Interim Results

29 July 2014

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 2014.

Financial highlights

· Positive total EBITDA1 for first time in Company's history of US$0.5 million (H1 2013: US$1.6 million loss); significantly improved operating EBITDA2 of US$1.6 million (H1 2013: US$0.03 million)

· Revenue up 82% to US$25.4 million (H1 2013: US$13.9 million) with impact of OSS acquisition outweighing reduced income from Canton; total income for the period of US$29.4 million includes US$4.0 million relating to estimated receipts for business interruption coverage under the Group's insurance policy

· Total sales volumes rose 106% to 25.5 million litres (H1 2013: 12.4 million litres), despite significantly lower SUPERFINETM sales pending Canton recommissioning

· Volume growth and steady gross margins in the recycling division compared to last 4 months of 2013 (post-OSS acquisition), despite more challenging market conditions in the UK for sourcing feedstock and sales of recycled oil

· Gross profit up 124% to US$7.9 million (H1 2013: US$3.5 million)

· Overall loss for the period more than halved to US$3.0 million (H1 2013: US$7.0 million)

· Positive operating cash flows (before working capital movements) of US$0.3 million (H1 2013: US$1.4 million outflow); substantial cash reserves of US$18.4 million (30 June 2013: US$4.5 million)

· Progress continues towards final insurance settlement in respect of Canton incident with interim payments of US$5.5 million received to date

Operational and strategic highlights

· Canton rebuild and expansion project underway with first two train module expected to be operational in Q4 2014 and further four trains in Q1 2015

· Provisional patent applications lodged in respect of transformer oil and lubricant oil re-refining technology

· American Carbon Registry approved Hydrodec's emissions reduction accounting methodology for generating carbon credits through re-refining transformer oil

1 including estimated receipts for business interruption coverage under Group insurance policy

2 EBITDA adjusted for growth expenditure of US$1.1 million (H1 2013: US$1.7 million)

Commenting on the results, Ian Smale, Chief Executive of Hydrodec, said: "Good progress this first half year demonstrates that we have a robust platform for our strategy, with real underlying operating momentum. We expect to move on significantly in the second half of the year delivering a series of milestones that will continue to build our unique renewable oil proposition."

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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. 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. Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia. In September 2013, Hydrodec acquired the business and assets of OSS Group, the UK's largest collector, consolidator and processor of used lubricant oil and seller of processed fuel oil, with a national network of oil storage and transfer stations, currently serviced by a fleet of more than 90 trucks which collect used oil and other garage workshop waste from over 30,000 customers. Used oil is converted into processed fuel oil ("PFO") at OSS's plant at Stourport and principally sold on to the UK quarry and power industry.

Hydrodec'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

Further positive progress has been made in the first half of the year with the interim results reflecting the work underway to prepare the Company for growth, as well as momentum in the operating businesses despite difficult market conditions. While reliant in part on our best estimate of amounts recoverable from the insurance policy for the period under review, I am very pleased that we can report a positive total EBITDA (US$0.5 million) for the first time in the Company's history which reflects our growing maturity as a business. Strong growth in revenues (up 82 per cent to US$25.4 million), together with US$4.0 million relating to estimated receipts for business interruption coverage, and sales volumes (up 106 per cent to 25.5 million litres) reflect the first full half-year period of OSS performance more than offsetting the lost production at Canton while the plant there is recommissioned.

The estimated business interruption coverage represents margin forgone, based on estimated lost sales of US$10.9 million, net of direct costs and insurance policy deductible. On a pro-forma basis, assuming sales from Canton had been made in line with the forecasts used to calculate the estimated business interruption coverage, revenue would have shown an increase of 161 per cent to US$36.3 million, of which US$16.9 million (H1 2013: US$13.9 million) would relate to the re-refining business and US$19.5 million relates to the recycling business. On the same basis, total sales volumes would have shown an increase of 194 per cent to 36.5 million litres, of which 14.1 million litres would relate to SUPERFINETM (H1 2013: 12.4 million litres), 2.9 million litres would relate to trading used oil (mainly in Canton) and 19.5 million litres relates to recycled oil products.

The Group achieved positive operating cash flow (before working capital movement) and remains soundly financed to meet demands for capital expenditure with cash of US$18.4 million at the end of June.

Progress towards a resolution of the insurance claim for the Canton incident continues in line with the Board's expectations, and the Group is cooperating fully with the underwriters and loss-adjustors. The structure to finalise a negotiated settlement is in place and we would expect to be able to announce the outcome during the third quarter of this year assuming the ongoing cooperation of all parties. A total of US$5.5 million has already been received as interim payments from the insurers and we see no reason to expect anything other than a full resolution of the claim consistent with the terms of the insurance policy. Hydrodec of North America has also worked hard to ensure all stakeholders will support the rebuilding and expansion of the plant in line with our original intent, and have favourably resolved regulatory and safety investigations into the incident. New plant with an improved design is now under construction in Canada with the first two "expansion" trains scheduled for commissioning in the fourth quarter, and the original four trains expected to be replaced during the first quarter of 2015. Photos and further description of the new plant under construction are available on our website (www.hydrodec.com) and we shall continue to provide updates regarding progress. The Canton operation has continued to take in and trade used oil during the downtime in production and work with partners G&S and the value-chain is underway to ensure a quick resumption of the re-refining business on recommissioning of the plant, benefiting from a higher quality product as well as the explicit link to carbon offsets.

OSS has built strong, positive momentum over the first half, not only substantially renewing all significant contracts for both waste service and oil supply, but adding new marquee customers for both oil supply and total waste management solutions. The original impacts of administration have largely been managed successfully with new depot and collection facilities in the Midlands and the resolution of significant outstanding payments dating from the period of administration prior to the acquisition by Hydrodec last year. Opportunistic competitor reaction in a competitive collection market and reduced demand for PFO from the power industry have had an impact, but the UK operation remains on track to meet the Board's expectations for the full year and has reinforced its reputation as the best in class operation based on service and value for customers. Oil collection continues to provide the necessary support for a re-refining project in the UK and the Group expects to announce progress on a number of key milestones in this regard by the end of the summer.

We continue to make progress with Southern Oil in Australia for the relocation of the Young operation to Wagga Wagga, NSW. The permitting timetable should allow us to implement the project by year end.

Two provisional patent applications have been made and lodged by the Australian technology team. The first patent re-establishes the technology innovation in the core transformer oil re-refining process to extend the current IP protection for a further 20 years; the second provisional patent describes the innovation in re-refining used lubricant oil through a pre-treatment and hydrogenation process which will offer a material improvement in recovery, and potentially quality, compared to current used oil re-refining. In the US, Hydrodec is now fully registered to trade accumulated oil and future oil production as a carbon offset.

Overall, the progress this year demonstrates that we have a strong platform for our strategy, with underlying operating momentum. We expect the outcome of these first six months will underpin the achievement of a series of milestones in the second half of the year as we continue to build our unique renewable oil proposition.

Ian Smale

Chief Executive

CONSOLIDATED CONDENSED STATEMENT OF INCOME

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 28 July 2014.

The interim consolidated financial statements for the six months ended 30 June 2014, 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 2013, which has been prepared in accordance with IFRS 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 2013 have been reported on by the Group's auditors, received an unqualified audit report 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 2014 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 2014, 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 2013.

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. 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 available working capital and working capital facilities for the next 12 months. Therefore the Directors consider the going concern basis appropriate.

2. Revenue and operating loss

On 1 December 2013 an explosion and fire at the US plant in Canton, Ohio effectively shut down production there causing significant damage to the main reactors and ancillary equipment. Since the date of the incident the Company along with its insurers and their loss adjusters have gone through a process of establishing the extent of the damage caused, the costs to rebuild it and the estimated time it would take to re-establish full operational capability. The Company has submitted a claim for its total loss including business interruption which is under review by the insurers for final approval. The Company believes its losses, including the impact of the estimated lost sales, lost production and additional expenses that have been incurred as a result of the incident, will be substantially covered by the Company's insurance policy single incident coverage of USD35,000,000.

Based on forecast sales, the Company has recorded USD4,018,000 of income receivable for the period from 1 January to 30 June recognised as other income under the terms of its business interruption coverage. The income receivable represents margin forgone, based on estimated external sales of USD 10,900,000, net of direct costs and insurance policy deductible.

The Directors consider the above represents the best estimate of amounts recoverable with certainty under the terms of the Group's insurance policy in respect of the period under review at the date of preparation of these financial statements. Confirmation of all amounts due to the Group will only occur once the loss adjusters have completed their technical review and evaluation which the Directors believe is close to completion and at which time the total claim receivable can be properly recorded. 

In anticipation of the resolution of the total claim, the Group received USD2,000,000 and USD3,500,000 on account from its insurers on 17 February 2014 and 11 June 2014 respectively.

2.1. Segment analysis

Following the acquisition of the principal assets and business of OSS Group Limited in September 2013, the Group now operates two main operating segments:

• Re-refining: principally the treatment of used transformer oil and the sale of SUPERFINETM oil

• Recycling: principally the collection and treatment of waste lubricant oil and the sale of recycled oil products

The financial information detailed below is frequently reviewed by the Board (the Chief Operating Decision Maker).

2.2. Geographic analysis

The Group's revenues from external customers and its non-current assets are divided into the following geographical areas:

*2014 includes estimated income receivable of USD4,018,000 for business interruption

2.3. Loss on ordinary activities

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

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. Finance costs

4. 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.

The weighted average number of shares used in the calculations are set out below:

In the period, the share options and warrants were anti-dilutive and diluted earnings per share is 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.

5. Intangible ASSETS

6. Trade and other receivables

As at 30 June 2014 the Group had a receivable due from the insurers of USD6,971,000 as a result of the explosion and fire at the US plant in Canton, Ohio on 1 December 2013. In anticipation of the resolution of the total claim including business interruption and other expenses arising as result of the claim, the Company received two payments on account totalling USD5,500,000 during the period (refer note 2 for further details). The breakdown of this receivable is as follows:

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 for the treatment of hardware at the Young facility and prepaid contracts for OSS Group.

8. NON-CURRENT LIABILITIES - borrowings

During 2013 the outstanding unsecured loan stock and fixed rate notes were repaid through the issue of new ordinary shares.

9. share capital

On 26 March 2014 the Company issued 125,000 new ordinary shares pursuant to the receipt of an exercise notice in respect of warrants to subscribe for ordinary shares at an exercise price of 8p per share and exercise proceeds of £10,000.

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.