Hydro International’s growth track record may have been interrupted last year, but the company has resiliently weathered the economic storm

Hydro International’s impressive growth track record may have been interrupted last year, but the provider of specialist equipment for water treatment has resiliently weathered the economic storm.

Environmental and legislative drivers, as well as the need for more careful management of global water resources, underpin the long-term flow of profitable growth at Hydro International, the provider of innovative products and services for the cost-effective control of stormwater and treatment of wastewater.

Headquartered in Clevedon near Bristol, Hydro – formed back in 1980, floated on London’s Official List in 1994 and AIM-traded since 2005 – has had to weather the recent economic storm, with the severest of recessions affecting its key new-build markets, both here in the UK and in the US, where it does the bulk of its business.

However, while its strong growth track record was interrupted in 2009, Hydro, whose corporate strapline is ‘turning water around’, remained profitable, keeping its head above water thanks to recent initiatives to diversify the business, which helped mitigate the worst effects of the downturn.

Having still made money, even at the low point of the cycle, bulls believe that Hydro is now perfectly positioned for a return to growth by capitalising on continued robust spending on wastewater systems and recovery in its lately beleaguered stormwater markets. And, since its technology plays a part in water conservation – the group offers solutions for stormwater harvesting and rainwater reuse – Hydro is handsomely placed to profit from the ascent of the better management of water resources up the international political agenda.

Yet despite its proven technology, strong relationships with water companies, local governments and contractors, and the lucrative potential of its core markets, Hydro International’s shares, which pay a dividend by the way, are selling on an undemanding forward p/e multiple of less than nine times earnings.

Strategy

‘There are two main parts to our business – stormwater and wastewater,’ explains Hydro’s enthusiastic chief financial officer, Tony Hollox, ‘and we have two principal home markets – the UK and the US – while we also sell internationally through distributor arrangements.’

Employed in urban drainage systems, Hydro’s stormwater products, sold to residential developers, local councils and transport departments, are used to control stormwater flows as well as remove pollutants such as rubbish, oil and sediment from such flows.

As well as the ability to control the flow of stormwater, they can store surface water run-off from new residential and commercial developments. Market drivers for the stormwater business include continued urban development, ever more stringent environmental and water quality legislation and, of course, flooding.

Legislative drivers are at play in the domestic market, where the development of sustainable drainage solutions is becoming increasingly important, with the UK Flood and Water Bill aiming to encourage passive or ‘natural’ flow and flood management in locations seen as susceptible to urban flooding. ‘Our stormwater business deals with the stuff that is falling out of the sky in increasing quantities due to global warming, and we are trying to provide products that mimic nature,’ informs Hollox.

Clients on the wastewater side of the business include water companies and local government. ‘We deal with all of the UK’s 12 water companies, as well as with the large contractors,’ says Hollox. Applications for Hydro’s products include the protection of wastewater treatment plant equipment, by removing fine grit from incoming wastewater flows, and the treatment of wastewater within such plants.

‘We have a multi-part strategy for growth,’ says Hollox, who is keen to restore profitable momentum to the business through a focus on selling core products into the UK and US markets. The board is also committed to furthering the group’s international development by expanding Hydro’s network of international distributors and licensees.

Naturally, new product development represents a further strategic plank, as do acquisitions of complementary businesses, such as the successful 2008 takeover of Eutek Systems in the US, removing a competitor and trengthening Hydro’s presence in the grit removal market.

Hollox says Hydro is always looking for acquisitions, without being overly aggressive: ‘We have done two acquisitions in the past five years, but we are very selective. We have tight criteria and we only look for good-fit opportunities.’

Meanwhile, every effort is being made to grow the business organically, by ‘cross-fertilising’ sales of Hydro’s technology across the US and UK markets and the stormwater and wastewater sectors.

Management

Steve Hides, chief executive, is a long-serving Hydro man, having joined the company back in 1980 as a project engineer before assuming the CEO mantle in 2000. The key player in the group’s subsequent growth and development, he is the architect of Hydro’s strategy to focus on core products and markets while moving into new geographical territories, developing new products and making acquisitions.

In charge of the numbers and with a huge hand in the strategic development of the business is highly energetic chief financial officer, Tony Hollox, who joined the company in the summer of 2006. Hollox earned his accountancy spurs with Coopers & Lybrand in 1988 and, after qualifying, went on to hone his skills in a variety of senior finance positions within industry, most recently as finance director (and company secretary) of Wyvern Waste Services.

When discussing the Hydro management team, it would be remiss not to mention chief technology officer Professor Robert, ‘Bob’, Andoh, who oversees product research and development and has responsibility for technical support, intellectual property rights and IT. Joining Hydro in the early 1990s, Andoh, a civil engineer and visiting professor of Liverpool John Moores University, has over 25 years of experience in the water industry, has played a pivotal role in the positioning of the product range and is an author and presenter of a number of technical papers relating to urban flooding, sewerage systems and wastewater treatment processes.

Chairing Hydro International since January 2000 is the experienced Roger Lockwood, a non-executive director of the business since late 1999 and also chairman of fully listed engineering group Rotork. Lockwood brings his considerable sector pedigree to the board, having previously held CEO roles at a number of engineering and automotive businesses.

Prospects

Amid the most challenging of market conditions in 2009, Hydro demonstrated what Hollox describes as its ‘natural resilience’, remaining resolutely profitable to the tune of £1.8 million, albeit down from £2.7 million a year earlier, despite recession and with a 9 per cent decline in turnover to £27.3 million (2008: £30 million).

‘It hasn’t been great,’ concedes Hollox, ‘and in 2009, we came off the growth path that we had been on since 2000. But we are trying to re-establish that growth pattern and have weathered the storm better than others’.

Depressing the financials was a 28 per cent decline in stormwater sales to £9.8 million, reflecting tough trading conditions caused by contraction in the UK and US housing and construction sectors. Encouragingly, though sales fell sharply in the early part of the year, revenues did stabilise, albeit at lower levels, and Hydro benefited from its wide diversification between private and publicly funded projects.

Last year was far more lucrative for the wastewater business, where sales flowed 7 per cent higher to £17.5 million. Business was especially strong in the US wastewater operations, driven by demand for fine grit removal systems needed to protect increasingly sophisticated wastewater treatment technologies, while Hydro also noted a marked rise in proposal activity related to its combined sewer overflow (CSO) treatment devices in the US.

In the UK, orders slowed as the AMP4 water sector capital investment programme wound down, but Hydro is well positioned to profit from a bounce back in spending as AMP5, which began on 1 April and boasts a bigger budget than AMP4, begins to kick in for real. Prospects for the wastewater operations are encouraging, with Hydro well positioned on a number of wastewater projects in the US, UK and Middle East.

Overall, Hydro is a proven, profitable business with good growth prospects in global markets where levels of investment to control flooding, improve water quality, remove grit and manage the water flow in sewers is only predicted to go one way.