Interim Results

6 September 2012

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 2012.

 Highlights

·; Revenues increased 37% to US$13.9 million (H1 2011: US$10.1 million) driven by record sales volumes and higher pricing from improved customer mix and more favourable market conditions

·; Record SUPERFINETM sales volumes of 11.7 million litres, up 23% on last year (H1 2011: 9.5 million litres)

·; Gross profit rose 66% to US$3.2 million (H1 2011: US$1.9 million); margins at 23% (H1 2011: 19%)

·; Unit sales margin increased 35% to US$0.28 per litre (H1 2011: US$0.20 per litre)

·; Both plants delivered positive operating cashflow and contributing to central overheads

·; Significant investment in growth initiatives related to market expansion and new product development of US$1.0 million (H1 2011: US$0.4 million)

·; Underlying cash outflow from operations, excluding additional investment in new business development, significantly reduced to US$0.7 million (H1 2011: US$1.9 million)

·; Plant utilisation rate increased to 69% (H1 2011: 56%)

·; Proportion of feedstock procured directly from US utility sector increased significantly to 38% (H1 2011: 18%)

·; Received approval from US Environmental Protection Agency ("EPA") to treat polychlorinated biphenyl ("PCB") contaminated oil

·; Awarded significant tender with local partner from Mexican national electrical utility to export and treat used PCB oil

·; New senior management team completed with appointment of Chris Ellis as Chief Financial Officer in July

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, Neil Gaskell, Chairman of Hydrodec, said: "Hydrodec has achieved strong growth in revenues and margins driven by record sales volumes in the first half. Our plant utilisation continued at higher levels and both plants generated cash during the period. The new management team have brought greater focus to the operation and a wider perspective on the business as a whole, which I expect to deliver further progress in the second half and we look to the future with cautious optimism."

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Notes to Editors:

Hydrodec's technology is a proven highly efficient oil re-refining and chemical process which is being initially targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. The Group takes spent oil, including polychlorinated biphenyl ("PCB") contaminated oil, as the primary feedstock, which is then processed at its two plants enabling 99 per cent or greater recovery of oil for reuse while also eliminating PCBs, a toxic additive banned under international regulations, without environmentally harmful emissions.

Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia. The Group's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com.

Chief Executive's Report

I am very pleased to report on financial and operational performance in the first half of 2012. It is the first period in which I and several of the new management team have been in situ having joined Hydrodec in January 2012.

Our immediate priority has been to continue to build momentum in the performance of our existing business in transformer oil along with new initiatives, including a planned investment in capacity that is essential for creating a sustainable platform for profitable growth.

These first six months have seen a material improvement in all the key performance indicators. Sales volumes, margins and revenues are all significantly up on the same period last year and there is further improvement in the underlying cash generation from operations. As importantly, there have been a number of specific developments during the period which will have a positive impact on existing operations and the future development of the Group.

We have a clear strategy to build on our proven, proprietary and industry-leading technology to create a profitable business and platform by emphasising growth through active participation in core OECD markets and expansion through licensing in new products and markets.

Hydrodec applies its cleantech process to produce a valuable, high quality, highly sustainable re-usable oil from spent industrial oil. We are also close to realising an ambition to offer this re-refined "new" oil as carbon neutral or with a carbon credit, making our solution an increasingly viable alternative to incineration or other treatments for PCB-contaminated oil.

Financial and operating review

The first half of 2012 has built on improvements first seen in the second half of last year. Revenues increased 37 per cent to US$13.9 million (1H 2011: US$10.1 million) driven by strong demand and higher pricing from an improved customer mix and more favourable market conditions.

Sales volumes of our premium quality, environmentally friendly SUPERFINETM transformer oil and SUPERFINETM base oil advanced 23 per cent to a half-year record of 11.7 million litres (H1 2011: 9.5 million litres). Overall utilisation of existing plant capacity in the period averaged 69 per cent, up from 56 per cent for the first half of 2011.

Unit sales margins widened substantially to US$0.28 per litre, a 35 per cent improvement (H1 2011: US$0.20 per litre), benefitting from both improved utilisation and higher average sales prices. Overall sales prices increased more than the benchmark ICIS Pale 60 index which increased marginally over the period, only weakening into July. Average feedstock costs have been stable, although have risen towards the end of the period through increased competition for the used oil.

The US performed particularly well with record volumes achieved in Canton, up 33 per cent on the first half of last year as further investment in the local management team continues to be rewarded with greater inroads into the core electricity utility sector. The proportion of US feedstock procured directly from utilities more than doubled to 38 per cent from 18 per cent. At the same time the proportion secured under longer term pricing contracts, rather than in the spot market, increased from 29 per cent to 44 per cent. Sales in the US also witnessed an increase under contract (against spot) at 46 per cent, up from 38 per cent.

During the period we obtained our long-awaited permit to treat used oil contaminated with more than 50 parts per million of PCB from the US EPA. This effective endorsement from the EPA will add to the volumes of used oil available to Hydrodec, and also lend further credibility to the Hydrodec process in the US, and potentially elsewhere internationally. We expect to commence treatment of contaminated oil in September.

In Young, Australia a successful planned shutdown was completed safely, on time and under budget, including a statutory review of tanks and equipment. During the period we announced the successful tender for treatment of 900,000 litres of used oil from the national electrical utility in Mexico, in tandem with a local partner. Subject to the granting of relevant import permits, this oil will be transported to, and treated in, Australia later this year and should assist Australian capacity utilisation rates and margins.

It is clear and important to state that both plants are now generating a cash surplus and contributing to the central overheads of the Group.

Performance improvements generally have significantly reduced the underlying cash outflow from existing operations, excluding growth costs, to US$0.7 million (H1 2011: US$1.9 million). Investment in growth costs increased in the period to US$1.0 million from US$0.4 million, reflecting the Board's strategic decision to invest for future growth - this investment will increase further through the rest of this year in support of the Group's aspirations.

The underlying operating loss before growth costs, intangible amortisation and share based payment costs reduced to US$1.8m (H1 2011: US$2.1m) reflecting the improved trading at an operational level. The overall loss for the period increased to US$6.3m (H1 2011: US$5.2m) once the impact of the additional investment in growth initiatives, the increased interest charge from the convertible loan note amortisation, intangible amortisation and share based payment costs are included.

Platforms for growth

US expansion and consolidation

In our core US market, the strategy remains to broaden feedstock supply channels to support higher plant utilisation and a planned expansion of production capacity into a market where overall demand for new oil continues to grow. Our increasingly direct engagement with the utility sector through our sustainable, "closed-loop" offer for the environmentally-friendly disposal and processing of spent oil has achieved some success and remains a core procurement and relationship strategy. Better understanding of the scope and value chain in used oil has created a second procurement strategy based on "following the oil." Here we are targeting significant quantities of spent oil liberated through the hardware disposal process which is increasingly managed through service suppliers to the utility sector. Opportunities to improve market access and reinforce a more complete one-stop offer exist through improving our engagement with this salvage, repair and recycling segment of the supply-chain; partnership opportunities where they create competitive distinction and secure access to feedstock will be considered.

The new EPA permit both endorses the Hydrodec offer as a viable and approved alternative to incineration and creates an opportunity to target oil with higher PCB concentrations. While volumes are not sufficient to displace existing sources of supply, availability of contaminated oil at significant discounts to uncontaminated stock should have a positive impact on reducing our average feedstock price.

Technology, new applications and products

As part of our strategy the Australian business is making real progress in extending its proven re-refining technology beyond transformer oils into other industrial oils. Using a self-funded "technology incubator" model, it is focused on developing a new and differentiated product line in industrial lubricants with a blender/marketer partner.

Previous product development and testing with a potential blender/marketer and industrial end-user partners has yielded encouraging results. Field trials are now underway that should re-confirm proof of concept and potential industrial applications by the year end. The value of our Australian intellectual property can be leveraged materially through partnership as well as by creating unique and potentially patentable new applications for the Hydrodec technology.

Opportunities to lease and operate, or license our technology will be considered to reduce the call for significant upfront capital. The initial focus is on the Australian mining industry which if successful could be the basis of an extendable global operating model into other territories and industries.

Delivering oil with a carbon credit has come one step closer through a methodology, developed by Hydrodec with external consultants, that independently verifies the carbon saving achieved by returning used oil to its original purpose. This is at the heart of Hydrodec's unique, sustainable offer of genuinely re-usable oil. The methodology has been recently submitted to the United Nations Framework for Climate Change Committee (UNFCCC) for validation. Once approved, tradable carbon credits for each litre of product sold may be available and/or assignable through various country or region specific programmes. To put the potential value into some perspective, to date Hydrodec has processed ca. 70,000 tonnes of used, contaminated oil which would otherwise have been incinerated. This is equivalent to 250,000 tonnes of saved CO2 emissions, notionally worth up to AUS$3.0m today on the basis of the current Australian carbon credit scheme. Achieving an annual saving of this scale would make the sustainable proposition relevant for a company of our size; this would be achievable through a doubling of our production capacity.

Japan, new markets and further options for growth

Japan remains the most favourable regulatory environment for Hydrodec technology and oil solutions, with clear evidence of at least 600 million litres of PCB contaminated oil awaiting treatment. Our technology remains the only certified non-destructive technology for low-level contaminated waste.

Whilst Japan offers huge potential for our technology over the long term, the progress of our joint venture with Kobelco-Eco Solutions has been slower than expected. However, the appointment in January of Takuichi Murachi as Hydrodec President for Japan has strengthened our position with our joint venture partner. There is a renewed focus on developing the joint venture business plan which will require additional direct involvement to realise the long term objectives. In the short term, key milestones will be land acquisition, supply contracts and commencement of construction.

In addition, after the period end we announced a joint marketing agreement with D.E.L.CO, a European-based group who specialise in the decontamination of PCB contaminated hardware. The obvious synergies with our technology to treat PCB contaminated oil lead the two groups to believe that we may be able to access interesting licensing opportunities for our respective technologies in new and developing markets.

Current trading and 2012 outlook

I am very encouraged by the strong first half performance and there remains scope for a continuing improvement in overall operating results and cash generation as the new executive management applies its extensive oil and industry experience to drive the business.

Current trading remains encouraging and our outlook for the year remains consistent with expectations. Margins have experienced some pressure in July and August due to refinery fires and outages elsewhere in the US which have impacted the price of our feedstock. However, following the EPA approval we have taken delivery of our first supplies of PCB contaminated oil in Canton and expect to begin processing this during September as previously indicated and at attractive margins.

The Group's facilities have the capacity to grow sales volumes. In Australia, processing of the Mexican import material should commence during the second half, slightly behind schedule due to the timescales involved in obtaining necessary permits. As a result part of the benefit of this breakthrough contract will be seen early next year. In the meantime, we are developing a real understanding of moving contaminated product internationally.

The progress made in the last six months has reinforced the new management's confidence in Hydrodec's core OECD markets and our commitment to the discretionary spend associated with the Company's potential and growth. The Group would benefit significantly from a larger capital base and a range of options are being considered.

A key consideration in any analysis will be the maturing of the convertible loan notes (CULs) on 1 November 2012. Should the CULs convert to equity (the strike price is 14.64 pence per share) then the Group will be essentially unlevered which will increase options for both future funding and flexibility materially. If the strike price is not achieved and the notes convert to debt (repayable in October 2014), then the residual coupon at 8% p.a. is an attractive cost of debt in current market conditions.

With the new management team complete, the Company is now in an excellent position to deliver on the potential of the Hydrodec technology.

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 5 September 2012.

The interim consolidated financial statements for the six months ended 30 June 2012, 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 2011, which has been prepared in accordance with IFRS's 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 2011 have been reported on by the Group's auditors, received an unqualified audit report but included an emphasis of matter modification regarding going concern, 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 2012 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 2012, 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 2011.

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.

Currently, the Group is dependent upon its two plants to produce sufficient SUPERFINETM oil at satisfactory margins to generate sufficient cash to meet the Group's forecast requirements. Margins are affected by, amongst other things, the world price for oil and demand for transformer oil which are beyond the Directors' control and about which there is material uncertainty. The plants are also reliant on satisfactory production rates which are dependent on the availability of sufficient feedstock, and at the appropriate cost. Sensitivity to change on both criteria have been assessed by the Board.

The Directors are satisfied that with available funding and at projected production, sales and margin rates the Group's cash flow requirements will be met and, if required, there is the capacity to reduce discretionary growth expenditure where warranted.

The Directors believe that it is appropriate to prepare the interim consolidated financial statements on a going concern basis as they believe that the conditions outlined above will be met or exceeded.

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 for the period

The loss on ordinary activities before taxation is stated after charging/(crediting) the following amounts:

2.3 operating ebitda

This is calculated as follows:

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. A total of 1,350,000 options issued to previous Directors and employees of the Company lapsed or were forfeited during the period. No new options were granted during the period. A total of 166,667 were exercised in the year and 16.08 million options were exercisable at prices between 6.9p and 33.25p at 30 June 2012 at a weighted average exercise price of 19.3p per share.

Warrants

On 25 May 2011, the Company issued 10,750,000 warrants in connection with the £2,000,000 of non-convertible fixed rate secured loan notes. The warrants have an exercise price of 8p per share with an exercise window from 14 June 2013 to 14 June 2016.

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.

The charge for the period is based on an independently commissioned estimate using a Black Scholes calculation to meet the requirements of IFRS 2.

4. Finance costs

5. TAXATION

The deferred tax liability has been adjusted by USD118,000 to reflect the change in the UK corporate tax rate from 26% to 24% during the period.

A deferred tax asset of approximately USD11,443,000 (2011:USD10,712,000) 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.

Diluted earnings per share takes into account the dilutive effect of potential ordinary shares. For the period the share options and warrants were anti-dilutive and diluted earnings per share are 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 (EBT).

7. 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 previously incorrectly recognised for the treatment of PCB contaminated hardware at the Young facility. A full provision for the treatment of this material was made in the Statement of Comprehensive Income as at 31 December 2011 and is disclosed in note 8.

8. 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:

9. long term borrowings

In November 2007, the Company issued a £13,800,000 convertible unsecured loan note by private placement, convertible at the loan note holder's option into ordinary share capital of the Company at a fixed price of 19p, subject to anti-dilutive conditions for subsequent share issues at below market price. Under the terms of the issue, the conversion price is revised for subsequent issues of share capital at discounts in excess of 10 per cent to the prevailing 5 day share price average.

At 30 June 2012, the current conversion price was 14.64p (2011: 14.64p) per share. Loan notes are convertible into ordinary shares at any time prior to 1 November 2012. Those elements not converted into shares by this date are repayable, at the Company's determination, between 1 November 2012 and 31 October 2014. Due to the convertible nature of this instrument it contains a loan element and equity element. Over time the loan element, as reflected above, increases such that the instrument's repayment value (currently £12,790,000) would be reached, assuming non conversion, on 31 October 2014.

10. 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.