Hudson Technologies Inc. Q1 2023 Earnings Call
Speaker 1: Greetings. Welcome to the Hudson Technologies First Quarter 2023 Erings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 1: Please note, this conference is being recorded. I will now turn the conference over to your host, John Nesbitt of IMS Investor Relations. You may begin. TO BE CONTINUED WEN
Speaker 1: Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies financial results for the first quarter 2023. On the call, Brian Coleman, President and Chief Executive Officer and Matt Krishnamurti, Chief Financial Officer.
Speaker 1: I'll now take a moment to read the safe hardware statement. During the course of this conference call, we will make certain forward-looking statements, all statements that address expectations, opinions, or predictions about the future of forward-looking statements, although they reflect our current expectations and are based on our best view of the industry and our business, as we see them today, they're not guarantees of future performance.
Speaker 1: Please understand that these statements involve a number of written assumptions since those elements can change. In certain cases or not within our control, we would ask that you consider interpreting them in that light. We urge you to review Hudson's most recent form 10K and other subsequent entity filings for discussion of the principle with and certain days that affect our business and our performance and are the factors that could cause actual results to different materially.
Speaker 1: With that, I will now turn the call over to the bar and call it. Go ahead, Brian . Good evening, and thank you for joining us.
Speaker 2: 2023 is off to a solid start and in line with our long-term target expectations. As you know, the 2022 selling season was exceptional due to sale prices rising in a much faster pace than inventory cost, which creates a tough quarter to quarter comparison. Our first quarter results reflect this dynamic with revenues down slightly due to a combination of lower selling prices.
Speaker 2: opportunities as certain of archipelters may struggle with these new requirements.
Speaker 2: Long term, we see a tremendous opportunity for the increased use of reclaim refrigerants for many reasons.
Speaker 2: With this in mind, we're focused on cultivating a customer base that encompasses industry participants who share our vision of the circular economy for refrigerants. As the Virgin HSC supply is limited, the commitment to recovering and reclaiming refrigerant becomes even more important so we will continue to seek customers who share our vision for the adoption of sustainable and responsible refrigerant management. We continue our efforts to promote our sustainable products, services and consultation capabilities to the marketplace. And earlier this week, we announced that Hudson has become a chemical producer partner.
Speaker 2: the circular economy of refrigerants.
Speaker 2: In addition to our Emerald products, 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 install base with reclaimed refrigerants as the industry continues to allow.
Speaker 2: With comfort cooling and refrigeration systems considered essential in most areas of the world, and systems having a lifespan of approximately 20 years, the availability of reclaimed HFCs to bridge the reduction in virgin supply will be critical in ensuring an orderly transition to lower duty and p refrigeration.
Speaker 2: Experiences taught us that comfort cooling and refrigeration can remain more insulated from the worst of a recessionary environment.
Speaker 2: but a recessionary environment can present challenges for everyone.
Speaker 2: With our industry-leading reclamation technology and decades of experience, we believe Hudson is ideally positioned to provide sustainable and responsible refrigerant management to support the industry transition to greenery refrigerant and environmentally sound cooling equipment.
Speaker 2: We see a tremendous opportunity for a company to play a leadership role in the meeting the refrigerant needs of the growing and stall base of cooling and refrigeration systems, as well as providing conversions and service options as equipment requirements evolve.
Speaker 2: In fact, we've attended many conferences where attendees and officials have looked to Hudson for our expertise as thought leaders and sought our advice and assistance. This is an exciting time for our industry and we are well positioned to facilitate and support the next move to the next generation technology and refrigerant.
Speaker 2: Now I'll turn the call over to Nat to review the financials. Go ahead Nat.
Speaker 3: Thank you, Brian . For the first quarter ended March 31st, 2023, Hudson recorded revenues of $77.2 million. A decrease of 8% compared to revenues of $84.3 million in the comparable 2022 period.
Speaker 3: The decrease is primarily related to decreased selling prices for certain refrigerants during the period, as well as lower sales volume in the quarter as compared to the first quarter of 2022.
Speaker 3: Gross margin was 39% for the first quarter of 2023 compared to 54% in the first quarter of 2022.
Speaker 3: has expected and previously communicated.
Speaker 3: Gross margin has begun to moderate as a gap between inventory cost and sales price narrows.
Speaker 3: With our current visibility, we remain comfortable with our long-range gross margin target of 35%.
Speaker 3: SGNA for the first quarter of 2023 was $7 million, which is slightly higher than the $6.8 million recorded in the first quarter of 2022.
Speaker 3: We recorded operating income of $22.7 million in the first quarter of 2023 compared to operating income of $38.3 million in the first quarter of 2022.
Speaker 3: The company recorded net income of $15.5 million, with $0.34 per basic and $0.33 per dubuted share in the first quarter of 2023, compared to net income of $0.29.6 million, or $0.66 per basic and $0.63 per dubuted share in the same period of 2022.
Speaker 3: In 2023 and future periods, we reflect the statutory tax rate of approximately 26 percent, excluding certain temporary and permanent tax adjustments.
Speaker 3: While the 2022 period reflects a very low effective tax rate, due to the use of then-existing net operating laws carried forward. During the three months ended March 31, 2023, the company generated $11.6 million of cash for the operations, compared to $5.1 million during the three months ended March 31, 2022. During the first quarter of 2023, the company paid down an incremental $3.3 million of term loan debt, resulting from improved performance.
Speaker 3: and increased cash flow, reducing its leverage ratio to 0.3521 for the trailing 12 months ended March 31st, 2023. This represents a significant decline from a leverage ratio of 1.1621 for the trailing 12 months ended March 31st, 2022.
Speaker 3: The company reduced total outstanding debt by 56% from $100 million at March 31, 2022 to $43.6 million at March 31, 2023.
Speaker 3: As you know, interest rates have risen almost 500 basis points over the last year, so this debt reduction has provided significant savings for the company.
Speaker 3: Throughout this time, we have not needed to borrow against our Revolver Loan, which allows us even greater financial and operational flexibility.
Stockholders' equity improved to $191 million at March 31, 2023 as compared to $175 million at December 31, 2022. The company's availability, consisting of cash and revolver availability, at March 31, 2023 was $84 million.
Once again, as we continue to generate additional cash flow in 2023, we expect to one further deliver our balance sheet, two ensure we have adequate inventory on hand, and three consider acquisition opportunities as they arise. We have strong liquidity.
with a solid financial platform and financial flexibility as we look forward to the future. I will now turn the call back over to Brian . Thank you, Nat. Our 2023 selling season is off to a solid start and we are focused on preparing for what we believe will continue to be a very receptive market for our products and services.
for 2023 and beyond. We look forward to continuing to drive the momentum we've built and to growing our relationship.
growing our leadership position as a provider of sustainable products and services for the refrigerant and reclamation industry.
our leadership position as a provider of sustainable products and services for the refrigerant and reclamation industry. Operator will now open the call to questions.
Thank you.
At this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please while we pull for question. The first question is from Ryan Sigdahl with Craig Hallam Capital Group. Ryan please proceed.
Good afternoon, Brian . Matt, thanks for taking our questions. Good afternoon. I don't think I caught up, but let's just start with current prices and what you're seeing in real time for our 22 and our 410A in the market.
The R22 continues to remain strong in $30 plus range and probably will continue as we really have normal economics with relative to supply and demand. HSC pricing came down at the tail end of the...
last year's selling season, and it continues to be soft as we begin this year's season. Pricing for HFCs are in that $10 plus range, which are down from where we were last year.
This particular year so far we haven't had a lot of warmer weather, you know, even in the southern states. So we think it's been a slow start, mainly because of lack of AC demand, but as we always say it's a nine month season and we expect that demand to begin as soon as we get the warmer weather.
I can attest to that here in Minnesota. It has yet to warm up. So I think it's...
Clearly that's been felt across most of the US. Here's on gross margins, pretty meaningful outperformance this quarter. So nice job there. Good to see. Despite not having the price tailwinds you've had the last two years. So I guess my question is, how do you feel about that medium term gross margin target? It feels like structural gross margins.
of this business or higher. That's kind of the first part. And then second, was there anything unique in the quarter, any sell through of kind of older, lower priced inventory or anything unique to call out?
Yeah, so versus last year, as you know, as Brian mentioned on the call as well, the cost basis of inventory has caught up with the selling price as well. So, you know, we still maintain our longer term target of 35% from a gross margin perspective overall.
Yeah, and as we said, those long-term targets we feel are conservative. We don't yet know how well and how quickly reclamation will grow. We do expect that to occur. As and when that begins to occur, it continues. Obviously, that gives us an opportunity to do better at the gross margin level.
Yeah, and to answer your the other part of the question, there wasn't anything like no anomalies or aberrations to report. So 39% is a decent run rate, assuming steady state price going forward kind of through the season assuming.
part of the question there wasn't anything like no anomalies or aberrations to report. So 39% is a decent run rate assuming steady state price going forward kind of through the season assuming similar reclamation etc.
Yeah, the only thing that could, let's say, hurt it possibly, although we don't think so, is if the volume is softer this year compared to last year, for example. We do expect the warm weather to come. It just hasn't quite hit yet.
Good. Last one for me. Any update on the Lenox partnership? Has that yielded any progress, specifically on reclamation activity?
Yeah, it's growing. It's going to I think continue to grow over time. We're really excited about it from very much a long-term perspective. And so we continue that relationship and I think it will really bear fruit.
and sort of compounding, if you will. It starts slow, and then as you begin to get momentum, it begins to grow at a pretty quick rate.
and sort of compounding, if you will. It starts slow, and then as you begin to get momentum, it begins to grow at a pretty quick rate. Excellent. Nice job, guys. Good luck.
Thank you. Thank you. The next question is from Chip Moore with EF Hutton. Chip, please proceed. Good evening. I hate writing that. Thanks for taking the question. I wanted to ask, I guess in relation to your comments, they're trying about volumes.
potential recession challenges I think you called out even though
you know, the business is more insulated. Maybe some historical perspective there in prior downturns would be helpful. And then I guess more specifically, any impact from the regional banking tightening that's going on in your customer base that would be concerning.
So when you think about like prior experiences, certainly in difficult economic conditions, people tend to repair units.
rather than replace them.
And generally, repairs are a little bit better for us than a replacement. And typically, as the systems get older, they tend to have more problems and therefore require more repairs and things like that. So usually, poor economic environment...
really doesn't have a material impact to us, although obviously could if we had a terrible condition, lots of unemployment, will people have money to fix things even, how severe does it have to get?
Typically, really though, what impacts a nine month selling season for us is weather. If you don't have warm weather, you're not going to turn your AC systems on. Our entire industry and the seasonal demand is driven by that AC demand. So we're waiting for the warmer weather to come, which we expect, and then we ought to have a fairly normal selling season.
Got it, yeah, we'll always have formal weather. And maybe pick a
maybe expand on leveraging your field service capability, partnership potential, emanate potential, sort of how you attack that opportunity.
Well, certainly as it relates to our field service, we benefit by using the term emergency response. So to the extent, you know, supermarkets, office buildings, chem plants, you know, have some sort of...
you know system down they're gonna pay to get the system back up and running and our field service will typically do well.
We will benefit though an additional layer of revenue and growth opportunity from all of the conversions that are expected to take place over the next five to 20 years. And that will be additive to what we've seen to date, particularly over the last 10 or 15 years. Say it another way, the opportunity.
before us for conversions. I'm going to look similar to how our business developed in the 90s and the significant growth we had in that services business.
And in terms of resources to meet that development, I mean, you have a little bit of time, but how do you think you fare there?
Yeah, again, I think the labor markets are still very tough. You know, we are having difficulty filling, you know, a handful of positions, probably similar to what other folks are experiencing. There is somewhat of a shortage of labor in just generally speaking in the HVAC industry.
So that's going to be probably the one thing we have to keep an eye on and try to hire and manage ahead. But generally we're able to balance our, you know, overall expenses, like our SG&A growth was fairly nominal this quarter. Generally our SG&A growth is, you know, inflation rate type growth. So we're expecting that to continue.
Okay, thanks for the color. Appreciate it.
Thank you. The next question is from Jerry Sweeney with Roth Capital. Please proceed.
Good afternoon, Brian and thanks for taking my call. Good afternoon.
So, another question about modern Wi-Fi share.
We know Q1 is very seasonal, but.
As we move into through 2023 into 2024, you know, this is a different sort of refrigerant market than we've been in before, just because HSC is of the predominant refrigerant and there's epidemics that are, are you having any talks with customers where they recognize that....
You know, there's some pending step downs coming along and they're planning.
for either taking more inventory where they want to partner with you, they want to become a preferred customer with Hudson etc. So, they're sort of prepping themselves for what's going on that may give you a little bit more visibility on revenue.
and the opportunity. We do think there's going to be some downstream build of inventory in, you know, in advance of 2024, which is going to be a huge step down. We try not to, like, support that, if you will, meaning we're not looking to try to sell next year's referentials this year sort of.
You know, so we're careful how we work with folks, you know, when you're in those kinds of environments. But we've been there before with all of the R22 step downs and the CSC stepped out back in the 90s. So the other part of it is, you know, often people don't have the ability to necessarily build inventory.
because there were housing spaces tight and they have to be able to be in a position to clear out you know air conditioning and refrigerants to bring in heating equipment for the winter and things like that. So there's probably going to be some of that build Because you know a fair number of folks know what's going to happen next year with with the step down We've managed through that before and it's probably something you're going to see if you see it in a lot of part of the year like you for
they're used to work guarantee, but I mean, I'm doing this a little bit off the cuff, but where you get a little bit more visibility, price certainty, they get supply certainty, not necessarily building inventory, but some type of relationship. So you smooth out some of the demand or peaks and valleys per se. Historically, we've never really had that kind of...
relationship with customers and that it's always been a spot purchase as they need it.
The strategic things that we've been talking about probably now for maybe as long as two years is making sure that we're working with folks who want to support recovery which then that leads to more reclamation.
So if someone's just looking for refrigerant or getting a quote from five or six people and have no desire for Supporting recovery then generally we're not working with companies that would fit that definition As I said a moment ago we would rather work with companies that are thinking about the long term Thinking about the need for recovery refrigerants
to service the install base and so forth. So that's the relationship but not so much fixed pricing per se or guaranteed supply per se.
stall base and so forth. So that's the relationship, but not so much fixed pricing per se, or guaranteed supply per se. Got it, that makes sense. I do remember you.
I just got that before. Switching gears, I guess, to the recovery and the regulatory fund, I believe there was some
requirements or talk that the AIM Act has to have some kind of requirements in place, I think sometime later this year to encourage increased reclaim. Any thoughts on that on how that's developing or any indication of where that may lead? Yes, there's a lot of initiatives going on right now at the state level, but ignoring that...
for different applications in future periods. That rule should get finalized sometime, you know, sigmaid year. In addition to that rule, there's a second rule which covers the allowance system for the 24 to 28 period of time. That also should get finalized sometime in the middle of this year.
The next big rule, or proposed rule, I should say, I apologize, is on refrigerant management which includes reclamation.
we believe based on what the EPA has publicly said is they expect to release that proposed rule approximately in September of this year and seeking to finalize that probably very early in 2024. That's going to be for us the most important rule making relative to the overall AMAC requirements.
Do you have any inclination as to directionally where that rule is going to land? Well, the EPA is involved in a lot of public discussions about ideas that they have and what they want to see what industry members think about.
The EPA is receptive to conversations and comments. We've already participated in what we might call a white paper that was initiated by two environmental organizations, NRDC and EIA, and we consulted with them on that.
which discuss a number of potential programs that the EPA could consider in connection with this next rulemaking. So we think there's a lot of information available for the EPA. The question is we're not sure what they may choose or path they'll focus on.
I appreciate it. I'll jump back in line. Thanks.
Thank you, Jerry.
Thank you, Chair. We have reached the end of the question and answer session.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation. Sorry, sorry. We would also like to thank our employees for their continued support and dedication to our business. And I want to again thank our long-time shareholders and those that recently joined us for their support.
We look forward to speaking with you after the second quarter results and have a good night everybody.
Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.