Hydrodec Group plc. Investor Presentation. September Ian Smale, Chief Executive Chris Ellis, Chief Financial Officer

Transcription

1 Hydrodec Group plc Investor Presentation September 2012 Ian Smale, Chief Executive Chris Ellis, Chief Financial Officer 1

2 PRECAUTIONARY STATEMENT This presentation has been issued by Hydrodec Group plc ( Hydrodec ) and is personal to the recipient. This presentation and these slides may not be reproduced or published in whole or in part for any purpose. This presentation and associated discussion includes forward-looking statements. Certain information contained in this presentation relating to Hydrodec has been compiled from public sources. All statements other than statements of historical fact included in this presentation, including without limitation those regarding the plans, objectives and expected performance of Hydrodec, are forward-looking statements. Hydrodec has based these forward-looking statements on its current expectations and projections about future events, including numerous assumptions regarding its present and future business strategies, operations, and the environment in which it will operate in the future. Forward-looking statements generally can be identified by the use of forward-looking terminology such as 'ambition', 'may', 'will', 'could', 'would', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek' or 'continue', or negative forms or variations of similar terminology. Such forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors related to Hydrodec. By their nature, forward-looking statements involve risks, uncertainties and assumptions and many relate to factors which are beyond the control of Hydrodec, such as future market and economic conditions, external factors affecting operations and the behaviour of other market participants. Actual results may differ materially from those expressed in forward-looking statements. Given these risks, uncertainties, and assumptions, you are cautioned not to put undue reliance on any forward-looking statements. In addition, the inclusion of such forward-looking statements should under no circumstances be regarded as a representation by Hydrodec that Hydrodec will achieve any results set out in such statements or that the underlying assumptions used will in fact be the case. Other than as required by applicable law or the applicable rules of any exchange on which securities of Hydrodec may be listed, Hydrodec has no intention or obligation to update or revise any forward-looking statements included in this presentation. This presentation is for information only and does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase, any shares in Hydrodec or any other securities, nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied upon in connection with, any contract or investment decision related thereto.

3 Contents Our Business 4 H Interim Highlights 16 Our Strategy 23 Summary and Q&A 29 3

4 Our Business 4

5 Who we are We produce new, high quality oil from globally distributed waste streams; Our unique clean-technology is proven, proprietary, sustainable and industry-leading; The core business is a virtual closed-loop re-useable transformer oil offer for the electrical utility industry; It is the most competitive, non-destructive technology to treat PCB (polychlorinated biphenyl) contamination in oil; New, re-usable oil will come with a carbon credit or offset as a source of value and a unique sales proposition. 5

6 Where we are We are approved by the regulatory authorities in the US, Japan and Australia, with product sales in North America, Latin America, Australasia; We are growing; we have commercial-scale operations in New South Wales, Australia and Ohio, USA; both cash generative at plant level; SUPERFINE TM transformer oil is endorsed by leading OEMs including ABB and Coopers; We have identified opportunities to grow key OECD markets, including Japan, and to diversify into multiple new products; Annual turnover has increased every year since 2004, with strong momentum maintained into

7 The team Ian Smale, Chief Executive 30 year career with BP plc. Leadership positions including Group Head of Strategy & Policy, Global Head of Mergers and Acquisitions, and as President and Chief Executive of BP Exploration North Africa Joined Hydrodec as CEO in January 2012 [Insert photo] Chris Ellis, Chief Financial Officer 20 years board level finance and management experience running large, complex international businesses as well as small and medium sized ventures, including significant period with GE Capital Qualified chartered accountant Joined Hydrodec as CFO in July 2012 Mark McNamara, Head of Technology and International Projects 10 years with Clough Engineering responsible for the environmental technology and engineering division Joined Hydrodec in 2004 originally as Chief Operating Officer, assumed the role of CEO in 2005 Became Head of Technology and International Projects in January 2012 David Robertson, Chief Operating Officer 30 years at BP plc., with executive level roles in BP Chemicals and Technology Recently COO at a US based technology startup business in the energy / waste sectors. Has worked in the US for the past 13 years Joined Hydrodec as Chief Operating Officer in January 2012 Lee Taylor, Head of Corporate Development Corporate partner at Linklaters for 15 years including as Global Head of the Energy and Utilities sector Structured several ground-breaking BP transactions, including the Amoco merger, the Burmah Castrol takeover and the BP / TNK joint venture Joined Hydrodec as Head of Corporate Development in January 2012 Takuichi Murachi, President, Hydrodec Japan 30 year career at Mitsui & Co, concluding as Senior VP and COO of Plant and Project Division Subsequent senior positions at Toyo Engineering Corporation and Veolia Water Japan Joined Hydrodec as President and Representative Director of Hydrodec Japan in January 2012 More than 150 years of oil, technology and business-based experience 7

8 Our technology simple chemistry and smart process engineering Developed in Australia to treat PCB (polychlorinated biphenyl) contamination the technology is simple chemistry and smart process engineering; IP protected; operational know-how increasingly important; Hydrogenation cleans and restores the hydrocarbon molecule, creating new reusable oil less susceptible to future oxidation with semi-synthetic properties as good if not better than new mineral oil ; The process is extremely efficient, rendering PCB contamination into an inert residue and recovering more than 99% of the original oil with negligible emissions; A sustainable methodology has been submitted for UNFCCC approval to qualify as genuinely carbon neutral oil. 8

9 The value chain Fragmented and lacking transparency; weighting and influence is strongly associated with ownership of the oil. Salvage, Repair Scrappers Used- oil collectors & traders Other markets e.g. - blending - fuel - explosives UTILITY e.g. - Duke - Dominion - NextEra Service companies e.g. Moran Oil Treatment e.g. - Hydrodec - EPS - EMI - Clean Harbours - Veolia Transformer Oil Used Oil Oil Filled Transformers The Hydrodec process is the most efficient, cost-effective and produces the highest quality oil, as good if not better than new. 9

10 Our core business model Transformer oil Core Offer CUSTOMER Business Model Safe alternative to incineration Owner operator (potential JV) PCB elimination Equity/debt funded Re-usable oil Sustainable carbon neutral Oil service offer Full-cycle margin (including royalty) Cost effective - not reliant on subsidy Variable logistic and market channels First commercial plant and R&D facility in Young, Australia (2006), 6.5m litre p.a. capacity 27m litre p.a. capacity plant in Canton, Ohio (2008) 10

11 Our global market The global market for new transformer oil is estimated at 1.2 billion litres per annum, about $1.5 billion; Global market has grown by an average of 2% p.a. for 10 years driven by power markets; Hydrodec currently supplies less than 30 million litres per annum; North American demand is 400 million litres p.a. growing at 6% p.a. over the last two years Hydrodec market share ca. 5%; Source: PFC Energy Annual transformer oil market value in Australia is ca. $25 million Hydrodec value share up to 20%; Source: Data from Australian Government, Hydrodec In Japan, highly regulated market provides 560m litres of PCB contaminated oil requiring treatment, up to 2 billion litres of T-oil in service; Source: Kline Report 2010 Industrial oil markets are materially larger, global value ca. $8bn p.a.; market structure can be more international and concentrated. 11

12 Key market drivers Non-OECD new oil demand primarily driven by growth in new infrastructure, also a factor in new grids for renewable energy in OECD markets; OECD new oil demand primarily driven by replacement of old oil US market - evidence suggests that up to 75% of new oil displaces used transformer oil creating a US feedstock market of million litres - Hydrodec call on 6-8% of available feedstock; PCB regulations: Stockholm Convention - 50ppm USA >50ppm (PCB contaminated oil ca. 10% of used oil (est.)) Australia >2ppm Japan >0.5ppm EPA approval was granted for Hydrodec in the US in July 2012 and Australia in The technology was licenced and approved in Japan in

13 Our channels of trade SUPPLIERS: H (US) CUSTOMERS: H (US) Utility Scrapper Consolidator Utility OEM Distributor Access to feedstock is critical Direct and indirect channels of trade characterise both feedstock procurement and sales; The market is regionally fragmented; although US logistics are efficient and national; The direct to utility virtual closed loop is ideal, however decommissioned hardware is a key source of used oil often outsourced to thirdparties; The broader supply base developed since 2011 has been retained creating greater transparency and access to feedstock. Transformer oil Base oil 13

14 Our suppliers and customers SUPPLIERS: (US) CUSTOMERS: (US) Building a broad base of relationships A focus on level loading the plant at Canton has resulted in a more flexible approach to the market; Sources of supply in US almost doubled in 2011, greatly improving the diversity and hence the security of supply; Just under 40% of total supply was procured via longer term agreements in 2011 increasing the predictability of product quality; 39 new sources of supply and 23 new customers were gained in the US in 2011, evidence of more effective procurement and sales; Term agreements in the US, Mexico and Canada have provided a base load of demand for SUPERFINE TM. 14

15 Transformer oil market dynamics $1.20 WTI ($/Lit) ICIS (Avg $/Lit) Sales price (indicative) Feedstock purchase cost (indicative) $0.00 Jan-10Apr-10 Jul-10 Oct-10Jan-11Apr-11 Jul-11 Oct-11Jan-12Apr-12 The closest pricing baseline for sales is the ICIS Pale 60 index; After two years of relatively high prices, oil fundamentals have seen prices drift; Feedstock prices have lagged the market and remain strong based on demand, and alternative use often informed by diesel markets; Access to PCB contaminated feedstock in the US has the potential to lower average relative feedstock costs post EPA approval (Canton); The sales spread to ICIS has narrowed over time indicative of robust demand for Hydrodec SUPERFINE TM transformer oil and base oil; there should still be price upside available. 15

16 Interim results H

17 H highlights $1.00 $0.75 $0.50 $0.25 Revenues (US$m) 37% 1H H H 2012 Volumes and Margins Volume ICIS Unit Margin 35% litres m Revenues increased 37% to US$13.9 million (H1 2011: US$10.1 million) driven by record sales volumes and higher pricing; Record SUPERFINE TM sales volumes of 11.7 million litres, up 23% on last year (H1 2011:9.5 million ltrs); Gross profit up 66% to US$3.2 million (H1 2011: US$1.9 million); margins at 23% (H1 2011: 19%); Unit sales margins increased 35% to US28 per litre (H1 2011: US20 per litre); Both plants delivered positive operating cashflow and contributing to central overheads; Significant investment in growth initiatives relating to market expansion and new product development of US$1.0 million (H1 2011: US$0.4 million); $0.00 1H H H

18 H highlights (cont.) 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 80% 60% 40% 20% 0% Utilisation 13% 1H H H 2012 Feedstock sources (US) H H Consolidator Scrapper Utility Underlying cash outflow from operations, excluding additional investment in new business development, significantly reduced to US$0.7 million (H1 2011: US$1.9 million); Plant utilisation rate increased to 69% (H1 2011: 56%); Received approval from US EPA to treat PCB contaminated oil; Awarded significant tender with local partner from Mexican national electrical utility to export and treat used PCB oil; Proportion of feedstock procured directly from US utility sector increased significantly to 38% (H1 2011: 18%); New senior management team completed with appointment of CFO in July; Outlook: current trading remains encouraging and consistent with expectations; scope for continuing improvement in operating results and cash generation. 18

19 H summary of results 6 months to 6 months to Year to USD June June 2011 December 2011 Revenue 13,865 10,104 22,414 Gross Profit 3,225 1,938 4,981 Gross Profit % 23% 19% 22% Operating Loss 1 (1,763) (2,076) (4,735) Operating EBITDA 1 (1,102) (1,368) (3,371) Operating Cashflow pre Growth Costs 2 (651) (1,862) (2,633) Cashflow from operating activities (1,624) (2,264) (3,452) Net Cash 3,378 1,214 6,755 Loss after tax (6,338) (5,176) (11,479) Loss per share basic/diluted (1.56) (1.47) (3.20) 1 Before Growth Costs 2, intangible asset amortisation and share based payment costs 2 Growth Costs includes expenditure on market expansion and new product development 19

20 Income statement 6 Months 6 Months 12 Months Jun-12 Jun-11 Dec-11 USD$m USD$m USD$m Revenue Gross profit Operating Costs: Employee benefit expense Administrative expense Foreign exchange(loss)/gain Depreciation Operating Loss Analysed as: Underlying operating loss Growth costs Amortisation of intangible assets Share based payment costs Operating loss for the period Loss after interest and tax Underlying Operating EBITDA* *Before growth costs,intangible asset amortisation & share based payment costs 20

21 Balance sheet Jun-12 Jun-11 Dec-11 USD$m USD$m USD$m Fixed assets Intangibles * Non-current assets Cash Other current assets Current liabilities Net current assets Provisons Long term borrowings ** Deferred tax Net assets * Patent, goodwill and Hydrodec technology ** Predominantly Convertible Loan Stock 21

22 Cashflow 6 Months 6 Months 12 Months Cash Flow 30 June June Dec 2011 USD$m USD$m USD$m Cash outflow generated from operations Capital expenditure Net cash outflow/inflow from financing Decrease/Increase in cash Movement in Net Cash Cash Bank Overdraft Opening Cash & Equivalents Decrease/Increase in cash Closing Cash & Equivalents

23 Our strategy 23

24 Our strategy Technology derived growth and returns Focus on technology through two core revenue streams: process waste oil at company-owned operations and sell branded products into an attractive market; and generate royalty income through licencing our unique clean technology. Create value through sustainability and carbon-free oil: broaden US feedstock supply to support an expansion of capacity in the core US market; leverage Australian technology & research base to create new, differentiated product lines in industrial lubricants with industry partner; deliver a participation and partnership model to unlock Japan, and thereafter new geographies. 24

25 US - growth strategy TRANSFORMER OIL CUSTOMER Direct 1. CLOSED LOOP 2. SERVICE ALLIANCE Salvage, Repair Scrappers Objective: Deliver a step out in US feedstock supply to support an expansion of capacity in the core US market. Engage and leverage to win: 1. Target direct engagement with the Utility sector deliver a closed-loop offer 2. Engage with the value-chain to ensure access to feedstock follow the oil partnership options may create competitive distinction in the value chain; improve customer offer through flexible procurement; Target high concentration PCB oils with new EPA permit to reduce feedstock cost; Deliver a differentiated sustainability offer in the US through carbon neutral oil. 25

26 Developing IP and business model New, patentable technology solutions in industrial oils Core Offer CUSTOMER Business Model Sustainable alternative to incineration Re-usable Group II base oil Carbon neutral oil Potential to disconnect supply from global markets Strategic resource partners BLENDER/ MARKETER Minority/lease operator Licensor Processing fee and royalty income Long term strategic partnerships Extendable global operating model, and partners Programme supported by leading global lubricants company Confirming previous work not re-inventing the wheel Target Australian mining industry first then step out jurisdictions and industries 26

27 New market entry Japan - Pacific-Eco joint venture Japan remains the most favourable regulatory environment for Hydrodec technology and oil solutions, clear evidence of at least 600 million litres of PCB contaminated oil; Strategic agreement and operating JV with Kobelco-Eco (a division of Kobe Steel) established in 2011; the technology remains the only certified non-destructive technology for low-contaminated waste oil; Appointment of Hydrodec President for Japan in 2012; Key milestones: land acquisition, supply contracts and commencement of construction. Japan has huge potential over the long term. Requires further direct involvement in shaping the JV business plan to realise the long term objectives. D.E.L.CO joint marketing agreement D.E.L.CO own technology targeted at PCB decontamination of hardware The agreement will target markets that are unlikely to be core operating targets for either party including South Africa, South America and Russia and Eastern Europe in due course. 27

28 Creating sustainable value Delivering oil with a carbon credit A methodology to verify the carbon saving benefit of returning oil to its original use has been submitted to the UNFCCC*; Carbon offsets may be available through various country-specific programmes for credit; To date, Hydrodec has processed ca. 70,000 tonnes of used, contaminated oil which would otherwise have been incinerated; This volume is equivalent to 250,000 tonnes** of saved CO2 emissions, notionally worth up to AUS$3.0m today if based on the Australian carbon credit scheme; To be relevant the company would need to do this annually which would require doubling existing capacity. * United Nations Framework Convention for Climate Change. ** US EPA equivalence calculator based on all processed oil re-sold as transformer oil. 28

29 The investment proposition Established, commercial business with a proven clean-tech solution; Addressing very large global energy markets with stable long term fundamentals and favourable regulatory trends; Blue chip partners and customers; Revenues increased every year since listed on AIM in 2004, reflecting rising demand for low carbon, safe technology with >99% recovery of spent oil; Existing operations in US & Australia provide near term growth ramp while new product development and Japan/ Asian joint venture offers long term upside and value creation opportunity; New leadership team brings global and strategic experience in core sectors and is incentivised to generate shareholder value; Excellent operational momentum being achieved as management team positions the business for significant scale and profitable growth; Strong H results driven by record revenues, higher margins and improving operational cashflow. 29

30 Appendices 30

31 Major shareholders AVIVA PLC 19.96% ANDREW BLACK 15.6% J.M. FINN & CO. LTD 5.24% THESIS ASSET MANAGEMENT 4.88% ROYAL LONDON ASSET MANAGEMENT 4.83% *per notification to the Company LUDGATE ENVIRONMENTAL FUND 3.78% **per shareholder register analysis 11 June 2012 ***includes Mr D V PENMAN interest as private client broker in the 3.54% holding of Mr D V Penman 3.54% There CHRISTOPHER are no RANSON restrictions on the transfer of the Company s shares. 3.00% 31

32 Non-Executive Directors Neil Gaskell, Chairman Neil has 25 years of experience of senior management roles in various companies in the Shell Group including working in Japan as Representative Director and Deputy Chief Executive of Showa Shell Sekiyu KK. From 2000 to 2003, he was Shell Group Treasurer, responsible for all financing policies, funding and financial risk management and a director of Shell International Limited. He is currently Chairman of Aberdeen All Asia Investment Trust PLC and a non-executive director of several companies. He is a fellow of the Association of Chartered Certified Accountants and has a B.A. in Philosophy and Economics from the London School of Economics, of which he is also a Governor. Neil joined the Board in June 2009 and became Chairman in July of that year. He also chairs the Board's audit committee, nominations committee and remuneration committee. Andrew Black, Non-Executive Director Andrew is the co-founder of Betfair, the world's leading online betting exchange and FTSE 250 constituent, having devised its unique betting exchange model. He was a director of the Betfair Group from 1999 to He holds board seats at a number of companies and investments in numerous others, with a focus on technology. Andrew joined the Board in July 2011 and also serves on the Board's remuneration and nominations committees. Alan Carruthers, Non-Executive Director Alan has 27 years' experience in the financial markets and from 2003 to 2010 he was Global Head of Equities at Cazenove. During this time he was appointed a main board director and was a member of both the executive and operations committees. He helped spearhead the joint venture with J.P.Morgan in 2005 and spent a year as Head of EMEA Cash Equities at J.P.Morgan Cazenove, following the buyout of Cazenove in January 2011 and the ensuing merger of both cash equity franchises. Prior to joining Cazenove he spent significant time at both Morgan Stanley and Goldman Sachs. Alan joined the Board in August 2012 and also serves on the Board's audit committee, nominations committee and remuneration committee. Gillian Leates, Non-Executive Director Gill brings with her a wealth of public market experience having served as Investment Director on the main board of Majedie Investments PLC. She also served as a non-executive director of Majedie Asset Management Limited where she played a key role in setting up the UK pension fund management business in 2002 which now manages approximately 4 billion. Since 2010 she has worked as a fund manager at JM Finn. Gill joined the Board in June 2009 and also serves on the Board's audit committee, nominations committee and remuneration committee. 32

33 Our history 33

34 Hydrodec Group plc Ian Smale Chief Executive Chris Ellis Chief Financial Officer London Office 50 Curzon Street London W1J 7UW Main: +44 (0)