliver approximately US$2.5 million of benefit on an annualised basis. Significantly, the reduced oil price has changed the character of the UK waste oil market from oil as an opportunity value proposition to a liability cost for workshops and operators. In the short term, however, this pricing lag both compresses margins and reduces oil available for collection. An additional market feature is a reduction in demand for PFO with the decline in UK coal-fired power generation, pushing markets increasingly into Europe. A number of steps to mitigate both pricing lag and market structure are underway as Hydrodec UK continues to respond and operate in a tough trading environment.

Overall, the Company's priorities remain clear, and the Board remains confident that our focused and comprehensive six point plan will deliver value for shareholders: delivering the rebuild and expansion of our US market position through our Canton re-refinery; embedding the outsourcing relationship with Southern Oil in Australia; delivering the leading oil and associated waste management business in the UK; securing the technology platform of the Company through patents and partnership with key technology providers under the guidance of the Safety and Technology Board Committee; building out into the large lubricant oil re-refining market to be value accretive to Hydrodec shareholders; and, growth through technology de-risking expansion through partnership, collaboration or integration along the value chain. The key elements of this comprehensive strategy are in place; the Board and management all believe that delivery of this strategy and plan will drive the Company to profitability.

Ian Smale

Chief Executive

Chief Financial Officer's Review

The following provides a review of Hydrodec's results for the 6 months ended 30 June 2015. The half year results include additional costs related to the acquisition and consolidation of Eco-Oil's assets in the UK as well as re-commissioning costs in both the US and Australia. The impact of the restructuring charges incurred in H1 2015 will further reduce direct and overhead costs in H2 2015.

Overview

In the period, the Group sold 33.2 million litres of oil, an increase of 30% on the previous year driven by the acquisition of the Eco-Oil business at the start of Q2. Total income declined 27% as Business Interruption income ceased on 31st March and Average Selling Price ("ASP") declined as a result of the fall in world oil prices.

The focus for H2 is the continued ramp up to full production in the US of the expanded six Train facility at Canton and to complete the consolidation of the UK Recycling business to build a sustainably profitable business despite lower oil prices.

Re-Refining

Whilst the US plant remained under construction for the first half of the year, oil sales were restricted in that region to traded oil (3.6 million litres) which was lower compared to the prior year as the business focus moved to re-commissioning the plant. In Australia the business traded oil to maintain supply to key customers while the operations were transferred to the Southern Oil Refinery, however because of extended commissioning there was some sales disruption to the business during the transition resulting in a decline in volumes of 20%.

Recycling

Overall volumes increased due to the acquisition of Eco-Oil on 1 April 2015. On a like for like basis volumes declined by 16% due to the focus on higher margin business and the impact of the decline in oil prices on the collection cycle at the end of 2014 as suppliers retained their feedstock on the expectation of a price recovery through Q1. The UK Recycling business has suffered further margin compression as a result of the recent decline in world oil prices. The business has successfully mitigated some of this impact by pushing down feedstock acquisition costs and following the acquisition of Eco-Oil has undertaken a significant restructuring exercise to bring down the fixed cost base for the combined business. Whilst some of these restructuring costs were incurred in H1 as noted below the impact of most of these changes will only materialise in H2 and further cost reductions will continue through Q3 and Q4.

Growth Costs and Overheads

*Excludes one off transaction costs of US$422,000 for the acquisition of Eco-Oil

Despite the acquisition of Eco-Oil during the year, the Group has reduced ongoing indirect overheads by 6% compared to the first half of 2014, driven by a reduction in Growth and other indirect employee costs.

Exceptional and other items

In the half year, the Group accounted for a net charge of US$175,000 of exceptional and other costs. This consists of:

· Transaction costs related to the acquisition of Eco-Oil of US$422,000

· Bargain purchase on the acquisition of Eco-Oil of US$847,000

· Restructuring costs in the Recycling business of US$105,000 as the business restructured Eco-Oil and OSS.

· Re-commissioning costs of US$115,000 in the US

· Re-commissioning costs of US$380,000 in Australia

· The cash associated with exceptional items in the period was an outflow of US$1,022,000

Cash Flow

Net cash expended in the first six months of 2015 was a US$12.6 million outflow compared to a US$3.5 million outflow in the prior year comparable period. EBITDA was US$4.8 million lower and working capital outflows increased by US$1.8 million driven mostly by the build-up of feedstock in the US in anticipation of the production restart at Canton. Capital expenditure in the period was US$10.9 million, of which US$10 million related to the construction of the expanded plant in the US with the remainder of the lease facility being drawn against it of US$9.6 million. The remaining US$0.9 million primarily relates to the UK as the Group progresses its planning permission process in respect of the planned UK based re-refinery. The acquisition of Eco-Oil for US$3.6 million completed during the period. Overall, the Group held US$2.4 million in cash on its balance sheet at the end of the period. Under the terms of the arrangements with G&S, a further US$1.7 million should be received in H2 along with disposal proceeds arising from the restructuring of the UK businesses.

Risk management process

The Group has policies, processes and systems in place to help identify, evaluate and manage risks at all levels throughout the organisation. Risks are regularly reviewed and monitored by Business Unit or functional management teams. The executive team review the major risks across the Group on a quarterly basis to ensure that the management of these risks has appropriate focus. The Board review these at least twice a year.

The principal risks that could potentially have a significant impact on our business in the future are set out on pages 20 and 21 of the 2014 Annual Report. The pace and execution of Canton ramp-up is the key performance imperative and short term financial risk for the Group. The Annual Report can be downloaded at www.hydrodec.com

Chris Ellis

Chief Financial Officer

CONSOLIDATED CONDENSED STATEMENT OF INCOME

CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION

UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

NOTES TO THE UNAUDITED INTERIM REPORT

1. Basis of Preparation 

Hydrodec Group plc is the Group's ultimate parent company. It is incorporated and domiciled in England and Wales. The address of Hydrodec Group plc's registered office is 6 Hay's Lane, London, United Kingdom. Hydrodec Group plc's shares are listed on the Alternative Investment Market of the London Stock Exchange.

The Group presents its financial statements in US dollars, as the Group's business is influenced by pricing in international commodity markets which are primarily dollar based.

These consolidated condensed interim financial statements have been approved by the Board of Directors on 22 September 2015.

The interim consolidated financial statements for the six months ended 30 June 2015, which are unaudited, do not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006. Accordingly, this condensed report is to be read in conjunction with the Annual Report for the year ended 31 December 2014, which has been prepared in accordance with IFRS as adopted by the European Union, and any public announcements made by the Group during the interim reporting period.

The statutory accounts for the year ended 31 December 2014 have been reported on by the Group's auditors, received an unqualified audit report and have been filed with the registrar of companies at Companies House. The unaudited condensed interim financial statements for the six months ended 30 June 2015 have been drawn up using accounting policies and presentation expected to be adopted in the Group's full financial statements for the year ending 31 December 2015, which are not expected to be significantly different to those set out in note 1 to the Group's audited financial statements for the year ended 31 December 2014.

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. As highlighted in the risk management section of the CFO's Report, a key underlying risk to this basis is the pace and execution of the ramp up of production at Canton.

2. Revenue and operating loss

2.1. segment analysis

Following the acquisition of the principal assets and business of OSS Group Limited in September 2013 and now of Eco Oil Limited in April 2015, the Group now operates two main operating segments:

• Re-refining: principally the treatment of used transformer oil and the sale of SUPERFINETM oil

• Recycling: principally the collection and treatment of waste lubricant oil and the sale of recycled oil products

The financial information detailed below is frequently reviewed by the Board (the Chief Operating Decision Maker).

2.2. geographic analysis

The Group's revenues from external customers and its non-current assets are divided into the following geographical areas:

*2015 income includes USD1,510,000 for business interruption.

2.3. loss ON ORDINARY ACTIVITIES

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

2.4. growth costs

The business continues to invest in long term strategic growth initiatives 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 the period, 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 held by the Employee Benefit Trust.

5. TANGIBLE FIXED ASSETS

6. Intangibles

 7. Trade and other receivables

8. Trade and other payables

The carrying values of trade and other payables are considered to be a reasonable approximation of fair value.

9. NON-CURRENT LIABILITIES - borrowings

During 2015 the Hydrodec of North America financed the plant in Canton in order to finance the expansion.

10. share capital

Pursuant to the liquidation of Virotec International plc and its subsidiary VIN Australia Pty Ltd, on 16 April 2015 the Company cancelled 56,673,333 ordinary shares held by those entities.

11. ACQUISITIONS

On 1 April 2015 the Group acquired the principle business and assets of Eco-Oil from Eco-Oil International Limited and its subsidiaries. The acquisition was made as part of the Group's strategy to secure the supply chain for used oil collection in the UK following the acquisition of OSS in August 2013 and underpins Hydrodec's plan to invest in a base oil re-refinery in the UK.

The details of the business combination are as follows: