Hudson Technologies, Inc. (HDSN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, welcome to the Hudson Technologies First Quarter 2021 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jennifer Belodeau. Ma'am, the floor is yours.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for first quarter 2021. On the call today are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, CFO. I'll now take a moment to read the safe Harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our business as we see them today, they are not guarantees of future performance. Please understand that these statements involve a number of risks and assumptions. And since those elements can change and in certain cases are not within our control, we would ask that you consider and interpret them in that light. We urge you to review Hudson's most recent Form 10-K and other subsequent SEC filings for a discussion of the principle risks and uncertainties that affect our business and our performance and of the factors that could cause our actual results to differ materially. With that. I'll turn the call over to Brian Coleman. Go ahead, Brian.

Good evening, and thank you for joining us. As at March 31, we kicked off our 2021 selling season. Our first quarter revenues were slightly down from the first quarter of 2020, primarily due to the impact of the COVID pandemic, which did not materially affect the economy until late March of 2020. This year, while the economy is opening back up, it's a gradual process, largely dependent on where our customers are located geographically, and our first quarter revenues reflect that, but we still believe we can get back to 2019 volumes levels during the 2021 cooling season. That said, well, first quarter revenues were down related to decreased volume, we were encouraged by price stability and pricing improvement for nearly all refrigerants. We are well prepared to meet potential demand as the 9-month selling season moves forward, particularly as cooling systems come back online with the return of business as usual and as we move into the warmer late spring and summer weather. Hudson continues to be a leading source for all refrigerants from legacy products like CFCs and HCFCs to the current HFCs and beyond to the next generation HFOs. We are positioned at 2 key points in the supply chain with a solid and longstanding customer base. With our capabilities of relationships, we remain optimistic about future opportunities. With the new administration comes a new regulatory landscape and we're encouraged by the progress made with passing of the AIM Act in December 2020 and the support the reclamation is receiving. As a leading source of wall refrigerants, Hudson is keenly focused on our role as environmental and sustainability legislation is adopted. Our capabilities as a reclaimer uniquely position us to support the phased down of virgin HFC production as we can reclaim and recycle these refrigerants, positioning us as an effective resource in the circular economy of the refrigerant industry. The AIM Act requires the phase down of virgin HFC production over the next 15 years with a cumulative 40% reduction in the baseline scheduled to take place in just 2.5 years. The installed base of HFC systems is large and growing, so reclamation will be a key component to maintaining necessary supply during an orderly phase out. This presents a significant long-term opportunity for Hudson to grow as an HFC supplier while also supporting the transition away from production of virgin HFCs. The regulated phased down of HFC virgin production through the establishment of an allocation system has some similarities to the previous ODS phase out, which included R-22. But with that previous phase out, the reclamation industry was in its infancy. Today, the reclamation industry is well-established with Hudson representing approximately 35% of all refrigerant reclamation activity in the U.S. And the AIM Act mandates the EPA to support the growth and development of the reclamation market. We are excited by the opportunities we're seeing not only to grow our business, but also to provide our services to benefit the environment. Likewise, we continue our focus and efforts of making our California production sites carbon neutral as we seek to achieve California stated goals for emission reductions and their legislative phase out of virgin HFC refrigerant use. As we make progress at our California sites, our larger goal is to achieve carbon neutrality at all of our production facilities. Just as we work with our customers to provide equipment optimization services to help them lower their energy bills and reduce their carbon footprint, we remain intent on finding more and better ways to improve the circular economy and end of life management of refrigerants. With our visibility today, we are optimistic about the 2021 selling season as we see the steady reopening of businesses, schools and public facilities that make up our customers and end markets. As cooling systems are reengaged and new systems come online, we believe that we're well positioned to leverage the near-term opportunities we are seeing in the refrigerant marketplace. Additionally, the scheduled phase down of HFC virgin production represents a significant opportunity for the growth of our reclamation industry and in turn our leadership position. Now I'll turn the call over to Nat to review the financials. Go ahead Nat.

Thank you, Brian. For the first quarter ended March 31, 2021, Hudson recorded revenues of $33.8 million, a decrease of 7% as compared to $36.4 million in the comparable 2020 period, primarily due to a decline in volume related to the COVID impact stemming from the closure of businesses, schools and other public venues, which as Brian mentioned, did not materially impact the economy until late March 2020. This was partially offset by an increase in selling price of certain refrigerants, which also led to the improved gross margin of 27% for the first quarter of 2021 compared to 23% in the first quarter of 2020. SG&A for the first quarter of 2021 was $6.7 million, a $600,000 decrease compared to $7.3 million in the first quarter of 2020, mainly due to reduced professional fees, partially offset by an increase in noncash stock compensation expense. We recorded operating income of $1.7 million in the first quarter of 2021 compared to operating income of $400,000 in the first quarter of 2020. To continue with the cost savings, interest expense for the first quarter of 2021 was $2.8 million, a decrease of about $500,000 from the $3.3 million reported during the first quarter of 2020, mainly due to principal payments made on the term loan. The company recorded a net loss of $1.1 million or a loss of $0.02 per basic and diluted share in the first quarter of 2021 compared to a net loss of $2.9 million or $0.07 per basic and diluted share in the same period of 2020. At March 31, 2021, we had approximately $32 million of total availability, consisting of both our cash balance and revolver availability. We have strong liquidity and our term loan and revolving loan credit facilities provide us with a solid financial platform and flexibility as we look forward. With our stronger balance sheet and improved liquidity metrics, we hope to further improve our financial condition by exploring the refinancing of our existing debt to help grow and support the business. And I'll turn the call back over to Brian.

Thanks, Nat. We are a leader in the industry with extensive experience that has served us well through the volatility and challenges we've encountered over the years. We built a solid platform for growth with a longstanding customer base, established distribution network and industry leading technology. As we move through the balance of 2021, we are energized by the opportunities ahead, while focused on meeting the needs of our customer base and increasing our position as a leader in the refrigerant and reclamation industry. Operator, we’ll now open the call to questions.

[Operator Instructions] And your first question is coming from Ryan Sigdahl from Craig-Hallum Capital.

So I know seasonality and weather as we warm up through the year have an impact, but maybe in the context of a normal kind of month over month compare how have volumes and demand trended through Q1 and then also into April here? Have we seen an increase with the reopening?

So in the first quarter, the volumes were down, which again, we attribute primarily to the overall openings or closings, whatever way you want to reference it. We do think that Q2 we should be able to grow our revenues in 2021 based on volume when compared to 2020. And we're really focused on volumes and the type of business we had for the '19 year. That may not come out that way, but we do think there'll be sufficient openings throughout the country. And as you probably heard in the past, the second quarter really gets kicked off not in April. April is generally very slow month, but it really gets kicked off in the warmer weather in May that we're starting to get into. And particularly, we like to see a string of 90 degree days around Memorial Day weekend, early June, particularly for the North and Northeast because that really kicks on the whole comfort cooling season, and that's really what moves the volume of refrigerants.

And then on gross margin. So it looks like a 3-year high there. So it's really nice. Was that improvement primarily just price or was there any other factors in their mix, et cetera?

It was primarily price. In some cases our cost base is a little bit lower, but we are seeing, like in the HFC class refrigerants, higher prices. But we're also seeing higher costs now that a lot of the tariffs have been applied to the various components. So the margins on the HFC class will probably stay similar throughout the season, even though we've seen some price increases, as I said, we've seen corresponding cost increases there. But the mid-20s that we're at in the 27%, we do think is achievable for the balance of the year.

Great. Then maybe I missed it, Brian. Normally you'd give kind of what the price of R-22 is in the quarter, curious what that is and then also where that price is today.

Yes. The prices right now are ranging in the $15 to $17 range. In some cases, you might see a little bit higher, but certainly up from the beginning of the year. We think we're going to see further price increases this year. We don't know when, but certainly the warm weather is going to help us to understand that relative to both the supply side and how much stockpile might be left. And then certainly the demand side.

On that stockpile, any indication of kind of where we're at?

No. No changes from the last couple of reported periods. We think Chemours is out, although they never published a letter, but based on the communications we understand they've had with customers. So that always ended up leaving Arkema as the entity that likely has a fairly large stockpile. Will it be used up this season or not? It's difficult to know. But we don't think that their stockpile is going to last for much longer.

One more for me. So the DoD contract is a 5-year contract, 5-year extension option. I believe we're coming up close to that 5-year mark here. I guess how is that contract or relationship gone relative to your expectations? And then remind us of the time line for that extension.

So you're correct, it expires at the end of July. We do believe we will receive the 5-year renewal. As evidence, let's say, to why we believe that, if they were to go out and not extend it with us, they have to do a formal bid process, which they haven't done. That's a very lengthy process. So we think that they're going to exercise their option. We believe we performed very well, particularly in connection with the prior contract holder in terms of delivery and fill rates and different metrics that are required within the contract. We're still a little disappointed though on the overall spend through the contract. We're not getting back to the levels yet that we had seen in the 2019 period. We were tracking to almost $25 million in revenues on a quarter-to-quarter basis. We were seeing growth on a quarterly basis. We think that this year -- so at some level, the COVID affected the contract as well, and we think this year that we can get back to marketing the contract more broadly and probably all that will begin after the renewal, which we probably will hear about that renewal before the contract expires, but -- and maybe 30 days out yet from where we are.

Your next question is coming from Gerry Sweeney from ROTH Capital.

Obviously, COVID was a little bit of a struggle last year, but it also depended on where you are in parts of the country. Brian, we're in the Northeast and New York City is scheduling to open up. Pennsylvania, Philadelphia is scheduled to open up soon. Is there an opportunity to see a little bit of a surge in business as some of these businesses that may have been shuttered or running at 25% capacity start turning on systems, more people, more body heat, you're starting to get into the summertime and maybe some of these systems just weren't charged up last year. Is there a potential opportunity for that?

We do believe so. How much will it be? We don't know. And this is why we're still optimistic about the 2021 season. As you said, the Northeast is beginning to open up in ways that we had not seen before. So we do think a lot of systems will be turned on. New York City is still having a lot of its struggles. But at the end of the day, we think there is a potential upside because systems likely could have leaked over this past year because they haven't been run and tested. So that would cause potential increase. Also, they may not have been maintained as well as they normally would have. So there's a potential increase for refrigerant sales and service work in that regard too.

And then just on the phase out of HFCs on the allocation system, we went through this obviously with R-22. I sort of caught the tail end when I picked up coverage a bunch of years ago, but is there -- it's not always as smooth or as linear as we would like and sometimes lawsuits pop up and I suspect HFCs are a little bit -- might be a little bit different than R-22. I think a lot of people want them gone, including producers. But do you have any insight into how it may develop over the next couple of years from that perspective?

So I would recommend folks go to our website and look at Page 7 of our current presentation, because you'll see this step down. It comes very hard and very fast. So in 2.5 years, there's going to have to be a 40% reduction from the baseline. We went -- with the 22 phase out, we probably went more than 10 years, maybe 12 years before we ever got to that threshold. So here the step-down comes very quickly, very hard, very fast. That I think is what makes this particular opportunity different. So in the old 22 phase out, there was the ability for the creation of very large stockpiles, for example. There'll probably be stockpiles in this phase out, but we don't think to the magnitude because the length of time to create a stockpile is greatly diminished because we're already starting next year. There'll be a 10% reduction off of the baseline. And then that will run for the 22 and 23 year and then a 30% reduction, which then is a cumulative 40%. So we think that's the big difference here. Also, the big difference is within the AIM Act, the EPA is mandated to find ways to help support the growth in reclamation. There's no such language in the original Clean Air Act and the phase out structure for all the ODS products, the ozone deplete substances. So there's a lot of differences. There's similarities, certainly, but there's also differences that I think will be positive to the reclamation industry and Hudson Technologies.

Got you. And size of the HFC market versus R-22, when they pace that, HFCs are significantly voluminous, right?

At its peak, 22 could have been 70% of the overall market. Right now, HFCs are probably 80% with R-22 around 20%. And as each year progresses, the 22 share diminishes and the HFCs grow because all of the new construction, new equipment, all the change out of the 22 units are HFC based. Soon HFOs will be introduced more widely than they are today. And they're beginning to get some traction. So over time, HFOs will grow into a larger market share, but that's probably 5 to 10 years out in terms of time line of it becoming a material piece of the overall market.

Got it. Okay. And one more question just pivoting back to R-22, probably should have asked that a couple of minutes ago. But how are collections going? Obviously, that is a key component to the model, is collecting you to use gas.

Yes. We've shared, I think our disappointment with you all. We just are struggling with why we're not seeing more gas coming back. We do think there is more gas that could come back. How much of it is illegal venting? How much of it is illegal reuse? We don't know. And part of this HFC phase out is the EPA has got to figure out this issue and is being mandated to find ways and systems, if you will, to improve the legal recovery and improve the volume of reclamation. So the positive thing more -- again, getting back to HFCs is the HFC reclaim is in its infancy relative to what we think the overall opportunity is. And there's certainly, 5x, potentially 10x growth in reclamation over the next number of years as these virgin HFC gases are being faced out.

I would now like to turn the floor back to Brian Coleman. Sir, the floor is yours.

Well, thank you, operator. I'd like to thank all of our employees for their continued support and dedication to our business. I want to again thank our longtime shareholders and those that have recently joined us for their support. Thank you everyone for participating in today's conference call, and we look forward to speaking with you after the second quarter results. Have a good night, everybody.

Thank you.

Thank you, ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.