Q2 2021 Hudson Technologies Inc Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies second 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 John Nesbitt, Sir the floor is yours.

Thank you good afternoon, and welcome to our conference call to discuss Hudson Technologies financial results for the second quarter 2022 on the call today are Brian Coleman, President and Chief Executive Officer, and net Krish, Marty 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 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 businesses as we see them today, we are not there.

Not guarantees of future performance. Please understand that these statements are involved involve a number of risks and assumptions.

And since these 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 factor.

That could cause our actual results to differ materially with that now I will now turn the call over to Brian Coleman go ahead, Brian.

Thank you good evening and thank you for joining US. We're pleased to have delivered very strong second quarter results characterized by substantial revenue growth significantly improve margins and improve profitability.

During the quarter, we benefited from very strong demand, coupled with favorable pricing trends across our portfolio of refrigerants.

As we anticipated we saw increased sales activity related to the continued reopening of our economy.

Additionally, the return to business as usual coincide with the warm summer weather in the north and northeast, which has historically driven heightened demand in the marketplace as cooling systems come back on line.

From our vantage point today, we're seeing more normal levels of demand than we had seen last year.

From a pricing standpoint during the second quarter, we saw improved pricing across most refrigerants, we sell and we believe prices will remain stable for the near term with the expectation of increases in 2022 season as the implementation of the Aimak phased out of begins.

With that reference in mind I'd like to take a minute to discuss our gross margin performance the.

The significantly improved gross margin in the second quarter is primarily attributable to the higher selling prices of certain refrigerants.

As you know, we take a FIFO approach to inventory management and during the second quarter, we were largely selling through inventory, we had acquired at lower costs there.

And therefore, we saw a more favorable impact on our gross margin performance.

Moving forward through the balance of the cooling season, we expect to see a return to more historical gross margin performance of the upper twenty's to the lower 30% levels with particularly HFC refrigerant inventory at price points more in line with the current selling prices.

Hudson is well positioned in the refrigerant supply chain of 2 key points, serving as the leading provider of all types of refrigerants.

To give some context, we sell hfcs, which are currently the most commonly used refrigerant and represents the largest installed base of equipment as well as legacy refrigerants like Cfcs and <unk>.

And eventually we will serve as the supply source for next generation <unk>.

We are secure and our leadership position and with our capabilities. The relationships, we remain optimistic about our prospects for the future.

As we discussed before our industry is on the cusp of exciting new regulatory changes.

And we remained focused on the opportunities before us as environmental and sustainability legislation is adopted.

The aim act, which was passed in December of 2020 requires the phased out of the HFC production over the next 15 years.

With the cumulative 40% reduction in the baseline scheduled to take place in just 2 and a half years.

With the large and growing installed base of HFC systems reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phased out.

As a leading reclaimer. We believe this represents a significant long term opportunity for Hudson to act as an HFC supplier, while also supporting the transition away from the production of Virgin Hfcs.

In September the EPA will finalize the HFC allocations likely for the years 2022 and 23.

Hudson believes it will receive allocations under this rulemaking.

With the allocation rule, we will have more visibility around how the industry will be positioned to meet demand as HFC production becomes more limited.

Moreover, the EPA will have to administer or other aspects of the aim act over the next several months, which should help fine tune the overall financial opportunity for our covenants.

Along with the establishment of an allocation framework the aimak mandates of the EPA to support the growth and development of the reclamation market.

Hudson represents approximately 35% of all refrigerant reclamation activity in the U S and our capabilities as the reclaimer uniquely position us to support the phased out of HFC refrigerants.

And as of the effective resource of the circular economy of the refrigerant industry.

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

We're pleased with our progress to date in the 2021 selling season and look forward to continuing to meet the demands of our customers as the end markets. They serve returned to normal operations.

We're encouraged by the opportunities we're seeing in the marketplace and we look forward to leveraging our capabilities to enhance our leadership role as the refrigerant provider and reclaimer as the HFC phased out begins.

Now I'll turn the call over to net to review the financials go ahead on that.

Thank you Brian for the second quarter ended June 30 of 2021 Hudson recorded revenues of $60.5 million and.

An increase of 27% compared to $47.7 million in.

In the comparable 2020 period.

The growth is related to increased volume as well as increased selling prices for certain refrigerants during the quarter.

Gross margin was 36% for the second quarter of 2021 compared to 27% in the second quarter of 2020.

The improved gross margin is primarily attributable to higher selling prices in the quarter, which in the context of our FIFO approach to inventory favorably impacted our margin performance as the.

Brian mentioned, we expect to see of returned to more historical gross margin performance as we close out the selling season with inventory that was purchased at a higher price.

SG&A for the second quarter of 2021 was $6.8 million.

Consistent with SG&A in the second quarter of 2020 and decreased as a percentage of revenue to 11, 1% as compared to 14, 2% of sales in the same quarter last year.

We recorded operating income of $14.4 million in the second quarter of 2021 compared to operating income of $5.2 million in second quarter of 2020.

Interest expense for the second quarter of 2021 was $2.9 million.

<unk> 2 of $3.1 million reported during the second quarter of 2020, mainly due to principal payments made on the term loan.

The company recorded net income of $11.3 million or 26.

For basic and 24 per diluted share in the second quarter of 2021 compared to net income of $2.4 million or <unk> <unk> per basic and diluted share in the same period of 2020.

Okay.

At June 32021, we had approximately $41 million of total availability consisting 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.

Our leverage ratio at June 30 of 2021 was for <unk> as compared to $5.8 for <unk>.

And $11 <unk> as of December 31, 2020, and 2019, respectively.

This improvement is a result of both increased earnings and Delevering the balance sheet.

As discussed on the last call we have initiated the process to refinance our debt and expect to be complete during the fourth quarter of this year.

I'll now turn the call back over to Brian.

Thank you net.

As we close out the 2021 selling season, we're excited about the opportunities ahead and are focused on growing our leadership position in the refrigerant and reclamation industry.

Operator, we'll now open the call to questions.

Thank you ladies and gentlemen, the floor is open for questions. If you of any questions or comments. Please indicate so now by pressing star 1 on your touched on phone pressing star 2 of removing from the Q should your question be answered and lastly, while posing your question. Please pickup your handset of listing on speaker phone to provide optimum sound quality. Please hold while we poll for questions and the first question is.

Coming from Ryan <unk> from Craig Hallum, Ryan Your line of life.

Good afternoon, guys. Congrats on the strong results.

Thank you Brian.

The first 1 to start on reclamation.

Given the increase significant increases in R 22 pricing.

Therefore ability likely to pay more for the dirty gas that helped to improve the feedstock supply.

Not really Ryan.

Express frustration in the recovery rates of R 22 for a number of years now.

We certainly did expect reclamation to have grown at levels much higher than where we are today and the law.

<unk> reported data all the shows about 8 million pounds being reclaimed annually.

So the economic factor Hasnt really stimulated.

Increases or changes in behavior.

Now I think an important distinction about the HFC phase out though is that in the HFC phase out as the aim act as currently constructed as legislated. So it's the wall now the EPA is mandated to find ways to help grow the reclamation market.

So what we are expecting is through various means and these are the further rulemaking that the EPA will be dealing with in the future.

The EPA is going to seek ways to help encourage increase the overall recovery rates, which really leads to the increases in reclamation volumes.

Another factor I think thats, probably important on why hfcs are different than the prior phase out.

For example in the state of California, There is a lot of reporting requirements regarding recovery rates and so forth that the contracted level.

And now that the Oems are part of a.

Rulemaking specific the state of California are being asked to include a certain percentage of reclaiming their factory charge units I believe the industry is going to be more engaged on an overall basis to encourage recoveries and when you think about in 2.5 years of 40% reduction off of the curve.

<unk> cap.

Relative to the HFC phased out that's a very significant <unk>.

Constraint on supply that likely reclaim will have to meet some portion of that overall need.

That's helpful.

Do you think there is there anything that could stimulate R 22.

To help get the feedstock.

And change of behavior or is it really shifting from R..22 on can the HFC opportunity at this point.

I mean, we certainly are not giving up on the R 22, and what we saw.

Certainly would love to increase the volume of recovery on R 22, and certainly now that the prices over $20 a pound, we're making closer to $10 per pound when years ago, where maybe make it only $5 per pound. So again, it's always a gross profit dollar story per pound recovered and we sold so yes, we would.

Love to see increases, yes, we've tried to enter different parts of the channel.

And we're looking to.

Grow our overall R 22, reclaimed, but we're basically suggesting from a modeling point of view stick with the current 8 million pound number.

We know that there should be some further upside in the sale price of R..22, as we continue with the phase out of.

Being solely sourced with weekly product in the stockpile should eventually be eliminated.

Got it so stability in volumes on the reclamation for R 22 to start growth at this point.

That's what we would say is best the model right now because we haven't really cracked the nut on finding ways to grow the overall recovery rate.

Helpful.

Just on pricing I don't think I caught it if you mentioned it but what was pricing in the quarter and then also current pricing.

So the pricing is now over $20 a pound we started within the quarter around closer to $15. So we saw growth of R 22.

Through the quarter and continues to be at those levels.

We still over time, we can't say when we still have the expectation that our 'twenty 2 could get to $3 a pound, possibly more as we've seen with the CFC phase out.

So we still think there is price increases available to R 22.

And then on the department of Defense DLA contract. It looks like it was amended raised the the.

The maximum value.

Recently here any update there on that amendment as well as how that contract is progressing.

So yes, we got the 5 year renewal.

May have done a press release I think in late June for that.

Net announcement the.

DLA does their press releases in the context of when the contracts renew so that's why there was a delay of.

Again, it's still a large pot of money, it's not a pot of money thats restricted on an annual basis. So Unfortunately, we peaked at close to about $25 million right now and I think.

And the annual revenue.

But again, we're trying to find ways to <unk>.

The increase the spend through the DLA contract as opposed to the various agencies usually using their annual budget for the first time. The DLA has added a program manager to this contract. So we think that is going to help us in terms of marketing and awareness.

To be able to grow the dollars through that contract.

1 more for me and then I'll turn it over to you.

You mentioned debt refinance you started the process any more detail you can give there I know you said expectation by Q4, but where are you at in the process given the fundamental improvement for the company as well as the industry.

What's your confidence there on where you're at in the process.

Sure No problem. This is not here.

Preliminary stages right now.

As far as the process from the process perspective, as I mentioned on the call. The leverage ratio is down significantly from the last couple of years.

Puts us in a really good position.

As we move forward and obviously with the earnings growth as well, but with even better positioned to move forward, we're expecting to close out probably sometime in Q4. So again like I said preliminary stages working with multiple parties to events.

Thanks, Congrats again on the nice results and I will turn it over.

Thank you Raj Thank you.

Once again, if there are any remaining questions or comments. Please indicate so now by pressing star 1 on your Touchtone phone.

Okay. We have no remaining questions in queue I would now like to turn the floor back to management for closing remarks.

Yes.

Well. Thank you operator, I'd like to thank all of our employees for the continued support and dedication to our business, particularly in these difficult times I want to again, thank our longtime shareholders for your support 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 and have a good night everybody.

Thank you ladies and gentlemen, this does conclude today's conference call.

Your lines have a wonderful day.