Q2 2023 Hudson Technologies Inc Earnings Call
Critics welcome to the Hudson Technologies second quarter at 2023 earnings call. At this time, all participants are in a listen only mode.
A question and answer session will follow the Formula presentation.
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Please note this conference is being recorded.
Now turn the conference over to your host John Nesbitt of I M. S. Investor Relations you may begin.
Thank you good evening and welcome to our conference call to discuss Hudson Technologies financial results for the second quarter 2023 on the call today are Brian Coleman, President and Chief Executive Officer.
Christian Birdie, Chief Financial Officer, and 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 the address expectations opinions are predictions about the future of forward looking statements. Although they reflect our current expectation are based on our best view of the industry and of our business as we see them today, they're not guarantee of future performance. Please understand that these statements involve a number of risks and assumptions since those elements can change in in certain cases or not.
We cannot 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's filings for discussion of the principle of risks and uncertainties that affect our business and a performance of the factors that could cause the actual results to differ materially with that I'll turn the call over to Brian Coleman Goodbye.
Good evening and thank you for joining us as many even though the close of the second quarter brings us two thirds of the way through our nine months selling season.
We view the cooling season as a nine month season, because from year to year. The start of warmer weather can vary throughout the country. So a quarter a quarter comparison won't always provide an accurate view of how the four seasons will play out.
For example, this year the star the cooling season was a bit delayed in some parts of the country. However, warmer weather date eventually arrived bringing with it opportunities for increased service calls every furniture in sales and.
Another quick point about the current cooling season, there have been a lot of headlines about the current heatwave, taking place in certain areas of the U S and it's important to understand that while the surge in high temperatures is certainly not after Hudson our business actually see the most positive impact then refrigerate systems are turned on for the first time.
In a given season.
As you know the 2022 selling season was exceptional due to sale prices rising at a much faster pace that inventory class. So as we move through the 2023 seasons, we are facing a difficult set a quarter to quarter comparisons.
While our second quarter of 2023 results were solid on a comparative basis. They reflect the decline in both revenue in gross margin for the prior year.
As expected we saw a narrowing the gap between.
Tori clawson sale price to more historical levels.
And as a result gross margins moderate to 40 per cent and a quarter.
We did benefit from her margins on carbon sales in front of the D. L. A when compared to historical levels without those additional contributions gross margins would've been closer to 38%.
It should be noted that we're on track to have our greatest annual revenue with our D. L. A contract compared to all the previous prior years.
With our visibility today, we remain comfortable with a long range gross margin target of approximately 35%.
For the quarter, we reported strong profitability and operating cash flow and reduced our total debt by $11.1 million.
Looking at the regulatory landscape in July the E. P. A issued its final rule for allowances for the 2024 to 28 period mandating a 40 per cent baseline reduction in the Virgin HSE production and consumption allowances.
As we previously discussed we believe the card details schedule represents a tremendous opportunity for our business as a supply of Virgin Hfc's becomes unlimited at our reclaim refrigerants will be needed to meet the demand for the large installed base base of more than 125 million HSE units.
Moving forward, we are seeing increased focus around propose regulations through both federal as well as state legislation promoting the use of more environmentally friendly cooling technology and refrigerants.
Heightened regulatory reporting initiatives could drive consolidation or industry and provide acquisition opportunities as certain of our competitors may struggle with these new requirements.
We believe Hudson is ideally positioned with a reclamation technology conversion and servicing capabilities and our admiral lined overclaimed refrigerator to capitalize on this shift to more sustainable circular economy for refrigerants in the system they support.
Longer term, we believe the use of reclaim refrigerants will be broadly adopted not just as a result of the anticipated legislation around their use but also as industry stakeholders embraced the environment the benefits of using reclaim refrigerants, which is nearly zero GBP gas.
But you cannot have reclaimed refrigerants without recovery so as the Virgin HFC supply is limited.
The commitment to recovering of reclaiming refrigerants becomes even more important. So we will continue to see customers who share our vision for the adoption of sustainable and responsible refrigerate management.
In a noteworthy development we were pleased during the quarter to achieve carbon neutrality at a reclamation facilities. As you may have seen in our July 6th press release.
Additionally, we continued to introduce our sustainable products services and consultation capabilities to industry partners and her efforts of gain favourable recognition.
Most recently Hudson's Emerald refrigerators Ah reclaim refrigerator spread was named top product of 2023.
Virement plus energy leader and awards program that recognizes excellence and products and projects that deliver significant energy and environmental benefits.
It's July 10th edition, the a C. H R News published a featured article entitled reclaim is the name of the game.
And highlighting Hudson's recent participation at the National H B a C R Education conference at.
At the conference Kate Houghton, Hudson's Vice President of sales and marketing engaged attendees on the importance of recovery and reclamation of Hfc's.
With our field service capabilities and expertise Hudson is ideally positioned for growth as the industry transitions to more environmentally friendly cooling system as a refrigerator.
HSC equipment has an anticipated lifespan of 20 plus years, so our ability to provide reclaim hfc's to maintain these systems as Virgin supplies declines will strongly position us.
Two strategic points in the supply chain is both the producer through reclamation and as a distributor.
Additionally, our ability to convert systems to run a next generation refrigerant is also competitive advantage.
It's important to note that a reclamation technology is refrigerate agnostic.
So we can recover reclaim any type of refrigerator.
As the industry evolves, we will not only support the end user transition for a business model revolves as well.
As we move through the balance of the selling season and beyond.
We remain focused on meaning the end to end needs of our customers by providing sustainable and responsible refrigerate management support.
With our industry, leading reclamation technology distribution.
Distribution network and service offerings, we look forward to growing our leadership role as our industry embraces greener alternatives for refrigerator and cooling equipment.
We are excited about the opportunities we're seeing in the marketplace to extend the reach of our products and services and expand our customer base.
Now I will turn the call over to that to review the financials Goodnight. Thank.
Thank you Brian for the second quarter ended June 30th 2023, Hudson recorded revenues of $90.5 million, a decrease of 13% compared to revenues of $103.9 million and a comparable 2022 period.
The decrease is primarily related to decrease selling prices certain refrigerant during the period as compared to the second quarter of 2022.
Gross margin was 40 per cent second quarter of 2023 compared to 55% in the first quarter of 2022.
As expected and previously communicated gross margin has begun to moderate as the gap between inventory cost and sales price narrows to more historical levels.
As Brian mentioned second quarter gross margin was favorably impacted by increased G. L. A and carbon credit revenue, we remain comfortable without long range gross margin.
A 35 per cent.
SG&A for the second quarter of 2023 was $8.3 million compared to SG&A of $70 million recorded in the second quarter of 2022, mainly due to increased payroll and stock compensation expense.
We recorded operating income of $27.7 million in the second quarter of 2023 compared to operating income of $49.8 million in the second quarter of 2022.
The company recorded net income of $19.2 million or 42 cents per basic and 41 cents per diluted share in the second quarter of 2023 compared to net income of $39.8 million or 89 cents per basic and 84 cents per diluted share the same period of 2022.
2023 in future periods will reflect a statutory tax rate of approximately 26%.
Excluding certain temporary and permanent tax adjustments.
The 2022 period reflects a 16 per cent tax rate due to the release of the company's remaining valuation allowance at the time.
During the three months ended June 30th 2023, the company generated $10.6 million of cash flow from operations.
Compared to $28.8 million during the three months ended June 30th 2022.
During the second quarter of 2023, the company paid down and an incremental $10 million term loan debt, resulting from improved performance and increased cash flow.
Leasing its leverage ratio from two 0.3221 for the trailing 12 months ended June 30th 2023.
This represents a significant decline from a leverage ratio of 0.7321 for the trailing 12 months ended June 30th 2022.
The company reduced total outstanding debt by 31% from $46.8 million at December 31st 2000, $22 million to $32.5 million at June 30th 2023.
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.
In fact since the refinancing in March 2022, the company has pay down approximately 67, and a half million dollars term loan debt, resulting in $6.8 million of savings on interest inclusive of any prepayment fees.
Throughout this time, we have not needed to borrow against a revolver alone, which allows us even greater financial and operational flexibility.
Stockholders equity improved to $211 million at June 30th 2023, as compared to $175 million at December 31st 2022.
The company's availability consisting of cash and a revolver availability at June 30th 2023 was $83 million.
As we continued 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 I turned around and revolving loan credit facilities provide us with a solid financial platform and flexibility as we look forward.
We'll now turn the call back over to Brian .
Thank you that we delivered solid results to date and we are focused on continuing to grow our portfolio of sustainable products and services to facilitate the transition to greener alternatives.
Also ensuring that we are well positioned to address market demand for refrigerants and for the services that enable efficient cooling system operations.
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 one on your telephone keypad, a confirmation tone willing to Kate Your line is in the question queue. You May press start to 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 poll for questions.
The first question is from Jerry Sweeney with Roth Capital. Please proceed.
Hey, good afternoon, Brian and that thanks for taking my call.
Yeah. Good evening good afternoon. Thanks.
So.
My channel checks you know.
Do these constantly but a show gas prices HSE prices stubbornly in and around $10 range. I believe this was due to some circumvention activities, maybe by some producers and distributors I was just curious what is this an accurate assessment on the price level in too.
As far as you can tell is this a rational reason for some of the pricing.
So it's difficult to ascertain the precise reasons for pricing.
But your channel checks I've always been very good and HFC pricing right now, we sit around and that $10 range. We.
We started to see the softening of HFC prices and the very tail end of the 2022 season.
And for the most part has continued throughout this season, thus far.
We initially attributed some of the softness to the possibility that larger allowance holders.
May have not properly estimated quarter to quarter demands of and what we believed may be happening or had happened was they were those larger allowance holders with we're trying to balance out their overall total quota.
Within the quarterly confines since all the allowances are done on a counter basis. So.
Meaning they likely this year were silly more quota in Q1, then they might have in the 2022 season. So we think at the end of the day prices reflect the availability of product compared to to men.
Since the demand started slower this year or later this year. If you will and you think about the north and the northeast really didn't get warm until late may into you know the latter part of June even yeah, probably folks we're trying to move inventory when the demand really wasn't there at.
At the end of the day, we've seen this cycle before we.
We still think with the significant reduction in the calendar allocation for next year, which is 40% off of the 2000.
We're all intents and purposes of 2019 demand, which that demand should be growing at a rate about three to five per cent since that time, we think there'll be a significant tightening in inventory and availability of product relative to the overall demand and that we would expect to see price increases as a result.
Got it yeah without a doubt right next year is the the 40 per cent stepped down to 60% from 90.
Does that step down play any role in your <unk> in terms of sales strategy may be being less aggressive with prices a little bit lower.
Ah and seeing that step down come next year in terms of sales.
Sales strategies aggressiveness et cetera in other words.
Yeah.
Purposely saw a little bit less gas this year versus next year, if it's due to pricing or other dynamics.
Two I'd say that our sales strategy has remained unchanged and <unk>.
Likely it's about two years ago we.
We really started to evaluate our customer base and.
And we did walk away from some customers that were simply looking for cheap gas.
And we tried to support those customers that in some fashion would support the growth and recovery, which then leads to growth and reclamation. So having those more strategic customers is extremely important to us and as we seek to grow customers. We typically will seek to grow that type of customer.
And not necessarily be associated with customers that are just looking for cheap gas.
That strategy will likely not changed and will continue throughout this HSC phased out which again. This 40 per cent reduction is only the beginning there'll be another very large reduction that will start at a minimum in 2029.
So it'll be important that we've built these relationships throughout this period and hopefully our customers will value the our.
Our ability to acquire and reuse and reclaim refrigerants.
Final question.
A follow up to what you just said obviously taken strategy.
Really relationship driven that price treatment.
As you talk to your customers.
And we see the step down coming later next year is there what is maybe the town 10 or what are they saying are they looking to potentially.
Pre buy into next year or develop some other programs where they.
Guaranteed levels gas et cetera, just curious how if there is any opportunity from that perspective.
Yeah, I I don't know that anyone in our industry that has access to refrigerants that allowances would be guaranteeing.
Particular volumes, so there may be but I I wouldn't think that that's a common practice I do think that there will be some inquiries from our customers in queue for that we normally would not see because of the reduction of for next year.
The other thing that you know folks needs to be mindful of as many of the customers have limited access to storage capacity. Many of our customers are in the heating business as well as the cooling business. So as the exit in August September timeframe, they're trying to read.
Do their inventory levels supporting cooling and build inventory as it relates to heating. So there's always that particular limitation, both on working capital and just actual storage space. So at the end of the day, there's probably going to be some additional activity in queue for but it's likely that most of the buyer will occur.
Her during the 2024 of cooling season.
Got it I'll jump back in line I I appreciate it thank you.
Thank you Jerry.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone. The next question comes from Ryan signal with Craig Hallum Capital Group. Please proceed.
Good afternoon, Brian that.
Curious if you've seen with those relationships you've been expanding any change in reclamation activity and or the ability to find feedstock.
Yeah, I'd say for it using you know the public announcement, we made Ah regarding Lennox last year that relationship is going very well, we're very pleased with Linux as an organization and very pleased to serve their authorized to steal dealers and install or.
So.
We're really happy with that we seek to make more of those types of relationships. Those are the sustainable relationships that are important to us and the types of customers that we want to serve particularly for those that support the residential like commercial contractor because that's the area that we expect to see significant growth.
Recovery and reclamation.
And then I guess switching over the court of Appeals district of Columbia, They struck down the E. P. As rule that would've been non refillable cylinders in the U S.
It would have required QR code tracking I guess any thoughts are on that ruling.
Yeah. So the court from our reading made it clear that the E. P. A has broad authority within the aim act, but maybe not specifically that brought it 30 as it related to the allowance rules of system, which is where they constructed these two newer require.
<unk>.
It appears that the court indicated the section H of the a Mac.
Which is the section that deals with refrigerant management is specifically E. P. A seeking to promote regulations to propagate the grilled. The reclamation is an area for the E. P. A that they could consider.
So that.
That particular proposed rule is likely going to come out in September we do not know if the E. P. A will attempt to readdress. These two points there.
But there'll be other rule makings in the future to the extent E. P. A feels that it has the authority to do so so this particular proposed rule is certainly not going to be the last rule within the requirements of the <unk>. So I don't think the result has a particular negative impact who are <unk>.
Business because.
These two new.
Posed approaches would be new to the entire industry. So by striking the sections were sort of reverting to business as usual if you will that we've been operating under quite a number of years.
Maybe just abroad follow up how do you feel the E. P. A stance today relative to five six years ago with H C. F c's on their ability to enforce either bad actors track.
Gas et cetera.
Well I think as an industry, we've been very proactive too.
Port any and all initiatives to prevent illegal actions.
And particularly illegal imports I also believe the E. P. A has put it quite a lot of reporting requirements within the aimak that still exist that are very helpful and tried to prevent bad actors and trying to prevent a illegal acts.
I think it's a combination of E P. A effort industry effort and customs and border that will hopefully.
Be able to limit if it it's probably very difficult to eliminate but limit the volume of potential illegal actions that are taking place.
Good maybe one more from me.
Just mentioned.
Mentioned kind of the heat picking up later in the season I guess have you seen an increase in volume or anything to comment on trends in July thus far.
Yeah, what we were trying to describe its once systems are turned on that's the real surge in demand.
It may sound Crazy in this number I will throw out is not exactly a statistic, but there could be you know 50 million units in the north and northeast it could get turned on within a week of each other so that's where the real surge of curves, but certainly warm temperatures good and warmer temperature like you're seeing in different parts of the country.
Right now will likely create more stress failures, but it's not that significant compared to deterring. The systems on so you know we should have a good season this year.
Great. Good luck guys. Thanks. Thanks.
We have reached the end of the question and answer session I will now turn the call over to management for closing remarks.
Thank you operator, I would like to thank our employees for the continued support and dedication to our business.
I want to again, thank our longtime shareholders and those that recently joined us for their support.
We look forward to speaking with you after the third quarter results have a good night everybody.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.