Q4 2021 Hudson Technologies Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies fourth quarter year end 2021 earnings call. At this time, all participants have been placed on 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 .
That's bit Investor relations for Hudson technologies, Sir the floor is yours.
Thank you good evening and welcome to our conference call to discuss Hudson technologies financial results for the fourth quarter and year end 2021.
On the call today are Brian Coleman, President and Chief Executive Officer.
And not Christian Verde, 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 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 our businesses as well.
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.
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 for the factors that could cause actual results to differ materially.
With that I'll now turn the call over to Brian Coleman go ahead, Brian .
Good evening and thank you for joining US we're pleased to have closed 2021 with record fourth quarter and full year results.
Our strong fourth quarter performance reflected significant revenue growth enhanced margins and improved profitability.
It is important to note that our fourth quarter has historically been our weakest quarter given that it falls outside our traditional nine month selling season, which takes place from January through September .
However, after the close of the selling season. This year the industry saw a continued strength in the average selling price of certain refrigerants, which drove our unusually strong fourth quarter performance.
Looking forward, we are energized to carry the momentum we built throughout 2021 into 2022.
To provide some pricing perspective, the average selling price of many refrigerants increased sequentially from the third quarter to the fourth quarter.
We had not expected fourth quarter pricing to increase but rather remains stable as it has traditionally done.
Instead pricing for certain refrigerants steadily trended upward throughout 2021.
As we enter the 2022 season, we believe this pricing behavior will continue, particularly as the amax Phasedown of Hfcs begins.
Assuming this pricing trend continues for the 2022 selling season, we could see revenues exceeding $270 million in 2022.
If we look to Europe as guidance for pricing relative to the initial steps taken under the Hs HFC Phasedown there.
We could expect to see a doubling in price for HFC refrigerants from the 2021 levels in the next few years.
While we can't be certain pricing will reach those levels or the timing of any such increase but over time, if we reach those levels. We could see our revenues reached $350 million with an operating income of over $70 million.
Moreover, <unk>.
Such a pricing dynamic should be a stimulus for growth in reclamation.
Which has not been factored in into this basic analysis.
As we move through 2022 and beyond we expect to see gross margin performance at the low 30% level as.
As we expect to acquire HFC refrigerant inventory at higher price points than reflected in the 2021 full year.
As reclaim volumes increase we could begin to see gross margin improvement greater than the expected low 30% levels.
Because we acquire guests for reclamation at lower costs as compared to Virgin purchases.
That said, we wouldn't expect to see a reclamation benefit to gross margin until the 2023 season.
And a favorable development last week, we announced that we have completed the refinancing of our debt.
That will go into more details on this but in short we have entered into a new 85 million term loan and.
<unk> increased our ABL facility to a total of $90 million.
This new debt structure will meaningfully improve our cost of capital and interest expense.
With an approximate 3% reduction in the overall effective interest rate.
Refinancing our debt and securing ample availability for the future is a key development for Hudson.
Reflecting our strong operating model and improving performance.
With our visibility today, we believe 2022 will be a year of tremendous opportunity for Hudson related to our strong market positioning, particularly as the industry begins to comply with the aim act as well as other legislative initiatives.
To recap the APAC has introduced a mandate, 10% step down in the production and consumption allowances for Virgin Hfcs in 2022 from the original baseline.
The aim act requires further phase downs of Virgin HFC production over the next 15 years.
With a cumulative 40% reduction in the baseline scheduled to take place in less than two years.
Reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phasedown.
As a leading reclaimer, we believe this will enable Hudson to act as an HFC supplier, while also supporting the transition away from the production of Virgin Hfcs.
We have the ability to process and reclaim all refrigerant gases, including Cfcs Hcf's HFC.
<unk> and <unk>.
So our reclamation capabilities provide a long term market opportunity.
In the near term the installed base of HFC equipment continues to expand and as Virgin supply tightens, we expected demand for Hfcs will drive accelerated reclamation activity to fill the anticipated supply gap.
With our industry, leading reclamation capabilities long standing customer relationships and efficient distribution network, we are well positioned to enable the efficient transition to greener refrigerants.
We've also previously mentioned carb or California Air Resources Board initiatives.
Currently carb has proposed a requirement that Oems use a minimum 10% reclaimed refrigerant and the factory charged equipment.
And we've been actively pursuing opportunities to assist Oems in meeting this requirement.
To that end in January we were excited to announce that Hudson will supply reclaim refrigerant to April there for use in their healthy air solutions for homes.
We are thrilled to work with April there as they take an early adopter approach to incorporating reclaim refrigerant into their products.
Hudson was founded on our commitment to sustainability and in conjunction with April here, our focus on recovering reclaiming and reusing refrigerants can reduce waste and greenhouse gas emissions and create maximum economic value for used refrigerants.
Hudson represents approximately 35% of refrigerant reclamation activity in the U S.
Which positions us to not only support the phase down of HFC refrigerants, but also as a key source and the circular economy of refrigerants.
We are energized by the opportunities, we're seeing to grow our business and to provide our services to better benefit the environment.
Now I will turn the call over to Nat to review the financials.
Net.
Thank you Brian for.
For the fourth quarter ended December 31, 2021, Hudson recorded revenues of $37 8 million.
An increase of 71% compared to $22 $1 million in the comparable 2020 period.
The growth is related to increased selling prices for certain refrigerants during the quarter.
Gross margin was 45% for the fourth quarter of 2021 compared to 25% in the fourth quarter of 2020.
The improved gross margin is primarily attributable to higher selling prices in the quarter, which in the context of a FIFO approach to inventory favorably impacted our gross margin performance.
As we move through 2022 weeks.
We expect gross margin performance for the full year to be in the lower end of the 30% level.
SG&A for the fourth quarter of 2021 was $7 million or 18, 4% of revenue as compared to $6 5 million or 29, 2% of revenue in the fourth quarter of 2020 to slightly higher SG&A cost was driven by higher payroll costs and professional fees.
We recorded operating income of $9 3 million in the fourth quarter of 2021 compared to an operating loss of $1 $7 million in the fourth quarter of 2020.
The company recorded net income of $6 2 million or <unk> 14 per basic and <unk> 13.
Diluted share in the fourth quarter of 2021 compared to net loss of $4 7 million or a loss of <unk> 11 per basic and diluted share in the same period of 2020.
Yes.
Looking at full year 2021, Hudson reported revenues of $192 7 million, an increase of 31% compared to revenues of $1 $47 6 million in 2020.
Gross margin for 2021 was 37% compared to 24% for the full year 2020.
The company recorded net income of $32 3 million or <unk> 74 per basic and <unk> 69.
Per diluted share for full year 2021, compared to a net loss of $5 2 million or a loss of 12 for <unk>.
Basic and diluted share and full year 2020.
The company's leverage ratio was 193 to one for the trailing 12 months ended December 31, 2021 declining significantly from a leverage ratio of $5 84 to one for the trailing 12 months ended December 31, 2020, mainly as a result of the improved financial performance in 2021.
Subsequent to the close of the fourth quarter. The company announced it has entered into a new $85 million term loan agreement with TCW asset management company LLC and has amended its existing revolving credit facility to increase the overall facility to $90 million, which comprises of TCW.
Dissipating and a first in last out or FILO term loan of $15 million.
And wells Fargo, continuing to manage the facility providing up to another $75 million in borrowing capacity.
In conjunction with entry into the new term loan facility and amended revolving credit facility. The company's preexisting term loan was repaid in full and terminated.
Increased revolver availability and provides the company with better opportunities to procure inventory for the upcoming selling season.
Future cash flow opportunities such as the potential for increased pricing that Brian mentioned enables the company to pay down its debt at an accelerated rate as has always been our philosophy.
At closing our excess availability under our credit facility was approximately $54 million we have strong.
Long liquidity and our term loan and revolving loan credit facilities and partners provide us with a solid financial platform and flexibility as we look forward I will now turn the call back over to Bryan Bryan.
Thanks, Matt.
As we enter the 2022 selling season, we're excited about the opportunities ahead and 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 have any questions or comments. Please indicate so by pressing star one on your Touchtone phone pressing star to where we're moving from the Q should your question to be answered and lastly, while posing your question. Please pickup your handset of listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
First question is coming from Gerry Sweeney with Roth capital.
Your line is live.
Hey, good afternoon, good afternoon, Brian and Matt Thanks for taking my call.
Yes, good afternoon Jerry.
Couple of questions for you.
Just curious.
How the HFC.
Recovery in the market is going do you have any sort of planned strategies maybe to maximize this opportunity.
In the past.
Sometimes it's been a little bit of a challenge just curious if how youre going to look at the market on a go forward opportunity.
So I would say, yes in the past the overall reclamation volumes were less than we expected, we certainly expect it more compliance to the work.
We also expected that some amount of economics would help drive their change behavior.
With regards to this particular phased out the HFC phased out there's a lot of differences.
You have seen in the past.
First off environmental organizations are seeking ways to help improve reclamation.
They see it as an opportunity to the extent that <unk> can grow faster than expected than the Virgin production facedown could maybe accelerate as well.
So there's that side of the equation certainly now that we have a requirement in the state of California and uncertain, what the federal level might do.
Our requirement for Oems to use a small percentage of reclaim in their factory charge that should incentive.
OEM to help participate in the growth of reclamation. So that there is adequate supply to meet their compliance needs.
The other thing that we feel strongly about relative to this opportunity is even at the producer level.
At some level when we get to the far end of the phase down.
We will see.
The limit on HFC Virgin production, but some of that HFC production is likely going to be needed to help grow <unk>.
So if there is inadequate Virgin hfcs at that time reclamation, certainly could help in that process as well. So there's a lot of different factors in this particular phase out as compared to the prior phase out.
So we're looking forward to an opportunity to see significant growth in reclamation and not necessarily driven by record reclamation or by regulation excuse me, but really driven by <unk>.
Business the participants in this industry across the board, including Reclaimer's.
Theres more stakeholders, what it sounds like from everyone from the local.
Hey track company all the way to the producers is that a fair way of looking at it.
Yes, we'd say just about anybody in the chain would want to see growth in reclamation and we expected some level, they're going to participate in that and then the other thing. If you think about it right. Now you could argue hfcs are very large percentage of the overall installed base here in the United States is it in.
The 80%, 85% range, probably something in that kind of range.
And that means that 80%, 85% of the installed base is going to have to change out of hfcs over let's say the next 10 15 20 years.
That's a tremendous opportunity for recovery and reuse as we work our way through this overall change to more environmentally friendly refrigerants.
Got it.
Changing gears, a little bit just to the HFC pricing.
Obviously, there's moving parts with the aim act but.
But theres also been supply chain.
Issues.
If any of the pricing increases or pricing pressure was a result of supply chain or any insight into that or.
Is it just a.
Driven purely by the aim act.
It's probably both certainly supply chain issues existed throughout last year.
Whether it be raw material costs are just transportation costs delays in transportation and they are likely going to continue at least for the foreseeable future. Let's say the first half of this year, possibly there might be improvement towards the back half, but also as it relates to know the overall reduction.
And availability relative to demand.
Starting to see price increases just from a supply demand imbalance.
Got it.
And then a final question from me and I'll jump back in line.
Curious.
Several years ago, there was a little bit of a pre buy pre buy opportunity for some refrigerants and then the market shift a little bit more towards.
Just in time inventory are you seeing any shift environment buying patterns this year for refrigerants.
Not necessarily but I do think there might be a hybrid this year.
Folks may be more concerned about availability.
And as a result may look to stock a little bit more product earlier than later.
At the end of the day.
I wouldn't necessarily expect to go back to the old days like the pre 2017 period, where there was a tremendous stocking that would have occurred in Q1 was probably going to be a little bit more than we saw last year.
But I don't think we're ever going to go back to the old days.
Got it.
I'll jump back in line I appreciate your time thank you.
Thank you.
Once again, if there are any remaining questions or comments. Please indicate so by pressing star. One. The next question is coming from Ryan <unk> from Craig Hallum Capital Group. Your line is live.
Good afternoon, Brian Matt Thanks for taking our questions.
Sure good afternoon.
Curious on the two.
$270 million revenue that you mentioned for 2022.
Curious two questions on that one what is the current price assumption you're using for R. 22, and <unk> and then secondly are you assuming volume is at least Directionally flat up down from 2021.
So when it when it comes to some of the target.
That we've talked about we're assuming volume is flat.
We're also assuming no material change with regards to supply side, meaning reclaimed versus Virgin.
Because those circumstances would only make the results better than what we've reflected thus far are talked about thus far.
As it relates to pricing R 22 pricing is definitely at the $30 level.
Now it seems to be fairly constant at that level and maybe slightly higher.
It is possible it could go higher but we've typically had folks think about the $30 level because that's the kind of sustainable level, we saw with cfcs.
With regards to Hfcs, Youre now seeing pricing above $10 a pound.
Probably 10 to $12 a pound the depending on the refrigerant of course, but certainly significant jump.
That occurred throughout the 2021 year.
Great.
And then just so I got it I think you mentioned low 30% gross margin expectation for 2022, how do you compare that I guess looking at your 2024 targets I believe it implies kind of a 30 ish percent gross margin.
Still the right assumption there on out.
Can you compare and contrast, the two.
Yes, what we're trying to suggest right now is we certainly did better on a gross margin basis.
Relative to more of a FIFO inventory, that's a sustainable level, we think that low <unk> is the sustainable level, but we also think we can do better than that now to the extent that we see growth in reclaim volume.
And that probably will start to happen.
Somewhat the later years. So we are expecting growth in HFC reclaim in 2022.
But because the use gas return comes in on the back half of the year typically relative to the season.
Usually going to see that growth go into inventory in 2022.
See the margin improvement until 2023, when you sell out that reclaimed gas.
So as we continue to update activities will be updated on what's happening with reclamation opportunities and to the extent we're pursuing more relationships like April are in organizations that are looking to.
Find ways to grow reclamation, we're excited about that opportunity because the margins typically on reclaimed gas that we acquire are higher than the Virgin supply side.
Great and then just on Opex, how do how should we think about historically it's been fixed.
Fixed good or bad and conditions, how should we think about that going forward with kind of the HFC phase out and the current supply chain issues we have.
Yes, I would say it's pretty flat.
We'll probably maintain the same type of SG&A that we've historically done.
Thanks, Matt one more just on the debt refinance.
Can you talk through kind of the lenders you were considering the process and I guess, how you decided on TCW asset management I know you had.
Quite a few issues with the previous lender. So curious how this one later on.
Sure. So we cast a fairly broad net out into the marketplace.
Lenders that would look somewhat similar to TCW.
At the end of the day, we spent.
Time with a small group.
Then really it just.
The relationship with TCW personnel the types of questions that we're asking the way they wanted to get into the business and understand it better.
<unk> made them.
A leader in the overall process.
The nice thing about working with them is the.
The folks that we spent all this time over many months many different due diligence questions and reviews are the same team that's going to continue with this investment. So a lot of times, you'll work with lenders, where you have new business folks and they hand, it over to another group to maintain the relationship.
But in this case, it's the same folks for both pieces of the puzzle.
So we're really happy with the relationship they have I think a very strong.
Reputation in the industry. So we're looking forward to a very long relationship with them.
Okay.
This concludes today's Q&A portion of the call I would like to turn the call back to management for closing remarks.
Well. Thank you operator, I'd like to thank our employees for their continued support and dedication to our business.
Once 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 we look forward to speaking with you after the first 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 lines at this time and have a wonderful day. Thank you for your participation.