Hydro : Interim Results

02 September

Embargoed until 07:00

Hydro International plc

("Hydro" or the "Group")

Hydro International (AIM: HYD), a leading provider of environmentally sustainable and innovative products for the control and treatment of water, announces its unaudited interim results for the six months ended 30 June 2014.

Group Financial Summary

*excluding amortisation of acquired intangible assets

** cash and cash equivalents, less borrowings

Group Summary

·      H1 results down on 2013 as anticipated, and the Group remains heavily H2 weighted

·      All divisions have grown revenues in constant currency terms apart from Europe Wastewater

·      Strategic investments on-track, as per previously outlined plans, including:

-      Territorial expansion with the appointment of new business development personnel into China, the Asia Pacific region, California and the US Pacific Northwest

-      Initial activities to build presence in industrial wastewater markets

-      Initiation of new Group-wide business systems implementation

·      Dividend, capital investment and working capital movements on major contracts reduce net cash in H1

Divisional Summary

·      Americas divisions continue revenue and order growth, masked by a relative weakening in the US Dollar

·      Europe Stormwater results improve as ongoing product range and sales channel expansion takes effect

·      Europe Wastewater revenues reduce as expected following the conclusion of major contracts for Thames Water

·      International business opens operations in China and receives first orders

Roger Lockwood, Chairman of Hydro International plc, commented:

"The 2014 interim results are in line with the Group's previously communicated expectations, reflecting the early stages of the implementation of the new strategy and the usual weighting of profit generation to the second half of the year. The Group is progressing well with its programme of investments aimed at improving our systems and business processes and bringing in high-quality people to deliver our strategy on the ground."

Michael Jennings, Chief Executive of Hydro International plc, further commented:

"The major work to build more sustainable growth platforms is well underway and very much on track with our plans. In our core UK and North American markets, we are already seeing some positive signs in response to investments made in regional sales and services resources, product range extensions, and improved sales channel management.  Internationally, we have remained focused on building the depth of our business in territory with new local managers in place in China and Singapore, working to establish and develop our network of regional distribution partners. It is not easy to be precise on the timing of returns on such investments, but it is clear we will build a material presence in these new and emerging markets. The good progress we have achieved in implementing our new strategy and the increasing strength of our order book gives us confidence in the future prospects of the Group."

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About Hydro International

Hydro International plc (AIM: HYD) (Hydro) is a global supplier of environmentally sustainable products and innovative solutions for the control and treatment of stormwater, wastewater and combined sewer overflows. Hydro's products use a range of advanced technologies including award-winning advanced vortex technology. Headquartered in Clevedon, North Somerset, Hydro also operates in the UK from offices in Ely, Cambridgeshire, as well as across the US from bases in Portland, Maine and Hillsboro, Oregon. The Group has a growing presence outside its core North American and UK markets in territories including: Ireland, the Middle East, Mexico, Brazil, Russia, the European Union, China, Malaysia, Singapore, Korea, Australia and New Zealand.

Please visit the website for further informationwww.hydro-int.com.

Interim Management Report to the members of Hydro International plc

Group results

Solid growth in the Europe Stormwater and International divisions partly mitigated the effect on the first half-year results of the anticipated reduction in revenues from the Europe Wastewater division.  As a consequence Group revenues for the period reduced by £2.0m against prior period levels to £13.1m (H1 2013: £15.1m).  The Group's operations in the Americas continue to experience solid underlying trading conditions, delivering further growth in local currency orders and revenues over the historically high level experienced in 2013.  A 9% weakening in the average comparative US Dollar exchange rate impaired this progress on conversion into Sterling.  The closing Group order book at 30 June 2014 was £14.1m (31 December 2013: £10.3m).

The Group has made good progress with the substantial programme of investments aimed at providing a broad and sustainable platform for future business growth.  Over the period, these investments included territorial expansion (including the appointment of new business development personnel into China, the Asia Pacific region, California and the US Pacific Northwest), further product range development, enhancements to our after-sales service resources, initial activities to build our presence in industrial wastewater markets, and the start of a project to implement new Group-wide business systems.  Much of this investment is reflected, together with the period-on-period increase in costs associated with the appointments, in the second half of 2013, of Michael Jennings as Chief Executive and Roger Crook as Group Commercial Director, in administrative expenses, which increased by £0.4m, to £5.9m (H1 2013: £5.5m).

During the period the Group has generated taxable profits in the US and taxable losses in the UK.  As we experienced during 2013, this imbalance in profitability across the Group's major areas of operation has significantly distorted the Group's effective tax rate.  As a consequence of this distortion the Group is reporting an overall tax charge of £0.11m on the consolidated profit before tax for the period of £0.02m (H1 2013: tax charge of £0.19m on consolidated profit before tax for the period of £0.41m).  The effective tax rate is anticipated to remain higher than would otherwise be expected for the full year in 2014 before returning to more typical levels with the return to profits in the Group's UK-based businesses in future years.

Net assets at 30 June 2014 reduced against the level at 31 December 2013 by £0.9m to £13.2m (2013: £14.1m).  This reduction included the loss after tax for the period of £0.1m, the dividend payment to shareholders in June 2014 of £0.5m and a £0.2m loss on US Dollar denominated assets caused by the weakening of that currency against Sterling over the period.

Net cash expended from operations for the period was £0.9m (H1 2013: £1.6m generated).  As in previous periods the principal impact on cash generation has been the timing of receipts and payments on the larger contracts typically seen in the Group's Wastewater divisions, but also including major stormwater storage projects in the Middle East secured during 2013.  During the period the Group made capital repayments totalling £0.1m against borrowing facilities, and a further £0.3m was paid as part of the Group's investment in new Group-wide business systems.  Net corporation tax refunds of £0.1m (H1 2013: £0.7m payment) were received in the period.  Along with the payment of the final dividend of £0.5m in respect of the year ended 31 December 2013, these were the principal movements in cash balances, which reduced by £2.1m over the period.  Net cash at the period end was £1.4m (H1 2013: £2.9m, FY 2013: £2.9m).

Business operating review

Note: In the following divisional analysis, segment profit excludes central Group costs and amortisation of acquired intangible assets

Americas Wastewater

The Americas Wastewater division continues to trade strongly, with a solid pipeline of projects.  Constant currency measures for order intake and revenues (£5.4m) exceeded the historically high levels reported for the equivalent period in 2013, by 4% and 3% respectively.  Both metrics were held back, however, when converted into Sterling by the 9% relative weakening in the average US Dollar exchange rate over the last year.

The division continues to pursue opportunities to build on its strong market position to both expand and broaden the business.  Additional investments have been made during the period to further develop both the product range and service capability, ensuring that Hydro can participate fully across the grit removal market and support the lifetime of our products with the customer.  The division has also made progress with diversification beyond purely municipal wastewater applications for products, and a first order was received for grit removal in a drinking water application in April, which along with the industrial (i.e. non-municipal) market, is a target sector for future growth. 

Americas Stormwater

The ongoing development and expansion of Americas Stormwater sales channels delivered a further increase in constant currency revenues (£2.1m) and orders, by 7% and 19% respectively.  This growth was achieved despite the impact of poor weather conditions in the first quarter impeding progress on construction sites.  Momentum has built steadily through the second quarter and the business has continued a programme of territorial expansion by appointing regional personnel into California and the US Pacific Northwest.  Further development of the sales distribution network is progressively ensuring that Hydro has a strong reach for the full range of products across as wide a North American geography as possible.  Work is also ongoing to grow material business levels in Central and South America, focusing initially on markets where we have an existing distribution presence in Mexico and Brazil.

The product range for the Americas Stormwater market has been enhanced by the market launch of First Defense High Capacity®, designed to accommodate larger pipe sizes and higher stormwater bypass flows, and first orders were received in the period.

Europe Wastewater

Divisional revenues and profits for the first half-year reduced against levels in the corresponding period of 2013, by £2.6m and £0.34m respectively, reflecting the impact of poor order intake during 2013 and the conclusion, early in the period, of the three major Zickert™ Scraper contracts awarded by Thames Water in 2010 and 2011.  These contracts provided revenues of £0.09m (H1 2013: £1.8m) over the first six months of 2014.

Order intake has continued to present a challenge during the first half-year of 2014, although a degree of improvement is expected in the second half-year, and £1.3m of orders were received in July, including a £0.9m contract for the supply of equipment to a major wastewater treatment site in Southern England.  Anticipating the timing of projects remains difficult as the UK water companies prepare for the next asset management programme, AMP6, which commences in April 2015. 

As previously reported, Hydro continues to identify opportunities to broaden and diversify its business, thereby reducing the impact of the relatively cyclical nature of the municipal equipment sales market in the UK.  The ongoing development of the division's service operations has continued during the period, with additional resources deployed to meet the demand being driven by the increased focus and investment by the UK water companies in the maintenance of existing assets and reduced whole-life costs.  A significant project is also underway to promote the application in the UK of Hydro's advanced grit removal technology, which has been highly successful in the US.  Hydro is now working with a number of major UK water companies to demonstrate the need for, and benefit of, a more effective approach than that afforded by current technologies.  Beyond the current exposure to municipal markets, the division is focusing on strategies to increase its presence in industrial process water markets.  Dedicated business development resources have been assigned to the industrial sector, and early orders have been secured during the first half-year.

Europe Stormwater

The Europe Stormwater division has seen strong growth over the period, reporting the highest level of first-half revenues since the equivalent period of 2009.  Growth is attributed to an ongoing programme of sales distribution arrangements, covering an increasing proportion of the UK merchant market, and ensuring customers have widespread access to Hydro's products.  The period has also seen further development of the flow control product range, and a building demand for the Group's stormwater treatment products in advance of the introduction of national standards in the UK for Sustainable Drainage Systems (SuDS), which have been further delayed to 2015 at the earliest.

International

The International business has continued to focus on developing and progressing significant opportunities in the Middle East and Russia whilst also making investments to enter the Chinese market and place dedicated regional business development resources into the wider Asia Pacific region.  The early opportunities identified in China have been encouraging, and first orders for stormwater treatment products were secured in May and June 2014.

In common with previous periods, anticipating the timing of projects in the Middle East remains a challenge, but the level of opportunities for Hydro's grit removal, flow control and stormwater treatment products remains encouraging.  The Russian market is also moving more slowly, and with greater uncertainty, following the geopolitical developments in the region over recent months.

Outlook

As previously reported in the 2013 Annual Report, the Group is investing in systems, business processes and high-quality personnel to provide a strong and sustainable platform for growth.  The financial impact of this investment programme on the current year, and the challenges facing the Europe Wastewater business following the conclusion of the three major contracts with Thames Water and poor order intake during 2013, is unlikely to be made up by profits generated from the further expected growth in the Group's other businesses.  Our view remains unchanged, therefore, that both revenue and profitability in 2014 will be broadly similar to 2013 levels, and that results for the year will again be weighted significantly to the second half-year.

The initial progress of our strategic initiatives is encouraging and the strength of our Group order book provides us with confidence. Looking beyond the current year we see considerable opportunities for the Group to capitalise on our investments and return to improved profitability with a robust sustainable earnings base from which to drive future growth.

Other Financial Matters

Foreign currency

The Group is exposed to the risk of fluctuating exchange rates through transactions undertaken, and accounting balances held, in foreign currencies.  Certain wastewater products sold into the UK and Irish markets are sourced from Sweden, and stormwater storage products are also purchased from Germany and France.  To mitigate this exposure, the Group may enter into forward purchase arrangements, resulting in minor foreign exchange gains or losses as the Kronor and Euro currencies move against Sterling.  Equally, the movement in the value of the US Dollar against Sterling gives rise to foreign exchange gains or losses on significant US Dollar denominated assets.  The overall impact of this, together with gains and losses associated with other currencies, was to debit the income statement with net losses totalling £45,000 (H1 2013: £124,000 gain).

Key performance indicators

In addition to the statutory revenue and profit measures, we monitor our performance in implementing our strategy with reference to progress in the financial highlights listed above and those shown in the "Measuring Our Performance" section on page 12 of the Annual Report 2013.

Segmental results for the six months ended 30 June 2014

A summary of the key financial results by segment is disclosed in note 2 to the condensed financial statements.

Dividend and dividend policy

In line with our current policy, no interim dividend has been proposed or approved by the Board for the period.

A final dividend of 3.6p per share (£518,000) in respect of the year ended 31 December 2013, as recommended by the Board of directors subsequent to the year-end, was approved at the AGM and paid during the period.

Principal risks and uncertainties

The principal risks and uncertainties which could affect the Group for the remainder of the financial year remain those detailed on page 22 of the Annual Report 2013, a copy of which is available atwww.hydro-int.com. In addition, the Outlook section of this Interim Management Report provides a commentary concerning the remainder of the financial year.

Going concern

A full commentary on the risks affecting the Group's liquidity and details of the Group's borrowing facilities are outlined on page 29 of the Annual Report 2013. 

The Group remained in compliance with banking covenants as at 30 June 2014.

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.  Accordingly, and after making enquiries, the directors have concluded that the Group has adequate resources to continue in operational existence for the foreseeable future.

By order of the Board

Michael Jennings

Chief Executive

1 September 2014

for the six months ended 30 June 2014

for the six months ended 30 June 2014

30 June 2014

for the six months ended 30 June 2014

Hydro International plc

for the six months ended 30 June 2014

*Represents deferred consideration payments to the vendor of Eutek Systems, Inc., acquired in May 2008, the final payments of which were made during the year ended 31 December 2013.

Hydro International plc

for the six months ended 30 June 2014

1.   Basis of preparation

The condensed financial statements for the six months ended 30 June 2014 were approved by the directors on 1 September 2014.

The information for the year ended 31 December 2013 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006.  A copy of the statutory accounts for that year has been delivered to the Registrar of Companies.  The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The condensed set of financial statements has been prepared on a going concern basis using accounting policies consistent with International Financial Reporting Standards (IFRSs) and in accordance with International Accounting Standard (IAS) 34 "Interim Financial Reporting". The same accounting policies, presentation and methods of computation are followed in the condensed set of financials as applied in the Group's latest annual audited financial statements, which are prepared in accordance with IFRSs as adopted by the European Union. 

2.  Segmental analysis of results

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.  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:

Information regarding the Group's operating segments is reported below.

Hydro International plc

for the six months ended 30 June 2014

2   Segmental analysis of results(continued)

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. Net finance costs

Hydro International plc

for the six months ended 30 June 2014

4.  Income tax charge

Income tax expense is recognised based on management's best estimate of the annual income tax rate expected for each operating entity within the Group for the full financial year.

During the period the Group has generated taxable profits in the US and taxable losses in the UK.  As we experienced during 2013, this imbalance in profitability across the Group's major areas of operation has distorted the Group's effective tax rate.  The effective tax rate is anticipated to remain higher than would otherwise be expected for the full year in 2014 before returning to more typical levels with the profitable growth of the business in future years.

Over the longer-term the Group continues to expect its effective corporation tax rate to be higher than the standard UK rate due to higher corporation tax rates in the US.

5.  Earnings per share

Earnings per ordinary share are based on profit or loss on ordinary activities after taxation, divided by a weighted average of 14,391,174 (H1 2013: 14,361,787) shares in issue during the period.  Diluted earnings per share is the same as basic earnings per share in the period ended 30 June 2014 because the Group recorded a loss and as such none of the shares that could potentially be issued are dilutive.  The diluted earnings per share for the period ended 30 June 2013 were calculated after the inclusion of share options, and the weighted average of ordinary shares used in that calculation was 14,694,458.

6.  Reconciliation of profit to net cash flow from operations

7.  Interim results

In accordance with AIM Rules 20 and 26 the interim results will be available on the Company's website at www.hydro-int.com, where they will be available to shareholders and the general public. 

INDEPENDENT REVIEW REPORT TO HYDRO INTERNATIONAL PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprises thecondensed group income statement, the condensed group statement of comprehensive income, the condensed group balance sheet, the condensed group statement of changes in equity, the condensed group cash flow statement and related notes 1 to 7.We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410"Review of Interim Financial Information Performed by the Independent Auditor of the Entity"issued by the Auditing Practices Board.  Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance withthe AIM Rules of the London Stock Exchange.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with the AIM Rules of the London Stock Exchange.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Bristol, United Kingdom

1 September 2014