Half Yearly Report

06 September 2011

Embargoed until 07:00

Hydro International plc

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

Interim Results

 Key Wastewater contracts drive increased revenue and profits

Hydro International (AIM: HYD), a leading provider of environmentally sustainable and innovative products for the control and treatment of water, is pleased to announce its interim results for the six months ended 30 June 2011.

H1 2011 Financial Highlights

Statutory

·; Revenue increased 23.8% to £13.7m (H1 2010: £11.1m)

·; Operating Profit increased 36.8% to £1.04m (H1 2010: £0.76m)

·; PBT increased 53.9% to £0.95m (H1 2010: £0.62m)

·; EPS increased to 4.16p (H1 2010: 2.68p)

Non-Statutory

·; Adjusted Operating Profit* increased 28.7% to £1.15m (H1 2010: £0.89m)

·; Adjusted EPS** increased to 4.62p (H1 2010: 3.24p)

·; Net Cash*** increased to £3.3m (H1 2010: £0.7m)

·; Closing order book £25.2m (H1 2010: £13.9m)

* excluding amortisation of acquisition related intangible assets, as disclosed in the income statement

** excluding amortisation of acquisition related intangible assets, as disclosed in the income statement, and related corporation tax effect at 37.2% (2010: 38.2%)

*** cash and cash equivalents, less borrowings

Operational Highlights

·; Strong order book position reported at the end of 2010 has continued into 2011

·; Revenue from the key wastewater projects secured in 2010 has driven an improvement in Group financial performance over the first six months

·; Despite trading conditions in the construction sector continuing to be challenging, growth was seen in the Stormwater businesses

·; International expansion accelerated with the appointment of an International Business Director

Steve Hides, CEO of Hydro International plc, commented: "Significant progress has been made in the half with accelerated progress on key Wastewater contracts pushing revenue, operating profit and profit before tax all well ahead of the same period last year."

"The Group remains financially strong and well placed to deal with the short term challenges posed by the current economic environment. The Board is positive about the prospects and opportunities for Hydro's solutions and products; we have a strong order book and continue to move forward with a range of new initiatives and programmes designed to deliver sustained growth in the medium term".

For further information please contact:

Interim Management Report

Group results

The Group is pleased to report solid financial results for the first half of 2011, with Group revenues increasing by 24% when compared to the same period last year, driven by progress on delivering the large-scale wastewater contracts secured in 2010. The record order book reported at the end of 2010 has also been maintained over the first half of 2011 with the award of further major contracts in both the UK and US. A number of key wastewater contracts have progressed ahead of schedule, benefitting sales revenue and profits in the first half.

During the first half, the Group increased revenues, improved margins on key projects and controlled overhead costs to deliver an increase in operating profit (before amortisation of acquired intangibles) of 29% on the 2010 level. The improved results have been achieved against a backdrop of a challenging trading environment with widespread public sector spending cuts, water sector procurement delays and low levels of investment in the private construction sector.

Net assets at 30 June 2011 were unchanged against the 31 December 2010 level at £11.6m. The profit for the period was offset by dividend payments and a loss on US dollar denominated assets as this currency depreciated against sterling.

Net cash generated from operating activities for the six months ended 30 June 2011 was £0.29m (H1 2010 £0.16m). As in previous periods the principal drivers for cash generation have been the timing of payments to suppliers and receipts from customers on the larger contracts typically seen in the Group's Wastewater businesses. During the period the Group made capital repayments totalling £0.36m against borrowing facilities used to finance the acquisition of Eutek Systems, Inc. in 2008, and a further £0.19m was paid as deferred consideration (based on performance) to the former shareholders of that business. Along with the payment of a final dividend of £0.47m in respect of the year ended 31 December 2010 and unfavourable foreign exchange movements totalling £0.22m, these were the principal movements in cash balances, which reduced by £1.18m over the period.

Business Operating Review

UK Wastewater

In February 2011, the UK Wastewater business was awarded a £3.5m contract to supply Zickert Scraper equipment to the Thames Water sewage treatment works at Crossness in London. This contract followed on from two similar contracts awarded in 2010 at the Beckton and Mogden sites with a combined value of £19.6m. Income on these three contracts has driven a significant increase in revenue and profit from this business over the first six months of 2011. The Crossness and Mogden contracts are currently expected to be complete by the end of 2012, with the Beckton project scheduled to finish in 2014.

Aside from the large Thames Water contracts, and despite a significant improvement in project proposal levels, we continue to see delays affecting projects coming through under the new Asset Management Programme, AMP5, the latest five-year periodic spending cycle for the water industry. Tough parameters for spending imposed under AMP5 by the industry regulator, OFWAT, are presenting the water companies with significant challenges in bringing through projects within budgetary constraints. This is delaying procurement at a time when the water companies typically start to gain momentum and move forward having established delivery arrangements and partners for the AMP period. We are optimistic that projects will start to come through in the second half of the year as water companies face pressure to meet operational improvement targets.

US Wastewater

The US Wastewater business continues to perform well and, in May, secured a further major contract for $2.5m to supply SlurryCup™ sludge de-gritting and grit washing devices for the Point Loma Wastewater Treatment Plant in San Diego, California.

Revenues and profits in the first half were increased over 2010 levels with the delivery, ahead of schedule, of the first of two large Storm King® units for the City of Boonville, Indiana. The Boonville contract, valued at $2.8m, was received in late 2010 and is part of a Combined Sewer Overflow (CSO) abatement programme for the city.

The US Wastewater business continues to progress a number of initiatives aimed at making the most of its highly effective network of independent sales representatives. As reported in the Annual Report 2010 the business launched the Hydro-Sludge™ Screen in the US in late 2010 and the first orders have been secured and delivered in the first half-year. Additionally, the business plans to apply knowledge and experience gained in the UK to re-launch the Reg-U-Flo® Vortex Valve during the second half of the year into the North American municipal market for applications such as flood alleviation and sewer system control.

Enquiry levels remain at encouraging levels, but the business is anticipating that contracts, which were expected to progress in the second half of the year, may experience delays as a result of the extended federal government budget discussions impacting funding for key programs such as the State Revolving Fund (SRF) programme.

International Wastewater

Over the last three years the Group has enjoyed considerable success in the Middle East, particularly in Egypt, where grit removal equipment has been supplied into the Villages projects along the River Nile.

Opportunities to build on this success have stalled as a consequence of the political unrest in the region during the spring. Whilst we remain actively engaged in discussions regarding projects in Saudi Arabia and Egypt predicting the timing of projects is a significant challenge, and most of the major wastewater treatment projects have indeterminate timelines that are expected to slip beyond 2011.

However, recent visits to the region have produced encouraging results and the medium-term outlook appears positive with a significant number of opportunities for Hydro in both flood control and grit removal applications. Some progress was seen late in the first half with the receipt of a £300,000 Grit King® order for a project in Qatar.

In June, the International team was enhanced with the appointment of an International Business Director. The immediate focus for this role is to review and develop the strategic plan for expanding the Group's international operations, with a particular focus on the opportunities presented by EU and BRIC countries.

Profit from international Wastewater activities was enhanced by the release of provisions for costs that are now not expected to be incurred on the Namur Storm King® project in Belgium.

UK Stormwater

The UK Stormwater business has shown a 6% growth in revenues when compared to the equivalent period in 2010. This is a good performance considering the relatively flat UK construction market. Markets remain highly competitive, and the business is focussed on building on its current market-leading position with a number of initiatives aimed at extending the range and performance capability of products. These developments should further differentiate Hydro from its competition heading into 2012.

2011 has seen the market launch of the Hydro Filterra™ Bioretention System which uses natural processes to remove contaminants from stormwater. Initial orders have been received and installed on site during the first half-year with further progress expected during the remainder of the year.

US Stormwater

Trading in the US Stormwater business improved significantly in the second quarter following a first quarter which proved to be one of the most difficult in the business' history. The long and severe winter had the effect of shutting down projects across the country, including a number of high-value public transport related contracts in the North Eastern states. With improving weather conditions at the beginning of the second quarter the log jam of projects started to move and the business recovered strongly.

During the period sales channels have been strengthened with the appointment of two Master Distributors, enhancing sales coverage across the US. Advanced Drainage Systems (ADS) is distributing Hydro's water quality products in a pilot area comprising 11 key Mid Western States around the Great Lakes. Hydro has also started offering products to market through a major regional distributor, ACF Environmental, covering the Eastern seaboard of the US. Early indications from the new channel partners are encouraging with increased enquiry and proposal levels.

The US business has also led a move into the Mexican Stormwater market. In December 2010, Hydro signed a distribution agreement with Soluciones Hidropluviales. It has been pleasing to see the progress that has been made in a short period of time, with strong interest shown by both Mexican Water Authority (Conagua), and major commercial and residential developers. Initial stock orders of both Downstream Defender® and Up-Flo® Filter have been delivered in the first half-year.

The additional resources brought into the business over the last year to improve operational effectiveness and build a platform for growth through improved distribution have increased staff costs for the period compared, resulting in a small operating loss for the first six months.

International Stormwater

Construction markets in Hydro's international Stormwater markets (New Zealand, Australia, South Korea and Malaysia) remain relatively subdued. However, flooding and water quality issues are increasingly on the international agenda, particularly throughout the Asia Pacific region. Medium-term prospects in this area, and others in Europe, are starting to build and Hydro is working with partner distributors to promote the development of a market for our products.

Outlook

Hydro has secured key long-term contracts over the last twelve months, and the acceleration of schedules on a number of these projects has benefitted the results for the first half of 2011. Looking forward to the second half of the year, there is pressure from macro-economic conditions and uncertainty remains high. Despite this general backdrop and the effective suspension of opportunities in the Middle East, Hydro remains well placed with a strong order book.

The Group is financially strong and well diversified, both in terms of business sectors and geographies. The business remains focussed on continuing the progress made over the last year to improve its commercial resources and sales channels, both in core UK and US markets, as well as on a wider international platform.

The Board remains positive about the prospects and opportunities for Hydro's solutions and products.

Other Financial Matters

Foreign Currency

The Group is exposed to the risk of fluctuating exchange rates through transactions undertaken, and accounting balances held, in foreign currencies. The Zickert Scraper product is sourced from Sweden and, with the start of the three major projects for Thames Water, the exposure to the Swedish Kronor has increased over the period. To mitigate this exposure the Group has entered into forward purchase arrangements providing the Group with gains as the Kronor has strengthened against sterling. Equally, the depreciation in the value of the US dollar against sterling gave rise to foreign exchange losses on US dollar denominated assets. The overall impact of this together with gains and losses associated with other currencies was to credit the income statement with net gains totalling £64,000 (2010: £189,000 gain).

Key performance indicators

In addition to the statutory revenue and profit measures we monitor our performance in implementing our strategy with reference to progress in the financial performance indicators listed above.

Segmental results for the six months ended 30 June 2011

A summary of the key financial results by segment is disclosed in note 2 to the condensed financial statements.

Dividend and dividend policy

In line with current policy no interim dividend has been proposed or approved by the Board in any interim period.

A final dividend of 3.3p per share (£472,000) in respect of the year ended 31 December 2010, as recommended by the Board of directors subsequent to the year-end, was approved at the AGM and paid during the period.

Principal risks and uncertainties

The principal risks and uncertainties which could affect the Group for the remainder of the financial year remain those detailed on page 12 of the Annual Report 2010, a copy of which is available at www.hydro-international.biz. In addition, the Outlook section of this Interim Management Report provides a commentary concerning the remainder of the financial year.

Going concern

A full commentary on the risks affecting the Group's liquidity and details of the Group's borrowing facilities are outlined on page 16 of the Annual Report 2010. Since the date of the Annual Report 2010 the Group has agreed the following changes to the facilities referred to in that report:

·; The Group's existing loan facilities are subject to financial covenants. The covenant testing the Group's cash generation in comparison to the level of debt service payments (loan capital plus interest) has been removed and replaced with a 'cash cover' test. Under this test the Group is required to hold cash equivalent to at least 45% of the value of outstanding primary loans and external bonds.

·; The Group has agreed a £3.5m facility with Barclays Bank for the provision of bonds, guarantees and/or indemnities. The Group is obliged to place cash on deposit with Barclays Bank as security for this facility in the sum of the lower of 30% of the total value of all bonds issued under the facility, or 100% of the bonds issued above a £2.0m threshold. This facility is renewed on an annual basis with the next review to be undertaken by the Group's Bank during April 2012.

·; The Group has relinquished the previous overdraft facility with Barclays Bank.

The Group remained in compliance with banking covenants as at 30 June 2011.

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 financial facilities. Accordingly, and after making enquiries, the directors have concluded that the Group has adequate resources to continue in operational existence for the foreseeable future.

By order of the Board,

Stephen Hides

Chief Executive Officer

5 September 2011

Hydro International plc

Condensed Group Income Statement unaudited

for the six months ended 30 June 2011

Condensed Group Statement of Comprehensive Income unaudited

for the six months ended 30 June 2010

Hydro International plc

Condensed Group Balance Sheet unaudited

30 June 2011

Hydro International plc

Condensed Group Statement of Changes in Equity unaudited

for the six months ended 30 June 2011

Hydro International plc

Condensed Group Cash Flow Statement unaudited

for the six months ended 30 June 2011

*Represents deferred payments to the vendor of Eutek Systems, Inc, acquired in May 2008.

Hydro International plc

Reconciliation of Profit to Net Cash Flow from Operating Activities unaudited

for the six months ended 30 June 2011

Hydro International plc

for the six months ended 30 June 2011

1. Basis of preparation

The Condensed Interim Financial Statements were approved by the directors on 5 September 2011.

The information for the year ended 31 December 2010 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The condensed set of financial statements has been prepared on a going concern basis using accounting policies consistent with International Financial Reporting Standards (IFRS's) and in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. The same accounting policies, presentation methods of computation are followed in the condensed set of financials as applied in the Group's latest annual audited financial statements, which are prepared in accordance with IFRSs as adopted by the European Union.

2. Segmental analysis of results

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board of Directors to allocate resources to the segments and to assess their performance. Information reported to the Group's Board of Directors for the purpose of resource allocations and assessment of segment performance is more specifically focused on the destination of products sold by the operating divisions and the combination of business activity as detailed above and the destination of the product. The Group's reportable segments under IFRS 8 are therefore as follows:

Wastewater

- UK and Ireland

- US

- Rest of World

Stormwater

- UK and Ireland

- US

- Rest of World

Information regarding the Group's operating segments is reported below.

Hydro International plc

for the six months ended 30 June 2011

2. Segmental analysis of results (continued)

There are no intersegment sales.

The accounting policies of the reportable segments are the same as the Group's accounting policies. Segment profit represents the profit earned by each segment without allocation of amortisation of intangibles, central administration costs including director's salaries, investment revenue and finance costs, and income tax expense. This is the measure reported to the Group's Board of Directors for the purpose of resource allocation and assessment of segment performance.

Hydro International plc

for the six months ended 30 June 2011

2. Segmental analysis of results (continued)

For the purposes of monitoring segment performance and allocating resources between segments, the Board of Directors monitor the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of other financial assets (except for trade and other receivables) and tax assets.

Hydro International plc

for the six months ended 30 June 2011

3. Net finance cost

4. Income tax charge

Interim period income tax is accrued based on the estimated average annual effective income tax rate of 37.2% (6 months ended 30 June 2010: 38.2%).

5. Earnings per share

Earnings per ordinary share are based on profit on ordinary activities after taxation, divided by a weighted average of 14,335,071 (2010: 14,279,460) shares in issue during the period. The diluted earnings per share are calculated after the inclusion of share options and the weighted average of ordinary shares used in the calculation is 14,426,768 (2010: 14,318,005).

6. Interim results

Copies of the interim results will be distributed to shareholders and made available to the general public at the Company's registered office. In accordance with AIM Rules 20 and 26 the interim results will also be available on the Company's website at www.hydro-international.biz.

INDEPENDENT REVIEW REPORT TO HYDRO INTERNATIONAL PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 which comprises the condensed group income statement, the condensed group statement of comprehensive income, the condensed group balance sheet, the condensed group statement of changes in equity, the condensed group cash flow statement, the reconciliation of profit to net cash flow from operating activities and related notes 1 to 6. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules of the London Stock Exchange.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with the AIM Rules of the London Stock Exchange.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Bristol, United Kingdom

5 September 2011