Q4 2022 Hudson Technologies Inc Earnings Call
[music].
Good day, everyone and welcome to the Hudson Technologies fourth quarter 2022 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 not my pleasure to turn the floor over to your host Jen Peladeau ma'am 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 ended 22022 on the call today are Brian <unk>, 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 don't make certain forward looking statements all statements that address.
Expectations opinions or predictions about the future are forward looking statements. Although they reflect reflect our current expectations and are based on our best view of the industry and of 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 ask that you.
Consider and interpret them in that light, where do 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 would cause our actual results to differ materially with out of the way I'll turn the call over to Brian Coleman go ahead, Brian.
Good evening and thank you for joining US 2022 was a tremendous year for our company highlighted by record revenues and profitability and significant debt reduction.
We closed the year with solid fourth quarter results, including revenue growth of 26% largely driven by increased selling prices for certain refrigerants and increase volume in the period.
As many of you know the fourth quarter is seasonally our weakest quarter because it falls outside our nine months January through September selling season.
Gross margin in the quarter moderated at 32% just below our long range gross margin target of 35%.
This slightly lower margin performance it doesn't change our current view for our long term target.
As we previously mentioned, we anticipate that gross margins will moderate sequentially from the 2022 levels in 2023 as the gap between inventory cost and sale prices narrow.
Our operational success throughout full year, 2022 drove enhanced profitability and strong free cash flow, allowing us to substantially reduce our total outstanding debt from approximately 95 million at year end 2000 $21 million to $47 million at year end 2022.
We remain focus on continuing to grow our customer base through strategic relationships with customers, who share our vision of a circular economy for refrigerants.
And are reviewing acquisition prospects as opportunities arise due to the implementation of the aim Act.
As our industry continues to evolve and the commitment to recovering and reclaimed refrigerants becomes even more important we will continue to emphasize our focus on working with those who share our vision for adoption of sustainable and responsible refrigerant management.
With that in mind, we are actively involved in promoting our sustainable products services and consultation capabilities to the marketplace at industry events.
To give you a flavor 2023 got off to a strong start with our presentation to a large chapter of the air conditioning contractors Association, where we discuss the aim act and the role reclaimed refrigerants play.
In February we delivered additional observations on the evolution of the APAC from the floor of the AC HR Expo the world's largest HVAC show and.
And coming up in March at the HVAC excellent conference, we will deliver a podcast and host a classroom session for service technicians on regulations refrigerant recovery and reclaim.
Additionally, we will also conduct IFC service technician training on recovering and reclaimed refrigerants.
So we're actively sharing our more than 30 years of experience and thought leadership in many conferences venues and events across the industry.
Through these efforts we are pursuing ways to jumpstart the growth in recovery and reclamation.
I'd also like to take a minute to share some exciting recognition we received.
Recently, our our side recovery services and reclamation technology were named to the building Greens list of top 10 products for 2023.
Building Green is a highly regarded publication that supports facilitates and champions change makers and sustainable design and building <unk>.
Building Green highlighted hudsons commitment and capabilities around the recovery of refrigerant during repairs.
End of life service, when upgrading systems, and improving equipment efficiency by cleaning refrigerant systems onsite.
Additionally building Green cited our certified reclaim refrigerants sold under the Enbrel refrigerants brand as an important element and effective refrigerant use and management.
In.
To being included in the publication of the list is featured on the U S. Green building Council's website, which serves as an information resource for companies and entities committed to creating environmentally and socially responsible buildings and environments.
The industry transition is underway and gain momentum with last year start of the HFC phased out as mandated by the APAC.
The act mandates the EPA to use regulations for the growth in reclamation.
Around September of this year, we expect the EPA will issue a proposed rule that will comply with that mandate.
The 10% step down in the Virgin production that began in 2022 remains in place for 2023 with a further reduction to 40% of the baseline beginning in 2024.
With an estimated installed base of over 125 million stationary units.
We remain optimistic that the ongoing step down in each of sea production and consumption allowances mandated by the APAC will benefit our business.
We are encouraged by legislation both at the federal and state levels that promotes the use of reclaim refrigerants we.
We believe that heightened regulatory and reporting initiatives will drive consolidation in our industry and provide acquisition opportunities of certain of our competitors may face compliance challenges.
Comfort cooling and refrigeration systems are considered essential in most areas of the world and these systems typically have a life expectancy of approximately 20 years.
So the availability of reclaimed hfcs to breach the reduction in the Virgin supply will be critical in ensuring an orderly transition to lower <unk> refrigerants and equipment.
Hudson is uniquely qualified to leverage our field service capabilities to help drive the transition to more efficient cooling equipment and greener refrigerants, while also servicing the existing installed base with reclaim refrigerants as the industry continues to evolve.
We're excited to have delivered record results in 2022.
To thank our entire organization for their efforts in driving our success this year.
As we begin to move through 2023, we like many companies are keeping a watchful eye on the economy.
We've weathered many economic environments during our 30 years in business and while comfort cooling and refrigeration can likely remain more insulated from the worst of a recessionary environment.
A recessionary environment can present challenges for everyone.
That said, we believe we are positioned for success with our proprietary reclamation technology and reclaim refrigerant products and our experience in this industry long standing customers and industry relationships and a proven distribution model to grow our role as a leader in the promotion and navigation of the circle.
Economy of refrigerants.
We remain focused on leveraging our strengths to grow our business. While also facilitating the transition to next generation cooling solutions.
Now I'll turn the call over to Nat to review the financials.
Thank you Brian .
For the fourth quarter ended December 31, 2022, Hudson recorded revenues of $47 4 million.
An increase of 26% compared to revenues of $37 $8 million in the comparable 2021 period.
The growth was driven by increased selling prices for certain refrigerants during the period as well as increased sales volume in the quarter as compared to the fourth quarter of 2021.
Gross margin was 32% for the fourth quarter of 2022 compared to 45% in the fourth quarter of 2021.
As Brian mentioned this is just below our long range gross margin target of 35%.
However, we don't believe that slightly lower margin performance in the quarter, we will have any impact on our long term target as fourth quarter margins are frequently lower that margins achieved in the selling season.
As we previously mentioned mentioned, we anticipate that gross margin will moderate sequentially in 2023 as the gap between the inventory cost and sales price narrows.
SG&A for the fourth quarter of 2022 was $7 5 million compared to $7 million in the fourth quarter of 2021.
SG&A has grown as the company invests more in personnel and it costs.
We recorded operating income of $7 1 million in the fourth quarter of 2022 compared to operating income of $9 3 million in the fourth quarter of 2021.
The company recorded net income of $5 1 million or 11.
Basic and diluted share in the fourth quarter of 2022 compared to net income of $6 2 million.
A <unk> 14 per basic and <unk> 13 per diluted share in the same period of 2021.
For the full year ended December 31, 2022, Hudson reported revenue of $325 2 million, an increase of 69% compared to revenues of 192, 7% for full year 2021 the.
The revenue growth was driven by increased selling prices for certain refrigerants during the period.
Gross margin for full year 2022 was 50%.
<unk> to gross margin of 37% in the prior year period.
The margin increase is primarily related to higher selling prices for certain refrigerant for 2022, when compared to 2021.
Hudson reported operating income of $131 5 million for full year 2022, compared to operating income of $42 $3 million in the prior year.
The company recorded net income of $103 $8 million or $2 31 per basic and $2 20.
Per diluted share in 2022 compared to net income of $32 3 million.
Or <unk> 74 per basic and <unk> 69 per diluted share in 2021.
Tax expense was $13 4 million in 2022, and $1 1 million.
In 2021.
Tax expense.
<unk> was higher in 2022 and 2021 since the tax benefit related to the deduction of net operating losses declined as we fully utilize these net operating losses in 2022 due to increased profitability.
The effective tax rate for future periods are expected to reflect an overall combined federal and state rate of 26% subject to various temporary and permanent differences.
During the fourth quarter of 2022, the company paid down an incremental $10 million of term loan debt, resulting from improved performance and increased cash flow.
Reducing its leverage ratio 2.03, or four times to one.
For the trailing 12 months ended December 31, 2022 declining significantly from a leverage ratio of 193 to one for the trailing 12 months ended December 31 2021.
The company reduced total outstanding debt by 50% from $94 9 million at.
At December 31, 2021 to $46 8 million at December 31, 2022.
During the 12 months ended December 31, 2022, the company generated $62 $8 million of cash flow from operations.
Which was mainly used to pay down term loan debt that now includes higher interest rates, which have increased by as much as 400 basis points.
Throughout this time, we have not needed to borrow against our revolving loan, which allows us even greater financial and operational flexibility.
Stockholders equity improved to $174 9 million at December 31, 2022, as compared to $70 9 million at December 31 2021.
The companys availability, consisting of cash and revolver availability at December 31, 2022 was $67 million.
As we continue to generate additional cash flow in 2023, we expect to one further delever our balance sheet to ensure we have adequate inventory on hand, and three consider other opportunities as they arise.
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 I will now turn the call back over to Brian .
Thank you.
Our 2022 selling season was very strong and we are focused on preparing 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've built.
And to growing 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.
Certainly at this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Brian <unk> from Craig Hallum Capital Group. Your line is live.
Good afternoon, Brian Matt Congrats on the strong results last year.
Want to start with pricing I didn't catch it if it was in the prepared remarks, but what are you seeing I know, it's seasonally quiet right now, but what are you seeing with R 22, and HFC pricing.
R 22 continues to be strong.
It's definitely in the thirties.
Has pretty much been that price range for last year, and certainly going into this year.
In the third quarter.
Reporting we noted that in the latter part like say September of last year prices started to decline from let's say a high generally speaking hfcs as a category around $14 a pound to around 12 that softer pricing has gone into the beginning of this season.
We don't know how pricing is going to play out, but we do think there's opportunities for higher prices, particularly as people start to become aware, we're thinking more about what the significant shortage might be for the 2024 year with the 40% step down in the Virgin allowances starting that.
Got you and then just on the gross margin in the quarter to 32% how much of that was impacted by just pricing declines I guess I don't know what the mix is if its any different in Q4 between our 2002 and hfc's, but what played into that.
It was really just overall volume relative to our overall fixed cost.
Nothing particularly special.
That said I think I said the same thing that we don't believe it has any impact on our long term targets.
What's your confidence you've talked about 35% gross margins is your medium term target is that a good baseline for 2023.
Well.
It is a baseline certainly for 2023 and beyond the question is when might we get to that level on a consistent basis.
We still think there's some upside to the margin, but right now I think thinking of it in the context of 35% makes the most sense.
Switching over to reclamation volume you mentioned a lot of proactive steps seminars presentations education et cetera, all very good from our view have you seen any improvement in the recovery of feedstocks are really fueled the process.
Unfortunately, reclaim continue to be flat again last year as it's been for the last couple of years.
To some extent that then ties into some of our frustration that we've expressed about the EPA.
Promulgating regulations, but based on their public comments, they've already started a process, which would lead to a proposed rule likely.
Likely issued in around September of this year that addresses regulations to promote the growth of reclamation.
Moreover, we know that with a 40% reduction in 2024, there's going to be shortages and when there's shortages there's growth in reclamation.
Great. Thanks, Brian , Matt I'll turn it over to the others.
Thank you.
Thank you. Your next question is coming from Gerry Sweeney from Roth Capital. Your line is live.
Good afternoon, Brian and Matt how are you guys doing.
Good good good thank you.
Obviously, the big question is increasing reclaim and but im curious if theres other channels, where you can go out and get more capacity I mean, your inventories are up.
Yes.
Quarter nicely, which is positive.
And to this year, but can you go out.
And by inventory from I don't know other participants et cetera, just curious if theres other ways to sort of manage that or take advantage of it or is there a secondary market.
Well I mean, we have many suppliers.
So I don't know that we really have limitations based on suppliers.
The thing that we're trying to spend a lot more time on that we might have in the past is with contractors around recovery.
So it's recovery that leads to increases in reclamation simply put if.
If contractors don't recover the gas then there isn't guests to re close.
So we.
We talked about a lot of different initiatives.
If you heard some of the descriptions.
Lot of it was centered at the contractor level and training on recovery as well as the importance of reclamation. So we think that as we begin to take a more proactive role at that level, we could stimulate more recovery, which hopefully then as we expect will lead to more reclamation pounds.
And.
On that front stimulating more recovery also goes hand in hand with sort of.
Paying for that gas and making sure that that money gets into the hands of the contract and because there is a time.
<unk>.
Value of time associated with that collection, where they can be.
Potentially otherwise going onto another sort of job.
Any thing working around that or some of these EPA regulations that youre alluding to maybe help increase.
That opportunity.
I'd say from an economics point of view last year, we were able to eliminate all fees.
So prior to last year, the sale price of Hfcs was relatively low.
There would be refrigerants that are recovered that are in our industry will referred to Ms Cross contaminated or co mingled.
And low economic.
Times, those refrigerants are really more of a cost than an asset, but now with the value of HFC as being as high as they are and with our robust fractional distillation capacity, we're able to pay for even the poor quality refrigerants, So hopefully economics isn't a barrier any longer.
<unk> for contractors to do the recovery.
We think the barrier, though is changing behavior.
We think the barrier is lack of training maybe even.
Poor equipment.
So we're supporting.
New recovery techniques and training.
And if necessary, we will support new recovery equipment, whatever we can do to help stimulate the recovery will lead to.
Further growth.
Growth in reclamation.
Got it.
Any way you could develop a.
Direct contact with the contractors to get it back or does that sort of.
I know you don't want to.
You have different ways to go to market, but you also don't want to upset some of your <unk>.
<unk> houses distribution channel, but I'm just curious if there is an option there as well.
We could get cylinders basically anywhere close to coast in the United States. There is a tremendous infrastructure of LTM debt.
Debt.
It could pick up silver is just about anywhere.
I don't think logistics and freight is going to be an issue where it's capacity.
We definitely have the excess capacity to handle more cylinders.
I think.
Handling cylinders and more importantly, returning cylinders on a timely basis can be difficult for other reclaimer's, particularly with long lead times on cylinder manufacturing things like that so again, we try to plan to be ahead of the game as we go into any particular season to be able to pick up additional capacity and volume.
Okay got it.
That is it for me.
$4 to 23.
It's hot dry.
And fought.
Thanks.
We're looking forward to two thank you. Thanks Sherry.
Thank you. Your next question is coming from Chip Moore from Es Hutton Your line is live.
Good evening, thanks for taking the question.
Congrats on the great year as well Echo my wishes for a good cooling season.
Brian I'm wondering if you could talk update us on maybe any state level initiatives, what youre seeing out there and then.
On the OEM equipment dealer side.
Progress there and some of the trends.
So there is probably at this point 25 states that are in different advanced stages.
<unk>.
Regulating HFC refrigerants.
Most of the focus now is headed towards equipment and GDP and charge sizes.
So that they're advancing the ideas that.
To enter commerce into their particular state.
We're likely going to have to sell equipment with very low Jude piece.
Most of those state level regulation legislation or close to the federal and the APAC some are a little bit different.
The industry Hudson are trying to tie some state initiatives backwards towards what the APAC provide so that we have one solution throughout the United States.
At the end of the day, it's possible, though some of the states will go beyond and have more restrictions than what the federal APAC provides currently.
But thats probably going to take.
A handful of more years to develop.
From where we are today.
We do like the idea of the California model regarding requiring Oems to use a certain portion of the factory charge of reclaim refrigerants, we certainly encourage that thought process as other states implement.
Their particular legislation, we certainly encourage.
Thinking in that.
Vein as well at the federal level.
Difficult to say, what the EPA may or may not too, but we're hopeful that as the EPA deals with equipment transition rule and then leads into the refrigerant management rule, which may come out of the proposed rule may come out in September .
They begin to address issues like that.
Got it that's helpful.
And maybe one more for me.
One of the capital allocation side I think.
Brian You mentioned kind of actively reviewing acquisition targets are you seeing.
I'll pick up in activity and are you seeing sort of that <unk>.
<unk> and some of those issues out there.
Is that.
Leading to.
More.
More of these mom and pop type entities potentially seeking exits are you starting to see some of that trend or is it still a bit early for that.
I do think there's folks out there theyre seeing the writing on the wall sort of.
Not that it's here and now some of the restrictions.
Really are not going to take effect until 2025 and beyond we still don't know where the particular lawsuit is going to land rigs.
Regarding the current EPA requirements for the industry to move towards reusable cylinders versus one way or disposable cylinders.
I don't know when that case will be determined but probably could be maybe as early as June could be as late as September that also will give some visibility about whether or not people are industry youre going to have to invest in reusable cylinders.
We do have a large reusable solar fleet, just because of the dynamics of our business.
But that's something that could impact others, whether they'll have the ability to invest in the steel. So I think it's a little early for folks to paddock per se, but certainly I think people are beginning to think about what they might need to do in 2025 and beyond.
Interesting, yes sort of a worthington.
Cylinder.
It could be an issue for some folks.
Regardless, you're delevering and your.
Position.
Even any macro slowdown.
Mike here.
Potential to scoop up some some targets is that fair.
Yes, we're definitely active we're certainly speaking to folks.
But to your question I don't think anyone feels like they haven't gone to their head at this point.
And certainly.
Most most of these transactions do take time.
And longer term more of that.
Sort of service opportunity is that.
An area you're investigating as well.
Yes, and there is already a lot of private equity money in this area a lot of consolidation.
So is something that we.
Would want to try to be as disciplined as possible evaluations.
But recognizing there may be competition.
Yes.
Okay I'll hop back in queue, thanks very much.
Thank you Tim.
Thank you. Your next question is coming from Ryan <unk> from Craig Hallum. Your line is live.
Hey, guys just two follow ups for me.
Curious on inventory, so grew pretty sizable year over year, but more so sequentially curious how much of that is price increase versus volume increase and then one follow up.
Yes, it's mostly pricing, obviously with the selling prices going up over the last year.
By prices has gone up as well as we've previously communicated.
Yes, generally our philosophy is not to somehow go long on inventory.
Makes sense.
And then just one we saw on the EPS.
Earlier this week, we saw them in force HFC restrictions on three companies that were.
Not accurately reporting their HFC imports I'm curious if you have thoughts on that enforcement and potentially the EPA actually starting to do a little bit more here.
Yes, no I think the Epa's in this area I think the EPA is doing a great job.
Both in constructing regulation that hopefully will prevent any illegal imports or limit illegal imports.
The alliance and the illegal import committee of the lines have been looking at for probably six seven years now.
I do think there is more and more requirements of data and the EPA staff is absolutely reviewing the data and accuracy.
So we're very pleased with those actions.
And we.
We can't say that we know more than what's reported but hopefully they will continue to monitor activity in who's reporting and be very aggressive as it relates to those who were not obey the rules regulations.
Very good. Thank you guys. Good luck.
Thank you.
Thank you that concludes our Q&A session I will now hand, the conference back to Brian Coleman, Chairman and CEO of Hudson Technologies for closing remarks. Please go ahead.
Thank you operator I'd.
I'd like to thank our employees for their continued support and dedication to our business.
I want to again, thank our long time shareholders and those that recently joined us for their support as well.
We look forward to speaking with you after the first quarter results have a good night everybody. Thank you.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.