HydroDec Group plc Final Results (9380E)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Hydrodec Group Plc	LSE:HYR	London	Ordinary Share	GB00BFD2QZ40	ORD 50P

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Hydrodec (LSE:HYR)
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RNS Number : 9380E

HydroDec Group plc

12 May 2017

Hydrodec Group plc

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

Audited final results for the year ended 31 December 2016

Hydrodec Group plc (AIM: HYR), the clean-tech industrial oil re-refining group, today announces audited results for the 12 months ended 31 December 2016.

Strategic highlights

-- Strategic focus during 2016 on core transformer oil re-refining business and associated technology

-- Rigorous focus on execution, making effective cost savings and delivering the ramp-up of production and sales in the US

   --    Disposal of loss-making UK recycling operations in March 2016

Financial highlights

-- Revenues for the year arising from the continuing core re-refining business increased by over 100% to US$16.8 million (2015: US$8.2 million), reflecting the full recommissioning of the Canton plant and ongoing refinements to operating procedures and technological efficiency

-- Gross unit margins higher than 2015, despite lower product sales prices and challenging market conditions, with operational performance driving improved commercial performance

-- Improvement in overall sales mix between higher margin transformer oil and lower margin base oil, with transformer oil sales representing 40% of total Group oil sales in 2016, up from 7% in 2015

-- Administrative expenses fell significantly by 44% to US$6.6 million (2015: US$11.8 million) representing 38% of total income (2015: 121%)

-- Group EBITDA loss from continuing operations significantly reduced in the year at US$1.3 million, with just US$0.2 million incurred in the second half of the year

-- Group EBITDA positive for Q4 2016, despite the usual seasonal trends, providing the Company with confidence that the trend towards positive EBITDA at Group level will continue throughout 2017

-- Net financial expense was US$1.1 million (2015: US$0.5 million) and relates to the interest payable under the lease in the US and interest payable on the shareholder loans in the UK

-- The overall loss for the year, including losses associated with the discontinued business, reduced to US$7.8 million (2015: US$31.1 million)

Operational highlights

-- Group sales volumes of premium quality SUPERFINE transformer oil and base oil for the year of 33.3 million litres (2015: 14.4 million litres), up 131% on the prior year

-- Average utilisation rate of 73% achieved for the year at Canton, further validated by a significantly lower number of production hours lost through unscheduled stoppages

-- Reported record sales of over 2.8 million litres in October from Canton and record production days on two separate dates in the same month

   --    SUPERFINE transformer oil in US achieved "500 hour" status, certifying its quality

-- Hydrodec of North America ("HoNA") received accreditation for generating carbon offsets through the re-refining of used transformer oil

-- Relocated plant at Southern Oil's location in Bomen, New South Wales performed well in first full year of operation under the tolling arrangements - quality of the oil produced there is extremely high

-- In Australia, award of a 5-year contract, for the supply of inhibited transformer and switchgear oil, by Essential Energy, expected to generate over 1 million litres of new transformer oil sales over the life of the contract

Post period-end highlights and current trading:

-- Continued to pursue further market penetration in the transformer oil business with an improvement in this key indicator of 47% of all oil sales in Q1 2017 (2016: 24%)

-- Company achieved positive EBITDA for Q1 2017 in traditionally the most difficult period of the year, particularly in respect of feedstock collection and availability

   --    Initial carbon credit sales achieved

-- Additional working capital facility for GBP0.5 million from Andrew Black, the Company's largest shareholder and a non-executive director

Chris Ellis, Chief Executive Officer of Hydrodec, commented: "I am pleased to report that 2016 saw significant progress for the Company as it moved towards profitability, reflecting the positive impact of the operational improvements and cost reduction measures put in place over the last eighteen months.

It was an important year for Hydrodec as we continued to deliver on our strategy and made key portfolio changes in order to focus the business on our transformer oil operations and, in particular, on driving both our margins and overall market share penetration of the US transformer oil market as we relaunched our business there.

In 2017, we remain focused on continuing to deliver on the positive Q4 2016 performance, seeking to sustainably improve margins and market share whilst achieving further cost reductions and efficiencies where appropriate. This should enable Hydrodec to deliver positive Group EBITDA for 2017."

For further information please contact:

 
Hydrodec Group plc                                  01372 824750 
Chris Ellis, Chief Executive 
Canaccord Genuity (Nominated Adviser and Broker)    020 7523 8000 
Henry Fitzgerald-O'Connor 
 Richard Andrews 
Vigo Communications (PR adviser to Hydrodec)        020 7830 9700 
Patrick d'Ancona 
 Chris McMahon

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. MarketsandMarkets forecasts that the global transformer oil market is expected to grow from US$1.98 billion in 2015 to US$2.79 billion by 2020 at a CAGR of 7.14% from 2015 to 2020. 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.

In 2016 Hydrodec received carbon credit approval from the American Carbon Registry ("ACR"), enabling its product to be sold with a carbon offset and creating an incremental revenue stream. The Group is now generating carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. This is a highly distinctive feature for the Group, confirming (as far as the Board is aware) Hydrodec as the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.

Hydrodec's plants are located at Canton, Ohio, US and Bomen, New South Wales, Australia.

Hydrodec's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Chairman's Statement

2016 was an important year for Hydrodec, which saw material progress both operationally and commercially, reflecting the strategic imperatives the Board had previously determined as we considered the best way ahead for the Company. I believe Hydrodec is now well-positioned to further develop its core business and move into profitability in 2017.

Following an internal strategic review which was initiated in December 2015, we decided as a Board to focus on our market leading transformer oil re-refining technology. As a consequence the Group divested its UK collections and recycling business in March 2016. This facilitated an enhanced focus on operational improvements at our core US and Australian businesses.

The Group's intensive turnaround programme has been driven by the Company's Chief Executive, Chris Ellis, with the refocused and rationalised business moving towards profitability. Having been Acting Chief Executive from December 2015, Chris was confirmed in his role in March 2016 and has continued to drive the turnaround strategy across the business in 2017.

Our clear focus on growing our market leading transformer oil technology and business remains underpinned by the potential scale of the US$2 billion+ global transformer oil market. With ongoing operating refinements and technological enhancements, our Canton plant has achieved record production levels and we continue to see further improvements throughout 2017.

Another key goal of the Group is to build our sales of transformer oil and to continue to increase the margin for our product in what remains a highly competitive market. We continue to rebuild our market share in the US, whilst increasing the production ratio of transformer oil against base oil - both fundamental aims for our North American business. The additional investment by G&S into the US business reflects the strength of this key partnership, thereby ensuring secure supplies of feedstock. We also continue to review opportunities to develop further re-refining capability in the US and other jurisdictions.

It was transformational to the Company to receive carbon credit approval in September, making the Company the first re-refiner to earn a carbon credit for its transformer oil. This further endorses the quality of our technology, our product and market leading green credentials; whilst creating an annuity-styled revenue stream for the Group. Our first sale of carbon credits was reported in May 2017.

I would like to record, on behalf of the Board and the Company, our thanks to Andrew Black, our largest shareholder, whose continuing support of the business in recent years, over a challenging period in the Company's history, has been hugely appreciated. This is further demonstrated by the provision of additional working capital facilities announced today. We are confident we will be in a position to repay Andrew's good faith and support as the Company continues to strengthen.

I look forward to updating you further as we continue to make progress during 2017.

Lord Moynihan

Chairman

Chief Executive's Report

I am pleased to report that 2016 saw significant progress for your Company as we moved towards profitability, reflecting the positive impact of the operational improvements and cost reduction measures put in place over the last eighteen months.

This work has also created strong foundations for the business on which we continue to look to build in the short term. This is particularly relevant in respect of feedstock supply and collection which are crucial elements of the supply chain and our business model.

Strategy

In March 2016, the Board restated its strategy to focus on the Group's core market leading transformer oil re-refining technology and to grow that business in order to access a larger proportion of the US$2 billion global transformer oil market.

Specifically, the Board stated its intention to look to strengthen Hydrodec's footprint in the US and in the international transformer oil market, where the Board believes Hydrodec has a competitive advantage through its proven and market-leading technology.

Our focus has therefore been to grow the transformer oil business in order to drive margin expansion and profitability, with a rigorous focus on execution, making effective cost savings and delivering the ramp-up of production and sales in the US.

It was, therefore, an important year for Hydrodec as we continued to deliver on this strategy by further improving our rebuilt, expanded facility at Canton in Ohio, as we relaunched our US transformer oil business. As the business there continues to grow we will further seek to leverage this opportunity with our partner and deploy a further two trains at the appropriate time.

In addition, we made important portfolio changes in order to focus our business on our transformer oil operations, with the disposal of our loss-making UK recycling operations in March 2016.

Regional business review

USA

Following the well-publicised reliability issues upon its recommissioning in 2015, the Canton plant performed satisfactorily in its first full year of production. Further improvements identified by operating the plant were made during 2016 and will continue to be made in the coming financial year to both enhance reliability and product quality. We were able to report record sales of over 2.8 million litres in October and record production days on two separate dates in the same month. It was also pleasing to report that our SUPERFINE transformer oil in the US achieved "500 hour" quality status, a requirement from a dielectric perspective enabling us to service the larger transformer market going forward. Importantly we were able to win back several of our largest customer relationships at the end of the year which will have a positive impact on the performance of Canton in 2017. As we continue to re-establish our market position, I am confident that we will see a further improvement in the proportion of transformer oil sales increasing significantly from the 40% they represented in 2016, with actual performance in 2017 to date at levels above that. Feedstock availability and collection are key to our business and I am pleased that, under the terms of our earlier agreement, we concluded in October additional investment by our partner G&S Technologies Group in Hydrodec of North America ("HoNA"), increasing their ownership of the business to 37.45% and their non-controlling interest to US$7.9 million (2016: US$5.6 million).

Australia

The relocated plant at Southern Oil's location in Bomen, New South Wales has worked well in its first full year of operation under the tolling arrangements and the quality of the oil produced there is extremely high. The key to unlocking all of the operational benefits available to us through this relocation is driven by the availability of feedstock. The more feedstock we are able to put through our production process over the fixed monthly fee, the more profitable the operation will become. A key focus has therefore been on this aspect of our commercial activities with some notable successes from a low starting point at the beginning of the year. The award of a five-year contract, for the supply of inhibited transformer and switchgear oil, by Essential Energy, including the collection and re-refining of all generated PCB and non-PCB waste oils, is expected to generate over one million litres of new transformer oil sales over the life of the contract. This is a significant step and validation of our product and service offering. The fact that our re-refined transformer oil was successful in a competitive tender and exceeded the technical product acceptance criteria provides the basis to develop similar relationships with other utilities in Australia in 2017.

Carbon credits

We were pleased to receive in September carbon credit approval from the American Carbon Registry ("ACR"), enabling Hydrodec's product to be sold with a carbon offset and creating a future incremental revenue stream. This is a highly distinctive feature for the Company, confirming (as far as the Board is aware) Hydrodec as the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.

HoNA is now generating carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. The ACR has recognised 165,000 credits for HoNA's previous production between 2009 and 2014 and the Board was pleased to announce post the financial year end, the first sales of a proportion of these historic credits. Whilst the historic credits may only generate nominal sums, the Company anticipates that it will generate between 50,000 to 60,000 tons of carbon offset annually going forward and the ongoing generation of such credits could realise a value of up to US$5 per ton based on current industry reports.

Operating and commercial performance

Revenues for the year arising from the continuing core re-refining business increased by over 100% to US$16.8 million (2015: US$8.2 million), reflecting the full recommissioning of the Canton plant at the end of 2015 and the ongoing refinements made to our operating procedures and technological efficiency.

This result reflected increased Group sales volumes of premium quality SUPERFINE transformer oil and base oil for the year of 33.3 million litres (2015: 14.4 million litres), up 131% on the prior year.

Underpinning this volume increase was the process of continued improvement of plant operability, with an average utilisation rate of 73% achieved for the year in Canton. This was further validated by a significantly lower number of production hours lost through unscheduled stoppages. We continue to focus on maintaining high levels of mechanical asset reliability.

Gross unit margins were higher than 2015, despite lower product sales prices and challenging market conditions, with operational performance driving improved commercial performance.

There was an improvement in the overall sales mix between higher margin transformer oil and lower margin base oil, with transformer oil sales representing 40% of total Group oil sales in 2016, up from 7% in 2015. We continue to pursue further market penetration in the transformer oil business with an improvement in this key indicator of 47% of all oil sales in Q1 2017 (2016: 24%).

A key focus has been on managing the cost base appropriately, and significant reductions in operating and corporate costs have already been realised with the benefits from more recently implemented initiatives continuing to filter through into 2017. Those initiatives include the recent outsourcing of non-core added activities such as finance in addition to expected reductions in other areas such as insurance. Administrative expenses fell significantly by 44% to US$6.6 million (2015: US$11.8 million) representing 38% of total income (2015: 121%) and a reflection of efforts in this area.

Group EBITDA loss from continuing operations significantly reduced in the year and was US$1.3 million, with just US$0.2 million incurred in the second half of the year. Group EBITDA was positive for Q4 2016, despite the usual seasonal trends, providing the Company with confidence that the trend towards positive EBITDA at Group level will continue throughout 2017. We have already seen further evidence of that in Q1 of this year as the Company achieved positive EBITDA in traditionally the most difficult period of the year, particularly in respect of feedstock collection and availability.

The overall loss for the year, including losses associated with the discontinued business, reduced to US$7.8 million (2015: US$31.1 million).

Internally the business continues to be managed and performance measured by reference to EBITDA, it being the closest indicator of cash generated from operations. As this is not a statutory accounting measure, the table below reconciles this figure to the statutory operating loss:

 
                           US$'000 
                          --------- 
 EBITDA                     (1,278) 
 Interest costs             (1,086) 
 Taxation                       445 
 Depreciation               (2,711) 
 Amortisation               (1,667) 
 Share based payment 
  costs                         (9) 
 Loss from discontinued 
  operations                (1,503) 
 Statutory operating 
  loss                      (7,809) 
                          ---------

Finance costs

Net financial expense was US$1.1 million (2015: US$0.5 million) and relates to the interest payable under the lease in the US and interest payable on the shareholder loans in the UK.

Operating cash flow and working capital

In 2016, the Group had net cash outflow from operating activities of US$4.4 million (2015: US$13.7 million). The movement in working capital of US$1.5 million was a combination of a reduction in inventory levels, an increase in trade receivables and a reduction in trade and other payables consisting principally of the payment of feedstock suppliers. Credit management remains robust with no bad debts written off during the year.

The amount of working capital required by the Group's operations continues to be closely monitored and controlled, and forms a key part of management information. While the improving operational and financial performance has led to the recent and forecast positive EBITDA position, the Group is not yet positive cash generative overall given its finance costs. As a result, and in light of the Group's current cash and working capital position, the Company announces that it has today agreed an additional working capital facility (the "Facility") with Andrew Black, the Company's largest shareholder and a non-executive Director (the "Lender"). The Facility is for up to GBP500,000, bears interest at 10% per annum on drawndown sums and is subject to an arrangement fee of 2.5%. The Facility is secured over the assets of the Company.

The Facility is repayable on 31 December 2017, however the Lender has agreed to provide the Company with an option to extend the repayment date on the Facility, and the repayment date on all other existing working capital facilities provided by the Lender, to 31 December 2018. Any such extension of the loans would be at the sole discretion of the Company and on commercial terms to be agreed between the parties at the time.

Liquidity and financing activities

The Group's principal financing facilities are a seven year US$10 million finance lease arrangement with First Merit fully drawn and repayment under which commenced on 1 October 2015, and shareholder loans from Andrew Black of US$7.8 million as at 31 December 2016 (of which US$7.4 million was utilised as at 31 December 2016), repayable on 31 December 2017. As referred to above, the Company has acquired the option, at the Company's sole discretion, to extend the repayment date of these loans to 31 December 2018.

The Company also has in place a lease financing arrangement of US$1.2 million with its partner in Australia, Southern Oil, in respect of the infrastructure costs incurred for the establishment of its facilities at the site in Bomen. Additional working capital has been provided by overdraft facilities in the USA and Australia. Borrowings associated with the discontinued UK business were divested as part of the sale arrangements for the UK operations in March 2016.

The Group's net debt at 31 December 2016 was US$19.2 million (2015: US$19.6 million).

Capital expenditure in 2016 totalled US$0.5 million (2015: US$14.9 million), primarily incurred in the US in relation to operational improvements of the rebuilt plant at Canton.

Financial reporting

The financial information has been prepared under IFRS and in accordance with the Group's accounting policies. There have been no changes to the Group's accounting policies during the year ended 31 December 2016.

Going concern

As set out in note 1 of the Group financial statements, taking into account the Group's current forecast and projections, the available facilities and progress in re-establishing market share in the US, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue operating for at least the next 12 months. Accordingly, the Directors continue to adopt the going concern basis in preparing the Annual Report and financial statements.

Disposal of UK recycling operations

In late 2015 and January 2016, the Company undertook a detailed internal strategic review of its UK waste oil collections business and proposed UK lubricant oil re-refining project, following a significant deterioration in its UK operations. This deterioration was driven predominately by the rapid decline in global oil prices and continued challenging market conditions which resulted in the UK business generating an increasing level of significant losses. Despite implementing extensive restructuring and cost-saving measures during 2015, Hydrodec remained heavily exposed to the impact of the global oil price decline. Given the significant cash consumption and limited cash resources available to the Company (in the absence of a significant further fundraising), the Directors reviewed all available options and concluded that it was in the best interests of the Company to dispose of the UK operations.

Following a strategic auction process conducted by an independent third party financial adviser, the Company sold its UK operations to Andrew Black, a non-executive Director and substantial shareholder (the "Buyer"), on 4 March 2016 for a consideration of GBP1 in cash, including the transfer to the Buyer of c. GBP3.9 million of existing third party indebtedness in the UK business and involving the injection by the Buyer of further working capital into that operation. In addition, the Buyer granted Hydrodec a contractual right to receive a proportion of the Buyer's entitlement to any future profits of the UK re-refining project on the following waterfall basis (a) first, the Buyer, as primary risk taker, to recover the costs of its investment in the UK re-refining project; (b) then, the next tranche to be applied 70:30 between Hydrodec and the Buyer respectively until Hydrodec has recovered its costs incurred to date in connection with the UK re-refining project; and (c) finally, the balance of any profits to be shared 90:10 between the Buyer and Hydrodec. The Buyer will bear all risk and responsibility for developing the UK lubricant oil re-refining project going forward, with Hydrodec retaining only a passive economic interest under these profit share arrangements. The UK re-refining project also offers a potential opportunity to develop transformer oil re-refining capacity in the UK. The loss for the year that is attributable to the discontinued operations is US$1.5 million (2015: US$14.1m). The impact on the Company and the financial statements of all of the above is described in note 4 to the financial statements, "Discontinued operations".

Outlook

I believe we continue to make strong progress in the turnaround of the Company, with the goal of generating positive EBITDA for 2017 in sight. Whilst the general operating environment for oil related businesses has improved recently, positively impacting the Group's pricing and margins, challenges still remain. 2017 has begun strongly in terms of sales orders in the US and Australia. Whilst the Australian feedstock position remains robust, the feedstock position in the US is tighter. Higher margin transformer oil sales currently represent c. 47% of total Group oil sales, with scope for further improvement through the year. The first sale of carbon credits in the US takes us a step further to realising our goal of an additional revenue stream unique to our technology and business.

In 2017, we remain focused on continued progress from the positive Q4 2016 performance, which will be driven by strengthening margins as the Group continues to grow market share and deliver further cost reductions and efficiencies where appropriate. This should position Hydrodec to deliver positive Group EBITDA for 2017.

Chris Ellis

CEO

Consolidated Income Statement