Q4 2020 Hudson Technologies Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies fourth quarter 2020 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 John Nesbitt. Please go ahead.
Yeah.
Thank you good afternoon, and welcome to our conference call to discuss Hudson technologies financial results for the fourth quarter and full year 2020 on the call today are Brian Coleman, President and Chief Executive Officer, and Matt Krish Krishnan already it's true.
<unk> 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 in certain cases are not within our control. It would 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 subs.
Sequencers SEC 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 okay with that I'll now turn the call over to Brian Coleman go ahead, Brian.
Good evening and thank you for joining US we closed 2020 with our fourth quarter performance continued to reflect the challenges that have characterized most of the year related to the public health and economic uncertainties caused by COVID-19 pandemic and I'll.
A positive note, we were seeing signs of price stability in certain price increases as we exited the year.
During the fourth quarter, we saw continued decline in overall demand as many schools businesses and other public venues remain either entirely close or open for only limited usage due to the pandemic.
As we've discussed before closures of facilities that have limited or no daily use have reduced needs for comfort cooling. So end market demand for refrigerants continue to be weak through the close of the year, resulting in lower volumes compared to last year.
The reduced volume was partially offset particularly in the fourth quarter by the higher selling prices of certain refrigerants.
The fourth quarter, which falls outside of our nine month selling season is typically our lowest demand quarter and that remained consistent this year.
However, as we've done through our 2020, we've managed the business through SG&A cost reductions delevering, the balance sheet and reduced interest expense all while improving our leverage ratio. That's net will describe later.
2020 was a challenging year overall and as it progressed, we focused on mitigating the downside of the bed.
And the residual shutdown for the U S economy, which impacted our entire selling season and beyond.
That being said refrigeration and comfort cooling are widely regarded as essential and is a widespread vaccination programs continue to roll out we are optimistic that more businesses universities and facilities will return to normal operations and will require our products and services as they get back to business as usual.
Well, we don't know the exact timing of the full return to normalcy for our customer base.
We used the fourth quarter to plan for 2021 selling season.
And we believe we are well positioned to meet potential demand as the economy comes back on line and more cooling system. So turn back on.
Hudson is a leading source for all refrigerants from legacy products like Cfcs and <unk>.
So the current hfcs and beyond to the next generation <unk>, we're 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 the future opportunities. Despite the challenges of 2020.
As a provider refrigerants were also sharply focused on our role in the industry is sustainability legislation promotes initiatives to phase out certain HFC refrigerants.
As such one of the cornerstones of Hudson operations is the reclamation of refrigerant and the complementary services, we offer to support reclamation and system optimization.
For many years, we along with many other sitting in our industry have worked to assist the federal government's development of a program for the eventual orderly phasedown of Virgin HFC production, while requiring the EPA to promote the growth in reclamation.
Concrete progress was made in December 2020, when Congress passed the aim act as part of the omnibus COVID-19 relief package.
Under the APAC Virgin HFC production will decrease by 85% over the next 15 years with a 30% reduction in the base line is scheduled to take place in 2024.
The regulated Phasedown of HFC Virgin production through the establishment of an allocation system is similar to the previous Ods phase out which included our 'twenty two.
With the expected allocation system, we will begin to see a tightening in the supply of Virgin HFC refrigerants.
Resulting in HFC price increases.
An important difference between the proposed HFC phased out and the Ods pays out is that the reclamation industry was in its infancy, when the CFC and H CFC phase up again.
Today, the reclamation industry is well established with Hudson, representing approximately 35% of all refrigerant reclamation activity in the U S.
Reclamation is a key component of the orderly phaseout of refrigerants and the new law requires the EPA to promote the growth of reclamation during the anticipated HFC phase out.
This represents a tremendous long term growth opportunity and we expect HFC sales will continue to grow as a percentage of our revenues as refrigerant systems are upgraded and new construction continues.
We are also acting innovative lead to drive further sustainability through our partnership with Blue source, the nation's leading carbon offset developer retailer to reduce greenhouse gas emissions associated with hfcs.
Through this partnership Hudson Blue source will work together initiating carbon projects to develop and market high quality voluntary carbon offsets.
<unk> from the reclamation of HFC refrigerants across the country using the American carbon registry certified reclaim HFC refrigerants protocol for the ACR protocol.
Hfcs can be very harmful invented into the environment, but alternatively recovery and reclamation provide a significant environmental benefit and Thats why were excited by the growth in the voluntary market and HFC reclamation the.
The ACR protocol is extremely important it has been executed in advance of any regulatory requirements.
And in other recent development along these lines Hudson has taken a significant step towards making our California production sites carbon neutral by offsetting their energy consumption with carbon credits.
Our goal is to reduce energy consumption and achieve carbon neutrality at our production facilities.
With our mission of providing reclaim refrigerants and equipment optimization services to help our customers lower their energy bills and reduce their carbon footprints.
These efforts tie, particularly well to the California's path to HFC reductions, which is currently independent of the federal efforts.
Excuse me.
For 2021, we are optimistic about the reopening of businesses schools and public facilities that make up our customers and end markets and we believe we are well positioned to leverage opportunities as cooling systems are we engaged.
Moreover, the phased out of HFC Virgin production will be a catalyst for growth and development of the U S reclamation market and our leadership in this space.
Now I will turn the call over to net to review the financials net.
Thank you Brian for the fourth quarter ended December 31, 2020, Hudson recorded revenues of $22 1 million, a decrease of 14% as compared to $25 $8 million in the comparable 2019 period, primarily due to a decline in volume related to the continued closure of businesses schools and other public venues.
Of the pandemic.
This was partially offset by an increase in selling prices of certain refrigerants, which also led to the improved gross margin of 25% for the fourth quarter of 2020 compared to 19% in the fourth quarter of 2019.
SG&A for the fourth quarter of 2020 was $6 5 million.
A $2 $4 million decrease compared to $8 9 million in.
In the fourth quarter of 2019, mainly due to reduced professional fees and payroll costs.
Our operating loss declined from $4 8 million in the fourth quarter of 2019 to $1 7 million in the fourth quarter of 2020.
To continue with the cost savings interest expense for the fourth quarter of 2020 was $2 9 million.
A decrease of $3 1 million from the $6 million reported during the fourth quarter of 2019, mainly due to the company paying down $15 $2 million of debt during the fourth quarter of 2019 and $15.01 billion of debt during 2020.
The company recorded a net loss of $4 7 million or a loss of <unk> 11 per basic and diluted share in the fourth quarter of 2020 compared to a net loss of $10 $8 million or 25 per basic and diluted share in the same period of 2019.
Looking at full year 2020, Hudson reported revenues of $147 6 million, a decrease of 9% compared to $162 1 million in 2019. The decrease in revenue was primarily due to decreased volume related to the pandemic driven.
Closures detailed earlier.
The company recorded a net loss of $5 2 million or a loss of <unk> 12 per basic and diluted share for full year 2020, compared to a net loss of $25 9 million or a loss of <unk> 61.
Per basic and diluted share and full year 2019.
Full year 2002 for you.
2019 included noncash inventory adjustments totaling approximately $9 2 million, mainly due to declines in selling prices of certain refrigerants during that time period.
At December 31, 2020, we had approximately $28 million of total availability consisting of our cash balance.
Revolver availability.
We reduced our total leverage ratio defined in our term loan credit agreement as the ratio of debt to adjusted EBITDA from 11, two times as of December 31st 2019 to five eight times as of December 31, 2020, mainly as a result of Delevering, our balance sheet and our cost savings in 2020.
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 I will now turn the call back over to Brian.
Thank you for that.
We have long term experience for this industry, which has served us well through many challenging times.
Navigating a global pandemic was an unexpected scenario, but we're optimistic that 2021 will bring a recovery in terms of both public health and improve the economy.
We are a leader in an industry that provides essential products and services and having built a loyal customer base innovative technology and well established distribution network. We believe we have a solid foundation from which we can grow our leadership position in the refrigerant and reclamation business.
Operator, we'll now open the call to questions.
Thank you ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please indicate so now by pressing star one pressing star to where we're moving from the Q should your question to be answered and lastly, posing your question. Please pickup your handset listening on speaker phone to provide optimum sound quality and your first question is coming from Ryan six Dahl for.
Craig Hallum Ryan.
Your line is live.
Want to wanted to dig in on pricing a little bit. So you mentioned higher pricing in Q4 can you break that out and what refrigerants and then if you're willing to quantify and then secondly on pricing can you talk about more recent trends.
Here to start 2021.
So the pricing in Q4 as it has continued through Q1, thus far so R. 22 was moved up to $14 a pound and higher.
And we do think in 2021 there'll be additional price increases there.
HFC prices tended to be volatile, but not materially volatile through most of the selling season, but towards the end of Q for through Q4 excuse me for the other.
For the season.
We saw stability across the board on all Hfcs with slight price increases, which continue today as well.
And Brian can you maybe take a step back on $14. Upon now what it was in exiting the selling season last year and maybe in Q4 overall.
So we would probably like.
At the end of Q3, probably in that $12 range.
It's moved to say 2014.
Through Q4. These are lower volumes this time of year, obviously, but again it is a good baseline.
For where we think it could go we also believe that the amount of stockpiles down.
That probably one of the large allocation holders has stockpile left but we are not sure about the other two we think at this point that may be out.
Great.
Secondly in the gross margin.
I look back it looks like the highest Q4 since 2010.
Pricing certainly helpful. There, but any anything else notable to call out mix or anything else I would think gross margin or is it primarily pricing.
It's primarily pricing.
Easy enough.
And then.
Looking at volumes for volumes down in 2020 can you break that out between reclamation and distribution. If you can quantify it or just at least directionally. If one was.
Slightly stronger or weaker than the other.
Reclaim volumes for us this year were up.
<unk>.
Again, the reclaim itself.
It's not how we look at that day, because reclaim is just the source of supply relative to the overall distribution.
So.
Really again, we look at the year on an overall volume basis sales volume basis, we've been down which we think is.
All attributable to Covid, when we think about 2021, it's not about building more for 'twenty, but it's really.
Reflecting back to where we were at 19 and getting back to there and then looking for ways to grow from there.
And just a point of clarification I will turn it over but when you get back to 2018 are you talking on volume basis or revenue basis.
Volume base.
Higher than magazine.
Right volume basis, we're always focused on volume.
And trying to seek ways to grow our volume at rates greater than the overall industry growth, which let's just six middle single digits, we've been trying to find ways to continually grow our volume in that 10% to 12% rate.
Great and then I guess, one follow up to that and then I will turn it over you think Q1 will be challenged from a.
Demand standpoint still its reopening has happened or you think you can get back to kind of back to those 2019 levels in Q1 or you think that's later in the year, Thanks and good luck.
So Q1 will be somewhat challenging because when you think back.
We'll pandemic shutdowns really happened late March.
So, yes, Q1 may be a little difficult from a comparability point of view.
But I think we're beginning to see more openings in loosening up relative to closures and the like.
There's still a ways to go probably in the <unk>.
Areas that we're in like New York.
But in places, where it's starting to get warm finally, now with Texas for example, Florida things seem to be opening up so.
It may be difficult to the comparability in Q1, but not again not diminishing our optimism for the entire 2021 sales season.
Okay. Your next question is coming from Gerry Sweeney from Roth Capital Jerry Your line is live.
Hey, good afternoon, Brian Matt Thanks for taking my call.
Sure good afternoon.
Yeah.
In the past we've talked about how large of a market there are 22.
GAAP is and is there any way you could sort of refresh us or at least directionally point to what that size of that market was in 2019.
By chance I always think like 35 million pounds for sort of a number but I'm not sure if that.
Entirely accurate.
So.
There is no.
Independent measurement of what the overall size was the best information available was always the Epa's vintage model.
And that vintage model.
<unk> the demand, let's say for 2020 to be 50 million pounds.
The details for the vintage model or not.
Got there, although theres glimpses of information, particularly as the EPA was going through the rulemaking process to eventually phase out.
22 Virgin production.
We started to think that there were flaws in the model and then we probably would have expressed a few years back that we don't necessarily think that the vintage models right and it may be off 20%, which means that maybe to the 2020 number would be more like $40 million.
We don't really know what the right answer is but we do think that probably they are modeling was off by a greater rate.
Particularly when you take into account.
The replacement rate that was.
Much greater the norms that we've seen historically for.
For probably a five year window of time at least the data is available through 2019, we havent seen 'twenty data yet.
Placement rates, but the replacement rates were closer to 7% versus the historical let's say, 5% for a good clip and we think that that eroded what the overall 22 remaining installed base was particularly in the air conditioning side.
That residential like commercial.
And so we do think that the demand is less than what we previously believed it to be.
Ultimately.
The part of the market, where we don't think there has been erosion is the largest system.
In terms of.
Large commercial industrial uses of 'twenty two.
22 is mainly a comfort cooling residential like commercial it's still used in those areas as well, we don't think there's been an overall erosion.
As greater rate, let's say as the residential light commercials occurred.
Got you Okay. That's helpful and I knew there was a pickup.
Loading number.
You would have a better idea than I at this point, but have.
Have you also sort of.
Maybe and again, that's a tough question, because there's a little bit of unknown for us.
<unk> tried to put paper pencil between how much.
Covid and pound impact.
What's the impact in pound two.
2019 versus 2020 or is that just.
A little bit too challenging to go that far.
Yes, we really try to find various sources of information to try and triangulate an estimate.
Part of the problem is we will take the building. We're in now it's 20 storey building throughout the entire summer. If you came to our building have you looked at the parking lot. It looked like a like a Saturday or Sunday.
Nobody nobody here. So this building has for Chillers, it's certainly probably ran the entire season, one chiller so.
Those are the kinds of things are very difficult to measure you could attempt to measure closures and there's a fair amount of data on closures and closure rates and things like that.
So we've been kind of guessing that maybe demand could be off as much as 20%.
This past year on a total basis.
We're not sure how right that really is but we certainly definitely think it's.
Double digits.
Okay.
Probably isn't like a 25% number, but it's probably upper teens to 20% something like that but that's our estimate of our guests.
Got it okay.
And the third part of it and I take the sort of.
I don't want to beat the dead horse for anything but.
Have you also looked at.
With Covid.
It's different.
Where you live right, Florida like what.
What buyers, Texas as much.
Much more lenient than we are in the northeast and things have been locked down.
Have you seen greater changes in demand based on geographic location.
Location.
We probably didn't spend a lot of time trying to slice and dice it.
Let's say a state by state basis.
Again, what we just tried to do throughout this period of time to stay close to our customers and make sure. We're there.
<unk> there were a lot of freight interruptions this year with Covid Covid drivers drivers have no place to stay in a place to eat.
So logistics was a tremendous challenge this year and we just tried to work.
With our.
Various trucking companies.
<unk>.
Just do a good job as possible on just delivery.
Livery times and things like that but there were a lot of.
Freight trucking disruptions this year that were very difficult to work through but we did our best I think.
Okay.
The other day, what I'm really trying to get through it like last year certainly some issues this year.
Apparently there's going to be enough vaccine out there by the end of may to get everybody vaccinated, if they choose to be so.
And there is an opportunity for openings in volume.
<unk>, rather quickly, especially if the warmer weather earlier in the northeast et cetera.
Not only were looking at some significant price increases year over year, but you also have significant.
Volume increases.
Markets open up.
I mean, that's a fair sort of way of looking at <unk>.
<unk> 2021.
Yes.
Even think of schools and universities.
A lot of those schools and universities closed during the warmer months of the year, they began to reopen and bring students back but not full populations, obviously say September but at that point in time not cooling season was pretty much over.
But hopefully we're optimistic that they will remain at these levels or improve even and therefore, there should be openings.
That class if you will that segment.
During the 2021 cooling season.
Let me just say that I hope so.
Okay.
Paul.
The yes, so hub.
Got it and then final question.
If they stay close to your customers, having done some channel checks I got that 13% to $14 sort of range.
And there is a sense of optimism certainly out there on the pricing side.
That's from R 22 world, but talking to your customers are they saying hey, just in time or is there some.
Opportunity to build inventory because even last summer I think there was a month or two where there was a lot of demand and there was strong demand at least for a month or two.
Just curious as to how people are going to be looking at inventory and managing it.
And especially as we go into <unk>.
Yes, we really think.
I guess it goes back to <unk> when the big change occurred the idea that youre going to stock shelves and carry a lot of inventory, particularly in Q1 those days are over.
And we've gotten through a couple of refrigerants cooling seasons.
Our wholesalers.
Could buy as needed.
And we've proven let's say the ability even in difficult times to get the trucking there so.
People, probably wont tie up working capital and refrigerants.
For the foreseeable future.
Got it no that's helpful. Okay.
I appreciate it I'll jump back in line. Thanks.
Thank you.
If there are any remaining questions. Please indicate so now by pressing star one on your Touchtone phone.
Yeah.
Once again, if there are any remaining questions or comments. Please indicate so now by pressing star one.
Okay. We have a question coming from Jim <unk> from RBC H, Jim Your line is life.
Thank you.
Good job guys.
Through the year righting the ship getting a great gross margins.
In the fourth quarter.
Just a curious question are you thinking about you've kind of you've done a good job of paying down debt do.
Do you think youre going to pay more down more debt down this year as well.
Yes.
Under the terms of the credit agreement right now, we expect to pay down just little bit over $5 million of debt for the term loan perspective, but.
Obviously in the future, we will consider refinancing opportunities.
Okay.
And.
Just curious as well.
With.
Everything that was discussed on the call.
Hasn't been any insider purchases at a very long time at these levels.
Do you think there'd be any interest from insiders purchasing at these levels.
Well the insiders management on a fairly large amount of stock in a lot of managements compensation has been stock based as opposed to cash. So there is already a significant incentive and built in incentive for management.
Two one <unk> own stock and to earn stock as compensation rather than cash.
Okay.
Okay. Thank you very much guys.
Thank you.
Okay now I'd like to turn the floor back to management for some closing remarks.
Well, thank you operator.
I'd like to thank all of our employees, particularly for their hard work and dedication during a very challenging year and I want to again, 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 first quarter results have a good evening everybody.
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.
Okay.