Hydrodec enjoys sales boost as US demand improves

Hydrodec CEO, Mark McNamara, holding Superfine oil at the company's plant in Ohio

Hydrodec (LON:HYR) , the company the reprocesses spent industrial oils and turns them into its own Superfine transformer oil, enjoyed a sales surge last year on the back of rising industrial demand in the US. However, uncertainty over access to debt funding to smooth out the flow of feedstock into the business later this year overshadowed the company’s best annual performance for some time. The Hydrodec share price fell by 5.5% to 6.5p.

Revenues at Hydrodec increased by 71% to US$17.8 million, gross profits doubled to US$7.9 million and gross margins increased to 44% from 35% previously. The margin improvement, while significant, is some way off typical industry levels before the economic downturn. Operating losses reduced to US$6.7 million from US$11.5 million and operating cash burn decreased to US$4.5 million from US$8.8 million. Sales volumes were up 71% to 20.2 million litres largely as a result of increased US sales of Superfine oil, with current demand for re-refined oil continuing to outstrip production. The company also doubled its US supplier base to 26, improving access to used oil feedstock supplies.

The issue of maintaining a robust supply of feedstock has led the company to start discussions with potential sources of debt funding. The extra cash would allow it to build its feedstock inventory during the coming months when availability typically improves in order to off-set the cash constraints of buying when feedstock is seasonally in shorter supply. This year, the effects of a harsh US winter and the floods in Australia disrupted feedstock supply and increased costs. This means Hydrodec is now unlikely to achieve an operating cash surplus in the first half of 2011. As a result, if it fails to secure debt funding, the company could potentially face a tight cash position later in the year. However, it said that improving market conditions should mean that its financial and operational performance will continue to improve.

Neil Gaskell, Hydrodec’s chairman, said: “The 2010 results mark a turning point in Hydrodec’s prospects as the company delivered a strong improvement in its operational and financial performance. We expect continued growth this year as demand for Superfine oil remains strong and industry fundamentals continue to strengthen. We are also working hard to remove supply bottlenecks which will further ramp up our plant throughput. As a result the Board looks to the future with confidence.”

Hydrodec’s technology is an oil re-refining and chemical process which is being initially targeted at the multi-billion dollar market for transformer oil used by the world’s electricity industry. The group takes spent oil, including polychlorinated biphenyl (PCB) contaminated oil, as the primary feedstock, which is then processed at its two plants in Ohio, US and New South Wales, Australia. The process enables 99% or greater recovery of oil for reuse while also eliminating PCBs, a toxic additive banned under international regulations, without environmentally harmful emissions. The company is planning to open a new plant in Japan and last year signed a joint venture with Kobelco Eco Solutions, a unit of Kobe Steel. Preparations for the first plant construction are understood to be on track for production in 2012.