Interim Results

04 September

Embargoed until 07:00

Hydro International plc

("Hydro" or the "Group")

Interim Results

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 to 30 June 2012.

Financial Highlights

1 excluding amortisation of acquired intangible assets

2 excluding amortisation of acquired intangible assets and associated tax effect

3 cash and cash equivalents, less borrowings

Operational Highlights

·; UK Wastewater growth in revenues driven by increased project flow under AMP5

·; US Wastewater contract secured for Bonnybrook WWTP in Canada worth CDN$4m, to be recognised in 2013 & 2014

·; US Stormwater is experiencing increased enquiry levels and wins key Department of Transportation contracts

·; Invested in launching key initiatives, including the Hydro Consultancy and the introduction of newly developed products (Hydro-Brake Optimum, GritCup and SpiraSnail)

·; International progress across South East Asia, Central and South America, and Eastern Europe

·; Contract signed for the redevelopment of St Petersburg International Airport in Russia worth €2m, to be recognised in H2

·; Order intake in the period at £17.1m was up 12% (H1 2011: £15.3m)

Steve Hides, CEO of Hydro International plc, commented: "While I am pleased that we have been able to grow revenues, a shift of sales mix towards lower margin, distributed products has resulted in a decline in gross profit. This is against last year's record first half results which, as previously outlined, incorporated favourable project delivery timing.

"Changes in sales mix between distributed and proprietary products leads to variations in the overall profitability of products sold. This is often difficult to predict and Hydro's strategy is to mitigate this through further diversification across geographies and a broadening of our proprietary product portfolio. Hydro made good progress on both fronts during the first half with the establishment of a foothold in several new territories through high-calibre distribution partners, and through new product launches.

"We anticipate that our full year results will be heavily second half weighted although sales will continue, as in the first half, to include a similar proportion of lower margin distributed products. Our core markets of the US and UK are expected to remain challenging, however, Hydro remains financially robust and continues to make good progress with initiatives to underpin future growth for the business."

For further information please contact:

About Hydro International

Hydro International plc (AIM:HYD) (Hydro) is a global supplier of environmentally sustainable products and innovative solutions for the control and treatment of stormwater, wastewater and combined sewer overflows. Hydro's products use a range of advanced technologies including award-winning advanced vortex technology. Headquartered in Clevedon, North Somerset, Hydro also operates in the UK from offices in Ely, Cambridgeshire as well as across the US from bases in Portland, Maine and Hillsboro, Oregon. The Group has a growing presence outside of its core US and UK markets in Ireland, Egypt, Middle East, Mexico, European Union, Malaysia, Singapore, Japan, Korea, Australia and New Zealand.

Please visit the website for further information www.hydro-int.com

Interim Management Report to the members of Hydro International plc

Group results

The financial result for the first half of 2012 is in line with our expectations. Hydro has delivered solid operational and strategic progress against a challenging economic backdrop and we expect the benefits of this progress to fall more substantially into the second half of the year.

During the period, a significant increase in UK Wastewater activity under the AMP5 asset management programme, in addition to the continued delivery of major long-term contracts for Thames Water, delivered a 12% increase in the Group's revenues. The lower margins associated with the Group's portfolio of distributed wastewater products supplied to the UK water companies contributed to the overall reduction in Group margins and accordingly gross profits. Administrative expenses increased by £0.3m reflecting our investment in new initiatives, including Hydro Consultancy, key appointments to improve the quality of the Group's commercial resources such as a new National Sales and Marketing Manager in the UK Wastewater division, and the release of provisions in the equivalent period in 2011.

In addition, several major contracts secured during 2011, as well as important contracts won during the period, have not contributed to the first half of the year, but will contribute to the full year results and beyond, in line with their delivery timeframes. Orders received in the period were 12% higher than the equivalent period in 2011 at £17.1m (H1 2011: £15.3m).

Net assets at 30 June 2012 were reduced by £0.3m against the 31 December 2011 level at £12.6m. The profit for the period was offset by dividend payments and a small loss on US Dollar denominated assets as this currency moved against Sterling over the period.

Net cash outflow from operating activities for the six months ended 30 June 2012 was £0.96m (H1 2011: £0.29m inflow). 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 £0.39m against borrowing facilities used to finance the acquisition of Eutek Systems, Inc. in 2008, and a further £0.10m was paid as deferred consideration (based on performance) to the former shareholders of that business. Along with the payment of a final dividend of £0.52m in respect of the year ended 31 December 2011, these were the principal movements in cash balances, which reduced by £2.11m over the period. Net cash at the period end was £3.6m.

Business operating review

UK Wastewater

In 2010 and 2011, the UK Wastewater division was awarded three major contracts to supply Zickert Scraper equipment to Thames Water for a combined value of £23m. These contracts, which have completion dates from the end of 2012 to early 2014, provided revenues of £4.0m (H1 2011: £3.0m) over the first six months of 2012.

Following the disappointing flow of AMP5 project work during 2011, the UK Wastewater division has seen a significant increase in activity during 2012. The business has secured a number of key contracts from water companies under the AMP5 asset management programme which, together with the impact of the major Thames Water contracts, have driven increased divisional revenues.

In May 2012 the Group announced the appointment of a new National Sales and Marketing Manager, a new role within the UK Wastewater division, with the aim of building on its successes in the municipal wastewater treatment sector and also to develop its offering into broader industrial sectors. This appointment is the latest stage in the wider Group strategy of looking for appropriate opportunities to invest in high calibre commercial resources.

US Wastewater

Revenues and operating profits generated by the US Wastewater division were lower than the record levels set in the corresponding period in 2011 due to the timing of major contracts. In 2011, the half year result was boosted by the early delivery of the large $2.8m Storm King® contract for the City of Boonville, Indiana. The division has continued to gain important contract wins over the period which, together with major contracts secured during 2011, have yet to contribute to revenues. The most significant example of this is US Wastewater's largest contract win to date for the Headcell® grit removal system which was secured in June 2012. The contract, worth CDN$4m, is for the Bonnybrook WWTP in Calgary, Alberta, Canada. Revenue from the order is expected to be recognised in 2013 and 2014 as the project is delivered.

More generally, there are signs of increased pressure on projects from public sector spending restrictions in the US Wastewater business, especially for projects on the 'wet weather' side of the business which offers solutions to municipalities with combined sewer systems.

There has also been significant progress on a number of new initiatives recently started by the business. Enquiries for, and sales of, the Hydro-Sludge Screen™, a product developed by the UK Wastewater business, are progressing well ahead of expectations. The Group also developed and launched a new grit handling system called GritCup™ with SpiraSnail™ at the beginning of July. These products target both new and retrofit installations at wastewater treatment plants and early interest from customers has been strong.

UK Stormwater

The UK Stormwater business, which is closely aligned to the new-build construction sector, has broadly maintained revenues in the face of the further deterioration in market conditions over the period. The division has made good progress with a number of key initiatives during the first half-year, including the successful market launch of the Hydro-Brake Optimum® flow control and the establishment of Hydro Consultancy. The early costs associated with the launch of the consultancy business have contributed to the reduction in divisional profits over the period when compared to the equivalent period in 2011.

The current challenges facing the UK construction sector have been widely reported, and we do not expect a return to growth in the short term. The division is focussed on maintaining the momentum created by the launch of the Hydro-Brake Optimum® flow control and maximising the effectiveness of sales channels.

The division continues to take a leading role in preparing the UK market for forthcoming stormwater quality regulation under the Flood and Water Management Act 2010. Whilst the UK Government has deferred the timetable for the publication of National Standards for sustainable drainage systems, by one year to April 2013, Hydro remains strongly positioned to capitalise on opportunities as new regulatory drivers take effect. The National Standards, once implemented, are expected to reinforce market demand for Hydro's products and services.

US Stormwater

The US Stormwater team has continued to focus on developing sales of its stormwater quality devices, Downstream Defender® and First Defense®, through its relationship with its master distribution partner, Advanced Drainage Systems (ADS). While the benefit of working through ADS is yet to translate into increased sales revenues, progress in the 11 state pilot territories, centred around the Great Lakes, has been encouraging with enquiry levels and proposal activity rising to record levels. This is particularly so given the general economic conditions and low levels of activity in the residential and commercial construction sector.

Product and territorial expansion plans are in development with ADS. It has been pleasing to see the US Stormwater business book early contract wins in new territories in the Western US, states where Hydro did not previously have coverage or representation.

Stormwater projects in the public sector are generally slowing as cities struggle to come to terms with declining tax revenues and increasing budget constraints. The transportation sector is one area where infrastructure spending has continued, and Hydro has recently won several key contracts for department of transportation work across the territory including projects in New Jersey, South Carolina and Florida, which collectively amount to over $1m.

International

The International team has continued to build on the success achieved in 2011 on specific stormwater pollution and emerging flood control projects in South East Asia, Central and South America and Eastern Europe.

In Malaysia, Hydro has now furnished over 100 Downstream Defender® units for the River of Life project, a programme to clean up and improve the Klang River in central Kuala Lumpur. In Mexico the business has completed its first First Defense® and Up-Flo® filter installations while in Sao Paulo, Brazil, a number of Downstream Defender® systems have been successfully installed to remove pollutants from stormwater runoff from commercial buildings and help the owners gain LEED (Leadership in Energy and Environmental Design) certification for their projects.

As recently announced, Hydro has signed a strategic business partnership with the leading Russian engineering company, Ecoline Ltd, to supply stormwater products into Russia, the Ukraine, Belarus and Kazakhstan. Established in 1998, Ecoline Ltd is one of Russia's leading companies for the design and delivery of water solutions. The Russian environmental market is emerging and expected to grow rapidly. Pollution control and improving water quality are key priorities and present opportunities for Hydro and its new partner. The Ecoline relationship has already generated a significant early success with a €2.0m contract to supply distributed stormwater storage systems and Hydro's Downstream Defender® stormwater quality systems as part of the redevelopment of St Petersburg International Airport (Pulkovo International).

Hydro has also appointed C&V Water as a distributor of its wastewater products to Romania's rapidly developing water infrastructure market. Hydro has identified Romania as a strategic priority due to the large number of EU funded water and sewerage infrastructure projects planned. Such projectsinclude the building of new wastewater treatment plants, the upgrading of existing infrastructure, and a major new initiative to connect a larger proportion of the population to the sewerage network. Hydro's advanced vortex separation technologies offer an advantage to wastewater plant operators who require innovative, sustainable, low maintenance solutions.

In the Middle East, efforts continue to build on the recent success of Grit King® projects in Egypt and Qatar by developing a stronger regional presence across the Middle East. Locally based territory managers are part of Hydro's strategy for growing its presence in international markets and Hydro has now recruited its first in-territory regional sales manager for the Middle East region.

Outlook

The UK construction market is anticipated to remain challenging, which is expected to continue to impact our Stormwater division, however, a number of initiatives and new product launches have been put in place to support sales. In the US, progress is being made with our new stormwater distribution partners and opportunities exist to convert high enquiry levels into sales. The Group's Wastewater businesses have made good progress in securing new contracts and the Wastewater order books remain strong. Whilst the timing of new projects remains difficult to forecast against the backdrop of water company and municipal spending constraints, in the UK the flow of new projects was aided by AMP5 activity and this is expected to continue through the second half of the year.

The full year outcome is expected to be heavily second half weighted although in the short term we expect sales to continue to include a similar proportion of lower margin distributed products to the first half.

Although our core markets of the US and UK remain challenging, Hydro continues to make good progress with initiatives to extend its reach into new and existing markets and to develop further its range of innovative and sustainable products. These projects are expected to underpin future growth opportunities for the business in the medium-term. Hydro remains financially strong and the Board remains focused on performance in the face of difficult trading conditions.

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. Certain wastewater products sold into the UK market, including the Zickert Scraper product, are sourced from Sweden and, with the ongoing delivery of three major projects for Thames Water and the increase in workload under AMP5, the exposure to the Swedish Kronor has remained at a high level over the period. To mitigate this exposure, the Group has entered into forward purchase arrangements, resulting in minor foreign exchange losses as the Kronor has moved against Sterling. Equally, the movement 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 debit the income statement with net losses totalling £13,000 (2011: £64,000 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 and those shown in the "Measuring Our Performance" section on page 6 of the Annual Report 2011.

Segmental results for the six months ended 30 June 2012

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 3.6p per share (£517,000) in respect of the year ended 31 December 2011, 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 18 of the Annual Report 2011, a copy of which is available at www.hydro-int.com. 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 23 of the Annual Report 2011. Since the date of the Annual Report 2011 the Group has agreed the removal of all 'cash cover' requirements associated with its loan and bonding facilities with Barclays Bank.

The Group remained in compliance with banking covenants as at 30 June 2012.

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

3 September 2012

Hydro International plc

Condensed Group Income Statement unaudited

for the six months ended 30 June 2012

Condensed Group Statement of Comprehensive Income unaudited

for the six months ended 30 June 2012

Hydro International plc

Condensed Group Balance Sheet unaudited

30 June 2012

Hydro International plc

Condensed Group Statement of Changes in Equity unaudited

for the six months ended 30 June 2012

Hydro International plc

Condensed Group Cash Flow Statement unaudited

for the six months ended 30 June 2012

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

Hydro International plc

for the six months ended 30 June 2012

1. Basis of preparation

The Condensed Interim Financial Statements were approved by the directors on 3 September 2012.

The information for the year ended 31 December 2011 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:

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

There are no intersegment sales included in the revenue figures stated above. Intersegment sales of £15,000 (2011: nil) have been eliminated on consolidation.

Hydro International plc

for the six months ended 30 June 2012

2 Segmental analysis of results (continued)

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.

3. Net finance costs

Hydro International plc

for the six months ended 30 June 2012

4. Income tax charge

Interim period income tax is accrued based on the estimated average annual effective income tax rate of 22.2% (6 months ended 30 June 2011: 37.2%). The effective tax rate has been reduced as a result of prior year adjustments in the period of £32,000 (6 months ended 30 June 2011: £13,000 charge). Excluding the impact of such adjustments, the effective tax rate is 33.6% (2011: 35.9%).

5. Earnings per share

Earnings per ordinary share are based on profit on ordinary activities after taxation, divided by a weighted average of 14,361,787 (2011: 14,335,071) 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 14,647,926 (2011: 14,426,768).

6. Reconciliation of profit to net cash flow from operating activities

7. 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-int.com.

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 2012 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 and related notes 1 to 7. 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 2012 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

3 September 2012