HydroDec Group plc – Final Results

Hydrodec Group plc (AIM: HYR), the clean-tech industrial oil re-refining group, today announces audited results for the 12 months ended 31 December 2018.

Strategic highlights 

• New executive management team concluded a fundamental review of the business and commenced implementation of a two year turnaround strategy:
  –  Completed a placing and open offer raising gross proceeds of approximately USD 14.3 million
  –  Strengthened balance sheet through the combined repayment and conversion into equity of USD 11.1 million of debt
  –  Significantly increased ownership interest in Hydrodec of North America (HoNA) from 58% to 85%
  –  Injected further working capital into US operations
  –  Commenced sale of non-core, loss-making Australian operations
  –  Began broadening the base of feedstock suppliers
• Concluded successful sale of historic carbon credits from 2009 to 2013 vintages.  Management expect carbon credits to be a key differentiator of Hydrodec’s offering in the future and to provide a unique selling point in trading for feedstock and generating higher value sales of SUPERFINE products.  Post period end, American Carbon Registry has issued a further 100,000 credits in respect of 2016-18 production
• Superior quality of SUPERFINE transformer oil further verified by independent laboratory tests
• New patent for the Hydrodec technology secured in more geographies (UK, various European countries and Mexico, in addition to 2017 grant in USA) for further 20 years from date of application – post period end patent granted in Australia and Japan

 

Financial and operational highlights*

• Revenues increased by 10.5% to USD 14.9 million (2017: USD 13.4 million), driven by improved pricing and sales mix
• Gross margins improved to 13.1% (2017: 12.8%)
• Sales volumes of premium quality SUPERFINE transformer oil and base oil from Canton lower at 23.0 million litres (2017: 25.6 million litres), entirely driven by feedstock constraints – demand for SUPERFINE products remains robust; management remains confident that it  can continue to sell all potential production volumes at prevailing prices:
  –  H2 volumes (12.7 million litres) significantly improved on H1 (10.3 million litres) due to increased feedstock
  –  Further improvement in overall sales mix between higher margin transformer oil and lower margin base oil, with transformer oil sales representing 66% of Canton oil sales in 2018, up from 58% in 2017
  –  Average utilisation rate of 55% achieved for the year at Canton (2017: 59%), with expectation of significant improvement in 2019 as the Group benefits from increased feedstock supplies
• Administrative expenses (excluding USD 1.1 million relating to the strategic review) increased to USD 5.8 million (2017: USD 4.8 million).  Of these, corporate costs were higher in the year at USD 2.7 million (2017: USD 1.4 million) impacted by costs associated with business reorganisation.  Corporate costs are expected to fall below previous levels in 2019 and management will seek to make additional savings throughout this current year
• The overall loss for the year widened to USD 13.7 million (2017: USD 4.3 million), reflecting losses associated with the discontinued Australian business of USD 7.1 million (2017: USD 0.2 million) and the costs of the strategic review and business reorganisation
• Group adjusted EBITDA loss of USD 1.2 million (2017: USD 7,200 profit), primarily driven by the increased corporate costs described above
• Adjusted EBITDA of US operations (HoNA) remained stable at USD 1.5 million profit (2017: USD 1.5 million profit) as the general operating environment for oil related businesses positively impacted the Group’s pricing and margins in the year, offsetting the feedstock-constrained sales volumes
• Net financial expense of USD 1.1 million (2017: USD 1.1 million) relates to the interest payable under the lease in the US and interest paid and accruing on  shareholder loans in the UK
• Cash balance at year end of USD 2.2 million (2017: USD 0.1 million)

*unless otherwise stated, figures refer to continuing operations 

 

Post period-end highlights and current trading

• Reorganisation and strengthening of the US business with a new management and reporting structure combined with a number of internal promotions and new hires within operations
• Focus on generating new partnerships and securing additional feedstock in the USA:
  –  Agreements for more than 1.5 million litres of feedstock from two US Department of Energy contracts
  –  Positive discussions with US utilities have been initiated and, owing to the unique benefit of carbon offset credits, will provide opportunities for utilities to partner with HoNA to meet sustainability goals
• Slower than planned start for feedstock collections in 2019 with volumes below budget owing to cold weather caused by the polar vortex across the US Midwest and short-term issues related to Venezuelan oil. However, feedstock from the Department of Energy contracts has begun to arrive in railcars and management expects the deficit to be caught up over coming months
• Australian plant tolling agreement with Southern Oil Refining (SOR) ceases in July 2019 but has required fixed payments with consequential high cash burn, diverting funds from the US business and consuming a significant amount of management’s time
• After some delays, the Australian sales process is now progressing with the Board having received an offer and expecting to conclude the sale of the Australian business before the AGM on 20 June 2019. This will enable management to focus on building the relationships to drive the significant growth opportunities in the US market
• Management remain confident that the Company will meet market expectations for 2019

Lord Moynihan, Executive Chairman of Hydrodec, commented: 

“2018 was a transitional but very important year for the Company, as the Board determined that a turnaround strategy was required to position Hydrodec to maximise its ability to address the full potential of its principal US market through its world leading re-refining technology and established that this was likely to require a two year turnaround strategy.  

We are just over a year into that schedule and we can report significant progress with the strategy’s implementation. The review determined that a refinancing of the business was required to provide the necessary funds to pay down debt in order to provide a solid financial platform and improve supplies of feedstock, whilst also rebalancing the Company’s stake in Hydrodec of North America (HoNA) to ensure full operational control of the Group’s key facility.  

The fundraising was completed successfully in the autumn, and having completed these key initial aspects of the turnaround strategy, 2019 will continue to see a focus on delivering a substantial feedstock uplift which will help underpin the Company’s US utility-targeted strategy, supported by its generation of carbon credits. We also expect to complete the proposed sale of the Group’s non-core, sub-scale Australian operations. It is in the US where we intend to realise growth through improved feedstock acquisition, and new partnerships with US government entities, US utilities and field service collection companies.

I would like to thank all shareholders for their support. Now that we are halfway through the two year turnaround strategy, we are confident we can execute upon this and deliver material upside for shareholders whose loyalty we hugely appreciate.”