Q4 2019 Earnings Call
Greetings and welcome to be Hudson Technologies fourth quarter 2019 earnings Conference call.
At this time, all participants Arnie listen only mode. A question answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star there on your telephone keypad. Please note. This conference is being recorded I would now trying to comps temperature host Nat Krishna Murdy CFO Mr. Krishna Murdy you may begin.
Thank you good evening and welcome to our conference call to discuss Hudson Technologies financial results fourth quarter of 2019. My name is not Christian Murchie CFO of Hudson technologies on the call with me today, our cabins I could be chairman and Chief Executive Officer, and Brian, calling President and Chief operating Officer.
I'll now take a moment to read the safe Harbor statement. During the course of this conference call will make certain forward looking statements all statements that address expectations opinions or predictions about the future all forward looking statements.
Although the 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 and interpret them.
And that like.
We urge you to review Hudsons form 10-K, and other SEC filings for a discussion of the principal risks and uncertainties that affect our business and outperformance and of the factors that could cause our actual results to differ materially.
With that I will now turn the call over to Kevin.
Thank you know.
2019 was another challenging year for Hudson and for the entire industry as we saw further price erosion for nearly all refrigerants during the 2019 selling season is compared to 2018.
However, entering 2020, we've seen some encouraging signs in the industry has to pricing and are currently seeing R 22 pricing above $10 abound.
Well it is difficult to assess where pricing will go during the 2020 selling season. Some facts are clearly in our favor.
First no more Virgin production or importation of R. 22 is allowed and secondly wanted the big three producers out of our 22 supply.
Coupled with the increased R 22 pricing, we're very optimistic about pricing and demand for our 22 going forward.
Before going further we were very pleased to have recently announced that we entered into a new revolving credit facility with wells Fargo and successfully amended our existing term loan facility.
As a result of that amendment financial Covenant default at June Thirtyth in September Thirtyth 2019 have been waived and the company is now in compliance with our term loan credit and so and security agreement.
While the 2018 and 19 defaults were technical in nature, we were timely in all of our financial obligations and since the acquisition of Aspen, We've paid down $68 million for 40% of the total debt we acquired under some of the most adverse market conditions as industry as ever experienced.
The amendment reset the maximum total leverage ratio financial Covenant through December 30, Onest 2021.
Reset the minimum liquidity liquidity requirement.
And added a minimum LTM adjusted EBITDA covenant.
With the new revolving credit facility in the amendment of the term loan in place. We believe we had the financial flexibility and liquidity that drive improved operating performance as we move through 2020 and beyond.
As part of that process, we have a new chief restructuring officer on two new members of our board of directors, who provide further depth and experience in maintaining financial stability and strength.
The amendment process was lengthy and we appreciate the paces support shown by our shareholders, while we completed that process.
In spite of the conditions, we encountered throughout the year, we generated $34 million of cash flow from operations, which included 15.2 million of cash interest expense and pay down 31 million of debt, including 14 million of long term debt in the fourth quarter of 2019.
As of December 30, Onest 2019, the company had over $22 million of availability.
Its new revolving facility.
As many of you know 2019 was the final year Virgin R 22 production and starting on January Onest 2020, no new Burgeon productions permitted.
There remains a large installed base of R 22 systems in the U.S.
Demand for comfort cooling and food refrigeration is strong and given the expense associated with replacing or upgrading or refrigeration and cooling system. We expect demand for our 22 to continue through 2030 and beyond.
With the elimination of versus production in importation in 2020, we expect to see a tightening in the supply of Virgin R 22, and we believe our ability to reclaim and resell R 22 creates a tremendous opportunity position to position Hudson.
To address the anticipated tightening of supply and become the leading producer of R 22.
Since our last call in November 2019, the price of R. 22 is stabilized with prices consistently above $10, a pound and we're beginning to see some strengthen the price of our 20 do as we enter 2020.
With the Prime 2020, selling seasons still 30 to 60 days away. It's still early in the 2020 season to know how pricing will develop Hudson continues to believe that with the removal of version supply. The R. 22 market will begin to behave in a true supply demand manner.
Additionally, the industry will likely continue to phase out.
HFC refrigerants as the development and use a more environmentally friendly products continues.
In this regard there's a growing bipartisan support for the American innovation and manufacturing Act of 2019, or the aim Act, which had been act, which if enacted.
With phase down HFC production as of today. The Senate version has 32 co sponsors half Republican and Democrat.
And the House version has 24 co sponsors again half Republican and Democrat.
We're encouraged by the level of bipartisan support for a bill which had been active would start regulated phase out of agencies.
Ultimately, we expect to see the establishment of an allocation system for hfcs as well as a tightening in the supply demand balance that will likely result in increased pricing.
For the last two seasons the entire industry has seen a significant decline in pricing on almost all refrigerants, which brings us to where we are today.
As we are steadily selling off our higher cost FIFO inventory layers, we have increased overall sales volume to our customers and a position the company to benefit from the eventual stabilization of our industry pricing dynamics.
2019 was another challenging year, but as evidenced by our increased sales volume, we remain optimistic about our long range prospects and focused on growing our market share and leadership position.
We can't control pricing changes in demand levels, but we can implement strategies such as heightening our market efforts.
Hi, expanding our portfolio products and services to appeal to a broader customer base, managing our inventory and reducing expenses.
Let me point out the 2020 may come with additional challenged due to the Corona virus, while it's too early early to tell the possibility exists that there could be a refrigerant supply shortages due to the fact that there is significant HFC capacity in China that is supported the world's demand for hfcs.
Any possible lengthy disruption agency production the distribution could cause supply chain shortages.
For the moment, we're not seeing signs of material disruptions, but as the weather becomes warmer, particularly in the second quarter of this year there could be supply disruptions.
We have a vast network of domestic suppliers and the ability to reclaim all hfcs as a result, we believe.
We should be able to meet our customers mezz.
2019 was a difficult Europe was also a year, where we saw growth in our sales volume reduction in costs and improvement in margins as we progressed through the year. We remain focused on meeting the changing needs of our customers and our remaining agile in the face of fluid market dynamics.
We have the people the processes the technology in the distribution network de leveraging grow our leadership position.
Now I'll turn the call around that to review the financials go at night.
Thank you Kevin for the fourth quarter ended December 31st 2019, Hudson recorded revenues of $25.8 million slightly higher than revenues of $25.7 million in the comparable 2018 period.
Gross margin for the fourth quarter was 18.5% an increase of 6.5% compared to 12% margin and the fourth quarter of 2018.
As Kevin mentioned during 2019, we saw an increase in the number of pounds or certain risk refrigerant sold offset by a reduction in pricing.
During the fourth quarter of 2019, the company recorded a net loss of $10.8 million or a loss of 25 cents per basic and diluted share as compared to a net loss of $8.1 million or a loss of 19 cents per basic and diluted share in the same period of 2018.
Approximately $1.9 million of this variance relates to higher interest expense mainly related to the write off of deferred financing costs from our previous revolving facility, which was replaced in December 2019.
In addition, during the fourth quarter of 2019, the company incurred additional and nonrecurring remit lender related fees and expenses related to the closure of facility.
Looking at full year 2019, Hudson reported revenues of $162.1 million decrease of 2.7% compared to $166.5 million.
In 2018.
The decrease in revenue was primarily due to further pricing correction in 2019, partially offset by higher refrigerant sales volume and higher revenue from ideal that contract.
The company recorded a net loss for 2019 or $25.9 million or a loss of 61 cents per basic and diluted share, which included inventory adjustments totaling approximately $9.2 million and nonrecurring expense of $3.6 million, mainly consisting of vendor related fees and shutting down if.
Facility as described earlier.
This compares to net loss of $55.7 million or $1.31 per basic and diluted share in 2018.
Full year 2019, net loss included approximately $8.9 million of other income relating to the resolution of the companies working capital adjustment claim against Airgas Inc. arising out of the 2017 acquisition of Airgas Refrigerants Inc. now Aspen Refrigerants, Inc.
Full year 2018, net loss included inventory adjustments totaling approximately $35.9 million and nonrecurring expense of $6.1 million, mainly consisting of integration expenses relating to the acquisition of Aspen.
And lender related fees from the previous amendment.
As we previously announced during the quarter, we secured a new revolving credit facility with Wells Fargo and a definitive amendment to our term loan credit facility.
For the term loan the amendment waived financial Covenant default at June Thirtyth in September Thirtyth 2019.
And amended the term loan credit and security agreement to reset the Matt maximum total leverage ratio financial Covenant through December 30, Onest 2021.
Reset the minimum liquidity requirement.
And added a minimum LTM adjusted EBITDA covenant.
At December 31st 2020 that term loan leverage ratio is set at approximately 8.9 times, which was derived from slight increases in revenues over 2019, mainly as a result of expected higher volumes and prices in 2020, when compared to 2019.
We're very pleased with this new revolving credit facility and the new amendment to our term loan facility, we have strong liquidity and these new facilities provide us with a solid financial platform.
And flexibility as we look into the coming years.
At the close of 2019, despite the challenging market conditions, we generated approximately $34 million and positive operating cash flow.
Additionally, we pay down approximately $31 million of debt and add approximately $22 million by availability under our revolving facility at December 30, Onest 2019.
I'll now turn the call back over to Kevin.
Thanks not.
Hudson remains a leader in the refrigerant reclamation business with the expertise innovative technology in a well established distribution network to drive continued growth with the addition of the significant experience and strength of our Aspen team, we're focused on meeting exceeding customer expectations by providing any refrigerant any place at any time as we work to further increase our mine.
Market share.
Operator, we'll now open the call to questions.
At this time, we will be conducting a question answer session. If you'd like to ask your question. Please press star one of your telephone keypad a confirmation Tom when can you. Your line is in the question Q you may prestart too if you'd like to remove your question from the Q4 participants using speaker equipment, maybe necessary to pick up your handset before pressing the star Keith So that we may address.
As many questions from as many participants as possible. We ask that you limit yourself to one question and one follow up if you have any additional questions you may recall and time permitting those questions we addressed.
One more feasible, we both questions.
Our first question is from Ryan the Dol Craig Hallum Capital Group. Please proceed with your question.
Hey, guys. Thanks for taking my questions.
Hello, Thanks to see volumes up in a challenging year.
2019 are you willing to comment Directionally, if both reclaim amberglen volumes were up.
When we're selling refrigerants there is no distinction between reclaim and a Virgin gas.
And when we talk about volume increases were talking about all refrigerants, whether it be 22, or hfcs and even we still cells.
Small amounts of cfcs.
But if you wanted to understand the reclaim market itself.
We don't have the 2020 data industry wide, but the reclaim market really still hasn't grown based on the industry data as reported to the EPA through 2019.
We through these periods have continued to maintain approximately 35% market share on the 22 and all refrigerants, we think that continuing for the 20 year, but we won't get the final EPA numbers until probably sometime this spring.
A great then if you look at inventory, where it's a here at the end of December and you enter 2020 milligrams, a stable level or is there more opportunity to rationalize there.
We we think theres an opportunity to rationalize a small level not as great as we might have seen the past couple of years, because we still have some high priced inventory coming from the Aspen acquisition.
We do expect to be out of wall that high priced inventory through the second quarter of this year.
But what we also don't know at the moment is what may happen with R 22 pricing and typically R. 22 pricing does go up then we will be paying more for the reclaim gas than what we paid for last year.
So it's difficult to say, where we'll end up there is no chest that inventory that little bit, but there's a chance that this is going to be approximately the right number.
And then maybe if we just assume stable working capital and inventory.
Do you expect it to generate free cash for this year, and if you're able and willing or able to kind of quantify a ballpark range.
Yes, we should generate positive cash flow this year.
We're not going there.
Quote a number at this time.
We are expecting to continue to pay down debt.
There's.
Restrictions limitations on how much term debt, we can pay down although we did increase the amortization slightly from what was previous relative to this amendment.
Typically we are seeing the l. come down and more availability to build and seasons with positive results.
And then last question for me and then I'll hop back in the queue. You mentioned R 22 above $10 have you as the price of R. 22 strengthened over the last few months or is this kind of holding the increase that the large allocators took in September.
No probably after the increase we talked about one producer really raising the price, but that really was a signal that they're out of the market.
We've seen increases, let's say slow incremental increases.
Two over $10 now, which we wouldnt have seen that necessarily in Q4 of last year.
But it's still too early in the season.
On the warmer weather comes then we'll understand where the markets going.
Great. That's it for me I'll hop back in the queue. Thanks, guys.
Our next question is from Jerry Sweeney Roth Capital. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking my call.
Roger.
A bunch of my questions were asked on the on there are 22 side, but.
I suspect were kind of most likely stick with this just in time sort of inventory that we've seen the last couple of years and not necessarily have much pre season.
Buying opportunity is that a fair way of looking at the.
Market today.
Yes, I'd say is still as yes.
Okay, and then on on that.
Pricing $10.
How much volume have you've been seeing at those levels I I'm not expecting a lot, but just curious if.
If you could quantify it.
But again, it's not it's not it's certainly not a lot obviously because its first of all the middle of winter and Theres no real preseason pining anymore. So since that's the case, obviously, it's we're not hitting the season to where you're going to see the significant volume, but it's enough volume obviously, it's it's in line with what we thought would be volume.
Okay got it and then I mean.
When should we see sort of normal sort of.
Buying began I mean, obviously you said a couple of years ago, we'd start seeing a by now but is it mid April or or early may just.
If you could remind me.
And when the weather gets war, you know that it'll build in the south and central part of the United States and then typically in the north and northeast Thats usually late may.
Probably pick a month you'd say may.
Okay, all right thank God.
And then Atsina you I think you mentioned 1.9 million and write offs, but I think the did mention that commentary you said there were some other fee so.
At the associated.
But I have one time.
Costs et cetera can you quantify those other.
One time.
Costs I'm, just looking to get maybe in a normalized SGN a sort of target for this year.
Sure it's.
For this past quarter of is about a one and a half million dollars.
In addition to that 1.9 million.
That's correct.
Got it.
Okay.
And then it bottle. So yes, just maybe to follow up Jerry in previous calls, we said that SGN a is it looks like the 28 29 million number.
We don't think there's going to be material changes to that again from let's say normal recurring expenses.
We don't expect a lot of nonrecurring costs coming forward, there's still some lender related expenses that they'll be incurred but we'll carve them out a little obviously, let everybody know on a quarter by quarter basis.
That's perfect and then finally, just the hfcs.
That was a tough market for a little bit to any any type of changes in that market, you're saying I mean.
I think there are some trade cases and different things slowed around curious.
Any of the case is out there right now, which you could see theres Theres a couple of the.
There's a specific case right now filed with the ITC and commerce and on our 32 component that goes into most of the agencies. Yeah Theres. The department of Commerce case, which is an anti circumvention case related to the tariffs that were put in by the ITC a few years ago. So these cases are out there that there's no real wage.
No how they're going to play out when they're going to be effective and so forth as it relates to commerce's case and anti circumvention, that's probably the furthers one along we may get a preliminary.
Finding which would be subject to challenge, but that's the right way of saying it late March April may be.
The 32 case, probably is a while away as to where that's going to go.
Alternately, though we've always supported the.
Phase out of HSC Virgin production.
Yes, Kevin talked earlier, whether it be golly or the aim act or some other mechanism that's likely good of better fit the company that the greatest over the long as period of time.
Got it thanks Thats helpful I'll jump back in queue. Thanks.
We have reached the end of the question answer session and I will now turn the call back over to Kevin there could be for closing remarks.
I guess I'd like to thank our employees are little time shareholders. Those that have recently joined us for their support thanks, everyone for participating in today's conference call. We look forward to speaking with the after the first quarter results. Thanks.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.