Q3 2022 Hudson Technologies Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to today's Hudson Technologies third quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode, but 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 Nesbit of.
IMS Investor Relations John the floor is yours.
Thank you Tom Good evening and welcome to our conference call to discuss Hudson Technologies financial results for the third quarter 2022 on the call are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, 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 or expectations 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 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 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 factors that could cause our actual results to differ materially okay with that I will turn the call over to Brian comment go ahead, Brian .
Good evening and thank you for joining us.
Third quarter delivered a strong close to our 2022 selling season, reflecting record revenues improved margins and enhance profitability.
During the third quarter, we continued to benefit from sustained strength in the pricing of certain refrigerants.
In addition to delivering our third quarter of record revenue performance, we achieved gross margins of 49% in.
In the quarter and a significant improvement when compared to gross margin in the third quarter of 2021.
However, as expected gross margin moderated sequentially as compared to the first and second quarters of this year as we begin to see less of a gap between the inventory cost in the sale price.
As we entered the fourth quarter, which is seasonally our weakest quarter, we are focused on maintaining our existing strategic relationships and adding new customers, who share our vision of the circular economy for refrigerants.
But it is a little time industry leader.
Facilitation and adoption sustainable refrigerant management.
And we are deliberate efforts to attract partners who are similarly committed.
In addition to our traditional sales activities. We are also heightening the market recognition of a sustainable products services and consultation capabilities.
Participation at industry events.
In mid September we exhibited at the food industry associations energy in store development confidence, which focused on retail food energy use and management.
<unk> refrigeration and sustainability.
In October Hudson presented for continuing education webinar around the amax paydowns and the importance of reclamation.
Which was sponsored by the industry newsmagazine AC HR news.
With almost 500 live attendees and we anticipate another several hundred reviews from registered participants.
This week, we are exhibiting at the Greenville International Conference and Expo, introducing our products to attendees focused on creating greener buildings in communities throughout the use of sustainable solutions.
And next week, we'll be at the institute of heating and air conditioning industry Tradeshow IH HCI is a California HVAC industry organization focused on contracted trading and with California's role as an early adopter.
Certain reclamation activities.
Look forward to showcasing our capabilities there.
As an industry veteran.
Resolutely pursuing opportunities to share or more than 30 years of experience and expertise and to provide alternatives and thought leadership as our industry continues to transition to next generation refrigerants.
As you know that transition has begun in earnest with the start of the industry's compliance with the <unk> This year.
To recap the Aynak mandates, a 10% step down in the production and consumption allowances referred to in Hfcs in both 2022 and 2023.
40% baseline reduction in 2024.
The act mandates much faster and more aggressive phase out that what was undertaken with the R 22 phase out a few years ago.
It promotes the use of reclaim refrigerants to meet demand as Virgin production steps down while.
While the move to reclaim refrigerant use won't happen overnight, we estimate an installed base of HFC units with more than $100 million in 2020.
So as the leading reclaimer with the fastest state of the art technology.
Decades of proprietary knowledge Hudson is uniquely positioned to fill the anticipated HFC supply gap.
With reclaim refrigerants as Virgin production is phased out.
Moreover, the EPA just issued post allocation will cover in the 2024 to 28 baked out period with the mandated 40% reduction from the original baseline.
Parallel opportunities related to the neighborhood.
We're working to establish partnerships and response to compliance issues being proposed by certain states as well as the federal government.
For example, we spoken a great deal about carb regulations in California, which require Oems to use a minimum 10% reclaim refrigerant and the factory charged equipment.
In the past year, we've announced partnerships with April air analytics, whereby Hudson will supply the reclaim refrigerant needs for their new equipment.
Likewise, there are many other states evaluating move forward I'm regulations, requiring the use of reclaimed hfcs and we believe there is a tremendous opportunity for us to grow our business as we help customers navigate the current and future regulatory environment.
As the leading reclaimer in the United States.
Related 35% market share, we are well positioned to supply reclaim refrigerant.
Stall base.
Equipment as Virgin HFC production is phased out.
And also as a supplier for new equipment at the OEM level.
We have decades of experience in several prior refrigerant phase downs under our belts.
And we're looking forward to playing a leadership role as this most recent refrigerant evolution continues.
Harper cooling and refrigeration systems are essential to day to day life.
And these systems have a longer life expectancy.
Therefore, the orderly transition to lower GBP refrigerants and equipment.
We'll rely for some time on the availability of reclaimed hfcs.
Rich the reduction convergent supply.
We remain committed to providing the products and services to enable an industrywide transition.
The next generation refrigerants and more efficient equipment.
As the leading reclaimer Hudson has the capability to reduce refrigerant ways and harmful denting of refrigerants into the atmosphere.
By driving forward, the technology and incentives that enable our industry partners to recover we clean and reuse refrigerants.
We're pleased to have delivered exceptionally strong performance in the third quarter and for the nine month selling season.
As we move through the close of 2022 and out to 2023, we along with the rest of our industry are keeping a close watch on the economy, because while comfort cooling in refrigeration.
Likely remain more insulated from the worst of the recessionary environment.
<unk> downturn isn't a positive development for anyone.
Hudson is uniquely positioned with proprietary recommendation technology.
Long standing customer relationships and our proven distribution model to continue driving our leadership role in the circular economy of refrigerants.
We remain focused on leveraging our strengths to grow our business. While also facilitating the transition to next gen cooling alternatives.
Now I'll turn the call over to Dan to review the financials.
Got that.
Thank you Brian for the third quarter ended September 32020 to Hudson.
Hudson recorded revenues of $89 5 million, an increase of 48% compared to revenues of $60 6 million.
In the comparable 2021 period.
The growth was driven by increased selling prices for certain refrigerants during the quarter.
Gross margin was 49% from third quarter of 2022 compared to 39% in the third quarter of 2021.
The gross margin increase is mainly due to the significant increase in selling price without a material depreciation and the cost basis certain refrigerants sold.
As expected we saw a moderation in gross margins sequentially in the third quarter compared to the second quarter of 2022 as the gap between inventory cost and sales price narrowed.
SG&A for the third quarter of 2022 was $7 2 million or 8% of revenue compared to $6 1 million or 10% of revenues in.
In the third quarter of 2021.
We recorded operating income of $36 3 million in.
In the third quarter of 2020 compared to operating income of $16 9 million in the third quarter of 2021.
The company recorded net income of $29 4 million or <unk> 65 per basic and <unk> 62 per diluted share in the third quarter of 2022 compared to net income of $15 9 million or 36.
Our basic and <unk> 34 per diluted share in the same period of 2021.
Net income during the third quarter of 2022 included a tax benefit of $2 $8 million associated with the release of an income tax valuation allowance as a result of increased profitability.
During the third quarter of 2022, the company paid down an incremental $31 million of.
Term loan debt, resulting from improved performance and increased cash flow.
Thus, reducing its leverage ratio to <unk> 41 to one for the trailing 12 months ended September 32022 declining significantly from a leverage ratio of 235 to one for the trailing 12 months ended September 32021.
Take that.
Our 2022 selling season was very strong.
And we're focused on using the off season to prepare for what we believe will continue to be a very receptive market for our products and services.
We look forward to continuing to drive the momentum we built to grow our leadership position as a provider of sustainable products and services for the refrigerant and reclamation industry.
Operator, we'll now open the call to questions.
Apparently ladies.
Ladies and gentlemen, the floor is now open for questions if you'd like to ask a question. At this time you May press star one on your telephone keypad to enter the queue. We do ask if listing on speakerphone. This evening that you. Please pick up your handset while asking your question to provide optimal sound quality once again, ladies and gentlemen, that'll be star one at this.
Time, if you'd like to enter the queue to ask a question. Please hold a moment, while we poll for questions.
And the first question today is coming from Ryan <unk> from Craig Hallum Group Brian .
Brian Your line is live please go ahead.
Afternoon, Brian Matt one start with pricing so strong pricing obviously throughout this whole selling season favorable dynamics I'm curious what you're seeing currently kind of holiday season ended and maybe if that.
Portends anything towards what you expect kind of a start next selling season next year.
Yeah, we've seen a little decline in the sales price, particularly towards the latter part of the third quarter.
Some segments, probably under 10%.
<unk>, we triggered it too this is our first year that folks would allowances, whether theyre producers with consumption allowances are importers, probably we're a little cautious with what product that we're making available in the beginning of the year.
To make sure let's say they didn't run out that's a way to look at it.
And probably found that they were too cautious and slightly more availability I think on the back half of the year.
So I don't think overall effects.
Our current view and long term views about pricing, we do expect.
Prices to increase over time.
And so we think it was just more probably the first year of folks trying to allocate allowances and where it will part of Olin.
Then moving over to reclamation have you seen any uptick in volume kind of once we get towards the tail end, it's kind of more reclamation timing have you seen any change in contractor behavior willing and able to capture more gas returning dirty gas et cetera relative to past seasons.
Again, it's right now it's surprisingly slow growth.
Because we are paying more money now.
Yeah.
As it relates to wholesaler activities they still continue on.
Often large majority continue to charge the contractors.
I think the relationship that we created this year with Lennox.
Which then has probably over 3000 dealers which are contractors.
Is the first big step for Hudson to go direct to the contractor to try and provide them with sufficient economics to obey the law and to increase the returns of refrigerants. So we're seeing some benefit from that lending relationships, but on an overall basis, we are still let's say.
On an overall basis disappointed with the rate by which reclamation is growing now.
We participated in a white paper with three Ngos and another reclaimer.
<unk> provided some guidance and recommendations for programs that the EPA could support to enhance the growth of reclamation.
And we believe that.
Sometime probably by mid next year, we should see a rule from the EPA around refrigerant management and programs to promote the growth of reclamation.
Now, we think it's going to be a little late in terms of timing too.
To help.
Offset what we think is going to be severe availability.
Availability in 2024 relative to the 40% reduction.
HFC Virgin allowances so.
We're moving forward I'd say slowly towards our objective.
And we're seeing some I'd say small signs of positive movement.
One more for me.
With California regulation change that you mentioned requiring pas.
Part reclaimed gas in original equipment here, starting in two months in 'twenty, three but how well prepared do you think Oems are educated prepared with the relationships access to reclaim gas et cetera, do you think there.
It's difficult to answer that without being inside any of these organizations. They certainly are aware of the issues.
Most would've participated.
In activities sponsored by a trade organization called AHRI.
And it's a negotiation with the state of California.
The 2022 year provided an opportunity for early adoption, but.
The regulation itself is not effective until next year.
So how any of the Oems are going to.
Treat the requirements next year versus this year, it's difficult to say, but.
I would say that it appears that there were very few early adopters.
Helpful. Thanks, Brian Good luck guys.
Thank you.
Thank you and the next question is coming from Gerry Sweeney from Roth capital.
Jerry Your line is live please go ahead.
Good afternoon, Brian and Matt Thanks for taking my call.
Good afternoon.
I wanted to stick on collections obviously.
But the key focal point for.
For the model.
Is there any obviously you mentioned <unk>, a 3000 deal or 3000 potential contractors with that.
Is there anything else that you can do to make even though we're 3000 contractors make it easier for them to get product here is there.
Our mail back program that they can Mount canisters, obviously, there's probably some rules and regs around that but I'm just curious what your thinking is too.
Make it easier for contractors, not just Linux, but even potentially others.
Yeah, I mean, that's a very good question.
We have spent.
Recently, a fair amount of time trying to get voice the customer ask a lot of questions of contractors are pinpoints.
Including the trade organization AHRI has put together some surveys and different places of the channel about what might be perceived barriers to.
Recovery in reclamation.
We are.
Trying to not create any one program, but we are trying to do is listen to the contractors and try to help with whatever problems. They may have do they have a loading dock do they not do they palletize do they not.
Do they want to.
Bulk up or not so we're trying not to have one program or one offering.
We have to date chosen not to go and create new clones.
Two contractors, there's some folks in our industry that have done that.
And the reason we chose not to do that is we never found that that approach to the market to be.
Economically viable.
It certainly marginal.
So what we're really trying to do is find ways to use <unk> or other means.
To get to.
These contractors as to avoid building up an infrastructure.
No.
The trucks and then draw.
Driving around to pick up at local locations.
Got it I may have an idea for you later actually offline.
It's just something.
There are people out there that do that but.
Got it.
That's helpful.
And inventory.
2024, big step down.
How much inventory I mean.
How do you look at inventory not just this year next year, but really.
We have 14 15 16 months before 2020, foreheads really hits the selling season.
Is this the time to bulk up on inventory have you made any decisions or thoughts on on that front.
So sorry, Jerry are you asking Hudson's view on Hudson's carrying volumes, yes, yes.
That's correct.
We we certainly were hurt when we did the airgas acquisition, yes.
Our multiyear stockpile a product at a price correction.
And prior to 2017, we generally saw wholesalers stocking inventory in Q1, and then reloading in Q2, and then not by a whole lot towards the end of the season in Q3.
It also simultaneously around the time of the acquisition we.
We saw the purchasing pattern change by those wholesalers and to date, we don't see a lot of wholesalers buying.
Large volumes in Q1, certainly by in Q1, but not to the extent that they might have in the past and we certainly see them buying more in Q2 and now Q3.
So we made a decision.
Not sure when we started to affect that decision, but let's say in 2019 sometime in 2019.
Going forward that we were going to carry as much inventory volumes and we're sticking to that plan.
We certainly don't know.
Next year's economy could bring.
As you know the thing that we really care about most as a headwind is cool weather.
You don't know if you'll have a cool spring. So we just always try to be a little bit cautious with the amount of inventory. We carry the dollars have been increasing in inventory, mainly because cost per unit has gone up not so much the overall volume of product.
Got it no that's fair.
Alright, unless and.
And on that front right last go around R. 22 had been phased out hfcs were taken by the army.
With the new game in town and we're well established in their alternatives.
Which brings me next question.
I don't know of any alternatives and I'm just curious if anything has popped up I don't think there's actually a way to create an alternative for the hfcs, but I'm just curious if you had any.
On that.
So I think we've covered.
There are several different pieces to this aim act in one of the aimed at an HFC reductions really do not look anything like the prior phase outs.
And probably one of the important pieces to this is what you just worth touching on.
Debt at the end of the day, there's a.
<unk> equivalent.
<unk> down of HFC production.
Not a product by product of phase down or phase out.
And so what we think will happen.
Is people and Oems over time, and we're still waiting for a lot of building codes to change to allow this to happen.
Good man.
<unk>.
Lower G. W. P refrigerants.
If you take like a <unk> it has a little over 2001, two week equivalent it's the most widely used HFC today.
But using allowances to produce for today is not sustainable when you had the severe cuts.
And so people will be converting to lower do you routine products.
We haven't seen any lower GDP products that might constitute a drop it.
So we haven't seen.
Any technology per se that you could argue.
Help run.
For 10 a unit.
With some other <unk> replacement or whatever category you talk about.
We're really talking about.
Well over maybe.
<unk> 120 million stationary units that over the next five to 15 to 20 years are going to have to likely convert to something new.
Now technology can change I don't know what 15 years from now will bring but right now we don't see let's say the same view our approach to drop and as you saw with <unk>.
Ods systems that were allowed to be.
Replace the converted with HFC systems.
So sorry for the long answer yes.
Yes, no no that's why I think it's.
That's helpful for everybody and the key there part of it is.
N H F O system has different.
From a different flammability, which needs building code to change before.
Our potential.
A drop in for an HFC system will require some HFF is which is more potentially more flammable, which also requires building codes. So there's several steps that have to happen for.
A potential drop down to occur.
Yes, and then building codes will catch up.
For 2024, 25, and then also.
Not all <unk>, but some amount of the <unk> use hfcs as components.
So again this will be another decision.
A producer with consumption allowances will have to decide are they really going to make hfcs for sale into the aftermarket or are they going to be making chip sees that will go into <unk> and then is it plausible that they might want to work with the reclaimer get more hfcs to grow that <unk> business.
Got it.
Okay. That's it.
I'll jump back in line. They asked enough took up enough time. Thank you.
Thank you.
Thank you. Your next question is coming from Chip Moore at EFI.
Chip you're line is live please go ahead.
Hey, Brian in that day.
Predicting question.
Wanted to ask another one on collections.
Claim rates still being a little disappointing like you said.
Curious, how youre thinking about the outlook for growth there supply growth next for next year's selling season do you think.
You can see that EPA rule to get a real pick up or how should we be thinking about that for next year selling season.
So.
Yes.
Most of the reclaim that we receive let's see this year.
We will be.
Utilized next year so.
Growth in reclaim activities in the 2023 season in some respects will benefit 2024.
Because most of the use gas that you bring income in the back half of the year around this time of year for example, more so than the first four months of the year.
And as it relates to the opportunity first off.
If you take HFC for today.
Right now the reclaim volumes of HFC for today are only about 25% of what the peak reclaim volumes were for R 22.
So if you just say that somehow which we don't believe but somehow the aim act and the implementation of a phased out is similar to ods than you have at least a fourfold growth and the opportunity of HFC reclaimed from where we are today.
But then we do believe there's added elements to allow for reclamation to grow much more significantly that.
One is as.
I briefly mentioned, we participated in white papers and have put forth. Some ideas for the EPA to create programs to promote the growth of reclamation and in fact, there will be a rulemaking likely the middle of next year that will address this so that'll be the first time and certainly.
No.
Promulgation of regulations by the EPA with the prior phase outs to support the growth in reclamation and then third piece. That's maybe the most important piece is the commercial side.
We really do believe Oems are going to back and support recovery and reuse I think they have to in some respect to meet their obligations and we do think chemical producers will also likely participate because it likely will benefit their ability to grow their HMO productions.
So we still.
Field has a tremendous upside.
On where we are it's just that we're sort of disappointed at the pace.
Growth and but we do think there'll be three drivers to help stimulate that growth, whereas we had the prior phase outs were simply.
The guys did obey the law drove the speed limit for the guys that did the recovery.
Got it Thats very helpful color.
Brian .
And maybe one more.
Any help you can give us on the outlook, obviously, you're running well ahead of the targets you laid out for for this year. So any color on Q4 weather margins or otherwise and then I assume you still feel very good about 2025 basis points.
Fair enough.
Yes, we still feel very good about our long term forecast and projections.
<unk>.
<unk> believes our Q4 for 'twenty two we will have some similar relationship for Q4 of 2021, certainly Q4 2021, you saw significant increase in gross margins in that quarter compared to the historical levels as we reflected in Q3 of this year.
We're seeing a moderation of the gross margins, which is what we expected the cost will begin to catch up. So we think Q4 'twenty two is going to look a lot like given the similarity to Q4 2021, but our long term.
No.
Projections are still we think conservative and we love to be able to get there.
Got it Okay fair enough.
Sort of a similar top line, but you think margins could be.
40% plus range.
For Q4.
Yes, something in that range.
Okay, So like I said it.
Likely similarity when you get to the operating line.
Got it okay. Thanks very much.
Thank you.
This does conclude today's Q&A session I would now like to hand, the floor back to management for closing remarks.
So.
Thank you operator, I'd like to thank our employees for the continued support and dedication to our business into our successes here with a record performance.
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.
Everyone has a happy and safe holiday season, and we look forward to speaking with you after our fourth quarter results.
Have a good night everybody.
Okay.
Thank you. 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.