Q3 2021 Hudson Technologies Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies third quarter 2021 earnings call.
At this time, all participants have been placed analysts and 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.
M S Investor Relations Sir Please go ahead.
Thank you good afternoon, and welcome to our conference call to discuss Hudson technologies financial results for the third quarter 2021 on the call today are Brian Coleman, President and Chief Executive Officer and Matt.
Christian Murdy, Chief Financial Officer, 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 expectations opinions and 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 these elements can change and in certain cases are not within our control. We would ask 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 with a discussion of the principal risks and uncertainties that affect our business and our performance and other factors that could cause actual results to differ materially with that we'll now turn the call over to Brian Coleman go ahead, Brian.
Good evening and thank you for joining us.
Third quarter delivered a very strong close to our nine month selling season.
As demonstrated by substantial revenue growth significantly improved margins and improved profitability.
Our improved performance was primarily due to the significant increases in average sales pricing across our portfolio refrigerants.
Which far away the decrease we saw in volume in the third quarter.
We attribute the decrease in demand largely to three factors.
A greater attention to our customer value proposition.
And realigned sales strategy focus to prioritize long term higher margin customers.
A slower than anticipated reopening of certain commercial locations.
And the impact from global supply chain shortages.
As we conducted the final integration of Aspen refrigerants, we enhanced and unified our sales team towards implementing our strategy, which renewed Hudson focus on higher margin long term customers.
Our current leadership team has been examining the inherited Aspen sales approach that in certain instances focused on higher volume sales at the sacrifice of gross margin.
As we previously discussed our industry is rapidly evolving.
And for some time now we've been carefully evaluate our sales strategies to maximize value.
We begin navigating the new landscape created by federal legislation, such as the aim act and the state level initiatives.
As we enter the initial stage of the APAC Phasedown of Virgin HFC production.
It is critical that we ensure we have the inventory to best support our longstanding higher margin customers.
Not only has our analysis has been important for the 2021 season to establish a baseline of profitability, but it is a necessary step to identify the customers, who we anticipate and be with us for the long haul.
As refrigerant buyers as well as sources of use gas.
As it relates to commercial cooling, we believe that over time the demand headwinds caused by Covid will be eliminated as commercial space continues reopening and volumes will return to more normal cooling demand.
Lastly, the global supply chain shortages have also impacted on occasion, our ability to meet a portion of emergency response demand from customers this quarter.
We are proactively managing our inventory to mitigate the challenging supply chain issues that we have many American businesses are facing.
To ensure that we can provide uninterrupted service to our customers.
From a pricing perspective during the third quarter, we saw average selling prices of many refrigerants remained strong an increase from the Q2 levels.
With the end of the selling season, we believe prices will remain stable through the fourth quarter and we believe we will see further price increases in the 2022 season as.
As the implementation of the <unk> phased out begins.
If we look to Europe as guidance for pricing relative to the initial steps taken under the HFC Phasedown there.
We could expect to see a further doubling or more in prices for HFC refrigerants in the foreseeable future.
This pricing dynamic should be a stimulus for growth in reclamation.
I'd like to take a minute to discuss our gross margin performance.
The significantly improved gross margin in the third quarter is primarily related to higher selling prices of certain refrigerants and the elimination of certain lower margin sales.
As you know, we take a FIFO approach to inventory accounting and during the third quarter, we were largely selling inventory that we acquired at a lower cost. So our gross margin performance benefited from this dynamic.
Moving forward through the close of the calendar 2021 and into 2022, we.
We expect to see a return to more historical gross margin performance in the upper <unk> to the low 30% levels.
As we expect to acquire HFC refrigerant inventory at higher price points for next year sales season.
We could begin to see gross margin improvement over historical levels with the growth of.
Growth in HFC reclamation volumes, which typically results in lower acquisition costs compared to Virgin purchases.
But that benefit to gross margin from increased reclaim supply will probably began during the 2023 season.
As I mentioned, a moment ago legislative activity continues as our industry adopts new regulations to drive the transition to more environmentally friendly refrigerants.
During the quarter and September the EPA published the final rule allocating allowances for the production and consumption of Hfcs as mandated by the <unk>.
And introduced a stepped out of 10% in 2022 from baseline levels.
As a reminder, the APAC, which was passed in December 2020.
Requires the Phasedown of HFC Virgin production over the next 15 years with a cumulative 40% reduction in the baseline scheduled to take place in just over two years.
Reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phasedown.
As a leading reclaimer, we believe this presents a significant long term opportunity for Hudson to act as an HFC supplier, while also transitioning away from the production of Virgin Hfcs.
Remember that Hudson Reclaims, all refrigerant gases, including Cfcs, HC, Fcs Hfcs and <unk>.
As we expected Hudson received an allocation allowance for the calendar year 2022.
Equally to approximately 3 million metric tons exchange value equivalents.
Or 1% of the total HFC consumption.
With allowances for 2023 and beyond to be determined at a later date.
We expect that the reduction in Virgin HFC supply will help accelerate reclamation activity in the near term with the final HSC allowances in place. We believe we are competitively position through both our reclamation capabilities, a robust distribution network to capture market share as both of us.
Supplier and a reclaimer, serving the large and growing installed base of HFC equipment.
We support the global efforts to transition our industry to more environmentally friendly gases and.
And we believe we have a unique opportunity to provide a sustainable alternative to Virgin refrigerants as the HFC supply tightens.
We are also optimistic regarding opportunities associated with the state level legislations, such as the refrigerant management program established by California through carp.
Among other initiatives. The car program is proposing a requirement that Oems use a minimum 10% reclaimed refrigerant and factory charged equipment.
So with California, leading the way we are encouraged that we will become a leader in helping companies comply with potential state imposed refrigerant regulations.
Hudson represents approximately 35% of refrigerant reclamation activity in the U S.
Uniquely positioning us to support the phased out of Virgin production of HFC refrigerants.
And to serve as a key resource in the circular economy of refrigerants.
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.
Now I will turn the call over to Nat to review the financials.
Thank you Brian for the third quarter ended September 32021, Hudson recorded revenues of $60 6 million, an increase of 46% compared to $41 $5 million in the comparable 2020 period the.
The growth is related to increased selling prices for certain refrigerants during the quarter as Brian mentioned.
Gross margin was 39% for the third quarter of 2021 compared to 22% in the third 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 we move through the close of the calendar year and the fourth quarter.
Which is historically, our weakest quarter, we expect gross margin performance to be more consistent with historical gross margin levels.
SG&A for the third quarter of 2021 was $6 1 million or 10% of revenue as compared to $6 2 million or 14, 9% of revenue in the third quarter of 2020.
We recorded operating income of $16 9 million in the third quarter of 2021 compared to operating income of $2 1 million in the third quarter of 2020.
Interest expense for the third quarter of 2021 was $2 8 million compared.
Compared to $3 million reported during the third quarter of 2020.
Mainly due to principal payments made on the term loan.
The company recorded in other income a gain on forgiveness of its paycheck protection program.
PPP loans.
A $2 5 million in the third quarter of 2021.
The company recorded net income of $15 9 million or <unk> 36 per basic and <unk> 34 per diluted share in the third quarter of 2021 compared to net income of $39000 or zero cents per basic and diluted share in the same period of 2020.
On September 32021, we had approximately $53 million of total availability consisting of our cash balance and revolver availability.
Increased revolver availability provided the company with better opportunities to procure inventory for the upcoming selling season.
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 on September 32021.
Was 235 as compared to $5 84, 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.
I will now turn the call back over to Brian.
Thanks, Matt.
As we close out the 2021 selling season, we are excited about the opportunities ahead for 2022 and beyond.
We continue to focus on growing our leadership position in the refrigerant and reclamation industry.
Operator, we will 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 by pressing star one pressing star to remove you from the queue should your question to be answered and lastly, while posing your question. Please pick up your headset. If this thing on speaker phone to provide optimum sound quality.
Once again Thats Star one if you have a question or comment.
And the first question is coming from Ryan Macdonald from Craig Hallum Capital Group. Your line is live.
Good afternoon, Brian Matt Thanks for taking my questions.
You're right.
Curious if you can elaborate on the debt refi process.
So you started it before didn't give much of an update now curious how that's trending and any more details you can share there.
Yes sure. Thank you.
We are on schedule as we mentioned.
To finish the debt refi process by the end of this year.
And is that finished or everything.
Everything's completed or just announce what's going to happen.
Yes, we wouldn't announce anything until it was completed yes. So our goal as we've stated before is to try to get everything done by yearend correct makes sense.
On the quarter were volumes up or down year over year.
While volumes are down.
I think in my prepared remarks for three for primary three reasons.
One is reexamining, our sales strategy and noting that.
Prior to the integration there were certain sales made through the Aspen side of the business that would be higher volume, but much lower margin.
The elimination of that activity probably represented about two thirds.
Of the total decline in volume in the third quarter.
We were slightly impacted by both the commercial side of <unk>.
Cooling.
Seems to continue to be down.
It seems to be probably mostly related to COVID-19 closures or openings that are not really openings. Like for example, our office buildings still probably has less than 50% attendance on any given day.
And then lastly, there were some missed opportunities during the period relative to primarily up emergency calls for refrigerant.
<unk>.
Whether the supply chains are it raw materials or disruptions because of hurricanes, but really the inter.
Continental United States.
Freight logistics has been very very challenging.
We've had months this year.
In some cases in the third quarter were on time delivery rates are below 80%.
So it's been a little bit of frustration.
<unk>.
Certainly improved and we're well over 90% now.
And in recent weeks, we've had actually a 100% on time delivery.
Which is really a testament to our folks in customer service and shipping.
But it's been a very difficult year.
Brian on number one on the sales strategy change or I guess examining that how much more work do you think has to be done there or do you think you cut out what you needed to and this is the rate base to kind of build off of and then assume seasonality on that.
Yes, our new leadership team.
Coal less now under one Hudson.
Meaning to final integration of both the Hudson sales business and the Aspen sales business that we intentionally kept separate.
In the initial years of the acquisition and then I think we announced late last year that we were looking at merging it all into one really gives us an opportunity to examine the entire business as one and do so in a critical way, but it also to think about long term growth initiatives and value propositions.
And sort of really taking the Aspen business and.
And evolving it into or emerging it into or making it the same as the Hudson value proposition.
Caused this examination and the decision to walk away from some business that again was very low margin.
<unk> had very little benefit to the operating line so.
We feel like we can make the right decision we feel that allows our sales force more time to spend on areas that could provide more profitability. So we think again it was an important step that should be completed this year.
But step that's a platform for 2022 and beyond.
One more follow up on that and then I'll move on but does that drop or I guess reduction in low margin sales our business does that impair your reclamation volume at all thinking they buy some they bring back dirty gas where it helps the feedstock.
If that was the case, we probably wouldn't have made that decision because we would have looked at these customers in a more holistic way.
I think we would have to go back in time, but I think we mentioned that one of the opportunities we are hoping to achieve out of the <unk>.
Acquisition of Aspen was the ability to acquire more used gas.
And then.
I think is true then and it's still true today. However, when you look at some of these high volume low margin sales. They typically with entities that we're not ever going to retard use gas so.
So for US it just was a business that didn't make sense when you think about the.
At energy, we spend that holistic relationships on the buy and sell most of our customers.
It makes sense.
I guess curious on the gross margin commentary given pricing remains strong.
In the seasonally strong period into Q4 Q4 is low volume. So I guess I would've assumed some of the transitory price benefit would help to gross margin in Q4 and even into early next year. So can you walk through and talk to your I guess, the pricing up where your inventory is in.
That gross margin into Q4.
Well.
Our cost and inventory, let's say lags the sale price.
Bye.
A couple of quarters.
So we've had two strong quarters that if you will we benefited on increase sale price on our FIFO methodology.
That slowly we will catch up to the increases in sale price at some point and bring us back to somewhat more normal gross margin percentages.
Now the dollars per unit will be higher therefore, the gross profit dollars will be higher but the percentage is probably going to go backwards towards that upper twenty's, probably more likely to lower 30%, but not necessarily.
The upper Thirty's that we've achieved particularly.
Particularly in Q3.
Last question for me.
Mentioned HFC allocation nice to see you guys get that this time around how do you feel about the 1% and I guess is that really equivalent to 1% effectively of the HFC allocations.
So it's a tough question to ask but a good question because youre dealing with these <unk>.
Metric tons of Cotwo equivalent.
You don't really know how you necessarily stack up to the other folks in the group.
Because you could have someone in the group that was importing.
Hi, GBP refrigerated.
As a result, they need more cotwo equivalent allocations, which could result in fewer pounds than someone else.
So we don't it's opaque if you will as to what exactly this means per pound basis.
But it could be some people that have a higher allowance could end up with fewer pounds, just because they're dealing with higher GDP gases.
But at the end of the day, we're very pleased as you said a moment ago, we were shut out.
Under the ozone depleting substance phase outs.
We have a long way to go yet and the aim act theres a whole refrigerant management section.
Where the EPA or to find ways to help grow and promote reclamation, we think its necessary obviously with the very aggressive phase now. So we're really looking forward to the next set of rulemaking that likely will be issued some time next year.
Great. Thanks, guys. Good luck.
Thank you.
If there are any remaining questions or comments. Please indicate so now by pressing star one on your Touchtone phone.
Okay. We have no remaining questions in queue I'd like to turn the floor back to management for any closing remarks.
Thank you operator I'd.
I'd like to thank our employees for their continued support and dedication to our business.
Through both the Covid challenges and particularly as we complete our final integration.
I wanted to again, thank our long time shareholders and those that recently joined us for their support.
Thank you to everyone for participating todays conference call and we look forward to speaking with you. After the fourth quarter results have a good night 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.