In this interview on the 19th January 2015, ( question 5 see below) the CEO of Hydrodec states that they have ‘secured’ the location and are ‘fully engaged’ in the pre-planning and permitting process.
Dave,Phil and I are meeting with the planning dept on Monday.
Q5. You have previously said that you are developing the business case for the UK re-refining project – how is that coming on?
We are making good progress and all is on track for an independent development of a rerefinery in the UK. We have a basic engineering design from CEP, and should be appointing a contractor early in the New Year to develop the front end engineering design (FEED). We have secured a very suitable location and are fully engaged in the pre-planning and permitting process which I would hope will lead to a full planning application in February, next year, with full project sanction before the end of the first half next year. The wider business case remains robust, and there is a real opportunity to meet a significant gap in the market, as well as move the UK forward with respect to the development and regulation of the used oil market.
For the complete interview
Q&A – Summary of an interview between Ian Smale and Scott Bannerman, BRR media. Trading Update – 19 January 2015
Welcome Ian Smale, CEO of Hydrodec Group Q1. Hydrodec has today released a trading update for 2014; it seems to be a positive statement given the challenges the Group faced during 2014?
A. Thank you Scott Yes, I think so. In the context of rebuilding a business in Canton, grappling with an arduous insurance process, re-engineering our own technology for transformer oil and managing the preparation, risk and planning for a major step out in the UK, there have been many challenges. I think these update numbers are a credit to the Hydrodec team, the potential as well as the resilience of the business we are building at a time of considerable change in markets, lower oil prices and necessary change as well as opportunity in the businesses.
Q2. What are the main highlights from today’s announcement?
The benefit of a full year of trading with OSS has enabled the Group to continue its commendable year on year growth in revenue, up 35% to US$54m, as well as a health increase in total oil sales, up 26% to 48 million litres. Don’t forget this was without production revenue from the US offset in part by business interruption income and a step up in oil trading as we maintained our channels of trade in preparation for this year. Gross margins are of course more complex to understand given the impact and accounting treatment of business interruption as income reimbursing lost margin due to the incident, but have otherwise stood up despite lower product sales prices and challenging market conditions. The potential to deliver an improved Group EBITDA in this context I think is a strong message and reflects the focus the management team have always had on this key measure as we grow the business.
Q3. So should we take it that you think this signals a Company ready to “reemerge stronger” which was the commitment you made?
A. It does, although there is a lot of work to do and a series of key deliverables that will fully establish that commitment over the next few months. In setting the ground for 2015 and beyond, we have delivered a number of significant milestones through 2014 that I believe have prepared the Company for growth. Better still, because of our actions I am confident that growth can be delivered at lower risk and from a stronger financial base than we envisaged in our original strategy from 2013. Delivering an expanded Canton, re-locating in Australia and progressing our plans for a re-refinery in the UK as we envisage today will put us back, or at least very close, to our original trajectory from before the incident.
Q4. Is the insurance settlement fully over?
The insurance settlement was extremely pleasing although frustratingly long and arduous as a process. However, it allowed us to rebuild at Canton funded and confident that we can re-capture the growth and momentum in the business interrupted by the incident. The regular payouts as well as the full co-operation from our partners G&S Technologies were critical to meeting our ambitious re-build target and of course the business interruption settlement held us financially whole through 2014 and continues to cover the period up to commissioning and operation. The financing agreement in the US is also very significant and completes the preparation for a re-launch of the business. A key aspect of this is the validation and confidence of a third-party in our plans and capability at Canton. But it also creates a more efficient capital structure for the long dated assets, introduces competitively priced debt onto the balance sheet of the operating company, and gives us the capability to fund additional working capital for the expanded business as well as creates flexibility for Hydrodec as a group to invest further in strengthening the value chain or in other opportunities. It means the general level of cash available at Group level will be similar to that following the fundraising in November 2013, and before the incident, with the rebuild and expansion fully funded.
Q5. Those are all financial, what about technology and operating milestones and your on-going commitment and spend on growth?
I think 2014 was a big year for Hydrodec technologically – we did a lot to protect our IP and unique transformer oil process as well as the innovations in lubricant re-refining through two provisional patents. I think this makes us a player in the longer term in lubricant re-refining where the long term aspiration is to reproduce very high quality oil, fit for its original purpose with world leading yields and efficiencies (just like we do for transformer oil). The agreement with CEP is an evergreen, exclusive licence for the technology in the UK, as well as the opportunity to collaborate on the development of our own technology going forward. CEP is the most commercial and distributed of the re-refining technologies, with current projects and installed capacity there will be approaching a billion litres per annum of capacity globally. This is very important, not least because it will significantly de-risk our major move into used lubricant oil recycling, but also allow us to do so on our original timing. We believe our technology innovation can upgrade the CEP process increasing yield or recoveries and improving product quality; in the meantime we can be assured that the deal brings in the experience and pedigree to move our project on, as well as learn from recent applications of this technology in Brazil, US and Finland. You are right; we do continue to invest in growth, a significant portion of which is in the development, delivery and innovation of our technology which in the end is what differentiates Hydrodec. We are also very aware that we aim to operate in new markets, as well as maximise the opportunity, as well as manage the risk in our existing markets. We set a strong store on partnership and collaboration as a way to manage risk, this is something I think served us well in 2013 and offers significant potential for the future if done properly and in a considered way as part of a clear strategy, all of which we have.
Q6. That seems like a good segue to OSS and the performance of your 2013 acquisition here in the UK?
A. The UK is a very attractive option for our growth and development in the used-oil and transformer oil markets – a unique opportunity to create a fully integrated operation from a standing start covering all oil, as well as leapfrogging much of the European competition in efficiency and product quality. OSS is critical to this, securing feedstock to underpin and support further investment, as well as offering the brand, business and customer base to be successful in its own right. Bringing a Company out of administration has been an interesting experience and one where we have learnt lessons, not just about the practicalities, but also the market reaction and response to a “new – old” player. We realised that business strategy and structure needed to change even before the decline in oil prices had any impact, and their accelerated decline will drive further significant change into the used oil market stressing weaker competition, resetting industry and pricing practice as well as margin and creating opportunities for growth and consolidation. On the plus side, OSS has a good, experienced team and remains the leading service provider by size and benefits from scale in the way others don’t; I am clear that realigning the business back towards the major transport and industrial clients from its past is the right strategy as is focusing on its compliant, convenient and competitive service offer to major car groups, workshop networks as well as industrial and transport companies. We have targeted more than £0.5m of operating synergies and refinanced the vehicle fleet; we are recruiting to deliver the business shift while we have discontinued use of an outsourced call centre, and scaled back our own call centre activity to focus more on direct customer service and sales. We have stopped the sub-economic collection of oil, as well as the cross-subsidising of services. The OSS business is capable of delivering a genuinely differentiated, integrated oil and waste management service which can be profitable in its own right and remains essential to our plans for a UK re-refinery.
Q7. How does the change in oil price affect your plans?
This is a very common question. The change in price is creating an interesting market correction in the waste oil market; and longer term lower oil prices can sometimes be helpful as they remove some of the incentive to blend untreated used oil in with new oil which happens in most of the markets where we operate. So lower prices are not an issue per se; oil is always a margin game; it is the difference between two numbers – what you pay for your feedstock, and what you are able to achieve for your products. Both are significantly influenced by factors well beyond our control, but which have a habit of realigning through an efficient global traded marketplace. The margin structure on the whole remains pretty robust even over the last few months of last year; the issue at Hydrodec has always been one of temporary dislocation, where one price moves faster than the other can respond. The issue is slightly exacerbated in the UK collections and PFO business as margins are significantly smaller, making the impact of change greater, but not necessarily any longer lived.
Q8. What can new look forward to?
2015 will be a year of regaining momentum much as we were doing in 2013. There is a lot going on starting with the re-location of the Australian plant to the Southern Oil Company in Wagga Wagga which will be a fascinating reset of our business in Australia driving efficiencies and reducing our reliance on Government subsidy. Clearly Canton is very important. We hope to be commissioning and operational by the end of the first quarter, looking to rebuild the business and ramp up production from the second and third quarter. It will be very interesting to see how far we can take this new design and equipment through the balance of the year which is a very exciting proposition for us. And in the UK the key is resolving the market structure of the collections business is important in the short term but making progress in resolving the UK re-refinery project including the location, submitting planning permission, building the business case and resolving how best to fund and develop this project to enable completion on our planned timeline of end 2016. All in all a lot to look forward to in 2015.