Q2 2020 Hudson Technologies Inc Earnings Call
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And to our participants personally standing by for today's Hudson Technologies Conference. At this time, we're taking a few extra minutes to allow for additional colors to be checked in we thank you all for your participation as well as your patience and we ask that you. Please continue to standby your conference will begin momentarily.
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Ladies and gentlemen, please standby we are about to begin.
Hello, everyone and thank you for joining todays Hudson technologies second quarter 2020 earnings report all lines are in a listen only mode, but after today's prepared remarks instructions on how to share a question will be given to our audience to get it started with opening remarks and introductions I'm pleased to turn the floor to Ms. Jennifer.
[noise] Bilodeau welcome Jennifer.
Thank you good evening, thanks for joining US night welcome to our conference call Didnt, That's I think technology finance results for the second quarter at 20 2020.
On the call, let me say, Hey, Brian Coleman, President and Chief Executive Officer, and that Krishna Murdy, Chief Financial Officer, I'm not now take a moment you 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 teacher are forward looking statements. Although the reflects our current [laughter].
Taking that are based on the best view of the industry and our business. Even today. They are not guarantees of future performance. Please understand that these statements involve a number of risks and assumptions. It's just there's elements can change and in certain cases are not within our control could ask you consider and interpret them in that like we urge you to review Hudson's most recent form 10-K and other subsequent.
You see filings for a discussion of the principal risks and uncertainties that affect our business and our performance and other factors that could cause our actual results to differ materially, but that I was glad like to turn it over to Brian Coleman.
Thank you and good evening.
In a difficult last few weeks at Hudson as we mourn the unexpected losses <unk> founder Kevin Dougherty.
Many of you reached out to express your condolences and then outreach has been very much appreciated.
Professionally Kevin was in industry pioneer with a low for innovation.
Flight as engineering expertise and working knowledge to building this company from the ground up.
Personally Kevin brought his energy kindness and sense of humor into our offices every day.
And candidly, we're still in the process of adjusting to his absence.
However over the years kind of put together a very strong operating team.
In each of US is committed to driving the continued success of the company you built.
Before we begin with our review the second quarter. Please join me in a brief voters silos are cabins memory.
[noise]. Thank you.
Our second quarter results were solid, particularly in light of the challenging landscape that Hudson or industry. The nationwide economy is still contending with due to the persistence or the code buyers.
During the second quarter closures of public venues, such as office buildings Recreation Center schools, and universities negatively impacted or end markets and the overall demand for refrigerants.
Well, we saw a slight increase in the pricing of certain refrigerants in the quarter. This improvement was offset by lower volumes, which resulted in a revenue decreased compared to the second quarter last year.
However, despite the volume headwinds associated with the overall economic downturn gross margin improved we achieved solid operating income and we saw a return to profitability.
Notably Hudson generated over 6 million of operating cash flow during the second quarter.
Our financial position and liquidity remains strong.
Total liquidity at June Thirtyth, 2020 of approximately 39 million, which includes cash and Bolivar availability.
In addition in the month since the close to the quarter.
We have repaid and incremental 7 million of our debt.
Finally, we've made certain performance targets set forth in our credit agreement and as a result to achieving those targets we have terminated the services over chief restructuring officer.
So we're very pleased with the progress made this quarter despite the challenging environment.
While there are still many uncertainties associated with this pandemic, we remain focused on the elements of the business that we can control.
Our priorities remain and continuing to protect the health and safety of our employees and keeping our products and supply to best serve our customers across all channels.
We have the benefit of more than 30 years of experience in this industry.
And that experiences allowed us to adapt to changing economic and industry dynamics, well executing our operational strategy.
These have been some difficult times, but Hudson has proven our agility when faced with challenging environments, where once again rely on that straight.
With the business and facility closures across our country.
Some temporary and some permanent this has not been a typical selling season.
As you know we look at the sale season as a nine month season.
Because in any given quarter, there's the potential for the economy or the weather to have a significant impact whose gains or losses can be mitigated in another quarter.
As we continue to move through the 2020 selling season, we've seen or 22 pricing remain constant.
However, as I mentioned earlier economic factors, resulting from the various government restrictions that put in place as a result of the cobot outbreak have negatively impacted demand and may cause continued pressure on demand in the third quarter.
This is a fluid economic environment and we'll take some time until we understand the full impact to our industry.
We are encouraged by the improved margin performance in the quarter.
And believe we have the opportunity to continue to drive improved margins through the balance of 2020.
As we replace higher priced inventory with low price products.
We believe the customers inventories are low.
And with the elimination of R 22 production and the importation in 2020, we expect to see a tightening in the supply of Virgin R 22, as we close out the selling season.
Moving forward, we remain confident that the marketplace will likely adopt a phase out of HFC refrigerants as the development and use of more environmentally friendly products continue.
As we mentioned before the American innovation in manufacturing Act 2019 or the aim at.
Which proposes the phased out both phased out HSC production over the next 15 years.
He is pending further consideration by both the house and said.
The bill enjoys bipartisan support and if enacted we start a regulator phase down of Hfcs that will lead to establishment of an allocation system similar to what we saw with the phased out of R 22.
We would then expect to see a tightening in the supply demand balance for HFC refrigerants likely resulting in each of see price increases.
As refrigeration systems, our upgraded and new construction continues each of sees represent a long term growth opportunity and we expect HFC sales will continue to grow as a percentage of our revenues.
These are unprecedented times, but we have a strong management team in place committed to driving our company success by leveraging three key competitive advantages.
Our strong and established distribution network, which firmly positions us a two key points in the supply chain.
Our diverse portfolio of refrigerants, which allows us to be a sale source for all refrigerants.
From legacy CFC gases to the Hcfcs and Hfcs that are probably use today and onward to the next generation Asia Pfos and lastly, our state of art or the art proprietary reclamation technology that enables us to reclaim all of these refrigerants, becoming the producer supplier of phased out.
Refrigerants.
[noise] Hudson is well positioned in the marketplace with our ability to provide any refrigerant any place at anytime.
We are optimistic about the long term opportunity in front of us and focused on growing our leadership position in the refrigerant and reclamation space.
Now I'll turn the call over to net to review the financials go ahead.
Thank you Brian for the second quarter ended June Thirtyth 2020, Hudson recorded revenues of $47.7 billion.
A decrease of 15% as compared to $56 million in the comparable 2019 period.
Primarily due to a declining volume, partially offset by an increase in the selling price for certain refrigerants.
Gross margin for the second quarter, 2020 was 26.6% compared to negative gross margin in the second quarter of 29 team.
We reported operating income of $5.2 million in the second quarter of 2020 compared to an operating loss of $10 million in the second quarter of 29 team.
During the second quarter of 29 change the company recorded a lower cost our net realizable value adjustment to its inventory of $9.2 million, mainly due to declines in certain selling prices of certain refrigerants at that time.
The company recorded net income of $2.4 million or six cents per basic and diluted share in the second quarter 2020, compared to a net loss of $13.8 million or a loss of 32 cents per basic and diluted share in the same period of 2019.
Estimate for the second quarter 2020 was $6.8 million consistent with the second quarter 2019.
The current SJ run rate is about $7 million per quarter.
Interest expense for the second quarter of Twentytwenty was $3.1 million.
A decrease of $1.2 million on the $4.3 million reported during the second quarter 2019.
Mainly due to the company paying down $14 million principal term loan debt in December 2019.
During the second quarter Hudson generated more than $6 million of operating cash flow.
At June Thirtyth 2020.
We had approximately $39 million of total availability, consisting of our cash balance and revolver availability.
Which is approximately 77% higher than the $22 million of total availability at June Thirtyth 2019.
At June Thirtyth 2020, our total term loan balance was approximately $87 million, while our revolver balance was approximately $16 million.
However, since June Thirtyth 2020, we have repaid an additional $7 million a revolver balance reducing the revolver balance from $16 million, so approximately $9 million as of today.
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 into the coming years.
Additionally, as Brian mentioned earlier as a result of our achievement of certain performance targets set forth in our credit agreement. We recently terminated the services of the Chief restructuring officer.
Before I close I'd like to Echo the sentiment Brian expressed earlier about Kevin's passive.
Kevin was not only a visionary leader for our company and our industry. When we all admired but also a brother and friends to all of us and it will be greatly missed.
As an organization, we're focused on ensuring that his legacy indoors.
Ill now turn the call back over to Brian.
Thank you net.
Even in these challenging times food needs to be kept cold and people value their code for cooling systems.
So the longer term demand for cooling systems and the refrigerants they run on who continue to grow.
Hudson remains a leader in refrigerant reclamation business with our experience loyal customer base.
Innovative technology, and well established distribution network in place to drive growth.
We are focused on increasing our market position and the refrigerant industry and on capturing new opportunities to provide our essential products and services.
Operator, we'll now open the call to questions.
Mr. Coleman Mr.. Thank you Matt. Thank you Brian for your remarks today, ladies and gentlemen, standing by on the phones. If you would like to African life question. At this time simply press Star then one on your telephone keypad pressing star and one will place your line into acute and we'll take your questions. One at a time as or from a reminder, that if you're.
Joining us today on the Speakerphone. Please return to your handset prior pressing star in one to be sure that's or signal does reach our equipment. Once again, ladies and gentlemen that is star and one if you'd like to ask in live question over your phone, we'll take our first question from Mr., Ryan Seagal at Craig Hallum.
Great Good afternoon, guys and our our condolences on Kevin as well.
Thank you Brian.
First I just wanted to start.
As mentioned weaker volumes in the quarter.
Yes, if you could break that out into different end markets, where you saw more of the weakness.
And also if you could remind us kind of a mix between residential versus commercial applications.
So I would say, it's very difficult for us to really discern where the weakness is live because often when you're selling refrigerants, you're selling to someone who is not going to describe to you how they're going to use that refrigerator or in which application.
But to kind of go back and try to answer the question a little bit more clearly.
Relative to how the quarter played out certainly the month of April was extremely slow was it.
You know economic driven the slowness wasn't the whether because of weather wasn't that great. It was very difficult. So just discern that but we started very very slowly in the month of April.
What helped quite a bit is towards the latter part of May and certainly at the end of May into early June we had warm weather in most of the country, particularly in the north and northeast, where theres, a tremendous amount of seasonal come for cooling.
And once those systems were turned on as is with true with any particular year. That's when you have the initial repairs and initial needs for refrigerant and that's where we saw an exceptional high level demand.
And in that particular, a period of time, we probably saw the highest demand in the company's history.
And those number weeks and so forth.
So the dust is kind of settling on the year end demand and it does seem like some of the areas that we talked about whether it be you know schools and universities.
And small businesses, we're seeing.
Some decline in demand it'd be hard to to know where we'll end up for the year, we're being a little bit cautious that we might see a little bit lower demand in Q3, although we don't want that to be the outcome.
And we would therefore try to answer Nonetheless part of your question, where it seems to be the demand is off is more in the come for cooling type of refrigerants like HFC 134 Ray.
HSC for today and even in some respects some more 22.
So it seems to be more on the smaller systems the residential like commercial side, but again, it's a nine month season.
If a schools and universities opened up in the latter part of August and it's hot and they have to turn the unit on the unit has been repair will then there's an opportunity for another refrigerant sales.
And then Brian just a follow up on that you've said.
You got into June and you saw the highest demand in company history. I guess can you help bridge that with the expectation that volumes will be lower in Q3.
And then secondly, what have you seen in July that may be will help answer that question as well.
Well, what I think were believing when we when we say what we just said relative to the month of June is inventory levels are very low down the check.
And it was hot so consequently people have to buy and therefore that was the surge in demand in that short period of time, and we had the product we had the locations and availability and we had the distribution networks to make it all habit.
Once that surge occurs in the units are turned on then you're more likely to run into stress failures relative to the operating system.
That's the type of some refrigerant sales that you'll start to see in July August and in some years tail off in September but like last year for example, and possibly your before we had somewhat warm September so would help extend the cooling season. So we're not at the moment predicting are suggesting will end up involved.
And for the third quarter, we're simply.
Stating the obvious that more businesses are closed an open then it's likely we'll miss on volume.
Great helpful and then switching over to reclamation.
Then flattish for our 20 through the past several years I'm going to be period data confirm that again last year went on surprising, but I'm curious what you're seeing from industry activity going on right now and if you've seen any improvement or if that's like we kind of years or for that.
So I think in the first quarter call. We talked about that we were planning to embark on a new initiatives to help us grow our reclaim volumes and you're right. We claim in particularly R. 22 was off like to 2.5% from 18 compared to 19.
Unfortunately with regards to the Cove it in the closures. It's made some of the launching that we were planning.
For let's say a march and April to get postponed.
So were reinvigorating that process relative to what our devers were plan to before the season. It may not result in significant change in our overall return rates, although we think we'll still see some benefit from it this year.
But we were hoping to have captured some of that earlier than the season because normally the return start once with warm weather comes in such as a month the June and so on.
So it's difficult to say what the overall a growth rate may or may not be for R. 22 in terms of reclaim but we still believe theres levers or strategies that we could apply to increase our market share.
Gotcha.
And then I think I caught in the prepared remarks. So you said refrigerant pricing R 22 has been stable.
Throughout the selling season did I catch I correct, and then would that imply something like mid to high times I think that's what you said on last call, but you could quantify it'd be great.
Yes, you're correct to both Coutts, it's been consistent and we I don't know, we would have said high tens, but certainly midsize, yes definitely.
Great.
Last one for me.
And then I'll turn it hop back in the queue and turn it over to the others. Thank you prone of buyers changed and customer sentiment decisions around upgrading HVAC systems versus you know repairing and recharging an old system with refrigerant.
We've seen industry data that indicates that and also.
Stating.
Historically, let's say the last three to five years the replacement rate was much higher than average. So is it because there was a lot of replacement that already recur occurred or is it the sediment it's probably a combination of both book we are seeing much lower replacement rates up so far.
This season, which again is a positive thing for demand for 22, this year and the years to come.
Great. So can you guys. Thanks good luck.
Ryan Thank you, ladies and gentlemen, once again that is star and one if you'd like to ask alive question over your telephone line well hear next from Jerry Sweeney at Roth Capital. Please go ahead hi, Jerry.
Hey, Brian that flux, that's my condolences, Kevin passing as well so.
He was great to work with so my my condolences.
Thank you very much Gerry.
Bunch of my questions have been answered or past, but just on the last one was I'm, assuming maybe some concerns or economic.
Tivity and just Dollarss et cetera are pushing more we'll say R 22 replenishment as opposed to like a whole system switch out.
Is that what you will essentially saying there.
So we think again, it's plausible that because the economy has the uncertainty and maybe there is folks that aren't working or or whatever the case may be that they're not going to spend.
Money on capital improvements, they're going to fix whatever's broke sort of mentality. So with that said, it's always for cheaper to fix a an R 22 unit of versus replacing it.
I don't know the exact mathematics, but could be at least an eight ex differential between fixing and replacing so it seems like an obvious choice that you're going to continue to maintain that 22 unit.
Got it.
That's what I've been hearing and then secondly.
Q1 call you discussed the inventory so higher price inventory I think from the Aspen acquisition being likely depleted during the second quarter.
One did that happen and too could you sort of indicate at what point on the quarter that occurs.
Sure Hi that it's not here on to respond to up yeah, obviously due to the year shortfall in volume, we're not through all of the high priced R. R 22, yet.
Anticipating sometime later this year.
Okay, great. So not all the way through but margins were still pretty good. So that's.
Uh huh.
Pretty interesting and then finally.
I think the chief restructuring officer, who is a monthly payment of 120.
Thousand dollars I mean, you indicated.
Chain Avon in breast, we I think about 7 million, which was a slight uptick from.
This quarter.
What's driving that.
That C.
See our ROE going away and that sort of changed on right now what's that additional sort of money being spent on on yesterday.
Well I don't know that we're going to spend the money first off what we're just simply doing is trying to set expectations that.
SG nay could be $28 million for the year.
Does it have to be will it be no. However, historically, we would have always deferred.
Spending in Q1 in Q2, and this would be the type of discretionary spending let's say in Q1 in Q2, and then depending on how well the year wed start to spend a little bit more more money, mainly in sales and marketing really it's again to prepare for next season.
So, let's just say back to not to say that we spent typically will have a 300000, our budget for sales and marketing per se relative to the CRL costs, but we certainly do have let's say a degree of pent up demand on certain projects that will likely be expensed in Q3, it into Q4 at the end.
Good day, though no desires to to spend the 7 million.
I would try to be is judicious as we always have been with ours to unit.
China now that's helpful. I appreciate the nuance here so.
That is get from my end I appreciate it thank you.
Ladies and gentlemen, I'd like to thank our leadership team for fielding all the questions. Today, we have no further questions wedding from our audience I'll turn the feel our turn the floor back over to Mr., Brian Coleman for any closing or additional remarks.
Thank you operator.
I'd like to thank all of our employees, particularly during this these extraordinary times for their hard work dedication.
I want to thank our long time shareholders and those that 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 third quarter results have a good night everyone.
Nick.
Oh.
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