Q1 2021 Hudson Technologies Inc Earnings Call

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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.

Bilodeau 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 2021 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 make certain forward looking statements all statements that address the.

And Japan's 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 where the ask that you consider and interest.

And in that line.

Could you review of 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.

With that I'll turn the call over to Brian Coleman go ahead, Brian.

Good evening and thank you for joining us as of March 31, we kicked off our 2021 selling season.

Our first quarter revenues were slightly down from the first quarter of 2020, primarily due to the impact of the COVID-19 pandemic, which did not materially affect the economy until late March of 2000 and <unk>.

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This year, while the economy is opening back up it's a gradual process.

Largely dependent on where our customers.

Okay to geographically and our first quarter revenues reflect that but we still believe we can get back to 2019 volumes levels. During the 2021 cooling season.

That said, while first quarter revenues were down related to decreased volume, we are encouraged by price stability and pricing improvement for nearly all refrigerants.

And we are well prepared to meet potential demand is the nine month selling season moves forward, 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 of leading source for all refrigerants from legacy products like Cfcs and <unk> to the current hfcs and beyond to the next generation <unk>.

We are positioned of two key points and the supply chain with a solid and long standing customer base with.

With our capabilities and relationships, we remain optimistic about future opportunities.

With the New administration comes the new regulatory landscape and we are encouraged by the progress made with the passing of the APAC and December of 2020, and the support the reclamation is receiving.

And as a leading source of all refrigerants Hudson is keenly focused on our role as environmental and sustainability legislation is adopted.

And our capabilities as the of reclaimer uniquely position us to support the phased out of Virgin HFC production.

As we can reclaim and recycle these refrigerants and positioning us as an effect of resource and the circular economy of the refrigerant industry.

The APAC requires the Phasedown of Virgin HFC production over the next 15 years.

The cumulative 40% reduction and the baseline scheduled to take place and just two and a half years.

The installed base of HSE systems is large and growing so reclamation will be a key component to maintaining necessary supply during and orderly phased out.

This presents a significant long term opportunity for Hudson to grow as and HFC supplier, while also supporting the transition away from production of Virgin Hfcs.

And the regulated Phasedown of HFC Virgin production through the establishment of an allocation system has some similarities to the previous Ods phase out which included our 'twenty two.

But with the previous phase out the reclamation industry was in its infancy.

Today, the reclamation of industries, well established with Hudson, representing approximately 35% of all refrigerant reclamation activity and the U S.

And the APAC mandates the EPA to support the growth of the development of the reclamation market.

We are excited by the opportunities, we're seeing not only to grow our business, but also the provide our services the benefit the environment.

Likewise, we continue our focus and efforts of making our California production sites carbon neutral as we seek to achieve California's stated goals for emission reductions.

And there are legislated phase out of Virgin HFC refrigerant use.

As we make progress on our California sites, our larger goal is to achieve carbon neutrality at all 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.

Remain intent on finding more and better ways to improve the circular economy and the end of life management of refrigerants.

With our visibility today, we're optimistic about the 2021 selling season as we see the steady reopening of businesses schools and public facilities that make up our customers and end markets.

As cooling systems, our re engage and new systems come online, we believe that we're well positioned to leverage the near term opportunities, we are seeing and the refrigerant marketplace.

Additionally, the scheduled Phasedown of HFC Virgin 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 net to review the financials go ahead of that.

Thank you Brian for.

And for the first quarter ended March 31, 2021, Hudson recorded revenues of $33 8 million.

The decrease of 7% as compared to $36 4 million.

And the comparable 2020 period, primarily due to a decline and volume related to the COVID-19 impact stemming from the closure of businesses schools and other public venues, which as Brian mentioned did not materially impact the economy until March of late March of 2020.

This was partially offset by an increase of the selling price of certain refrigerants, which also led to the improved gross margin of 27% for the first quarter of 2021 compared to 23% and the first quarter of 2020.

SG&A for the first quarter of 2021 was $6 7 million.

A $600000 decrease compared to $7 3 million and the first quarter of 2020, mainly due to reduced professional fees, partially offset by an increase of noncash stock comp compensation expense.

We recorded operating income of $1 $7 million and the first quarter of 2021 compared to operating income of $400000 and the fourth 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 $5 million from the $3 3 million reported during the first quarter of 2020, mainly due to the principal payments made on the term loan.

The company recorded a net loss of $1 1 million or a loss of <unk> <unk> per basic and diluted share and the first quarter of 2021 compared to a net loss of $2 9 million or <unk> <unk> per basic and diluted share and the same period of 2020.

At March 31, 2021, we had approximately $32 million of total availability consisting of both of 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 a stronger balance sheet and improved liquidity metrics, we hope to further improve our financial condition by exploring the refinancing of our of our existing debt to help grow and support the business I'll now turn the call back over to Brian.

Thanks, Matt.

We are a leader and 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 the longstanding customer base established.

Distribution network and industry, leading technology.

As we move through the balance of 2021, we are energized by the opportunities ahead.

And while focused on meeting the needs of our customer base and increasing our position as the 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 opened for questions. If you have any questions or comments. Please indicate so now by pressing star one on your question on pressing star two and removed from the queue should your question be answered and lastly, we are posing your question. Please pickup your handset and listening on speakerphone and to provide optimum sound quality.

Please hold while we poll for questions and your first question is coming from Ryan <unk> from Craig Hallum capital.

Brian Your line is live.

Great. Thanks.

And the AP.

Oral here have we seen on increase with the reopening.

So and the first quarter the volumes were down which again, we attributed primarily to the overall openings or closings sort of way you went on.

The reference it.

We do think the Q2, we should be able to grow our revenues and in 2021 based on volume.

And when compared to 'twenty, and we're really focused on really on volumes and the type of business. We had for the 19 year.

That may not come out that way, but we do think there'll be sufficient openings throughout the country.

And as you probably have heard in the past the second quarter really gets kicked off not and April april's generally a very slow month, but it really gets kicked off and the warmer weather and may that we're starting to get into and.

And particularly we like to see a string of 90 degree days.

Around Memorial Day weekend early June, particularly for the north and northeast because that really kicks on the whole comfort cooling season, and that's really what moves the volume of refrigerants.

And then on gross margin so it looks like a three year high there so it's really nice.

Was that improvement, primarily just price or whether it was there any other factors and their mix et cetera.

It was primarily price in some cases, our cost basis of little bit lower.

But we are seeing like and the HFC class of refrigerants and higher prices, but we're also seeing higher costs now that a lot of the.

Tariffs are been applied to the various components so.

So the margins on the HFC class will probably stay similar throughout the season, even though we've seen some price increases as I said, we've seen corresponding cost increases there, but the mid twenty's that we're at and the <unk>.

The 7% of it we do think is achievable for the balance of the year.

Great.

And then maybe I missed it Brian normally you give kind of what the price of R. 22 is in the quarter curious what that is and then also where are the prices today.

Yeah of the prices right now are ranging in the 15 to $17 range.

And so the cases, you might see a little bit higher.

But certainly up from the beginning of the year.

We think we're going to see further price increases this year.

We don't know when but certainly the warm weather is going to help us understand that relative to.

Both the supply side and how much stockpile might be left and then certainly the demand side.

On the stockpile any indication of kind of where we're at.

No no changes from the last couple of reported periods. We think of Moore's is out although they never published a letter.

But based on the communications and we understand and they've had with customers. So that always end up leaving arkoma as the entity that likely has a fairly large stockpile will it be used up the season or not it's difficult to know but.

But we don't think.

That their stockpile is going to last much longer.

Great one more for me so the D O D contract because the five year contract five year extension option, we were coming up close to that five year Mark here I guess, how is that contract or and ill relationship gone relative to your expectations and then remind us of the timeline for that extension.

So you are correct and it expires at the end of July we do believe we will receive the five year renewal.

And as evidenced let's say to why we believe that if they were to go out and.

Non extended with us they'd have to do a formal bid process, which they haven't done.

And that's a very lengthy process. So we think that they're going to exercise their option. We believe we performed very well, particularly in connection with the prior contract holder in terms of delivery and 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 yet that we had seen in the 2019 period.

We were tracking to almost $25 million of revenues and on a quarter to quarter basis, we were seeing growth and.

But on a quarterly basis.

We think that this year so at some level the COVID-19 affected the contract as well and we think this year that we can get back to marketing the contract more broadly and probably that all of that will begin after the renewal, which we probably will hear about that renewal before the contract expires.

And maybe the.

30 days out yet from where we are.

Great. Thanks, guys. Good luck.

Thank you. Thank you.

Okay. Your next question is coming from Gerry Sweeney from Roth Capital and Jerry Your line is live.

Hey, good afternoon, Brian and Matt Thanks for taking my call.

How are you doing.

Good.

Obviously, COVID-19 was a little bit of a struggle last year, but.

It also dependent on where you are and parts of the country and.

Iron ore and the northeast and New York City scheduling to open up and our Pennsylvania, Philadelphia is scheduled to open up soon.

Is there an opportunity to see a little bit of a search and business. Some of these businesses that may have been shuttered or running at 25% capacity start turnaround systems and a more people more body and are you starting to dip into the summertime and maybe some of the systems just werent charged up last year.

And there are an opportunity the potential opportunity for that.

We do believe so.

How much of the.

Will it be we don't know.

And this is why we're still optimistic about the 2021 sees and as you said.

Of the North northeast is beginning to open up and ways that we had not seen before.

So we do think of lot of systems will be turned on.

New York City is still having a lot of its struggles.

But at the end of the day, we think there is potential upside because systems and likely could've leaked.

Over this past year.

And because they haven't been run and tested so that would cause potential increase also they may not have been maintained as well as they normally would of so there is a potential increase for refrigerant sales and service work in that regard too.

Got you and then just on the on the phase out of <unk>.

<unk> on the allocation system and we went through this obviously with R 22.

Sort of call it the tail on and want to pick up coverage of bunch of years ago, but.

Is there.

And if not always as smooth as linear as we would like and sometimes lawsuits pop up and.

And I suspect hfcs are a little of it might be a little bit different than our 'twenty. Two I think of a lot of people one let them go on inclusion of producers, but do you of any insight on to the insight into how it may develop over the next couple of years from that perspective.

Well.

I would recommend folks go to our website and look at page seven of our current presentation, because youll see the stepped out and it comes very hard and very fast so and two five years.

And there's going to have to be of 40% reduction from the baseline.

And we went with the 22 phase out we probably win.

More than 10 years, maybe 12 years before we ever got to that threshold.

So here the step down comes very quickly very hard very fast.

That I think is what makes this particular opportunity different.

So in the old 22 phase out there was the ability for the creation of very large stockpiles for example.

There probably be stockpiles and this phase out, but we don't think to the magnitude because of the length of time to create a stockpile is greatly diminished.

Because we're already starting next year there'll be a 10% reduction.

Off of the baseline and.

And then that will run for the 22 and 'twenty three year and the 30% reduction which debt is a cumulative 40. So we think that's the big difference here also the big difference is within the aim Act.

And the EPA mandated and find ways to help support the growth and reclamation Theres no such language and the original cleaner act on them and the phaseout structure for all of the Ods products. The also on the <unk> substances. So theres a lot of differences the similarity certainly but there's also differences that I think will be positive to the reclamation industry and.

Hudson Technologies got.

Got you and.

On.

Five of the HFC market versus our 2000 to one.

And one day and you wanted to face on Hfcs are significantly less.

So significantly and it's.

And at its peak.

<unk> 22 could have been 70% of the overall market okay.

And right now hfcs of probably 80% with our 'twenty, two around 20% and as each year.

Progresses, the 'twenty two share diminishes and the hfcs grow because all of the new construction of new equipment. All the change out of the 22 units of our HFC based.

Soon <unk> will be introduced more widely than they are today.

And they are beginning to get some traction.

So over time <unk> will grow into.

A larger market share, but thats, probably 510 years out in terms of timeline, if it becoming a material piece of the overall market.

Got it okay.

And one more question just the.

Pivoting back to R 22, I should ask that on a couple of minutes ago.

How are of collections go on obviously.

That is a key component.

And to the model is collecting of the used gas.

Yes, we've shared I think our disappointment.

With you all.

We just are struggling with.

Why we're not seeing more gas coming back we do think there is more gas that could come back how much of it is illegal venting how much of it is illegal reuse, we don't know and.

And part of this HFC phase out is the EPA has got to figure out of this issue and.

And is being mandated to find ways.

And systems, if you will to improve.

The legal recovery.

And then improve the volume of reclamation so.

The positive thing.

And again getting back to hfcs as the HFC reclaim is in its infancy relative to what we think the overall opportunity is and Theres certainly five ex potentially 10 ex growth and reclamation over the next number of years as these eight Virgin Hfcs of gases are being phased out.

Got you and I appreciate it thanks.

The great update thank you.

I would now like to turn the floor back to Brian Coleman sort of the floor is yours.

Well, thank you operator.

Like to thank all of our employees for their continued support and dedication to our business.

And again, thank our long time shareholders and those that have recently joined us for their support.

Thank you everyone for participating in today's conference call and 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 line at this time and have a wonderful day. Thank you for your participation.

Okay.

Yes.