HYR.L Regulatory News (HYR)

2 May 2018

Hydrodec Group plc

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

Q1 Trading Update

Hydrodec Group plc (AIM: HYR), the cleantech industrial oil re-refining group, provides a trading update for the quarter ended 31 March 2018.

Highlights

· Group sales volumes of premium quality SUPERFINE transformer oil and base oil lower at 5.3 million litres (Q1 2017: 7.7 million litres) - demand for end product remains strong yet feedstock supply, particularly challenging during the period, remains the key constraint to higher throughput and strategic initiatives continue to secure sustainable, increased supplies going forward 

· Revenues expected to be approximately US$3.5 million (Q1 2017: US$4.5 million) as a result of lower sales volumes, offset in part by improved pricing

· Gross unit margins in the US materially up on prior year at 19% (Q1 2017: 10%) - driven by improved sales mix between higher margin transformer oil and lower margin base oil

· Superior quality of SUPERFINE transformer oil has been further verified by independent laboratory tests and is evidenced by higher pricing being achieved in the US relative to pricing indices

· The Company is pleased to confirm, post quarter end, the sale of all of its remaining carbon credits in respect of production in the US up to and including the 2013 vintage, generating US$190k of proceeds - now targeting sales of more recent vintages at higher prices

Outlook

The first quarter is historically difficult from a feedstock perspective and Q1 in 2018 was particularly challenging. In the US significant weather disruption impacted supplies with our partner G&S not able to fulfil their budgeted volumes during the period and other sources of supply being similarly impacted. In Australia a large decommissioning contract scheduled for the first week of February was pushed back to the end of Q2, significantly impacting performance there. As a result, the Board expects that Group EBITDA for Q1 will be weaker than in recent quarters with the Group continuing to operate within current tight capital constraints and the Board closely monitoring the Group's working capital requirements.

However, margins in the US continued to improve in Q1, driven by an increase in the proportion of higher margin transformer oil sales to lower margin base oil of 66% (Q1 2017: 53%), with an expectation that there will be further improvement throughout the year. The Canton operation contributed materially higher EBITDA than for the same period last year. Demand for our product continues to be robust and the focus therefore remains on expanding the number and value of significant feedstock contracts that in turn will drive the utilisation of the operations and which are expected to materially improve the Group's EBITDA and cash-flow generation going forward.

The Board is concluding its work with Simmons & Co., specialists in international investment banking services for the energy industry, in exploring options which will deliver accretive value for shareholders. We are looking to grow our core US business and are currently developing partnerships to significantly increase feedstock to match the growing demand for our products in the world's largest market.

Lord Moynihan, Executive Chairman and Interim Chief Executive Officer of Hydrodec, commented: "Hydrodec's business continues to offer significant upside with a strong forward order book in the US; the first material sale of carbon credits and excellent quality production. The management team is now focused on the central issue of substantially increasing the availability of competitively priced feedstock which has a direct impact on the performance of the existing operations; a stronger balance sheet and finalisation of the Board's review of its various growth options. These include 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. 

Whilst feedstock conditions have impacted performance in Q1, we see scope for new partnership arrangements this year to facilitate increased supplies of feedstock. We were particularly pleased to secure the sale of the balance of the historic carbon credits and look forward to being able to report on the sale of more recent vintages at improved prices. I look forward to updating shareholders further at the time of our 2017 results which are expected to be released at the end of May."

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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.

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 plants are located at Canton, Ohio, US and Bomen, New South Wales, Australia. 

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.