Preliminary Results

RNS Number : 8957H

Hydro International PLC

02 March 2010

 

HYDRO INTERNATIONAL plc

 

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2009

 

 

Hydro International plc ('Hydro' or 'the Group'), the provider of innovative products for the control and treatment of water, is pleased to announce its preliminary results for the year ended 31 December 2009.

 

KEY INDICATORS

		Year ended 31 December 2009	Year ended 31 December 2008
Statutory:
Revenue		£27.3m	£30.0m
Operating profit		£2.0m	£2.8m
Profit before tax		£1.8m	£2.7m
Earnings per share		7.97p	12.27p
Cash and cash equivalents		£5.0m	£5.8m
Non-Statutory:
Adjusted operating profit*		£2.1m	£3.2m
Adjusted earnings per share**		8.42p	13.98p
Closing order book		£7.8m	£8.8m

*excluding exceptional other operating income, amortisation of acquisition related intangible assets.

**excluding exceptional other operating income, amortisation of acquisition related intangible assets and related corporation tax effect at 37.7% (2008: 34.2%).

 

 

For further information, please contact:

 

Hydro International plc Tel: +44 (0) 1275 878371

Roger Lockwood, Chairman

Steve Hides, Chief Executive Officer

Tony Hollox, Chief Financial Officer

 

KBC Peel Hunt Tel: +44 (0) 20 7418 8900

Nominated adviser and broker

Julian Blunt (Corporate Finance)

Matthew Tyler (Corporate Broking)

 

 

 

2 March 2010

 

 

 

CHAIRMAN'S STATEMENT

 

As anticipated, 2009 proved to be a challenging year for Hydro International with overall Group revenues 9% lower than 2008. The Group's Stormwater businesses continued to be affected by the global recession and the consequent downturn in the development of new residential housing and commercial/industrial sites. In contrast, our Wastewater businesses, particularly in the US, performed extremely well allowing the Group as a whole to deliver a financial result in line with expectations.

 

Government stimulus spending in both the UK and US has, to a limited extent, mitigated the exposure to the sharp downturn in private sector development activity by providing funding for public infrastructure projects such as roads, airports, schools and other public buildings. Initiatives in the UK to address urban flooding are providing opportunities to apply Hydro flow control and storage products and this is an area that we expect to develop further following the anticipated enactment of the Flood and Water Management Bill. The major contract to supply Hydro Brake® Flow Control units as part of the Whitecart Water flood alleviation project in Glasgow is a good example of the type of project that are anticipated to become more common in the future.

 

In the US, Government stimulus spending associated with the American Recovery and Reinvestment Act of 2009 (ARRA) did help to bring forward some wastewater projects although the overall benefit of the ARRA programs has been relatively minor. Many customers opted not to take advantage of the ARRA funds due to the attendant limitations and restrictions placed on specification and procurement procedures associated with federal programmes.

 

Profitability in the year was affected by lower sales volumes and some adverse foreign exchange movements. In the light of lower activity levels we conducted a formal review of operating resources and structures in the Stormwater business, which resulted in a modest reduction in employee numbers. Despite these actions, and a general improvement in average gross margins generated by reducing product costs from a competitive supply chain, return on sales was lower at 7.5% (2008: 9.4%) and total Group operating profit was lower at £2.0m (2008: £2.8m).

 

Economic conditions affect Stormwater revenues

 

The demand for the Group's Stormwater products is driven by local planning requirements, environmental regulation and permits for new build residential and commercial construction.

 

Stormwater revenues reduced by 28% to £9.8m (2008: £13.6m) reflecting difficult trading conditions caused by contraction in the housing and construction sector in the UK and US. The small Irish market was particularly hard hit. Sales fell sharply in the early part of the year, but then stabilised at the lower level in the second half. The scale of the contraction is illustrated by the level of new housing starts in 2009, which were 50-60% down on 2007 levels in the UK and US. The smaller scale of the reduction in revenues seen by Hydro is due in part to the relatively wide diversification within the business between private and publicly funded projects.

 

In recent years the Stormwater market has become increasingly competitive with a greater number of suppliers pursuing what became in 2009 a diminished pool of work as the sector contracted. We remain confident that there will be a return to growth in the sector over the medium term and we are taking steps to strengthen our market leading position by continuing to invest in further improving existing products and developing new solutions for emerging needs. To that end, in 2009, the Group raised the bar in the vortex flow control sector of the market with the introduction of a new and improved range of Hydro-Brake® Flow Controls offering customers enhanced performance and providing clear differentiation from competitor products.

 

Markets move towards sustainable solutions

 

There is a growing movement in the market towards sustainable drainage systems (SUDS) and low impact development (LID) that is generating a demand for "natural" systems to manage surface water flows and treat and remove pollutants associated with urban stormwater runoff. In the UK this movement is being supported by the Flood and Water Management Bill which focuses on reducing the likelihood and impact of flooding and encourages sustainable drainage practices. The Bill will introduce the development of national standards for SUDS, and proprietary products such as those currently offered by Hydro are expected to form an important part in the overall range of solutions. We are actively involved with all stakeholders and are in consultation with Defra and the UK water industry bodies on the development of the national standards. In addition, Hydro is introducing further products to support and respond to the trend towards more natural solutions. A good example is illustrated by the new Hydro-Filterra bio-retention system that was brought to market, under licence in the UK, during 2009. This system uses natural processes to remove contaminants from stormwater and initial interest in the product has been strong.

 

Consultation has continued on the implementation of EU Water Framework Directive with key stakeholders in the industry. The Directive is focused on improvements in the management of stormwater quality across the EU and Hydro is well positioned to offer tested and proven technologies to address this problem. We are in the process of transferring into the UK and EU products first developed for the US market to address the National Pollution Discharge Elimination System (NPDES) legislation.

 

Key approval gained in US Stormwater market

 

Despite the economic turmoil of the past twelve months, the US remains the largest stormwater market in which Hydro operates. Poor trading in the first half year and a strategy aimed at aggressively increasing our US market share led to a restructuring at the half year stage and the appointment of a new National Sales Manager in the final quarter of 2009. The remit of this key appointment is to oversee management of the sales channels and refine the routes to market.

 

Regulatory approvals are a major barrier to entry into the US stormwater market. In December we were awarded a key regulatory approval by New Jersey Department of Environmental Protection for the Up-Flo® filter. Gaining this approval is seen as a major milestone for the US business and is expected to increase sales growth for the Up-Flo® Filter in 2010 and beyond. We have also partnered with our EU based partner to introduce Stormbloc® plastic storage media into the US.

 

Increased revenues in Wastewater

 

Wastewater revenues increased by 7% to £17.5m (2008: £16.4m) with growth seen in each of the Group's major markets. Sales and order intake were particularly strong in the US Wastewater business which benefitted from a combination of a wider acceptance of the new Headcell® grit removal system and the growing demand for fine grit removal systems needed to protect increasingly sophisticated wastewater treatment technologies. This business also handles the Group's Combined Sewer Overflow (CSO) treatment devices in the US. Hydro's independent network of wastewater sales representatives is now promoting our CSO product portfolio leading to increased exposure for the products and a marked rise in proposal activity. 2009 saw the Group's first Heliscreen® installations in the US CSO market. Heliscreen® is a mechanical screening device that is designed to remove debris and floatables from CSO's and is a product that sold well in the UK under the AMP3 programme.

 

UK Wastewater market prepares for AMP5

 

In the UK, the fourth asset management programme (AMP4) entered its final year on 1 April 2009. Order intake in the first half of the year was encouraging with a major order for £2.6m received early in the period, representing a repeat order for Zickert Scraper technology following a successful initial contract in 2008. Order flow slowed in the second half of the year as the UK Water and Sewerage Companies deferred expenditure until the next five year AMP cycle which starts on 1 April 2010.

 

Retrofit, maintenance and remedial works programmes are likely to be a focus for AMP5 and Hydro is well placed to continue offering existing solutions in this area. The UK Wastewater business is also expecting to build on the success of the Zickert product in AMP4 with further significant orders likely under the AMP5 programme. AMP5 is also expected to bring a greater focus on sewer flooding, which should create new opportunities for the flow control and storage products which we currently sell into Stormwater markets.

 

Across the water industry the energy efficiency and carbon minimisation agenda is starting to take a firm hold. In May 2009, the UK Wastewater business signed a licence agreement with Parkson Corporation to introduce the HiOx ultra-fine bubble aeration system into the UK and Irish markets. The HiOx diffuser is a flat membrane system that produces extremely fine bubbles to increase oxygen transfer efficiency and reduce power consumption at wastewater treatment plants.

 

Hydro's export business also made good progress in 2009 with solid growth resulting from a focused effort on promoting the Group's wastewater product portfolio in the Middle East. Most notable were orders for Grit King®, the Group's vortex based grit removal technology, from the Egyptian wastewater sector as part of a programme to introduce wastewater treatment to villages situated along the Nile.

 

People

 

I should like to thank all the members of the Hydro team who have helped contribute to our performance during a testing 2009.

 

Dividend

 

The Board is recommending an unchanged final dividend of 3.0 pence per share which, subject to approval at the Annual General Meeting on 20 May 2010, will be paid on 3 June 2010 to shareholders on the register on 3 May 2010.

 

Outlook

 

As we anticipated, 2009 proved to be a challenging year for Hydro. Whilst the economic downturn slowed growth, our recent efforts towards diversification in our core markets and core sectors has helped to mitigate the impact on the Group as a whole.

 

Residential housing and commercial construction sectors now appear to have stabilised, albeit at a low level, and we are not expecting to see meaningful recovery until at least the second half of 2010. Private sector recovery should benefit the Group's Stormwater businesses, but there remains considerable uncertainty around the impact on both private and public sector investment as governments look to balance public finances and review spending. Water is, however, high on governments' agendas and the move towards low impact development and sustainable drainage, supported by the introduction of new legislation in the UK, should benefit Hydro.

 

Prospects for the Group's Wastewater businesses are encouraging and further progress is expected in 2010, as we are well positioned on a number of strategic wastewater projects in the UK, US and Middle East.

 

The impact of winter weather conditions and the start of the new US fiscal year traditionally balance Hydro's results towards the second half of the year. With the end of AMP4 in April 2010 we would expect this influence to be more pronounced in 2010.

 

We continue to actively pursue implementation of the Group's strategic plan, whilst at the same time placing a short term emphasis on ensuring strength and focus in core markets, sectors and products. The Board is fully aware of the short term trading challenges associated with the recent economic slowdown, however it remains confident of the Group's ability to deliver long term growth.

 

 

 

Roger Lockwood

Chairman

 

 

 

 

Hydro International plc

Preliminary Results

Group Income Statement (Unaudited)

Year ended 31 December 2009

 

Continuing operations	2009 £000	2008 £000
Revenue	27,326	30,013
Cost of sales	(15,796)	(17,865)
Gross profit	11,530	12,148
Administrative expenses	(9,642)	(9,333)
Exceptional other operating income	151	-
Operating profit before exceptional other operating income and amortisation of acquired intangibles	2,140	3,208
Exceptional other operating income	151	-
Amortisation of acquired intangibles	(252)	(393)
Operating profit	2,039	2,815
Finance costs	(213)	(159)
Profit before tax	1,826	2,656
Tax	(689)	(908)
Profit for the period from continuing operations	1,137	1,748
Basic earnings per ordinary share Diluted earnings per ordinary share	7.97p 7.95p	12.27p 12.17p

 

Consolidated Statement of Comprehensive Income (Unaudited)

Year ended 31 December 2009

 

	2009 £000	2008 £000	2007 £000
Profit for the financial year   Exchange differences on translation of foreign operations	1,137   (191)	1,748   527	1,764   31
Total comprehensive income for the year	946	2,275	1,795

 

 

 

 

Hydro International plc

Preliminary Results

Consolidated Balance Sheet (Unaudited)

31 December 2009	2009	2008
	£000	£000
ASSETS
Non-current assets
Intangible assets - Goodwill	5,064	5,619
Intangible assets - Other	2,346	2,825
Property, plant and equipment	1,805	2,027
Deferred tax assets	67	191
Trade receivables	774	64
	10,056	10,726
Current assets
Inventories	553	687
Trade and other receivables	8,437	9,427
Cash and cash equivalents	5,040	5,808
Derivative financial assets	5	24
	14,035	15,946
TOTAL ASSETS	24,091	26,672
LIABILITIES
Current liabilities
Trade and other payables	7,518	9,193
Current tax payable	499	593
Deferred tax liability	495	391
Borrowings	3,559	819
	12,071	10,996
Non-current liabilities
Trade and other payables	773	991
Deferred tax liability	864	915
Borrowings	-	3,938
	1,637	5,844
TOTAL LIABILITIES	13,708	16,840
NET ASSETS	10,383	9,832
EQUITY
Called up share capital	714	713
Share premium account	975	967
Foreign currency translation reserve	301	492
Retained earnings	8,393	7,660
TOTAL EQUITY	10,383	9,832

 

 

 

 

Hydro International plc

Preliminary Results

Consolidated Statement of Changes in Equity (Unaudited)

Year ended 31 December 2009

	Issued capital	Share premium	Foreign currency reserve	Retained earnings	Total
	£000	£000	£000	£000	£000
1 January 2008	710	953	(35)	6,296	7,924
Currency translation difference	-	-	527	-	527
Profit for the period	-	-	-	1,748	1,748
Comprehensive income	-	-	527	1,748	2,275
Equity shares issued	3	14	-	-	17
Share based payments	-	-	-	15	15
Dividends paid	-	-	-	(399)	(399)
31 December 2008	713	967	492	7,660	9,832
Currency translation difference		-	(191)	-	(191)
Profit for the period	-	-	-	1,137	1,137
Comprehensive income	-	-	(191)	1,137	946
Equity shares issued	1	8	-	-	9
Share based payments	-	-	-	24	24
Dividends paid	-	-	-	(428)	(428)
31 December 2009	714	975	301	8,393	10,383

 

 

 

Hydro International plc

Preliminary Results

Consolidated Cash Flow Statement (Unaudited)

Year ended 31 December 2009

	31 December 2009	31 December 2008
	£000	£000
Cash generated from operations	2,068	2,443
Interest paid	(211)	(260)
Corporation tax paid	(488)	(596)
Net cash from operating activities	1,369	1,587
Cash flows from investing activities
Purchases of property, plant and equipment	(146)	(320)
Proceeds from sale of property, plant and equipment	-	13
Purchases of patents and trademarks	(114)	(59)
Purchase of software assets	(12)	(25)
Expenditure on product development	-	(1)
Interest received	17	127
Cash acquired with subsidiary	-	283
Acquisition of subsidiary	(540)	(3,376)
Net cash used in investing activities	(795)	(3,358)
Cash flows from financing activities
Proceeds from the issue of shares to shareholders	9	17
Repayment of borrowings	(742)	(860)
Finance lease capital payments	-	(4)
Dividends paid to shareholders	(428)	(399)
New bank loans raised	-	3,492
Net cash generated from financing activities	(1,161)	2,246
Net increase in cash and cash equivalents	(587)	475
Cash and cash equivalents at the beginning of the period	5,808	4,848
Exchange (losses)/gains on cash and cash equivalents	(181)	485
Cash and cash equivalents at the end of the period	5,040	5,808

 

 

 

 

Hydro International plc

Preliminary Results

Reconciliation of profit to net cash flow from operating activities (Unaudited)

Year ended 31 December 2009

	31 December 2009	31 December 2008
	£000	£000
Profit for the period	1,137	1,748
Finance costs	213	159
Corporation tax expense	689	908
Share based payment expense	24	15
Depreciation	338	326
Amortisation of intangibles	374	506
Decrease in inventories	134	167
Decrease/(Increase) in trade and other receivables	534	(239)
(Decrease) in trade and other payables	(1,375)	(1,151)
Loss on sale of fixed assets	-	4
Net cash generated from operations	2,068	2,443

 

 

 

Notes to the Preliminary Announcement

 

1. Basis of preparation

The preliminary announcement was approved by the board of directors on 1 March 2010. Whilst the financial information included in the preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not contain sufficient information to comply with IFRSs. The company expects to publish full financial statements that comply with IFRSs in April 2010.

 

2. Earnings per share

Earnings per ordinary share are based on profit on ordinary activities after taxation, divided by a weighted average of 14,265,823 (2008: 14,244,771) shares in issue during the year. 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 14,310,150 (2008: 14,359,114).

 

3. Segment analysis of results

The Group has adopted IFRS 8 Operating Segments with effect from 1 January 2009. 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. In contrast, the predecessor Standard (IAS 14 Segment Reporting) required the Group to identify two sets of segments (business and geographical), using a risks and returns approach, with the Group's system of internal financial reporting to key management personnel serving only as the starting point for the identification of such segments. As a result, following the adoption of IFRS 8, the identification of the Group's reportable segments has changed.

 

In prior years, segment information reported externally was analysed on the basis of activities undertaken by each of the Group's operating divisions. These divisions were as follows:

 

Stormwater - Products for controlling flow and removing pollutants from stormwater for application in the existing urban environment and for new residential and commercial development.

 

Wastewater - Products for screening, grit removal, primary, secondary and tertiary treatment, for application in the municipal and regulated water industry.

 

However, 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:

 

Stormwater

- UK and Ireland

- US

- Rest of World

 

Wastewater

- UK and Ireland

- US

- Rest of World

 

Information regarding the Group's operating segments is reported below. Amounts reported for the prior year have been restated to conform to the requirements of IFRS8.

 

3. Segment analysis of results (continued)

 

	2009	2008
	£000	£000
Revenue by destination
Stormwater
UK and Ireland	6,844	10,294
US	2,319	2,757
Rest of World	656	529
	9,819	13,580
Wastewater
UK and Ireland	8,022	7,629
US	8,237	8,062
Rest of World	1,248	742
	17,507	16,433
Consolidated	27,326	30,013

 

There are no intersegment sales.

 

	2009	2008
	£000	£000
Operating profit by destination
Stormwater
UK and Ireland	971	1,771
US	(284)	404
Rest of World	386	157
	1,073	2,332
Wastewater
UK and Ireland	932	416
US	2,027	2,425
Rest of World	490	287
	3,449	3,128
Group	(2,382)	(2,252)
Consolidated	2,140	3,208
Exceptional other operating income
US Wastewater	151	-
Amortisation of intangibles
US Wastewater	(252)	(393)
Operating profit	2,039	2,815
Finance costs	(213)	(159)
Profit before tax	1,826	2,656
Taxation	(689)	(908)
Profit after tax	1,137	1,748

 

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. Segment analysis of results (continued)

 

	2009	2008
	£000	£000
Gross assets by origin
Stormwater
UK and Ireland	4,256	3,571
US	1,465	760
	5,721	4,331
Wastewater
UK and Ireland	5,688	4,136
US	11,363	12,239
	17,051	16,375
Group	1,319	5,966
Consolidated	24,091	26,672

 

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.

 

	2009	2008
	£000	£000
Capital expenditure by origin
Stormwater
UK and Ireland	6	20
US	22	-
	28	20
Wastewater
UK and Ireland	18	9
US	126	45
	144	54
Group	100	285
Consolidated	272	359
Depreciation and amortisation by origin
Stormwater
UK and Ireland	13	29
US	98	-
	111	29
Wastewater
UK and Ireland	35	28
US	121	412
	156	440
Group	445	363
Consolidated	712	832

 

 

 

 

 

4. Exceptional other operating income

The exceptional other operating income received during the year ended 31 December 2009 related to the reversal of a fair value adjustment made to the assets recognised on the acquisition of Eutek Systems, Inc. The circumstances giving rise to the reversal occurred more than 12 months after the date of the acquisition and as such could not be treated as an adjustment to restate the fair value of assets acquired.

 

5. Post balance sheet event

Subsequent to the year end the directors have recommended a dividend of 3.0 pence per share to be paid, totalling £428,000.

 

6. Going concern

Whilst the Group has considerable financial resources, the current economic conditions create uncertainty particularly over (a) the level of demand for the Group's products; (b) the exchange rate between sterling and the Euro and the consequent impact on the cost of the Group's imports of stormwater storage products sold through its UK Stormwater business; and (c) the exchange rate between sterling and the US dollar and the consequence for the value of external borrowings denominated in that currency and the associated cost of servicing that debt.

 

Group borrowing facilities comprise a $3.1m US dollar term loan expiring in May 2013, a $2.7m US dollar term advance (secured on the Group's freehold properties) expiring in May 2018 and a £1.8m overdraft facility which is repayable on demand and subject to review in May 2010. As at 31 December 2009 the overdraft facility was not in use and the Group maintained £5.0m of cash balances.

 

Borrowing facilities are subject to financial covenants which specify a maximum ratio of net debt to EBITDA of 2.0 times, a minimum interest cover of 3.0 times and a minimum ratio of cash flow to debt service of 1.25. In addition the term advance is subject to a further covenant under which the amount borrowed shall not exceed 80% of the value of the properties against which the advance is secured.

 

The Group has remained in compliance with these covenants during 2009 other than the minimum ratio of cash flow to debt service. As such, the full balance outstanding on both the bank loan and term advance are shown in the balance sheet as at 31 December 2009 as current liabilities. Since the year end the Group's bank has waived the measurement of compliance with this covenant at 31 December 2009. The bank has also waived compliance with this covenant at 30 June 2010 provided the cash flow to debt service ratio does not fall below 0.82. The directors have considered the measurement of the covenant that will be required at 30 June 2010 and at 31 December 2010, and consider that the group is expected to generate sufficient cashflow during 2010 to ensure compliance with this covenant.

 

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 for at least the next 12 months.

 

After making enquiries, the directors have concluded that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

 

7. Status of information

The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 December 2009 or 2008. The financial information for the year ended 31 December 2008 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or (3) Companies Act 2006 or equivalent preceding legislation. The audit of the statutory accounts for the year ended 31 December 2009 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's Annual General Meeting.

 

 

Full audited accounts of Hydro International plc for the twelve months ended 31 December 2009 will be dispatched to shareholders, and made available on the Company's website at www.hydro-international.biz, on 7 April 2010 ahead of the AGM date of 20 May 2010. The AGM will be held at the Company's registered office at Shearwater House, Clevedon Hall Estate, Victoria Road, Clevedon, BS21 7RD. Copies of the Annual Report and Accounts will be available from the registered office from 7 April 2010. The audited accounts will be delivered to the Registrar of Companies following the Annual General Meeting.

 

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