HYR.L Regulatory News (HYR)

14 February 2020

Hydrodec Group plc

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

Year-end Trading Update

New 3-year contract with Duke Energy

Hydrodec Group plc (AIM: HYR), the cleantech industrial oil re-refining group, today provides the following trading update for the financial year ended 31 December 2019.

Unaudited highlights for year ended 31 December 2019

·; Revenues approximately US$11.6 million (2018: US$14.9 million), impacted by working capital constraints

·; Gross unit margins declined reflecting the higher cost of feedstock in H1

·; Group adjusted EBITDA loss of approximately US$3.2 million (2018: US$1.2 million loss)

·; Sales volumes of premium quality SUPERFINE transformer oil and base oil of 18.3 million litres (2018: 23.0 million litres), reflecting feedstock and working capital constraints in H2 - demand for SUPERFINE products remains robust

·; Canton plant utilisation at 45% on average for the year (2018: 55%) - feedstock remains key constraint to higher throughput and strategic initiatives

·; Progress made in securing sustainable, increased supplies going forward, with the Group seeking to achieve utilisation rates at the Canton facility of at least 60% in 2020

·; Reduction in corporate costs to US$1.8 million (2018: US$2.7 million)

Post period-end highlights

·; First direct contract with a major US utility, Duke Energy ("Duke"), to provide Hydrodec generated carbon credits in return for Duke's used oil to be processed by Hydrodec using its patented technology

·; One-year contract extension to continue to supply up to 10 million litres annually of its SUPERFINE transformer oil to a major transformer original equipment manufacturer

Chris Ellis, Chief Executive Officer and Interim Executive Chairman, commented: 

"Since stepping back into the role of CEO in Q4 2019, the conditions under which the Company has operated have been very challenging, as was communicated in the Company's interim financial statements released in September 2019. Working capital constraints, by necessity, have a material impact on our ability to source feedstock, which in turn drives volume, margin and overall financial performance. It is in this context that the 2019 performance should be viewed and whilst, overall, it is extremely disappointing, there are some encouraging signs of early successes with our sustainability strategy, and this, together with traction with major US utility companies, gives me cause for greater optimism going into 2020."

Financing update

Further to its announcement of 24 December 2019, the Company confirms that it has agreed headline terms with its largest shareholder, and non-executive Director, Andrew Black in respect of the extension of his financial support. The Board would like to express its gratitude to Mr Black for his unwavering support, particularly over the last few months. Mr Black has continued to support the Group, providing cash of approximately US$1.8 million since 30 June 2019. A further announcement in respect of the loan terms, together with the extension of the existing loans, will follow once finalised and fully documented. Such terms will constitute a related party transaction pursuant to AIM Rule 13.

The Company continues to work on a refinancing package in respect of the Canton plant and assets in the early part of 2020. The purpose of which is to replace the existing equipment lease, which is over-collateralised, with an extended facility to provide additional funds for feedstock, approved capital expenditure and growth opportunities. In the meantime, as disclosed in the Company's interim results, Hydrodec remains reliant on the on-going support from Mr Black.

Recent developments and outlook

Whilst Q1 2020 operating performance will further reflect the challenges the Company faces in terms of its working capital, the Board is pleased to confirm that Hydrodec has signed a 3-year contract with Duke Energy, a major US utility, to process its used transformer oil with an option to extend for a further 2 years. Under the terms of the contract, Duke Energy will be the first utility to benefit directly from the carbon credits that Hydrodec generates by processing used transformer oil supplied to it under the contract in direct support of the utility's sustainability goals.

This is a key pillar of the strategy for the Company and the focus remains on expanding the number and value of significant direct feedstock contracts of this type to drive higher utilisation of the operations and improve the Group's EBITDA and cash-flow generation in the future. Management is in discussions with several of these utilities with the objective of signing more over the coming months. In that context, today's announcement regarding the contract with Duke Energy is a watershed moment for Hydrodec strategically.

As well as focusing on expanding the number and value of significant feedstock contracts to increase throughput in our existing operations, the Board continues to undertake a strategic review. As part of the review process the Board will continue to pursue other strategic growth initiatives that will ultimately seek to accelerate the Group's overall profitability.

Despite the positive impact of the Duke Energy contract, the Group has revised its expectations for 2020 to be materially lower than previous market expectations for this year due to ongoing working capital constraints. However, the Board expects an improvement on the financial results for 2019 with the Group targeting positive EBITDA from US operations for 2020.

Chris Ellis, Chief Executive Officer and Interim Executive Chairman, commented further: 

"The Duke Energy contract is a game-changer for Hydrodec and a clear signal that the environment in which the Company is operating has changed significantly in our favour and that the sustainability strategy that the Company has embarked upon has the potential to be successful. As we build on the success of the Duke Energy contract, there will continue to be challenges particularly in respect of feedstock procurement in the short term, but I am confident in the Group's ability to deliver a much improved performance in the coming years and I look forward to reporting further progress."

For further information, please contact:

The information communicated in this announcement is inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

Notes to Editors:

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process principally 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. Used transformer oil is processed 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 Group's proprietary technology and standing as a leader in its field.

Hydrodec's operating plant is located at Canton, Ohio, US.

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