Hudson Technologies Inc /Ny Q1 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies First quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jennifer Bella Dough. Ma'am the floor is yours.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the first quarter 2021. On the call today are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, Chief Financial Officer. I'll 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 principal risks and uncertainties that affect our business and our performance and of the factors that could cause our actual results to differ materially. Okay. With that, I'll now turn the call over to Brian Coleman. Go ahead, Brian.

Good evening. And thank you for joining us. As of March 31st, we kicked off our 2021 selling season. Our first quarter revenues were slightly down from the first quarter of 2020, stemming from 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. However, we still believe we can return to 2019 volume levels during the 2021 cooling season. That said, while 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 nine-month selling season progresses, 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 HDFCs to the current HFCs and beyond to the next generation, HFOs. We are positioned at two key points in the supply chain with a solid and long-standing customer base. With our capabilities and 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 the passing of the AIM Act in December of 2020 and the support 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 the reclaimer uniquely position us to support the phase 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 two and a half years. The install 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 the production of virgin HFCs. The regulatory phase down of virgin HFC production through the establishment of an allocation system has some similarities to the previous ODS phase-out, which included R-22. However, 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 on making our California production sites carbon neutral, as we seek to achieve California's stated goals for emission reductions and their legislative phase-out of virgin HFC refrigerant use. As we make progress in 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 comprise our customers and end markets as cooling systems are re-engaged and new systems come online. We believe that we are well positioned to leverage the near-term opportunities we see in the refrigerant marketplace. Additionally, the scheduled phase down of HFC 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 31st, 2021, Hudson recorded revenues of $33.8 million. The decrease of 7% compared to $36.4 million in the comparable 2020 period was 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 of 2020. This was partially offset by an increase in selling prices of certain refrigerants, which also led to an 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 non-cash 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 half a million dollars 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. As of March 31st, 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 standing 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.

Thank you, ladies and gentlemen, the floor is now open for questions. Your first question is coming from Ryan Sigdahl with Craig-Hallum Capital Group. Brian, your line is live.

Great. Thanks, Brian. That takes care of our questions. I'm curious. So I know seasonality and weather kind of have an impact as we warm up through the year, but maybe in the context of a normal kind of month-over-month, how have volumes and demand trended through Q1? And then also into April here, have we seen an increase with the reopening?

In the first quarter, the volumes were down, which again, we attributed primarily to the overall openings or closings, however you want to reference it. We do think that in Q2, we should be able to grow our revenues in 2021 based on volume when compared to 2020. We really focused on the type of business we had in 2019 that may not materialize, but we do think there will be sufficient openings throughout the country. As you probably have heard in the past, the second quarter really kicks off not in April — April is generally a very slow month, but it really gets kicked off in the warmer weather in May that we're starting to get into. Particularly, we like to see a string of 90-degree days around Memorial Day weekend and early June, especially for the North and Northeast, as that really kicks off the whole comfort cooling season. And that's really what drives the volume of refrigerants.

And then on gross margin, it looks like a three-year high there, so it's great to see. Was that improvement primarily just price or were there other factors in their mix, et cetera?

It was primarily price in some cases with a lower cost basis, but we are seeing higher prices in the HFC class of refrigerants, although we are also experiencing higher costs as a lot of the tariffs have been applied to the various components. Therefore, the margins on the HFC class will likely remain similar throughout the season, even though we've seen some price increases. The mid-twenties that we're at of 27% we do think is achievable for the balance of the year.

Great. Then maybe I missed it, Brian. Normally you provide guidance for what the price of refrigerants is in the quarter. I'm curious what that is and then also where that price is today?

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

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

No changes from the last couple of reported periods. We believe the competitor is out, although they never published a letter. Based on the communications we've had with customers, it seems that Arkema likely has a substantial stockpile. It's difficult to determine whether it will be used up this season, but we don't expect their stockpile to last for much longer.

Great. One more from me. The DOD contract was a five-year contract with a five-year extension option. I believe we're coming close to that five-year mark here. How has that contract or relationship gone relative to your expectations and remind us of the timeline for that extension?

You're correct. It expires at the end of July. We do believe we will receive the five-year renewal. If they were to go out and not extend with us, they would have to go through a formal bid process, which they haven't done. That's a very lengthy process. We think that they will exercise their option. We believe we performed very well, particularly in connection with the prior contract holder in terms of delivery, 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 we had seen in the 2019 period, where we were tracking to almost $25 million in revenues. On a quarterly basis, while there has been growth, we think that this year we can get back to marketing the contract more broadly, likely beginning after the renewal, which we probably will hear about before the contract expires, but maybe in about 30 days out from where we are now.

Great. Thanks, guys. Good luck. Thank you.

Your next question is coming from Gerard Sweeney with ROTH Capital Partners. Jerry, your line is live.

Hey, good afternoon, Brian. And thanks for taking my call. Obviously, COVID was a little bit of a struggle last year, but it also depends on where you are in parts of the country. Brian, we're in the Northeast, and New York City is scheduling 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 and more body heat — you're starting to get into the summertime and perhaps some of these systems just weren't charged up last year. Is there a potential opportunity for that?

We do believe so. How much of it there will be, we don't know. And this is why we're still optimistic about the 2021 season, as you noted. The Northeast is beginning to open up in ways that we have not seen before. We do think a lot of systems will be turned on. New York City is still facing a lot of struggles. However, we think there is potential upside as systems likely could have leaked over this past year since they haven't been run and tested. This could lead to increased refrigerant sales and service work in that regard too.

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

From that perspective, I would recommend folks visit our website and look at page seven of our current presentation. You'll see this step down comes very hard and very fast. In two and a half years, there will be a 40% reduction from the baseline. With the R-22 phase-out, we probably took over 10 years, maybe 12 years before we ever got to that threshold. Here, the step down happens quickly. That is what makes this particular opportunity different. In the old R-22 phase-out, stockpiles could be created over a long period. In this phase-out, we don’t think this can occur to the same magnitude due to the shortened timeline for stockpiling. We are already starting next year with a 10% reduction off the baseline. This will progress to a 30% reduction, which results in a cumulative 40%. The big difference is within the AIM Act, the EPA is mandated to find ways to support growth in reclamation, which was not present in the original Clean Air Act related to the phase-out structure for the ODS products.

Got you. And about the HFC market versus R-22— at its peak, R-22 could have been 70% of the overall market. Right now, HFCs are probably 80% with R-22 around 20%. As each year progresses, R-22's share diminishes, while HFCs grow due to new construction and new equipment. HFOs will be introduced more widely than they are today, but that timeline is probably five to 10 years out. Okay. One more question just pivoting back to the R-22. How are collections going? Obviously, that is a key component to the model—is collecting the used gas?

Yes, we've shared our disappointment regarding this. We are struggling with why we're not seeing more gas come back. We do believe there is more gas that could come back. How much of it is illegal venting or illegal reuse, we don't know. Part of this HFC phase-out is that the EPA has got to determine this issue and is being mandated to find ways and systems to improve legal recovery and then bolster the volume of reclamation. The positive takeaway is that HFC reclamation is in its infancy relative to what we think the overall opportunity is. There's certainly potential for five to ten times growth in reclamation over the next several years as these virgin HFCs are being phased out.

I'd like to turn the floor back to Brian Coleman, sir. The floor is yours.

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 who have recently joined us for their support. Thank you, everyone, for participating in today's conference call. 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.