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

Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies First Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jen 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 2022. 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 certain forward-looking statements. All statements address expectations, opens 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 businesses 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 that an inter present 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 principal risks and uncertainties that affect our business and our performance and other factors that would cause our actual results to differ materially. With that out of the way, I'll turn the call over to Brian Coleman. Go ahead, Brian.

Thank you. Good evening, and thank you for joining us. 2022 is off to a very strong start, building on the momentum we saw coming out of calendar year 2021. We delivered record first quarter results as demonstrated by significant revenue growth, substantially enhanced margins, and improved profitability. The first quarter kicks off our traditional 9-month selling season, and we saw a continuation of the upward pricing trends that characterize pricing activities in the back half of calendar year 2021. We may remember that our 2021 season got off to a slow start and then picked up momentum as the year progressed. In addition to record revenue for the first quarter of 2022, gross margin increased to 54%, mainly due to a significant increase in the average selling price without material appreciation in the cost basis of certain refrigerants. Simply put, selling prices for refrigerants increased faster than our cost of refrigerants in the quarter. Additionally, we benefited from increased sales volume as we continue to focus on developing strategic working relationships with customers who value not just our ability to meet their refrigerant needs today, but who also recognize the value of our sustainability portfolio. This growth was achieved while we continue to exit certain non-core sales, which is a pattern we started during the third quarter of last year and likely conclude this year. Over the years, we've established a solid base of long-standing customers, and we remain focused on adding customers who understand Hudson's value proposition as a supplier and a producer in the circular economy of refrigerants through reclamation. That said, our first quarter margin was unusually strong and not sustainable over the long term. We expect margin performance for the full year 2022 will moderate to levels similar to last year as the cost of inventory will increase through 2022. The start of 2022 marks the beginning of our industry's compliance with the AMAG regulations, which mandated a 10% step-down in the production and consumption allowances for HFCs for 2022 and '23, with a 40% reduction in the baseline scheduled to take place in 2024. HFCs are currently the most commonly used refrigerants and as a leading reclaimer, we are uniquely positioned to fill the anticipated HFCs supply gap as virgin production is phased out. It's important to note that the AMAG mandates a much more aggressive and faster phaseout than what we previously saw with the R22 phaseout and promotes the use of reclaimer refrigerants to meet demand as virgin production steps down. As a leading reclaimer with the reclamation technology capabilities and established distribution network in place, we believe this presents us with a tremendous market opportunity to expand our leadership role in the industries transition to cleaner, more efficient, next-generation cooling equipment and refrigerants. We previously communicated longer-term annualized revenue and operating income targets of $350 million and $72 million, respectively for 2023 through 2024 based on pricing in Europe as they were implementing their HFC phaseout. With our visibility today, assuming this year's pricing trend continues and with the initial impact of the AMAG regulations, we believe we're on a path to reach those longer-term targets at a faster rate than we originally estimated. We remain confident that 2022 will be a year of tremendous opportunity for Hudson. In addition to the AMAG we are positioned to benefit from industry compliance with initiatives put forth by the California Air Resources Board, or CARB. As we mentioned before, CARB has proposed a requirement that OEMs use a minimum 10% reclaim refrigerants in the factory-charged equipment, and we've been actively pursuing opportunities to assist OEMs in meeting this requirement. We are intent upon growing from our initial partnership, supplying the clean refrigerant to April air to expanding our brand recognition among other OEMs in our industry as they seek a source for reclaimed refrigerants. Hudson was founded on a commitment to promoting and enabling sustainable cooling practices. Our focus on recovering, reclaiming, and reusing refrigerants reduces waste and greenhouse gas emissions, creating maximum economic value for used refrigerants. The integration of refrigerant reclamation sales of our branded Emerald claim refrigerants and our site services creates a powerful platform for us to continue to lead the way in providing measurable and verifiable sustainability practices for our customers, wishing to document their positive impact on the environment. As we begin to enter the heart of the 2022 selling season, we are energized by the opportunities we're seeing in the marketplace for our products and services. With our long-standing customer base, diversified technology, and product offerings, and proven distribution network, we believe we are ideally positioned to capitalize on the changing market conditions as the industry transitions from existing to next-generation refrigerants and equipment. 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, 2022, Hudson recorded revenues of $84.3 million, an increase of 149% compared to $33.8 million in the comparable 2021 period. The growth was driven by increased selling prices for certain refrigerants during the quarter as well as increased volume. Gross margin was 54% for the first quarter of 2022 compared to 27% in the first quarter of 2021. As Brian pointed out earlier, the gross margin increase is mainly due to the significant increase in selling price without a material appreciation in the cost basis of certain refrigerants sold. As we move through 2022, we expect gross margin performance for the full year to moderate to levels similar to gross margin performance in fiscal year 2021. SG&A for the first quarter of 2022 was $6.8 million or 8% of revenue compared to $6.7 million or 20% of revenue in the first quarter of 2021. We recorded operating income of $38.3 million in the first quarter of 2022 compared to operating income of $1.7 million in the first quarter of 2021. The company recorded net income of $29.6 million or $0.66 per basic and $0.63 per diluted share in the first quarter of 2022 compared to a net loss of $1.1 million or a loss of $0.02 per basic and diluted share in the same period of 2021. The company's leverage ratio was 1.16:1, for the trailing 12 months ended March 31, 2022, declining significantly from a leverage ratio of 6.18:1 for the trailing 12 months ended March 31, 2021, mainly as a result of the improved performance. During the quarter, as previously announced, the company entered into a new $85 million term loan agreement with TCW Asset Management LLC and amended its existing revolving credit facility to increase the overall facility to $90 million, which is comprised of: one, TCW participating in $15 million of this facility; and two, Wells Fargo, providing up to another $75 million in borrowing capacity. Wells Fargo continues to manage the overall revolving credit facility. Our March 31, 2022 balance sheet disclosed a $100 million term loan, consisting of the aforementioned $85 million term loan and the $15 million of participation in the ABL with no additional drawdowns on the ABL. The company's total availability at March 31, 2022, was $62.1 million, consisting of $56.9 million under the new revolver facility and $5.2 million of cash. In conjunction with entry into the new term loan facility and amended revolving credit facility, the company's existing term loan was repaid in full and terminated. The refinancing of the term loan constituted an extinguishment of debt, resulting in a onetime nonrecurring incremental interest expense of $4.6 million during the first quarter of 2022. Any deferred financing costs relating to the ABL or the new term loan will be amortized over the 5-year term of the respective loans. The current ABL structure gives the company better opportunities to procure inventory for the ongoing selling season. future cash flow opportunities, such as the potential for increased pricing that Brian mentioned, would enable the company to pay down its debt at an accelerated rate. We have strong liquidity, and our term loan and revolving loan credit facilities and partners provide us with a solid financial platform and flexibility as we look forward. I will now turn the call back over to Brian.

Thank you, Nat. As we enter the heart of the 2022 selling season, we are excited about the opportunities ahead and focus on growing our leadership position in the refrigerant and reclamation industry. Operator, we'll now open the call to questions.

[Operator Instructions] Your first question is coming from Ryan Sigdahl from Craig-Hallum.

Curious, I don't think I caught it. What exactly is the price of R22 and R410a currently?

Sure. R22 is fairly stable in the low 30s. I'm not certain that you're going to see much further price movement on R22. We always have provided a long-term range target that R22 to get to $30 a pound as we would have seen with many of the CFCs that were phased out back in the '90s. R22 will be acting with much more normal economics relative to supply and demand and, therefore, pricing. So we expect it to continue to be in that level and probably not materially change over time. We expect Hudson to continue to gather used R22 at a significantly lower price cost basis relative to that sale price, and that model should continue. As it relates to HFCs, we've seen, again, further price increases even in our last earnings call. We're now certainly above $14 on average for HFCs. And we're now starting to see a break in HFC pricing that we may not have communicated clearly in the past, but we're starting to see higher than average prices, let's say, this $14 or higher for HFCs that are much higher GDP value than, let's say, a 410a. So what we're trying to articulate here is if you happen to have an HFC that might have twice the GP weighting of 410a, while it's not true today, we do see situations where that particular refrigerant could sell for twice the price for today just because of the GDP weighting. So this is something we do expect to see more so possibly in 2024, but we're beginning to see a lot of signs already in this initial implementation in Q1 of the AMAG that has accelerated what we thought we might see, and as a result in our financial performance this first quarter.

And Brian, can you remind us what your breakout is approximately on HFCs between R-410A and those other gases?

Well, HFCs now are the dominant refrigerant in the marketplace. They're likely in that 75% to 80% of the total aftermarket volume. -- within R-22 and other products and even to some extent, HFOs are beginning to increase but very small percentages right now in the aftermarket. So really, HSCs dominate the overall demand in the aftermarket.

But maybe breaking that down one more layer within that HFC 75% to 80%, what percent is R-410a which historically thought was the vast majority of the volume versus those higher GWP HFCs that you're referring to?

Yes, that would be correct. So R410a is the replacement refrigerant for R22. It's mainly a comfort cooling application. R410a probably is the single largest volume HFC. But there are 20-plus HFCs out there in the marketplace of some material size. After -- for today, then you're getting into products like 130 foray and then the rest of the HFC pack is pretty similar to each other.

Helpful. Moving on to inventory. So it increased pretty significantly. How much of that is adding pounds versus price increases within there as your cost base increases? And then secondly, on inventory, how do you feel about inventory levels heading into the summer selling season?

Yes. So back to our inventories and discipline with our inventories, we are really seeing dollars in inventory and higher dollars in Q1 versus December, really coming from price. Our cost base is increasing in the refrigerants we're selling. And that's why we say that don't expect this very high Q1 gross margin to continue for the remainder of the year. Q2 will be lower than where we are now. And certainly, by the time we get to Q4, we would think our gross margins are going to be closer to our long-term forecast for now, which is that low 30%. So that's how the year should progress. It's likely whenever you see dollars in inventory, it's always going to be because of price increase not because we've got more pounds in inventory. And we feel like we have done a very good job managing our inventory relative to our customer demands, particularly in light of the experiences we had in the past where we might have carried more inventory than we needed to, and when we had price volatility, we certainly -- as it, when prices went down, were more negatively affected because of the volume. So I think we have the inventory volume in the right place. And I think any further price increase or dollar increases, you'll see on the balance sheet will because the price of the inventory went up.

Helpful. Maybe to dig into that gross margin statement. So if you exit the year Q4 closer to that 30% or low 30% and it just kind of works its way lower throughout the year. Based on where Q1 came in, I mean that for the year, it implies something decently better than where 2021 was at 37%. Can you square and reconcile kind of the statement that you expect full year to be similar year-over-year and then what you just said kind of the cadence.

Well, again, we just think that starting in Q2, you're going to see a retraction on the margin percentage. But on an overall basis, we thought the 2022 year gross margins might have been lower towards that 30, 31, 32 kind of number. Clearly, we think based on Q1, expecting a retraction in the margins throughout Q2, Q3, and particularly Q4, we think we're going to be able to achieve something similar to that of last year.

[Operator Instructions] Thank you, ladies and gentlemen this concludes our Q&A session and conference call. Thank you for attending today's presentation. You may now disconnect.

Sorry, I'd like to-- excuse me. Thank you-- I'd like to thank our employees for their continued support and dedication to our business without the hard work of oral employees. We would not be able to achieve these results. And I want to thank again our long-term shareholders and those that recently joined us for their support. Thank you, everyone, for participating in this evening's conference call, and we look forward to speaking with you after the second quarter results. Have a good night, everybody.