HYR.L Regulatory News (HYR)

25 September 2017

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 2017.

Financial highlights

· Positive Group EBITDA of US$26k, the first positive trading EBITDA generated by the Group since its inception and an improvement of US$1.1 million on the prior year (H1 2016: US$1.1 million loss)

· Revenues increased by 11% to US$9.0 million (H1 2016: US$8.1 million) driven by improved pricing and sales mix

· H1 2017 gross unit margins up to 13% (H1 2016: 5%)

· Significant reduction in corporate costs, falling to US$1.1 million from US$1.5 million (H1 2016)

· Statutory loss for the period down to US$2.6 million from US$5.3 million (H1 2016, including discontinued operations)

· Operating cash outflow (before working capital movements) reduced to US$0.2 million (H1 2016: US$2.0 million)

Operational highlights

· Both US and Australian operations EBITDA positive in H1

· Lower volumes reflecting a less active feedstock market in the US particularly in Q2 - demand for products remains very strong 

· Improving margins in the US business with increased proportion of transformer oil (compared to base oil) sales (H1 2017: 58%) compared to H1 2016 (42%)

· Significantly improved feedstock performance in Australia

· First sale of carbon credits in respect of credits generated by production in 2013

Post period-end highlights and outlook

· August provided best EBITDA month for US operation since recommissioning of the rebuilt plant in 2015

· Strategic initiatives around procuring additional US feedstock underway

· Expectation of further margin improvements in the US heading into Q4

· Agreement for "take or pay" arrangement with largest customer in Australia providing a basis for a much-improved performance in that business in H2

· Confirmation of new patent for a further 20 years in the key US market

· Environmental award from US EPA for Canton operation

· Substantial growth in EBITDA expected in Q3 from Australian and US operations

· While working capital continues to be closely monitored and controlled, the Board is increasingly confident that the Company will record positive EBITDA and cash generation for the full year for the first time in its history

Chris Ellis, Chief Executive Officer of Hydrodec, commented: "I am pleased to be able to report another positive step towards making Hydrodec profitable and re-establishing its position in the transformer oil market in our key operations in the US and Australia. Whilst market conditions, and particularly the availability of feedstock, remain highly competitive, both operations are generating positive EBITDA and the focus remains to continue to improve margins and profitability. Volumes and margins in Q3 to date have shown further significant improvements on Q2 and both operations are expected to generate substantially stronger positive EBITDA in Q3. The latest commercial arrangements in Australia will provide additional momentum heading into Q4. We continue to seek to take advantage of any opportunities the current market may yet present to grow the business within our existing platforms and will be focused on deploying our technology into new geographies and markets in the coming months."

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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. MarketsandMarkets forecasts that the global transformer oil market is expected to grow from US$1.98 billion in 2015 to US$2.79 billion by 2020 at a CAGR of 7.14% from 2015 to 2020. 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 Bomen, New South Wales, Australia. 

In 2016 Hydrodec received carbon credit approval from the American Carbon Registry ("ACR"), enabling its product to be sold with a carbon offset and creating an incremental revenue stream. The Group is now generating carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. This is a highly distinctive feature for the Group, confirming (as far as the Board is aware) Hydrodec as the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.

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

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Chief Executive's Report

I am pleased to be able to report significant progress during the period under review towards delivering the Company's key objectives of making Hydrodec profitable and re-establishing its position in the transformer oil market in our key operations in the US and Australia.

Strategy

In the first half of 2017, we have taken further significant steps forward to successfully reshape the Company in what continues to be a highly volatile marketplace. Our strategy of refocusing on the Group's market leading transformer oil re-refining technology and business, and to grow that business to access an increasing proportion of the US$2 billion plus global transformer oil market, is being rewarded. The Board remains committed to strengthening Hydrodec's footprint in the US and in the global transformer oil market, where the Board believes Hydrodec has a competitive advantage through its proven and market‐leading technology. 

However, from a personal perspective I am still to be satisfied with the speed of our progress and remain hugely ambitious for the Company and the opportunity to deliver fully on its technological potential, with the award and sale of carbon credits only reinforcing the unique offering Hydrodec possesses. With the full support of the Board, I will continue to assess all opportunities for internal and organic business growth as well as strategic acquisition opportunities and partnerships if, and only if, they are seen by the Board to add shareholder value. We will update shareholders on the progress of these initiatives. In the meantime, my focus remains on continuing to build upon the positive EBITDA delivered for H1, through the continued improvement in volumes and margins in both of our existing operations.

Summary

Operational review

USA

The focus for the first half of 2017 has been on key customers, and strengthening the value of those relationships, as well as optimising the performance of the Canton facility, through a combination of leveraging the experience gained since fully commissioning the plant at the end of 2015 along with implementing specific targeted operating improvements identified at the beginning of the year.

Total sales volumes in Canton in the period were 13.2 million litres (H1 2016: 15.5 million litres), a reflection of the slower feedstock market in the first half of the year along with the effect of the stored inventory held at the beginning of 2016. Importantly, the primary objective of improving the sales mix between higher margin transformer oil and lower margin base oil produced at the Canton plant has seen significant progress with transformer oil sales representing 58% of sales (H1 2016: 42%). Plant utilisation during the period averaged 61% (H1 2016: 65%) - this indicates the spare capacity and potential for further significant operational and financial improvement when the feedstock position improves. Strategic initiatives in respect of sourcing additional feedstock are underway.

Post period-end, Hydrodec of North America has been recognised under the Ohio Environmental Protection Authority ("EPA")'s Encouraging Environmental Excellence Program (E3) which commends an organisation's exceptional achievements in environmental stewardship. Specifically, Hydrodec's Canton, Ohio location was congratulated by the EPA for its enhanced process recycling, energy efficiency, improving process efficiency to reduce waste and increased recycling, brownfield redevelopment, and upper management commitment for ongoing environmental improvements. This award is a tribute to the creativity and perseverance of our local team, the application of Hydrodec's world class technology and the support offered by our supply chain partner, G&S.

Australia

In respect of the operations in Australia, since the commissioning of the plant at the Southern Oil Refinery in May 2015 we have made further progress in re-establishing our commercial position. This has seen us win some notable feedstock opportunities with additional ones in the pipeline. Total sales volumes in Australia for the period were 1.9 million litres, a 45% increase on the prior year. The focus remains on expanding the customer base and increasing the proportion of transformer oil sales.

Post period-end, we reached agreement with our largest customer to convert to a "take or pay" arrangement. This is a key award for the business and provides us with a robust sales forecast going into Q4.

Market background

In the US, the general rebalancing of inventories has led to some recovery in pricing. Demand for our product remains strong while the general environment for feedstock remains competitive with lower quality producers blending into other grades of oil. From an environmental perspective this is disappointing, but in the long term continuing to pursue wider relationships with utilities will address this issue. Whilst the Group has been successful in improving margins we will continue to be challenged as we seek to gain recognition for the quality of the product we produce.

In Australia, market demand and margin remain relatively stable and the key to margin and volume improvement will be based around leveraging the quality of our product to increase sales of transformer oil into the key utilities.

Financial review

Revenues from continuing operations increased 11% to US$9.0 million (H1 2016: US$8.1 million), driven by improved pricing and sales mix. The Group sold 15.1 million litres during the period, a decrease of 10% on the corresponding period in 2016 reflecting the less active feedstock market in H1, particularly in the US. Of the volumes sold in the period, 52% represented transformer oil (H1 2016: 40%) and 48% was base oil (H1 2016: 60%), with margins steadily improving since the beginning of the year.

There has been a key focus on the reduction of overheads and corporate costs since 2016. Significant reductions have already been realised and the benefits from more recently implemented initiatives have been realised in the period under review. These savings are reflected in the reduction in administrative expenses from US$3.9 million to US$3.4 million as highlighted below.

Group EBITDA from continuing operations improved from US$1.1 million loss (H1 2016) to US$26k positive. The total loss for the period was US$2.6 million (H1 2016: US$5.3 million, including discontinued operations). 

Operating cash outflow (before working capital movements) reduced to US$0.2 million (H1 2016: US$2.0 million). The improved performance resulted in working capital inflows of $0.6 million (H1 2016: outflow US$2.4 million). Total net cash inflow in the first six months of 2017 was US$47k compared to a US$0.2 million outflow in the prior year comparable period. Overall, the Group held US$0.2 million in cash on its balance sheet at the end of the period and retained approximately US$0.4 million headroom under its working capital facilities provided by Andrew Black, a Director and the Company's largest shareholder. As previously announced, these facilities are repayable on 31 December 2017, however Andrew Black has provided the Company with an option to extend the repayment date to 31 December 2018. Any such extension of the loans would be at the sole discretion of the Company and on commercial terms to be agreed between the parties at the time.

The amount of working capital required by the Group's operations continues to be closely monitored and controlled, and forms a key part of management information. While the improving operational and financial performance has led to the recent and forecast positive EBITDA position, the Group remains reliant on the operations continuing to operate positively going forward.

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 the Group in the future are set out on pages 11 to 13 of the 2016 Annual Report. The continued successful operation of Canton and Australia is the key performance imperative for the Group. The Annual Report can be downloaded at www.hydrodec.com.

Outlook

Today's results confirm further significant progress in the turnaround of the Company over the first half of the year. Our key objective during the rest of the year is to strengthen margins, grow market share and seek to leverage the recent carbon credit agreement signed in the US, whilst continuing to focus on cost reduction and efficiencies. Volumes and margins in Q3 to date have shown further significant improvements on Q2 and both operations are expected to generate substantially stronger positive EBITDA in Q3. The Board are increasingly confident that the Company will achieve positive Group EBITDA and cash generation for the full year for the first time in its history.

Chris Ellis

CEO

25 September 2017

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2017

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2017

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2017

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Audited)

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

For the six months ended 30 June 2017

HYDRODEC GROUP PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the six months ended 30 June 2017

1. ACCOUNTING POLICIES

Basis of preparation

This report was approved by the Directors on 22 September 2017.

The condensed consolidated interim financial statements have been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs').

The condensed consolidated interim financial statements are presented in United States dollars ('USD') as the Group's business is influenced by pricing in international commodity markets which are primarily USD based.

The Company is domiciled in the United Kingdom. The Company's shares are admitted to trading on the AIM market.

The current and comparative periods to June have been prepared using the accounting policies and practices constant with those adopted in the annual financial statements for the year ended 31 December 2016, and with those expected to be adopted in the Group's financial statements for the year ended 31 December 2017.

Comparative figures for the year ended 31 December 2016 have been extracted from the statutory financial statements for that period which carried an unqualified audit report, did not contain a statement under sections 498(2) or (3) of the Companies Act 2006 and have been delivered to the Registrar of Companies.

The financial information contained in this report does not constitute statutory financial statements as defined by section 434 of the Companies Act 2006, and should be read in conjunction with the Group's financial statements for the year ended 31 December 2016. This report has not been audited by the Group's auditors.

During the first six months of the current financial year there have been no related party transactions that materially affect the financial position or performance of the Group and there have been no changes in the related party transactions described in the last annual report.

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 principal risks and uncertainties of the Group have not changed since the publication of the last annual financial report where a detailed explanation of such risks and uncertainties can be found.

2. SEGMENTAL INFORMATION

Subsequent to the disposal of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited ('discontinued operations') in 2016, the Group has one main operating segment, Re-refining, which is classified as the treatment of used transformer oil and the sale of SUPERFINETM oil. The operating segment arises from two geographic locations, USA and Australia.

3. DIVIDENDS

The Directors do not recommend the payment of a dividend for the period.

4. LOSS PER ORDINARY SHARE

Basic loss per Ordinary Share is calculated by dividing the net loss for the period attributable to ordinary shareholders by the weighted average number of Ordinary Shares in issue during the period. The calculation of the basic and diluted loss per Ordinary Share is based on the following data:

5. OTHER INTEREST-BEARING LOANS AND BORROWING

6. SHARE CAPITAL