Q2 2019 Earnings Call
Greetings and welcome to the Hudson Technologies' second quarter 2019 earnings Conference 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.
I would now like to turn the conference over to your host Ms. Jennifer Belodeau. Thank you Mr. <unk> you may begin.
Thank you.
Good evening and welcome to our conference call to discuss Hudson technologies financial results for the second quarter of 2018 on the call today, we have Kevin it's like a beat chairman and Chief Executive Officer, and Brian Coleman, President and Chief operating 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 predictions about the future are forward looking statements. Although they reflect our current expectations and are based on our best view of the industry and 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 would ask that you consider and interpret them in that light. We urge you to review Hudsons Form 10-K , and other SEC filings for a discussion of the principal risks and uncertainties that affect our business and our performance and other factors that could cause our actual results to differ materially, but that's the way I'll turn it over to Kevin go ahead Kevin.
Good evening and thank you for joining us.
Our industry continued to see challenges in the second quarter as we encountered downward price movements changes in customer buying behavior and cooler than average temperatures, particularly in the north and northeast regions of the U.S. for much of the copper cooling air conditioning systems reside.
This year's pricing pressures, mainly related to R. 22, refrigerant due to the parents sell off of stockpiles. Some of the larger allocation holders are experiencing poor market conditions in Europe , which we believe has apparently driven them to lower the price of R. 22 in the U.S. in an attempt to move more volume and alleviate a portion of the negative financial impact you're seeing from outside the U.S.
On a favorable note as we anticipated sales volume increased meaningfully during the second quarter. Despite the cooler weather in the quarter and were pleased to see the temperatures warmed up in recent weeks to more seasonal levels.
Well, our second quarter results were not where we want to be we remain confident about the long term opportunities for our company, which are tied to the fact that the mantra refrigeration called cooling systems continues to grow.
In the U.S. Twod refrigeration is considered a non negotiable essential income for cooling for homes and businesses in this increasingly viewed as a necessity for most of the population.
With Hudsons competitive positioning it two points in the supply chain, our long standing customer relationships established distribution network and ability to provide all types of refrigerants anywhere at any time, we're optimistic about our long range prospects.
We're confident that demand for air conditioning refrigeration systems will continue to grow and we're focused on growing touched this leadership role as a comprehensive provider all types of refrigerants, including legacy gas is such a CFC is commonly used gases such as our 22 and hfcs and next generation each oh products.
Furthermore, as the industry conducts phase outs of certain refrigerants favre promoting more environmentally friendly products are proprietary technology were claims all of these gas is more quickly and efficiently than any competitor and advantage that positions us as a leading producer supplier phased out as well as currently produce refrigerant.
As we move through the back half of 2019, we draw closer to the end of R 22 production.
In June of this year, one of the three largest allocation holders notified their customers that they have discuss discontinued the sale of our 22.
This information reinforces our belief that stockpiles are dwindling and possibly by the end of this cooling season, the industry make it work to the truest stockpiles.
Upon the elimination of R. 22, stockpiles, we expect that the R 22 market will operate within a traditional supply demand model and that the negative price influenced we've seen during the past two seasons will be alleviated.
It's important to note that the pricing pressures or last two seasons, where was created by the three largest out allocation holders, which we believe related market dynamics that had nothing to do with our 22 demand in the U.S.
Rather we believe these pricing pressures associated with shortfalls in other areas of their businesses.
Given the existing installed base of R 22 equipment and with the elimination of Virgin production, we expect to see a shortfall in the supply of R. 22, and we believe our ability to reclaim and resell our 22 creates a tremendous opportunity to position Hudson to address the anticipated supply shortage and become the leading producer of R 22.
Currently we're seeing R 22 pricing of approximately $9 per pound, while this pricing dynamic has negatively impacted our 2019 selling season to date.
We expect that the R 22 market will demonstrate more traditional supply demand behavior. Once production has stopped which will result in increased pricing for R 22.
We have faced pricing and weather challenges during both the 2018 and the 2019 selling seasons.
If we've learned anything in our 30 years in the refrigerant industry. It's the focus on the elements of our business within our control.
With the addition of Aspen, we've enhanced our portfolio products offerings and expanded our competitive positioning in the supply chain, which has increased sales volume.
We have proven our ability to innovate our business model elevate our technology and leverage.
Our distribution network and customer relationships as the situation demands.
Hudson is a seasoned company that has come through challenging market periods before and we remain intent on focusing our efforts on growing our leadership position in the refrigerant industry.
Unfortunately, as a result of the company's second quarter performance, primarily related to the lower price of R 22, when compared to 2018.
We failed to comply with the financial covenants contained in our term loan facility and our revolving credit facility.
Brian will provide more detail around this situation, but in short we don't believe that the covenant defaults relate to a liquidity issue or relate to a leverage issue what are the current covenant structure.
Another recent development Hudson Airgas completed the working capital adjustment process that arose from our acquisition of <unk>, which resulted in airgas agreeing to a cash payment to Hudson and the amount of $8.9 million. We're pleased to have this matter finally at favorably resolved.
We are confident that as we sell through the higher price layers within our FIFO inventory and continue to drive increased sales volume.
The end result will be a significant increase in the gross margin of the business.
Now I will turn the call over to Brian to review the financials go ahead Brian .
Thank you Kevin.
For the second quarter ended June 32019, Hudson recorded revenues of 56 million, a decrease of 3% compared to the $57.8 million in the comparable 2018 period.
The average selling price for certain refrigerants on a quarter over quarter basis declined by approximately 19%.
Offset by a 12% increase in sales volume.
Revenue from our contract with the only increased by approximately $2.3 million for the second quarter and represented 6.8 million in revenues.
During the second quarter 2019, we recorded lower costs or net realizable value adjustments to our inventory of 9.2 million primarily attributable to the remaining R. 22 purchased in connection with the acquisition of they are right.
Due to the impact of these items net loss for the second quarter was 13.8 million.
32 cents per basic and diluted share.
Compared to a net loss of $30.6 million or 72 cents per basic and diluted share in the second quarter 2018.
As to the expense for second quarter, 2019 was 6.8 million, a 3.8 million reduction from the $10.6 million in the second quarter of 18.
The decrease in X gene a is attributable to a 2.5 million a decrease in professional fees pertaining to the integration and services associated with the IRI acquisition.
With the remaining portion of the decrease primarily due to reduced payroll expenses advertising and other professional fees in the second quarter of 2019.
Following the close of the quarter Hudson and air gas completed the working capital adjustment process that arose from Hudson's acquisition of air rights, including the settlement related litigation.
As a result, airgas agreed to a cash payment to Hudson and the amount of 8.9 million.
This coupled with the significant recent cash collections as is customary during this time of year will increase our liquidity and contribute to our continued strategy of paying down our debt obligations.
As Kevin mentioned earlier, the company failed to comply with the financial covenants in our term loan and revolving credit facility at June 32019.
We are currently in default under those agreements.
Other than the financial covenants. The company has fully comply with all of its debt payment and other obligations on a timely basis and had over 21 million of availability pursuant to the borrowing base formula and its revolving credit facility as of June Thirtyth 2019.
As such the company does not believe the covenant default relates to liquidity issue.
But relates to a leverage issue under the current covenant structure.
We are working closely with our lenders to secure waiver and amendment to waive the covenant defaults and reset the financial covenants under both the term loan and the revolving credit facility.
The lenders do have the right to declare all amounts under these facilities to be immediately due and payable and there can be no assurances that the company will be able to take any such waivers or amendments.
We were in a similar position last year with our lenders and while there are no guarantees we believe that the company its advisors and the lenders and their advisors can reach an agreement on these matters I will now turn the call back over to Kevin.
Thanks, Brian .
Well it can be challenging at times, we believe the refrigerant industry is a dynamic marketplace with tremendous opportunities for companies agile and innovative enough to evolve along with it.
Hudson has successfully navigated this changing industry for many years and we believe we have the right people products relationships and technology to increase our leadership position in the refrigerant and reclamation business. Thank you all for your continued support of Hudson and now Brian that we'll take your questions. Operator, Please 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 when they can your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
Oh participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Our first question comes on the line of Steve Dyer of Craig Hallum. Please proceed with your question.
Oh, Thanks, good afternoon.
[laughter].
Volume volume shipment up 12% in the quarter year over year, obviously pretty impressive, particularly given the weather is that your view sort of in line with the industry or do you feel like you are.
Maybe pushing some inventory through there or any color on that would be great.
It's hard to see how we might compare to the industry we actually.
I don't necessarily believe.
Folks would have seen increases in volume in second quarter because of reports from wholesalers and the like.
But anything is possible but for us.
There is a twofold a parts to the answer one is certainly last year, we were concerned about our position with our inventory at our lenders and so forth and we probably walked away from some quotes or sales that we could have completed.
This year, obviously were past all that we've obviously been in forming our lenders on a monthly basis or financial condition. So there were well aware of where we're going to end up relative to Q2, and the covenants and the like.
But as we've been saying for many many years, we do believe we have strategies to grow volumes at a double digit rate, we obviously need some cooperation from weather.
And it makes it a little bit harder for us to achieve that when our customers are buying more just in time, it's difficult to predict out how the season will play out, but we still have the confidence we still try to build strategies on an annual basis to achieve that kind of growth level and again, we did achieve it and probably one of the more difficult weather quarters.
We really didn't see any warm weather in the north and northeast until nearly the last week of June so.
It was probably a pretty good achievement.
Got it.
And we'll just as it relates to that inventory and I know, it's a little bit of a moving target because prices seem to keep drifting, but how long do you expect that to sort of take year to reset that FIFO inventory.
Such that the gross margins normalize here.
Well I believe we told all the shareholders on previous calls that we expected by about May of this year that Hudson would be out of all of the high priced inventory. It had when it had a write down in 18 and in fact, that's the case and we're now beginning to release layers that are in the four or five kind of dollar ranges.
Because.
Almost all of our Hudson inventory now relates to reclaim and that's roughly where we are the market on the bike price for use gas.
As it relates unfortunately, though to Aspen, because with the Aspen acquisition, we had to purchase the stockpile at 22.
We.
New or projected that that stockpile, we continue to run into early next year and unfortunately that is the case. So what's happened here is because we've had roughly let's say a $2 a pound reduction in the sale price from this time last year, we've had to have about a $2 a pound reduction in that it remaining inventory and nearly all of that adjustment is it now reflected in the second quarter.
So.
Again, as we said in our prepared remarks that we do expect prices of 22 to increase because we do believe the stockpile is dwindling certainly there's no more Virgin allocations left for next year. So we are optimistic that prices of 22 will go up but even if they don't go up and they stay where they are today, we probably now have right sized that Aspen, our 22 inventory relative to cost basis and write downs.
Got it that's helpful.
Deal a revenue pretty impressive in the quarter is that a level you think that you can sort of build and grow off of or is that somewhat lumpy and it's going to be up that it's going to be down on this just happened to be a good quarter.
Well I guess, we'll never know the future for sure, but our plan was exactly where it's headed and we thought we can.
Absolutely bring this up quarter after quarter year after year, and we're probably on a run rate of little over 25 million a year now and the goal is to continue growing so I think our R&D law group has done a very good job.
Bringing new agencies in smoothing out the program and I think we should see continued growth.
And maybe just as you would have heard in prior quarters us referred to some administrative problems and things like that relative to the initiation of the contract we.
[noise] worked through many of these problems and the program is now smoother and now is the time for US is now sort of seek to grow the program now that weve worked through all those little which is the administration side.
Got it just a couple of quick balance sheet questions and then I'll pass it along so your inventory in the quarter, excluding the impairment was down $16 million, but looks like debt basically stayed the same cash basically stays the same where did those proceeds go.
We didnt.
From the personnel side, we didnt generate cash relative to our increased interest rates and debt service and so forth.
So that really eight into into.
What cash we generated but we had to have a little bit more borrowings during the period, we are going to come out of that cycle, though.
We we originally thought we would generate about $20 million of free cash flow, we're not going to generate that level, but certainly with the.
The cash award that we have with your guess, we'll probably end up being in the mid teens for the year. So you'll start to see the debt coming down and availability increase over the remainder of the year.
Got it Okay I'll hop back in the year. Thank you.
I would like to remind our audience at this time, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of John Sturges of Oppenheimer and company. Please proceed with your question.
Thank you for taking my call I, just want to get a general sense of what you're thinking in terms of operations. How much inventory you are likely to hold to meet.
Customer expectations.
Considering we've had such a while the fluctuation in price.
Could you sort of I'm just curious obviously you've come through this a period, where you had bought a lot of inventory in the acquisition, but what would be a runway run rate level and have have your thoughts changed as to how much you'd like to to keeping inventory going forward.
So I believe what Weve said recently is we are not buying inventory in the same manner. We would have historically what I'm, referring to is historically, we would have bought a fair amount of inventory in the third and fourth quarters for sales that should have occurred in the first and second quarter.
And what happened is we followed that pattern for decades and last year first quarter, our customers almost across the board went from buying inventory in Q1, and then restocking in Q2 to solely just in time bye.
That put us at extreme exposure for all the price of corrections that occurred last year and in some respects the negative impact to last years.
Write downs were twice as big as they could have been if our customers have not changed their buying habits. So what we did going into this year.
We would have told everyone that we are managing our inventory working capital levels and expecting higher turns on inventory and not going as long, let's say an exposure to price risk as we would have previously and it mainly matches our buying habits, mainly now match the customer buying habits and that just in time model.
Two other things to your question one is because we bought a stockpile 22 liquidating that stockpile frees up cash and then obviously, bringing inventory levels down.
We still believe we've got a fair amount to go on bringing cash dollars out of inventory because the second part to that is when we release high priced inventory, we're generally replacing the same pound for half the cost.
So we expect this year at the end of the year that the dollars in inventory will be lower than the dollars were last year and probably that will again occur in 2020 that the December 2020 balance for inventory will probably be lower than that of December of 19.
And probably that inventory dollars.
Will be the right amount of dollars in inventory to manage the business now things can change obviously, depending if we have an HFC phase out an always on the factors, but that's our current view at long term view relative inventory dollars.
Terrific. So we should expect obviously higher inventory turns going forward.
The other question I'm curious does the current covenant violation situation does that impact.
Business development and are you seeking alternatives to.
To maybe get out from that situation. Besides what you done current lenders.
It doesn't really impact the operations of the business because again, it's not a liquidity issue, we've got tons of liquidity and so.
Certainly we should and have publicly said that we would be looking to seek new lenders in this back half at 19 that is our intention, but we also need to resolve the matter with the current lenders relative to a wave waiver and amendment to get that behind us. So.
There's multiple things were an options were looking at.
And but it could be a car definitely requires a waiver amendment, but also could include new lenders as well.
Thank you.
I would like to take this time to remind all participants at this time, if you would like to ask a question. Please press star one on your telephone keypad.
Once again to ask a question during the Q and a session.
Please press star one.
Our next question comes from the line of.
I'll parts. Its been has removed himself at this time I would like to turn the conference back over to management for closing remarks.
I'd like to thank our employees, our long time shareholders and those that have recently joined for their support thanks, everyone for participating tip for participating in todays call. We look forward to speaking you after the third quarter results. Thanks.
This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful rest of your day.
[noise].
[noise].
[laughter].