HYR.L Regulatory News (HYR)

31 July 2013

Hydrodec Group plc

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

Unaudited Interim Results

Hydrodec Group plc (AIM: HYR), the cleantech industrial oil re-refining group, today announces unaudited results for the six months ended 30 June 2013.

 Highlights

·; Completion of transformational strategic partnership with G&S Group and commencement of major expansion plans in US

·; Record SUPERFINETM sales volumes of 12.5 million litres, up 7% on last year (H1 2012: 11.7 million litres)

·; Revenues increased to US$13.94 million (H1 2012: US$13.87 million) with higher sales volumes offsetting lower average sales prices, which fell less than the benchmark ICIS Pale 60 pricing index

·; Gross profit margin improved to 25% (H1 2012: 23%); unit sales margin increased to US$0.29 per litre (H1 2012: US$0.28 per litre). Improvements reflect tight controls on feedstock and other direct costs, offsetting the fall in sales prices

·; Underlying operating EBITDA* significantly improved at US$0.2 million loss (H1 2012: US$1.1 million loss); improved period end cash balance at US$4.5 million (H1 2012: US$3.4 million)

·; Utilisation of productive capacity steady at 72% (H1 2012: 72%), with an expectation of improvement in H2

·; Strong growth in re-refining of polychlorinated biphenyl ("PCB") contaminated oil positively impacting margins; PCB feedstock increased to 11% of total volumes processed (H1 2012: 6%)

·; Current trading remains encouraging amid early signs of improved market pricing. On track for further growth in sales volumes, revenue and margins in second half in line with market expectations for full year

Summary of Results

*Before growth costs**, intangible asset amortisation and share based payment costs

**"growth costs" includes expenditure on market expansion and new product development

Commenting on the results, Ian Smale, Chief Executive of Hydrodec, said: "The first half has been very encouraging as volumes continued to increase amid solid demand for our re-refined products, which enabled the Company to offset some weakness in market prices. We also significantly improved performance at an underlying operating EBITDA level and made excellent progress in bedding down our strategic partnership ahead of a major expansion of the Group's activities in the US. We are on track to achieve our eighth year of top-line growth and focused on moving to a positive overall EBITDA run-rate by the end of the year for the first time in the Company's history."

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

Chief Executive's Report

The first six months of the year have seen further improvement in the key performance indicators in our existing transformer oil re-refining business. Furthermore, the completion of our strategic partnership in the US in April 2013 has given the Group a major platform for growth in the US. It is a transformational deal for the business and much headway has already been made for an expansion in our US activities from next year.

Trading in the first half was resilient against lower market pricing. Sales volumes, margins and revenues are up on the same period last year, which was itself a strong comparative period, and significantly up on the second half of last year. Underlying operating EBITDA has improved markedly through increased gross profit contribution and reduced costs and we continue to drive the business towards delivering a positive overall EBITDA run-rate by the end of the year.

The management team has also taken the first steps to diversify beyond transformer oils. The successful proof of concept in extending the technology into re-refining of industrial and motor oils opens up materially larger global markets for the Company. Testing continues and details of a pilot phase will be announced before the end of the year.

The US transaction has demonstrated the execution of a key part of the Company's strategy, which is founded entirely on optimising most value for the business and our shareholders. As a general principle we will own and operate our unique, clean-technology at least once to ensure its competitive position and our stewardship of it. Beyond that, our participation will be based purely on commercial or strategic logic, and through licensing as a means of low-cost access to growth and returns. This provides a significantly more flexible approach to new markets, as well as a reduced burden on shareholder funding in the longer term.

Operating and financial review

The first half of 2013 has demonstrated continued improvement in financial and operating performance. The comparative period in 2012 was itself a record on key performance indicators and to outperform against a background of softer pricing in the industry is a significant achievement.

Sales volumes of our premium quality, environmentally friendly SUPERFINETM transformer oil and SUPERFINETM base oil advanced 7 per cent to a half-year record of 12.5 million litres (H1 2012: 11.7 million litres).

Revenues increased 0.5 per cent to US$13.94 million (H1 2012: US$13.87 million), despite lower average sales prices reflecting movement in the benchmark ICIS Pale 60 pricing index. While the average for this industry benchmark is down 14 per cent for the period versus the first six months of last year, our average sales prices have further narrowed the discount to this index by only falling 8 per cent. The benchmark index has risen again recently and there appears to be further upward pressure. We would expect that our pricing would follow these trends.

Unit sales margins widened to US$0.29 per litre (H1 2012: US$0.28 per litre) and are significantly up on those for 2012 as a whole (US$0.24 per litre). Improvements reflect tight controls on feedstock and other direct costs, offsetting the fall in sales prices.

Overall utilisation of existing plant capacity in the period remained steady at 72 per cent (H1 2012: 72 per cent). We would expect this to increase further through the rest of the year as the impact of the access to feedstock supplies through the strategic partnership in the US takes effect.

PCB contaminated oil as a proportion of total feedstock increased to 11 per cent (H1 2012: 6 per cent), enhanced by the US Environmental Protection Agency approval to treat PCB oil. This has positively impacted margins as PCB feedstock is acquired at lower, nil or negative cost.

Both plants continue to generate a cash surplus and are contributing to the central overheads of the Group.

Performance improvements generally have significantly improved the underlying operating EBITDA, before growth costs and share based payment costs, to a US$0.2 million loss (H1 2012: US$1.1 million loss). Investment in growth costs increased in the period to US$1.7 million from US$1.0 million (H1 2012), reflecting the strategic decision to invest for future growth and the costs incurred to close the US transaction in the first half of the year.

The overall loss for the period widened to US$7.0 million (H1 2012: US$6.3 million) after the impact of significant non-cash items including depreciation, amortisation (including the increased non-cash interest charge from the unsecured loan note) and share based payment costs is reflected.

The Group ended the period with an improved cash balance of US$4.5 million (H1 2012: US$3.4 million).

Platforms for growth

US expansion

The early days of the US strategic partnership with G&S announced earlier this year are exceeding my expectations with both parties committed to enhancing the business today as well as expediting its potential to grow. Our partner's market access and expertise is enhancing Hydrodec's position in the US, as well as allowing us to put forward a shared offer with G&S to utilities in terms of both hardware and oil treatment. The broadened feedstock supply from G&S has assisted in reducing feedstock cost as well as committing volumes for growing capacity.

We are already working on an expansion of Canton from four trains (processing units) to six, deliverable by late summer 2014. Work on engineering design, permitting and a contracting strategy is well underway. We have clear line of sight to the commissioning of a second US plant in early 2015 and at this stage it would seem likely that a third plant will be required to fully access the US transmission system; this is being assessed. Expansion at Canton offers very attractive returns and will deliver a significant improvement in EBITDA through leveraging the existing infrastructure and cost base as well as providing an ongoing royalty stream.

This transformational deal provides a clear fit with our strategy, as well as a blueprint for further expansion of the business. In simple terms, we have traded a proportion of our current capacity for a secure source of feedstock and cash. The commitment of feedstock fundamentally de-risks expansion, with the proceeds from the transaction (including the earn-out) funding Hydrodec's share of the capital expenditure required to grow the US business. The recurring royalty based on turnover is also a key step forward for the Company and the first stage in genuinely remunerating our technology, as well as funding its development in due course.

Technology, new applications and products

The second key element of our strategy is to extend the technology into the re-refining of general used oils. We are now engaged in a broad testing programme defining the limits of the announced proof of concept and building the knowledge required to design a pilot phase. We would also expect to start protecting the evolving process and chemical reaction technology through patent applications later this year.

While risks clearly remain, this project is fundamentally de-risked by being an extension of the existing technology. We are expanding the scope and potential of the technology, not starting afresh, which I believe is very important. We will investigate options to fast-track components of the process as we progress, but a full implementation and roll-out plan is currently being developed for commissioning in late 2015. Partnership and/or access to feedstock will be critical and we are already reviewing a number of potential options in this space.

New markets and further options for growth

We have a clean technology offer and business model that is established and proven and I am confident that the transformer oil market has global potential. There are growth options in Europe and elsewhere through low risk licensing and/or higher risk, but higher return, partnering or acquisition. Australia also offers options to build scale and reduce our reliance on the product stewardship for oil (PSO) subsidy.

We have reviewed our approach to the challenging, but potentially very large, Japanese market and have decided to pursue a new route to building a position in the region. As announced earlier this year, we have terminated the strategic alliance with Kobelco-Eco, instead focusing on a number of potential licensing opportunities as well as reducing cost. Japan remains the most favourable regulatory environment for the Hydrodec technology, which remains the only certified non-destructive technology for low-level PCB contaminated waste. I believe there is a substantial opportunity in Japan, but one we will have to remain patient to access.

Beyond transformer oil, there is a major opportunity in general lubricant re-refining. We are confident that we can develop robust options for growth at a substantially enlarged scale based on our already proven technology platform. Although there is a lot of work to do, we have identified potential roll-out options in Australia and the UK which offer attractive returns.

Current trading and 2013 outlook

I am encouraged by the strong first half performance and there remains scope for a continuing improvement in overall operating results and cash generation as the impact of the US strategic partnership comes through. Current trading remains positive and market demand and pricing for transformer oil in the US appears to be strengthening.

We are on track to achieve further growth in sales volumes and revenues, together with a further improvement in gross margins, in the second half of 2013, consistent with expectations. In addition we remain focused on delivering a positive EBITDA run-rate by the year-end.

Active consideration is being given to the Company's debt position with a number of options being explored for managing the balance sheet. This is a priority for the Board in 2013.

Looking further ahead, the US transaction is a clear blueprint for how I see us developing the Company; value-chain integration and especially security of feedstock, enhanced competitive positioning, partners with deep capability and efficient capital and funding structures. The management team continues to explore new licensing, partnership and acquisition opportunities, particularly in Europe.

With solid progress being made on all fronts, the management and Board look to the future with increasing optimism.

Ian Smale

Chief Executive

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 50 Curzon St, 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 30 July 2013.

The interim consolidated financial statements for the six months ended 30 June 2013, 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 2012, 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 2012 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 2013 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 2013, 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 2012.

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. Therefore the Directors consider the going concern basis appropriate.

2. Revenue and operating loss

Revenue and assets for each period are wholly attributable to the Group's sole activity of the treatment of used transformer oil and the sale of SUPERFINETM oil, which are deemed to be continuing activities.

2.1 geographic analysis

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 initiatives focused on geographic expansion and research and development. These costs are analysed as follows:

3. share based payment costs

Equity-settled share option scheme

The Company has a share option scheme for selected employees and Directors of the Group. Options are generally exercisable at a price equal to the quoted market price of the Company's shares on the date of grant. The vesting period for each grant is variable and typically between 2 and 5 years. 1,000,000 new options were granted during the period. 500,000 options issued to a previous employee of the Company were forfeited during the period. No options were exercised in the year and 16.58 million options were exercisable at prices between 6.9p and 33.25p at 30 June 2013 at a weighted average exercise price of 19.0p per share.

Long Term Incentive Plan

In November 2011 shareholders approved the Hydrodec Group plc 2012 Long Term Incentive Plan (the "LTIP") for the purposes of attracting, retaining and motivating key executives of the Group and securing greater alignment of shareholders' and management's interests with transparency over performance targets.

Awards were granted to selected members of the senior executive team effective 15 January 2012 and will be conditional on the achievement of the following share price targets on or before 15 January 2015: 16 pence, 20 pence and 25 pence per ordinary share (each a "Share Price Threshold"). Awards will not vest at all unless the 16 pence Share Price Threshold is achieved.

The aggregate value of ordinary shares in the share pool will equal 15 per cent of the growth in market capitalisation of the Company between 1 November 2011 and the first date on which a Share Price Threshold is met and successive subsequent growth in market capitalisation upon achievement of any higher Share Price Thresholds.

During the period the existing awards were re-structured as various classes of shares in Hydrodec Holdco Limited ("Holdco"), a subsidiary of Hydrodec Group plc. The Holdco articles of association entitle the individuals to exchange their Holdco shares for shares in the Company, determined by reference to the individual's proportionate interest in the share pool, if the Share Price Thresholds are met.

4. Finance costs

5. TAXATION

The deferred tax liability has been adjusted by USD 41,000 to reflect changes in the UK corporate tax rate during the period.

A deferred tax asset of approximately USD 15,474,000 (2012: USD 13,927,000) in respect of losses against future taxable profits is not recognised due to the uncertainty of future taxable profits.

6. 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 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.

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. Deferred income consists of income for the treatment of hardware at the Young facility. A provision for the treatment of this material has also been made and is disclosed in note 9.

9. Provisions

The provision relates to stocks of materials at the Young facility dating from the plant's original function, ownership and business strategy. During the period the Company was able to process certain materials for which it incurred costs for remediation services charged to the provision. The cost for treatment and disposal has been reassessed by management and the current remaining provision is deemed to be adequate:

10. NON-CURRENT LIABILITIES - borrowings

Unsecured loan stock

The Company has £12,790,000 of unsecured loan stock in issue. The loan stock was originally convertible into ordinary shares but these conversion rights have lapsed and the loan stock is now an unsecured loan repayable, at the Company's determination, on or before 31 October 2014.

Interest is charged at a fixed rate of 8 per cent per annum. 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 19 December 2012, the Company created £5,000,000 of fixed rate loan notes - 2015, of which the outstanding £3,000,000 was received in the period. 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. 

11. share capital

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

In 2011, the Company issued 10,750,000 warrants in connection with the £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.

The Company has issued an additional 25,000,000 warrants in connection with the £5,000,000 of fixed rate loan notes - 2015. The warrants have an exercise price of 16p per share with an exercise window from 19 June 2013 to 19 December 2017.

12. SALE OF INTEREST

On 16 April 2013 the Group sold a 25% interest in its US operations to G&S Oil Recycling Group LLC for total consideration based on a multiple of earnings for the years ended 31 December 2012 (5 times EBITDA) and 2013 (6.5 times EBITDA). Management have estimated the value of the consideration to be USD$3.62m, based on latest available projections to December 2013, of which cash of USD $1.73m was received in the period. The value of the remaining consideration has been included in "Other receivables" (see note 7), and will be finally determined when the results for the year ending 31 December 2013 are known. Additionally a royalty stream of 5% of net revenue is payable to the Company under the terms of the strategic partnership.

Included in the agreement with G&S Oil Recycling Group LLC is the potential for the sale of a further 24.9% of the investment in the Group's US operations, conditional on a number of future actions to be undertaken by both parties. The value of the consideration is set at a price to be determined by earnings for the years ended 31 December 2012 and 2013. At 30 June 2013, the Group has not valued this future arrangement, as both the completion and timing of conditions related to the further sale would render the estimation of this value unreliable.